{audio:0:00:29} Wayne, how do you compare today’s situation, in the airline industry, to 2008?

{audio:0:00:37} The incredibly interesting thing about both of these is that they built up over a number of weeks. In fact, 2008 took even a bit longer. There’s this sense that something’s coming. In the beginning, we were getting assurances of, don’t worry, it will go away. That’s usually what political leaders try to tell the general population, or otherwise, we’re too worried about too many things. But really what happened in 2008 was, there was this moment when Lehman Brothers went over, back in about August. When that happened, there was an immediate, impending fear that went through the community. We all started to feel, my god, are we really looking at a total collapse of the financial system and is this the verge of the Great Depression, again? We were all very, very worried.

{audio:0:01:26} I remember sitting around the board table, at Etihad, thinking what are we really dealing with here? Fortunately, in that situation, we were in Abu Dhabi, which is one of the most oil-rich countries of the world, prices had spiked, we knew the government had money and we knew we’d get through it. From a personal point of view, it was a very terrifying situation, as well.

{audio:0:01:47} We also had a tremendous amount of aircraft on order. As the chief of strategy and planning, where I looked after fleet, network revenue management and a lot of the issues that involved, my concern was, what am I going to do now? You immediately go from the big issue to, how do I make the business work and minimize the damage and, actually, try to look for some opportunity.

{audio:0:02:10} Just looking at demand, can you give me a sense of how executives were looking at demand and the evolution of consumer behavior and demand, in the boardroom, in 2008/2009?

{audio:0:02:29} What you’re really dealing with there is one of the most important things of all and that’s staying on top of your data. Companies that are really good at being data intensive, analytical quickly, and not getting immersed in the data – the old question about paralysis by analysis – but instead, understanding it, working out where you are and doing something, is super critical. Companies that immediately go to the data, get a conclusion and work their way through it. People who don’t look at data and just sit around, get into terrible trouble, very quickly. Once you get into trouble, it takes a lot longer to get out of it than you think.

{audio:0:03:11} How did you look at demand, coming out of 2008/2009 and how would you compare that to the situation today, for both business and leisure travel?

{audio:0:03:23} Then, it was better, because it didn’t stop. Now, it’s stopped and hardly anybody operates anything at all. It’s just completely finished and you’ve got virtually nothing operating. Back in 2008, we could see demand collapsing and there were certain routes that held up better than others. The trick was to – when you run a network airline, with a big hub and spoke – look at what is the traffic that is surviving and you move the capacity to it and really focus on it. The place where capacity is failing, you take it away from it.

{audio:0:04:05} If I go back to an earlier example, which was 9/11, which happened in later 2001 and ran through to 2002, and I ran a travel company. I was fortunate that I’d invested in an intensive data management system. I could see, literally within two days, demand had moved away from people going from England to the United States and had moved enormously to the United Kingdom going to Europe. I shifted our whole sales and marketing program to that market and that’s how we survived. I always go back to data. You must look at the data and look at the revenue and compare it against your cost.

{audio:0:04:43} How do you think consumer behavior will change for travel, in the next five years?

{audio:0:04:50} It all depends on whether or not there is a solution. Is there a vaccine or not? If there’s no vaccine, you’re only going to get the bravest people or those with the greatest need to travel and everybody else is going to be very conservative. We can already see, in society, that there are people who are willing to take a lot more risks than others, but the great bulk of the population is following the government’s restriction. So if there’s no vaccine and we don’t get a breakthrough on what happens when you get sick, you’ve got to think that people are going to go a lot more local. You’re probably going to start to get a lot more travel around the UK, if you’re a resident there, or the US, if you’re a resident there.

{audio:0:05:30} But I tend to think a lot of the more exotic destinations, like going to Africa, Far East, long-haul travel, even going to Australia, even though it’s safe, people will always be afraid, in case something happens and they can’t get back quickly.

{audio:0:05:46} Can you elaborate on that strategic decision. You’re at Etihad; you’re managing the network, you see travel and demand change, in routes and across the network, how do you think about managing that hub and spoke network, during that tough time?

{audio:0:06:10} When you’re looking at that issue, you can see that certain travel did hold up. Some of the business travel sectors, on the big blue-ribbon routes, were still okay. When you got to routes that you were trying to stimulate business traffic to and it was leisure travel buying up, that tended to fall away, because people really wanted to go for price. Everyone became extremely cost conscious.

