Aviation outlook: What will fly in 2020

Airline profitability is forecast to improve in 2020. Photo / Grant Bradley

This year will see a new face at the top of Air New Zealand, airlines facing cost and competition challenges, pressure to reduce their environmental impact and getting new aircraft in the air. Grant Bradley examines what this will mean for the companies and for passengers.

Air New Zealand - a new broom in its 80th year

When it comes to high-profile hires they don't come much bigger than Greg Foran who will take the hot seat at Air New Zealand on February 3 after heading Walmart in the United States for five years.

He transformed the business there; turned around sluggish sales, cleaned up shops, improved customer service. He even gave workers a pay rise, something noted by a union here.

There is a massive difference in scale between Air NZ and Walmart but both are complex businesses which have enthusiastically embraced technology to make the customer experience better but under Foran this could happen at an even faster rate.

Walmart has been pioneering blockchain tech for its suppliers, for which it drives a notoriously hard bargain. He will be looking very closely at costs.

Air New Zealand is not in need of an immediate overhaul but the returning Kiwi will undertake a 100-day review to get to grips with the business and inform his thinking about where to next.

He's going to meet 1200 of the airline's leaders to get their views on moving to another level of performance for the airline which is dominant domestically but still facing intense competition on international routes.

Incoming Air NZ chief executive Greg Foran has been Walmart US president and CEO. Photo / AP

This will result in the formulation of a new strategic vision which will be outlined at the airline's full-year results in August.

The airline put the brakes on overall network growth early in 2019 in response to a souring economy but still expanded on targeted international routes and started a new one to Seoul in November.

It will benefit from the withdrawal of Jetstar from some regional routes which are a big part of the airline's total flying.

Qantas has paused growth on the Tasman and Virgin Australia has cut some capacity. However, it faces increased competition on the North American market with Air Canada flying from Vancouver to Auckland this summer, and in a bigger threat, American Airlines starting Auckland to Dallas and Christchurch to Los Angeles services later this year.

Business as usual

In the meantime the operations side of the business continues to be challenged by Dreamliner engine issues but has become adept at working through these while disrupting a minimum number of passengers, the airline's marketing continues to ensure it punches above its weight (by size it sits about halfway among 200 international carriers), new technology is set to ensure even more sophisticated and targeted selling of tickets and its crew still win accolades.

One area where there will be change is in cabin product, especially in Business Premier where the airline is now lagging its rivals.

Air NZ is making modifications to its business premier seats, making storage more convenient, which will be rolled out next year. More significant work is under way and it is close to finalising the complete overhaul of seats as a result of research and development at its ''Hangar 22'' facility.

Transtasman competitor airlines at Sydney International Airport. Photo / Grant Bradley

The work is well advanced and will be fitted into its new Dreamliners - the stretched 787-10 - when they start arriving in 2022.

The introduction of new crew uniforms has been delayed and won't be seen until 2023 as part of a review of the airline's visual identity.

This will influence the future look and feel of long-haul aircraft interiors, lounges, check-in experiences and digital presence. It had planned to introduce new uniforms for 4500 staff in 2021. The $60 million revamp of its domestic and regional lounges will continue with New Plymouth the next one to be opened.

One high-profile new international route has already been announced. The highly anticipated non-stop flight from Auckland to Newark (New York) will start in October. It will be the longest in the Air NZ network.

Elsewhere In this region there will be a call by Qantas on even longer flights. In February the Australian carrier will decide whether its Project Sunrise flights from Australia to New York or London will go ahead.

An analyst's view

Air New Zealand's super-profits of 2016 and 2018 weren't repeated in the latest financial year, with pre-tax earnings falling to $374m.

But Shane Solly, portfolio manager at Harbour Asset Management, says the airline has done well to stay on a roll, especially given the impact of engine issues which have been a big test for the airline and will not be resolved quickly.

''For Air New Zealand to be able to maintain that momentum is a real positive,'' he said.
The airline had been growing very strongly for five years and a re-set was timely.
He's got high hopes for Foran.

''We observe him as being a very effective manager at Walmart - he's done a stunningly good job and hopefully that will translate to what he'll do at Air NZ.''

There were similarities between the businesses. The people side of the companies was critical to success of both which also had to make big calls on capital.

''You decide to put a store down you decide to buy an aircraft - getting people and culture right is where the rubber hits the road making those long-lead-time decisions.''

The airline had been well run since coming back from the brink in 2001 by a succession of chief executives with different priorities and different styles and it was a good time for a new one.

''The good news is he doesn't have to do anything in a real hurry but it is a good, pertinent time because there are changes to the way people are travelling.''

Solly said the airline would have to review its policy on dividends which have supported its share price for many years although it fell 5.5 per cent for 2019.

