CEO Conference 2003
"Survival 101"
11th International Airline CEO Conference
May 4-6, 2003
The Biltmore Hotel, Coral Gables, Florida
11th International Airline CEO Conference Summary
by Charles F. Donley II and Elizabeth C. Collins
Squire, Sanders & Dempsey LLPThe 11th International Airline CEO Conference, themed “Survival 101,” was held at the historic Biltmore Hotel in Coral Gables, Florida, from Sunday, May 4, through Tuesday, May 6, 2003. Although the aviation industry is in the midst of a downturn, there was a very impressive turnout of 28 airline CEOs and 37 airlines. The Conference began on Sunday afternoon with the traditional golf tournament, which was also held at the Biltmore Hotel. Delegates were then treated to an opening cocktail reception overlooking the Biltmore’s golf course and dinner Sunday evening.
Monday morning began with remarks by Jim Mathews. In his first address to the CEO Conference as Editor in Chief of Aviation Daily, Mr. Mathews advised carriers to focus on operations, improving customer service, and reducing costs. Mr. Mathews believes today’s successful airline needs to create a space for itself in the market as one of three types of carriers: hub and spoke, niche or premium. He described the hub and spoke carrier as one that is nimble—it has flexibility in aircraft types and provides service to many cities from its hub. The niche carrier is generally low cost and focuses on only a handful of markets. The premium carrier is a simplification of the current national carrier—it is a long haul, full service, high quality carrier whose traffic is usually fed by carriers in the other two categories. Mr. Mathews concluded that the best strategy today’s airlines can follow is to keep their operations simple and focus on providing safe, reliable air transportation.
The Plenary Session
Bobby Booth began Monday morning’s Plenary Session by thanking Bob Papkin, chairman of ten past conferences, for his service, and wished him well in his retirement. Then, noting the impressive turnout of CEOs and airline representatives, Mr. Booth observed how this showed the ability of Latin American and Caribbean carriers to survive and prosper. Mr. Booth believes current economic conditions provide Latin American and Caribbean airlines with a tremendous opportunity to organize and negotiate for better fuel prices, handling rates, ticket counter space, and any other product where forming a unified group (but not merging) would improve their negotiating position, which could mean the difference between profit and loss. He emphasized that Latin American and Caribbean airlines should not think of one another as competitors but as potential partners with whom they could enter into horizontal alliances.
Delegates next received a warm welcome to Coral Gables from Mayor Donald Slesnick, who stated that air conditioning, aviation, and Latin America and the Caribbean are all critically important to South Florida. On a more serious note, he recognized that the health of the aviation industry is critical to both Coral Gables and South Florida since aviation is the lynchpin that holds the area together.
Marshall S. “Sandy” Sinick, Chairman of the Conference, then delivered his opening remarks. Mr. Sinick noted that in preparing his remarks he had reviewed various opening comments delivered at prior conferences, and had noticed a few recurring themes: (1) the Latin American and Caribbean carriers’ true competitors are the larger U.S. airlines; (2) Latin American and Caribbean carriers have struggled during both downturns and upturns in the U.S. economy; and (3) the list of Latin American and Caribbean carriers no longer operating unfortunately continues to grow. Mr. Sinick noted that the challenges of the past pale in comparison to those facing Latin American carriers today, and pointed out to delegates the enormous financial assistance the United States Government is providing to U.S. carriers to help them survive today’s difficult economic environment. Echoing one of Mr. Booth’s theories, Mr. Sinick stated he believes carriers that have best weathered the recent global and regional problems are the ones who had the foresight to enter into horizontal and vertical alliances with other carriers, suggesting this might provide an avenue for carriers today to protect themselves from poor economic conditions and build for the future.