{audio:0:06:35} So what happened in that situation is, to get the traffic, you had to drop your price. We were in a position that we could, in that with a big hub and spoke network, you can look for wherever the traffic is willing to come from and to and go to that market, but we did discount a lot. It really was terrifically bad, from a profitability point of view. The impact rolled on for about two years. From Lehman Brothers, a bit less than a year. It was pretty bad. But once you got through that, it did come out a lot more quickly than I thought, after about nine months, actually.

{audio:0:07:11} With the hub and spoke model, if you do lose a slot or a route, does that multiply the impact on your network, because you’ve reduced the number of connections?

{audio:0:07:22} How do you look at managing that challenge, in a down market, where you’re actually reducing capacity, overall?

{audio:0:07:28} It’s a good question. In a situation like that, let’s say you operated a flight from Abu Dhabi to a point in Europe and that flight was losing a lot of money, the question becomes, is it still covering the variable costs? The basic costs that an airline has got to cover is the independent cost of actually making that operation. That’s going to come down to things as simple as the fuel, the cost of the crew’s salaries, air navigation charges. Are you better off grounding the flight? So the issue that you are always looking at is, if you can cover that, the next decision point you’ve got is, can I find somewhere that I’ll get a greater revenue, at a greater delta? In a situation like that, it’s very hard to do it, because normally, when an airline puts on a long-haul flight, it takes up to three years to get it from losing money, to profitability.

{audio:0:08:25} On the whole, you’re better off sticking with what you’ve got or giving it up and grounding an aircraft when you’re in very bad times. But that’s a tough decision, because then it starts to trigger employee numbers and furloughs and lay-offs.

{audio:0:08:40} Do you think the low-cost carrier model can take market share from the hub and spoke model, in these times? How do you look at that, competitive landscape?

{audio:0:08:52} Low cost has been very, very successful in short haul. But so far, it’s struggled to get going, long haul. Etihad was, essentially, a long-haul carrier so it certainly didn’t bite us then. In the situation you’re raising now, it’s pretty interesting, because you’ve got this new factor coming in that says, the government is considering, when it allows airlines to re-operate, what are you going to do about social distancing, until we’ve got a vaccine?

{audio:0:09:21} Even Ryanair has come out and said, we’re not going to let the middle seat be empty. A whole lot of people have said, if you’re operating a narrow-body aircraft, with three seats on the left and three on the right, have the middle seat, on both sides, empty for social distancing. He’s come out and said, I can’t do that, because I’m going to, basically, lose two out of every six seats and that’s just too much; I can’t do it profitably, because what’s that’s going to do is, drive the entire cost structure up.

{audio:0:09:50} If governments and regulators start coming out and saying, airlines have got to observe some social distancing on the airplanes, it probably works in first class and business, but for economy, the only thing that’s going to do is to really increase the prices enormously. I don’t think that’s sustainable. The only way you’re going to really work around that is that they are going to have to find a compromise of how do you offer maximum protection?

{audio:0:10:12} So are we going to be looking at seat barriers, in economy class? Are we going to require everybody to wear masks for the whole journey? Are we going to require people to wear gloves? Are we going to feed people or tell them to eat before they get on the airplane and bring their own bottle of water with them? The more of that we do, you start to introduce an element of risk.

{audio:0:10:36} How do you think this will evolve? Do you think the regulator will actually take out the middle seat or enforce that stricter distancing, on a plane?

{audio:0:10:46} Economically, I don’t think it will work, that’s the problem. I don’t think people will be able to afford to travel. If that happens, you’re going get a price increase of about 40% and that’s going to knock a lot of the market over. Then all we’re going to have is, airlines going back to operating a much-reduced schedule. There are already a number of people who have come out and grounded many of their larger airplanes and there is this expectation that it will take two or three years to get anything back to normal.

{audio:0:11:16} That’s been current now and people have been saying that for a good month, six weeks. But I noticed, recently, that the chief executive of Air France came out and said, “No. I think, by the end of the year, we’ll be back to 70% capacity.” But then he threw in a few little provisos like, as long as there is effective medication. If there is effective medication, I think we’ll all get through this pretty quickly. The real question is, how long is it going to take us to get there? Unless you’re into drinking drain fluid, I’m not sure what the answer is.