''It's an interesting one for the shareholders. You've got a business that has been growing well for the last five years and delivered pretty solid profits that has translated to a fairly strong stock price but there's a recognition that something has changed in the industry.''

Air New Zealand had a gross dividend yield of 10.3 per cent compared to 4.8 per cent for Qantas, he said.

''There are few people expecting an increase in dividend - [Air NZ] already pay a healthy dividend but maybe they need to think about reinvesting into the business.''

The global outlook

The International Air Transport Association says profits across its members would next year increase to US$29.3 billion ($44.5b) in 2020, improved over a net profit of US$25.9b expected in the past year.

IATA's director general and chief executive Alexandre de Juniac says weaker-than-forecast economic performance this year to weaker global GDP growth of 2.5 per cent (versus 2.7 per cent forecast in June) and world trade growth of just 0.9 per cent (down from 2.5 per cent forecast in June) had affected profits in 2019.

These negative developments contributed to softer passenger and cargo demand and corresponding weaker revenue growth, as passenger yields fell 3 per cent and cargo yields dropped 5 per cent compared to 2018.

Slowing economic growth, trade wars, geopolitical tensions and social unrest, plus continuing uncertainty over Brexit all came together to create a tougher than anticipated business environment for airlines.

Qantas has operated trial flights ahead of a decision on Project Sunrise commercial operations. Photo / Supplied

Thomas Cook, among others in the tough European market, went bust and established carriers South African Airways and Alitalia needed bailing out.

Yet the industry managed to achieve a decade in the black, as restructuring and cost-cutting continued to pay dividends.

"It appears that 2019 will be the bottom of the current economic cycle and the forecast for 2020 is somewhat brighter," he said.

GDP is forecast to expand by 2.7 per cent in 2020 (marginally above the 2.5 per cent growth in 2019). World trade growth is expected to rebound to 3.3 per cent from 0.9 per cent in 2019, as election year pressures in the United States contribute to reduced trade tensions.

Growth is supported by actions from central banks as well as easing fiscal policy.

The expected industry fuel bill of US$182b will represent 22.1 per cent of expenses, down from $188b or 23.7 per cent of expenses in 2019. Iata points out that the 2020 average return airfare (before surcharges and tax) is expected to be US$293 which is 64 per cent below 1998 levels after adjusting for inflation.

Coming up in 2020
• The return on invested capital is forecast to be 6 per cent
• The net profit margin is forecast at 3.4 per cent.
• Overall industry revenues are forecast to reach US$872b
• Industry operating expenses are projected to climb 3.5 per cent to US$823b.
• Passenger numbers are expected to reach 4.72 billion (up 4 per cent from 2019).
• Freight tonnes carried are expected to recover to 62.4 million, up 2 per cent
• Average net profit per passenger of US$6.20 (US$5.70 in 2019)

Flight shame

Growing concern about the impact of airlines on the environment (aircraft are responsible for about 2 per cent of CO2 emissions) is forcing them to reassess operations.

The flight shame movement which started in Scandinavia is growing and while it is affecting air travel only marginally there are growing efforts to try to assuage those worried about flying. Iata says that carbon emissions per passenger have declined by more than 50 per cent since 1990, largely because of more efficient planes and operational efficiencies.

This year is a milestone one - the industry has pledged to cap emissions at 2020 levels and ambitiously says that by 2050 it will cut them to half 2005 levels. This will need a big breakthrough in sustainable aviation fuel. Biofuel development efforts to date have been stop-start.

Climate change activist Greta Thunberg has been a face of the flight shame movement. Photo / AP

While battery technology will help power small regional aircraft in the not-too-distant future, large aircraft that fly visitors to New Zealand and Kiwis to the world will need drop-in alternative fuels, available around the world.

Air New Zealand has said tackling the issues behind flight shaming were a priority this year. It was working with Refining NZ, and Scion and Z Energy to develop alternative fuels.

Like other airlines, Air New Zealand currently offers customers a way to offset their flying. In the 2019 financial year retail customers partially, or fully, offset 183,600 journeys which was up from 130,200 journeys in the previous year.

The MAX factor

The re-entry of Boeing's troubled new 737 to service is uncertain. Grounded after two crashes which claimed 346 lives, the plane's flight systems have to be approved safe by regulators.

While the re-entry of close to 400 of the grounded planes will add a sudden surge of capacity to the aviation market, this may be tempered by the reluctance of passengers to fly on them.

Already there's a dwindling appetite among the aircraft's customers to have the word MAX painted on it.

Crisis-hit Boeing has a chance for partial redemption this year if it can get its 777X programme cranking.

The plane, with its folding wingtips, will be sought-after if it can recover from high-profile setbacks, partly due to its new engines. It is due to enter service in 2021.