Keynote Address – The MIA Survival Plan
The delegates were fortunate to have as the keynote speaker Angela Gittens, Director of Miami-Dade Aviation. Like Mayor Slesnick, Ms. Gittens recognized the importance of the Latin American and Caribbean aviation industry to MIA, which receives 82% of its international passenger traffic and 92% of its cargo traffic from this region. Ms. Gittens noted that the past twenty months have been like no other in the aviation industry and that the tragic events of September 11th changed the way airports conduct business. As a result of this change, MIA is now focused on four cornerstones: (1) safety and security; (2) customer service; (3) environmental responsibility; and (4) economic vitality. Ms. Gittens described safety and security as the bedrock of commercial aviation, which is demonstrated by the billions of dollars that the U.S. Government and airports are spending to restore the confidence lost by passengers after September 11th. Ms. Gittens noted that customer service is equally important and that even gateways such as MIA must learn to compete effectively for passengers. Ms. Gittens pointed out that although airports can be beneficial to the local economy, they can adversely affect the environment if they do not work to mitigate the effects of noise. Finally, airports also serve as economic engines and as Ms. Gittens noted, with one of six jobs in South Florida linked to aviation, MIA is no exception.
Refining the Low Cost Model
The next speaker was Ned Homfeld, founder and Chairman of Spirit Airlines. Mr. Homfeld stated that a good description of the state of the industry is chaos, not turmoil. He noted that their own economies, the U.S. recession, the effects of September 11th, the Iraq war, high fuel prices, and SARS have battered Latin American and Caribbean carriers. Notwithstanding these obstacles, he believes the potential for growth in Latin American and Caribbean aviation is significant. Mr. Homfeld sees a rush for the legacy carriers (national U.S. carriers) to start low cost/low fare carriers but he views these exercises as a failing effort of airlines to reinvent themselves. He believes the legacy carriers should fix the problems of their hub and spoke systems rather than start new low cost/low fare carriers. He recommended that airlines find a new business model that includes cost reductions and refinement of their brands to differentiate themselves, two things that Spirit has done. As a result of Spirit’s refinements, said Mr. Homfeld, it is now bucking downward industry trends.
The Survival Panel
The first panel of the day, “The Survival Panel,” was moderated by the Conference Chair, Sandy Sinick. The first panelist was Richard Hollowell, Director of Corporate Recovery & Capital Services at Rachlin, Cohen & Holtz. Mr. Hollowell provided useful advice to delegates on how to deal with lenders in troubled times. He recommended that airlines review critically their obligations to banks, credit companies and leaseholders because even if the airlines have not missed a payment, they likely have an opportunity to negotiate a discount in rates and terms. When examining debt service obligations and the ability to obtain forbearance from a lender, Mr. Hollowell recommends examining whether the value of the bank’s or credit company’s collateral has diminished in view of market conditions. By so doing, an airline can approach its bank or credit company early if it anticipates being in violation of its loan covenant or debt/equity ratio.
Jonathan Leak, Senior Vice President of Risk Management at World Fuel Services, was the next panelist. Mr. Leak discussed jet fuel hedging and price risk management. Since the price of jet fuel, which can comprise anywhere from 10% to 30% of a carrier’s operating budget, can fluctuate widely, Mr. Leak advised mitigating price risk by entering into fuel hedging arrangements. Mr. Leak noted that a 1-cent per gallon increase in the cost of fuel could result in a $3.6 million increase in costs per year for a Latin American carrier. Mr. Leak recommended that carriers engage in prudent hedging and risk management but that they not speculate, attempt to use hedging as a profit center, or hedge because they think they can predict prices. Mr. Leak concluded by noting that he believes fuel price risk management is one of the industry's “best practices.”
The final Survival panelist was Tom Salerno, partner with the international law firm Squire, Sanders and Dempsey LLP and chairman of the firm’s Bankruptcy and Restructuring Group. Mr. Salerno began his remarks with a discussion of the use of bankruptcy in the United States by airlines and others as a tool for lowering costs and expenses, including those associated with expensive leases and labor agreements, and pointed out that U.S. bankruptcy laws are the most debtor-company friendly bankruptcy laws in the world. He then focused his remarks on the recent filing of U.S. Chapter 11 bankruptcy by Avianca, Inc., which was filed in New York even though most of Avianca’s assets and creditors are located in Colombia and throughout Latin America. Mr. Salerno predicted this case will be watched carefully by other airlines and other industries to see how successful Avianca is in using U.S. bankruptcy law to improve its leverage in dealing with its creditors, including several major aircraft lessors. He noted that the U.S. bankruptcy court has worldwide jurisdiction over all of Avianca’s assets and debts, and that, in addition to most of Avianca’s creditors, the Colombian Government is itself considering voluntarily submitting to the U.S. court’s jurisdiction under the theory that it has a better chance to recover in the U.S. proceeding than in any proceeding that might be brought in Colombia. This will provide Avianca with a single, company-friendly forum in which it can reduce expenses associated with a variety of obligations and debts.