{audio:0:11:51} I’m curious about your views of how the market structure will change. As you said, commuter flights are likely to remain. Short, local flights; less long haul. Do you see the overall market structure changing, in terms of the total demand decreasing and then more local flights, more business relative to leisure?

{audio:0:12:27} Every time we’ve gone through this, in the past, everybody has said, the world will be different. Every time we’ve bounced out of it much, much more quickly than anyone has ever anticipated. The recovery mechanism has always been, airlines, hoteliers and everybody, dropping their prices, having enormous stimulations and a lot of the market thinking, I can’t afford not to go. People have been prepared to take more risks than they ever would, in a situation like that.

{audio:0:12:59} This is different, in that they’re not going to take that risk if they think there is a true risk to their health. Of the industries involved in travel and tourism, the one that has got the greatest danger, is undoubtedly the shipping. The stories of cruise ships and being cooped up with 5,000 people have been heart-rendering. However, air travel, a lot of people are going to say, look, if I go to the airport and I get through it pretty quickly, on a short haul and I only fly for an hour, an hour and a half, I can sit there with my face mask on, not eat and drink and then run away at the other end; I should be okay. I think that’s where people will start to take a lot of risk, early on. The element of risk is too small.

{audio:0:13:41} The long haul is the danger. That’s going to really make a lot of people think twice. I do think we’re going to have to get to a point where the government is coming out and saying, we think this has completely receded and you can all go back to travel and the incidence of illness has been reported as very low, or we get a vaccine.

{audio:0:14:01} Do you think that will hurt the Gulf airlines or the larger carriers, more than the smaller LCCs?

{audio:0:14:09} It’s a good point you’re raising, because what would you do now, if you were going to go to Bangkok, which is one of the greatest tourist destinations in the world? The Gulf carriers carry an enormous amount of traffic there. How would you feel about flying from London to a Gulf point, getting off, having a two and a half, three-hour transit, with massive volumes of people, from all over the world, milling around, getting on another airplane and going to Bangkok? Or would you rather get on BA or Thai Airways and fly directly there and, maybe, pay £30 or £40 more? What would you do?

{audio:0:14:48} Yes; you want to minimize all interactions, at this point.

{audio:0:14:52} I think that’s right; I think you do. I think you want to say, I want to make sure that I can come back out of this and still be alive and well and be with my family and workmates.

{audio:0:15:05} Can we step back to 2008? You’re at Etihad in a strategic role. What were you focusing on? What were the core principles and factors you were really focusing on, once you’d realized you were going to survive and Etihad were going to be fine, because of the Gulf state and the oil?

{audio:0:15:30} In the beginning, it was just, how do we minimize this? We had a fleet of about 40 aircraft at that time; fortunately, it wasn’t too big. We had gone to the trouble of building a very effective hub and spoke network. So it was staring at it and, very quickly, coming to the conclusion of that paradigm that I was discussing earlier – if you cut a flight, where do you put it? It didn’t stack up. On top of that, we had a lot of extra aircraft coming in; almost one a month. They were three wide bodies for every one and a half narrow bodies. So we had to drive a long-haul network and the long-haul network had to feed itself.

{audio:0:16:10} I was obsessed with saying, when the next aircraft come on, I’ve got to put one onto Europe and one onto Asia. Or if I put one onto Australia/New Zealand or one onto America, I’ve got to balance it on the other side. I was just continually saying, where’s the strongest points of origin and where do they go? That was our obsession. The thing I’ve learnt from the very beginning is, just live in the data. Analyze it, understand real value, don’t get down into the grass roots too much, and we were just trying to do our best to get by.

{audio:0:16:50} We were price aggressive. We did have a strong marketing budget and we kept the marketing budget up and I think that was very important. But it shifted from brand to tactical. More price, today’s flight, hot destination, great deals, and we got out of it quicker than I thought and I was very pleased with that.

{audio:0:17:08} My experience in running a large British travel agent, for eight years, while it was on a tiny, tiny margin and had a massive volume, taught me that lesson. You had to really understand where value was and chase it all the time and live on it, day by day. That’s what I’d encourage anyone to do. Don’t fall into the trap of sitting around talking about what you think; live on your data. Do what you learnt at university. Go away and research and write papers, based on what the empirical information tells you. If you don’t do that, you’re going to get into a lot of hot water and it’s a lot harder and a lot more expensive to get out of it than you can imagine.

{audio:0:17:49} How did you approach managing your fleet, when you were trying to manage demand and manage these orders that you had committed to?

{audio:0:17:57} One of the really big things in an airline is, you’ve got multiple aircraft types. In those days, we had the 777-300ER, which had about 360 people on it and we used that for the big people routes, down to Manila and Bangkok, where there were huge volumes of traffic and it was a small business class and a big economy. We had some aircraft that we configured with three classes that we’d use, for example, for Heathrow. A big first class, a very big business and a smaller economy. It was very much a case of trying to match the right aircraft with the right product, for the right market and make sure that what it connected to could carry it.

{audio:0:18:35} How did you navigate that conversation with Airbus or Boeing, when you had one aircraft delivered, per month, at that stage and the market is in crisis? Did you cut the orders? Did you defer the orders? How did you approach that?

{audio:0:18:57} That’s a really interesting point, because the manufacturer doesn’t want to defer them. It’s exactly like right now. If you go to Airbus or Boeing and say, I really wouldn’t mind putting all my airplanes back, they’re going to say, you’ve got a contract. If we defer you, we haven’t got any other buyers, so you’ve got to take it. Recently, the chief executive of Airbus, came out and said, he was cutting back production jobs in the United Kingdom. Boeing had already announced that their 787 – at their peak production, they were knocking out 13 per month, which is a staggering number – they were going to start to cut that back down to about seven.

{audio:0:19:38} To give you an idea, Boeing and Airbus, with the 737 and A320, build between 50 to 60 aircraft, per month. It’s almost incomprehensible. The worldwide demand was just huge. All those order books are sold out for, literally, a couple of years. So if somebody comes in, running British Airways, in the good times and said, “Traffic is not working as well as we wanted it to, Boeing or Airbus, I want to put some orders back.” They would probably say, thank god; we need someone like you, because we’ve oversold. In bad times, they don’t want anyone to do it.
{audio:0:20:15} We couldn’t get out of anything and we had this huge order book. The answer is, you have to make do. You have to do the best you can.

{audio:0:20:23} They weren’t really flexible, at all, in deferring?

{audio:0:20:26} They can’t. They were probably scaling back, but the problem is, it takes you a couple of years to build an aircraft, with the whole supply line. If you go to the Boeing factories in Seattle, it’s amazing. They build a 737 in, literally, 14 days. It’s incomprehensible. I stood there and looked at this line and, every day, this plane gets shunted one position further on and they bolt on the wings. The next day, they bolt on the engines. The reason they can do that is, all those things are built and assembled in multiple factories, not only in the United States, but all around the world. You’ve got all this stuff built for years out and you can’t just put a stop to it.

{audio:0:21:16} The trouble is, when you do start to slow it down, it’s like a super tanker and it’s going to take you another enormous period of time, a couple of years, to ramp it up to where it was. All those people who have stopped building their part of the aircraft have been laid off, gone away, the factory has shut, converted to building something else.

{audio:0:21:35} Do you think the situation today is different from the situation in 2008?

{audio:0:21:42} Today is worse, because there is no demand. Virtually nothing.

{audio:0:21:46} But in terms of the fleet management? Do you think Airbus and Boeing will be a bit more flexible today, because of the state aid? How do you think they are looking at that?

{audio:0:21:55} They’re saying they’re going to slow everything down. They’ve got no option. They have to slow it down. Airbus had already said they were going to stop making the 380 and they have to slow it down. The other thing that starts to happen is, airlines can’t afford to pay. About 30% of all the aircraft out there, airlines get from leasing companies. Let’s say, you ran your own William’s Aircraft leasing company and I might have three A320s from you. I might be paying you – I’ll make up a number – half a million dollars a month. You’re ringing me up and saying, “Wayne, we’ve known each other for a while, but I haven’t got your check from last month.” I’d say, “I haven’t got any money. What are you going to do? Come and take my plane away?” I would probably tell you, take it, but who are you going to give it to?