Survival 101 and the Coming Age of the Airline Consumer
The next speaker was David Melnik, CEO of Kinetics, Inc. Mr. Melnik believes that passenger self-service (for example, self check-in) is becoming the dominant channel for distribution and service. Since September 11th, passengers have perceived air travel as taking longer and causing greater inconvenience. Self-service technology has helped ameliorate both of these perceptions. According to Mr. Melnik, now that self-service has come to be expected in the U.S., passengers traveling in or returning to other countries will expect the same amenity. An additional benefit of self-service is that it frees airline staff to focus on higher value activities such as assisting customers. In sum, self-service simplifies complex procedures and enhances customer service.
Luncheon Speaker – Nicole Piasecki
The luncheon speaker was Nicole Piasecki, Senior Vice President of Business Strategy and Marketing of Boeing. Ms. Piasecki provided delegates with the aircraft manufacturer’s perspective on the state of the aviation industry, including in particular Latin American aviation. Boeing forecasts slow growth in Latin America and the Caribbean over the next five years. Over the next twenty years, however, Boeing forecasts a higher growth rate of approximately four percent per year. Ms. Piasecki also took this opportunity to introduce to delegates Boeing’s latest aircraft, the 7E7, which will replace the 767 family of aircraft. According to Ms. Piasecki, the “E” in 7E7 stands for efficient, economical, environmental, and e-enabled. She believes the 7E7 is the perfect aircraft for Latin America since its operating costs and overall efficiency will help to improve the economics of any airline that flies it. Ms. Piasecki concluded her remarks by emphasizing that Boeing has worked with Latin American carriers in the past during economic downturns and that it wants to continue to work with the airlines of Latin America and the Caribbean to build a successful future.
Tourism on the Web – the Future is Here
Henry Woodman, President of World Travelvision, addressed the conference after lunch. Mr. Woodman suggested to delegates that digital brochures are of key importance to marketing because they can provide information about a carrier’s destinations, including the local weather, hotels, local activities, and fact sheets, as well as connect consumers easily to other sites that provide additional information. He recommended that airlines, tourist boards, hotels, and hotel associations work together to create digital brochures. Mr. Woodman noted in conclusion that distribution on the Internet is highly cost-effective and potentially far-reaching.
Cargo – Key to Survival Panel
The second panel of the Conference focused on cargo and was moderated by Bill Spohrer. Before introducing the panel, Mr. Spohrer gave delegates several cargo statistics that provided a useful context: air cargo traffic fell 5.9% in 2001, which was the largest decrease in U.S. history. The figures for 2002, however, provide a more optimistic outlook with cargo traffic expected to grow at a rate of 6.4% over the next 20 years. Mr. Spohrer stated that the perishables market, which accounts for 14% of worldwide commodities, was the only market that grew during 2001 and is predicted to be the fastest growing commodity during the next twenty years.
The first panelist to speak was Rob Zoller, CEO of KittyHawk. Because Mr. Zoller has spent most of his career in the aviation industry on the passenger side, he was able to provide the unique perspective of person newly involved in the cargo business. Mr. Zoller remarked that the focus in the cargo industry is on three issues. First, shippers, receivers, and manufacturers want peace of mind and reliability. That is, they want to know the location of their freight and how it will be transported. Second, commercial freight customers want rapid transport, seamless transfers, quick clearance of Customs, the knowledge that security regulations will not impede the transit of their goods, and time-definite deliveries. Finally, shippers also want access to tracking information on a real-time basis and the ability to track shipments via the Internet. Mr. Zoller stated his belief that entering into horizontal alliances or other relationships with freight forwarders and cargo carriers is the best way to operate and that these relationships will play a key role in the future of the cargo business.
The next panelist was Richard Haberly, the CEO of Arrow Air, who predicted that the aviation industry in Latin America would expand because that geographic area has very few roads and railways. Mr. Haberly sees the traffic rebound in the Brazil market (both northbound and southbound) as a good indicator that the rest of the Latin American cargo market will also soon rebound. He advised cargo operators to keep their operations safe and simple, and execute their business plans well.