{audio:0:22:56} I think this is one of the most interesting questions, right now. They were producing 60 odd planes a month, a huge oversupply of planes now. If you’re managing a fleet, do you upgrade to new planes? Do you scrub the old ones? Do you run the old ones now, because the fuel is cheaper? How do you look at minimizing your variable costs?

{audio:0:23:23} You’ve raised another really interesting question, because there’s been this massive, unbelievable, improvement in technology, in aircraft, over the last 50 years. A lot of people say that the airplanes look pretty much the same. There’s a lot of truth in that. If you look at a 777 produced now, compared to 30 years ago, you could put them up against each other and they are very similar. But the efficiency of those aircraft is just staggeringly different, in terms of the amount of fuel per passenger that they burn. What’s happened that is so extraordinary is the cost of oil – and in the aviation industry, we call it Brent Crude – has gone down from a period of about 2008 to 2012, where we were paying $110 a barrel, to now, where you can buy it for about $25 a barrel. That is incomprehensible. It’s like taking the price of fuel back 25 years.

{audio:0:24:25} Everything that justified that extraordinary capital investment in jet engines, composite materials, amazing sophistication, to get the drag down of the aircraft, has gone. If I’m sitting there, running an airline now, I’m going to think, I can almost use anything because, as long as it can actually make the mission and back, it will work, because the fuel isn’t going to be the difference that it once was. What a lot of airlines are doing now, and how they’re making dollars, is that they are using passenger aircraft, believe it or not, as cargo planes.

{audio:0:25:02} What they do is, in the hold of the aircraft, like a 777-300, you could probably put about 20 tons of cargo. Originally, we’d have about 12 tons of cargo and eight tons of people’s baggage and other stuff like that. So you stick all that in cargo, and they don’t take the seats out. You either just put boxes down and tape them onto the seats, believe it or not, and these things have been converted into semi-freighters. When you talk about flexibility, you’ve got to be prepared to do anything.

{audio:0:25:33} What you suddenly start getting your crew to do is operating all these services for freight. As long as you can cover the variable costs, you’re ahead. So anything goes.

{audio:0:25:44} As you said, you’d rather own older planes, today, than the newer A320neo, or newer planes, which are more expensive?

{audio:0:25:54} There are a lot of people making some pretty incredible claims about a vaccine, at the moment, including Oxford University and some people in the States. Let’s just say, for argument’s sake, that happened, and oil didn’t go up, materially, and it stayed at this $25 mark, Brent, approximately. I wouldn’t be in a hurry to buy anything new, that’s for sure. If I had aircraft that were, eight, 10, 12, 14 years old, I would think, I’ve paid it off, I’ve got a higher maintenance bill, like your car – you pay more maintenance as it gets older – but I’d say, I’m going to go with that. I can’t afford the capital, anyway. I’m pretty broke. So I’d rather just use my old planes. If anything, put some nice seat covers on. I wouldn’t bother to paint them, because not too many people look at the paint outside, unless it’s an ad. I would just get people on and focus on the service for the customer. That’s what I’d do, bearing in mind what the guy actually sees, when he or she is sitting in the seat.

{audio:0:27:06} Most people’s interaction is defined by a tiny amount of space. It’s what do you see on the back of the seat in front of you, which is the in-flight video and who is that crew member coming down the aisle? How are they interacting with you as that personal skill is a big deal? What do they give you to eat and drink? Increasingly, and I imagine when you go on an airplane, you probably take something like an iPad, and you watch movies you’ve already downloaded and you skip whatever is on the screen in front of you, anyway. You’ve probably got a bottle of water. A lot of people, if it’s short haul, have brought something to snack on, anyway.

{audio:0:27:38} It’s very important that you make whatever is there acceptable to people and that’s probably where I’d put the bit of money that I’d spend, if I spend anything.

{audio:0:27:49} As an airline executive, how do you look at the role of lessors, in this industry and how that, potentially, is going to now change, going forward?