Delegates next heard from Roberto Bianchi, Senior Vice President for North and Central America and Asia for LanChile Cargo. Mr. Bianchi said that LanChile Cargo attributes its success to adherence to four main concepts. The first is improved service, with investments in new freighter aircraft, improved cargo facilities at MIA, and both belly and freighter capacity to main markets. The second concept is enhanced efficiency as a result of improved cargo facilities and new aircraft. The third is increased flexibility—both in LanChile’s schedule and its ability to add capacity based on seasonal demands or new business. The final concept is expanded network capability. LanChile has entered into alliances with other airlines to expand network service in Europe and the Americas.
The final panelist was Fred Jacobsen, CEO of Tampa Colombian Airlines. Mr. Jacobsen told delegates that during 2002 Tampa battled Colombia’s economic crisis, an IASA Category II assessment, increasing competition and decreasing yields. Tampa was forced to return to the “basics” and, as a result, achieved six milestones. It gained financial strength by keeping costs down, regained market share, regained operational and technological capabilities, involved its employees, focused on quality of service, and standardized procedures. Its next steps are to continue to focus on quality of service, maintain efficiency, develop a global network through strategic alliances, and continue to focus on safety.
Wake Up Call: The Challenges of Airline Survival
Delegates were next treated to remarks by Steve Hazy, Chairman and CEO of ILFC, who offered his view of the challenges confronting Latin American and Caribbean aviation and suggested paths to survival and prosperity. Mr. Hazy likened being involved in Latin American aviation to living in a dangerous jungle where predators are numerous: large U.S. airlines, overtaxation and overcharges, high insurance costs, overdiversification of fleets, excessive infrastructure, increasing government regulations and restrictions, high fuel prices, and political instability (particularly in Venezuela and Argentina). He also provided what he termed his jungle survival techniques and advised airlines to streamline and focus on core markets and city pairs where the airline can be the dominant carrier. Mr. Hazy suggested that airlines make their fleets less complex, which will in turn reduce training, spares, maintenance, and overhead costs. Additionally, he recommended that carriers create regional codesharing and alliance agreements to minimize self-destructive competition and increase revenue by carrying cargo in freighters and passenger aircraft bellies.
The CEO Panel
One of the perennial highlights of the conference, the CEO Panel, closed the plenary session on Monday with Michael Miller, CEO of Miller Air Group, serving as moderator. The first speaker was Conrad Aleong, CEO of BWIA, who agreed that airlines needed to look at simplification of their fleets. Mr. Aleong noted that undercapitalization is a problem for BWIA but that problem is not unique to his airline. He observed it is difficult to obtain government assistance when an air carrier has no government ownership and it is also difficult to find investors for a privatized airline. In response to a question from delegates, Mr. Aleong stated that if LIAT and BWIA were ever to merge, now would be the best time to do it. According to Mr. Aleong, the Government of Trinidad & Tobago is interested in investing to combine the two carriers. Mr. Aleong reported that a decision will be made on a merger by the end of June.
The next speaker was Ernesto Asbun, CEO of Lloyd Aéreo Boliviano. Mr. Asbun sees a “light at the end of the tunnel” as a result of falling fuel prices and an end to the war in Iraq. He stated he has learned much in his year as CEO of LAB and shared with delegates not only his experiences to help increase airline survival rates, but also an impressive slide show of Bolivia and the history and future of LAB and the Bolivian aviation industry. He noted that to survive under current economic conditions, an airline must compete effectively against other airlines, operate in failing economies, deal with unstable fuel and oil prices, improve its load factors, simplify its fleet, improve and enhance cargo operations, control its budget, and enter into a dialogue with governments to make them produce benefits for air carriers but not impose on them unnecessary burdens. Mr. Asbun noted that survival is now a way of life and a catalyzing agent in all areas of the aviation industry.
The third panelist was Enrique Cueto, CEO of LanChile, who told delegates that LanChile recently celebrated its ninth year of consecutive profitability and provided his thoughts on why LanChile has been successful. According to Mr. Cueto, LanChile works hard to provide its customers with a consistent product, which it extends to all of its affiliated carriers. Every time LanChile uncovers a problem, it works to resolve the problem immediately. Although LanChile is efficient and highly competitive, Mr. Cueto pointed out that LanChile remains a full service airline. Mr. Cueto also noted his belief that every crisis brings opportunities to reduce costs, increase investments, create new companies, and try new things and the current economic downturn is no exception. He stated candidly that part of LanChile’s success is also attributable to luck, in addition to hard work, because LanChile currently enjoys a competitive advantage over many other airlines.
The next panelist was Pedro Heilbron, CEO of COPA Airlines. He stated that COPA is also profitable because of a combination of skill and luck. COPA is focused on fleet renewal, rather than growth, and strengthening its product and service while containing costs. According to Mr. Heilbron, this strategy has worked well and COPA has remained profitable so far this year. In the future, COPA intends to continue with its fleet renewal plans, which should be completed in 2004, and create a hub of the Americas in Panama. He noted that COPA has benefited from its alliance with Continental Airlines and hopes to join the larger Continental/Northwest/Delta alliance but has not yet determined how it will fit in the alliance.
The fifth panelist was Juan Emilio Posada, CEO of Alianza Summa, who told delegates that although Alianza Summa has experienced increased costs, it has also reduced its losses. He stated that Avianca filed for bankruptcy because he believed it needed to reduce costs to survive the currency devaluation, renegotiate its off-market leases, and reduce its operational costs. Mr. Posada believes that Alianza Summa’s growth is a result of its low cost/low fare transportation. He emphasized, however, that it needs to maintain quality, particularly in its international service, and to simplify its domestic operations.
Nelson Ramiz, CEO of Aeropostal Alas de Venezuela, was the sixth panelist and discussed how to survive five years of President Hugo Chavez. Although 2002 was a difficult year, Aeropostal maintains its strengths: it operates a fleet of aircraft that were purchased inexpensively and that perform well, it performs all of its own maintenance with a few exceptions, it makes its fuel payments in advance, and it has no labor unions. Since Mr. Ramiz does not anticipate recovery in the Venezuelan domestic market soon, Aeropostal is taking a conservative approach for 2003. The company has drastically reduced projections based on current operations and does not anticipate commencing service on any new routes. Mr. Ramiz is also reviewing the routes Aeropostal currently operates in Latin America and if he does not see improvement, he will shift his concentration to the Caribbean and Miami markets.
The final speaker on the CEO panel was Daniel Ratti, CEO of TACA Peru. Mr. Ratti attributed TACA Peru’s 2002 profits to decisions made during 2001, prior to September 11th. Specifically, TACA Peru operates a single fleet of new aircraft that are interchanged within Grupo TACA. TACA Peru remains a full service airline operating from Grupo TACA’s three major hubs: San José, San Salvador, and Lima. Finally, approximately one month ago, TACA Peru was awarded permanent traffic authority to operate on different routes in Peru after a five-year court battle. The airline looks forward to commencing service on these new routes soon.
Tuesday Morning Speaker – Jeff Shane
There was a very high turnout on Tuesday morning to hear Jeff Shane, Under Secretary of Transportation of the U.S. Department of Transportation. Mr. Shane noted that although the U.S. made progress during the 1990s to liberalize international aviation, service throughout the Americas remains highly constrained. These constraints have prevented consumers from realizing increased travel options and placed at risk ensure the ultimate survival of many carriers that open skies agreements were intended to protect. Mr. Shane proposed an alternative to bilateralism—a regional framework that would consist of two pillars. Under the first pillar, the governments of Latin America would replace the existing patchwork of bilateral agreements with a single market and agreement; the second pillar would link the new Latin American marketplace with the U.S. marketplace. Mr. Shane encouraged the CEOs to work toward this transition because, as industry leaders, they can convince their respective governments to work with the U.S. Mr. Shane told delegates that the U.S. would not alone determine what multilateral arrangement should be adopted, and noted that open skies is not necessarily a requirement for a new multilateral agreement. The U.S. would like to begin a dialogue to advance liberalization and does not want to delay liberalization because of current economic troubles. Mr. Shane believes that the air transportation market will rebound and that governments should take action now in anticipation of that rebound.
Virtual and Other Alliances
The final panel of the conference addressed the subject of Virtual and Other Alliances and was moderated by Jim Foster, President of Group Systems America. Mr. Foster summarized the problems that airlines face today: a decrease in business travelers, increased costs, and a widening revenue gap. He told delegates that the exponential rise of the Internet booking channel has propelled the low cost/low fare carriers forward and allowed them to challenge the major network carriers. The network carriers have responded by cutting costs, staff, and starting their own low fare carriers to compete. Mr. Foster predicts that the future will bring virtual alliances of unaligned carriers, which would be a solution for all carriers, not just low cost/low fare carriers.
The first panelist was Jaan Albrecht, CEO of the Star Alliance, who advised delegates that alliances are not a substitute for profitable online flying, but instead offer convenience to customers and cost reductions to their members. He stated that there are four key elements in a successful alliance: (1) the right organization, which includes common governance and a transparent structure; (2) aligned interests and objectives; (3) aligned product and delivery processes; and (4) a common infrastructure so reservations systems can communicate as if the reservation were made with a single carrier. He predicts that low cost carriers will expand but that network carriers will continue to play the most important role in aviation and that globalization will force airlines to work and grow together.
The next panelist was Marc Cavaliere, Vice President of Sales and Distribution for Spirit Airlines. Mr. Cavaliere noted that although there are many interline modes, conventional interlining is expensive and can shift the focus from a carrier’s core business. He believes there must be sufficient traffic to justify the time invested in an interline arrangement and that the interline arrangement must be beneficial to all parties (that is, end-to-end feed rather than overlap). Mr. Cavaliere discussed the two formats used for interlining: Internet based (virtual interlining) and bilateral agreements. According to Mr. Cavaliere, the benefits of interlining with low cost carriers include instant access to the U.S. domestic market, an increase in incremental traffic, less route overlap and more route complement, and less risk of passenger migration.
Rick Blake, Vice President of Marketing for Cayman Airways, spoke next. Mr. Blake noted it is difficult to define a virtual alliance because it is a concept that has been emerging over many years. He divided the market into four long-standing segments of travelers: demanding, dependent, self-reliant, and bargain hunter. The demanding passenger is not price conscious and wants all amenities (the typical business traveler). The dependent passenger is characterized by the inability to make a purchase without the help of a personal assistant, secretary, spouse, or travel agent. He or she is not influenced by price and will travel on any carrier selected by the third party. The self-reliant passenger is likely to have the pocket OAG and airline system timetables in his or her briefcase. This passenger makes his or her own choices and purchases based on a mosaic of schedules and price. The bargain hunter is extremely price conscious and would accept one or two connections if he or she could save money. Currently, there are fewer demanding and dependant travelers and more self-reliant passengers. According to Mr. Blake, bargain hunters have now permeated all categories of travelers because of the worldwide economic downturn. Mr. Blake believes that alliances have now taken the place of interlining and the virtual alliance is still evolving.
Raymond Neidl, an airline analyst with Blaylock & Partners LLP provided some colorful and unique stories about his experience in the aviation industry. Mr. Neidl began his career with American Airlines where he worked with American’s current president, Gerald Arpey, in finance and planning positions. He subsequently held positions with ABN-AMRO Securities, ING Barings and Dillon Read.
Juan Arbelaez, Director, North America for Avianca, was the last panelist to speak. Mr. Arbelaez provided thoughts and recommendations for Latin American and Caribbean carriers to consider before joining an alliance. He believes that small carriers should not consider joining alliances as full members currently because it is too costly. The critical issues to consider before joining a global alliance are the alliance’s culture, the alliance’s governance mechanisms, a carrier’s prior experience with individual airline alliance members (for example, codeshares and interlines), the strategic focus of key partners, and personal chemistry and trust. He also believes that smaller carrier members can benefit from the “halo effect” of an alliance by saving money on global advertising and press exposure, obtaining a global sales force, obtaining a global presence, sharing best practices, coordinating government affairs efforts, obtaining an antitrust immunized selling environment with key partners, and participating in cost-saving opportunities such as joint purchasing and training.
The conference concluded Tuesday afternoon with summary remarks by Sandy Sinick.
ConclusionThis article provides only a brief summary of the speeches and presentations made during the Conference. Please see http://www.ceoconference.com for copies of the full text of the speeches and presentations available currently.