{audio:0:28:00} I fear that a number of them won’t be around, in every industry. They’ve got this ongoing, massive obligation, to financiers. They’ve played an incredible role and you often get the question of, why do you lease an airplane? If you put a middle man into anything, it’s going to add a cost. If I rent from William Leasing, over time, I’m going to pay you more than if I’d bought the aircraft from Boeing or Airbus, as a general rule. There are a lot of circumstances that affect that, like how good a negotiator you are, how desperate the manufacturer has been to sell, how aware am I and all the rest of it. But why people lease is because they haven’t got the capital. They can’t raise the capital. The capital amount is too great. They don’t want the encumbrance of owning the aircraft. They might be attracted to a deal where you come along and say, hey, Wayne, I’ve got a great A320. It’s only 10 years old. I’ll lease it to you for six years and, instead of the market rate of half a million, I’ll give it to you for 250. I’ll say, I can afford 250 a month, but I can’t afford $40 million for an airplane.

{audio:0:29:14} So I think they’ll always be there and they provide a valuable service.

{audio:0:29:19} But they’ll be leasing the older planes to you, that you can afford? Not the new planes?

{audio:0:29:24} They often lease you new planes.

{audio:0:29:26} But today, would you take that new plane or would you say, actually, I’d rather lease the old plane, at a much cheaper price, because the fuel price is much cheaper now?

{audio:0:29:35} You’ve got it. I’d go for something like eight, 10, 12 years old. It’s a good price, maintenance isn’t bad, you’ll get a cycle of four to six years out of it. Give it back or renegotiate a better deal. When they get past 16 years, they get pretty cheap. It’s the end of life, because aircraft last about 18 to 20 years. Sometimes they fly a bit longer than that, but usually, the maintenance bill is getting pretty high. I’d go for those older airplanes. I wouldn’t be attracted to the new ones, with fuel as it is at the moment.

{audio:0:30:11} This is a tricky spot for the lessors, who have huge orders and a huge fleet, today.

{audio:0:30:19} Their big issue, right now, like everybody else, is that they fund all that by somebody having loaned them the money. They can’t get the money off the airlines and the banks want the money off them. Are Airbus and Boeing going to get some money? There’s been a lot in the press about Boeing getting money from the American government. Are leasing companies going to be able to get money off governments, to stay alive, because some of them are very, very big? Some of these guys own several hundred aircraft. If they go down, what’s going to happen to all of those airplanes? Let’s hope that that doesn’t happen. Let’s hope that everybody finds a way through it.

{audio:0:30:56} But you can see the ramifications of it going through the industry, already. Boeing had been in a lot of financial trouble, because of the 737 MAX. It had made this gigantic deal to buy into Embraer, for $4 billion. That came about a year after Airbus bought into Bombardier, out of Canada. Boeing has just walked away from the at $4 billion deal and said, we can’t afford it, because they are already in so much trouble. The longer this goes on, how many of those sort of deals are we going to start seeing going on? In Europe, this has been since the start of March. We’re towards the end of the second month. Imagine if it goes on for another six months. It’s going to be pretty hard, for everybody.

{audio:0:31:43} If you were at Etihad today, or running an airline, would you take on the MAX? Let’s say that Boeing fix it and upgrade the software, again and FAA approve it. Would you take that aircraft?

{audio:0:32:01} You’re getting this confluence of all these different factors. First of all, usually, a contract is pretty hard to get out of. However, usually, in the contracts, there are reasons that, if the manufacturer doesn’t deliver within a specific time period, you have a right to get out. Some people might not have that in their contract, which makes life pretty difficult for them. But if you had that, you’re going to be tempted to look pretty hard at it. With fuel at the price that it is at the moment, and god knows what the demand of the network is, you’re going to be very careful about wanting to add anything to your fleet requirements.

{audio:0:32:38} If I were in any situation, at the moment, I’d hold off any obligation I could get out of, until I could get a better view. That’s always what happens. Then you get this tipping point. The tipping point comes when everyone thinks, we’re on again. Then they all go running off after whatever they can get, and prices start going up. You’ve got to be a very fine judge and, usually, you can afford to take risks if you’ve got a lot of capital. If you don’t have a lot of capital, you’ve got to be careful.

{audio:0:33:10} On the MAX issue, what is the time period, typically, in these contracts, where you can leave the contract with no penalty?

{audio:0:33:22} Usually, between one and two years.

{audio:0:33:25} So we’re getting into that period, now, for the MAX. I think they were grounded March 2019?

{audio:0:33:31} Yes, you’re right. I think it was March 14th 2019. A lot of it is triggered and you’ve seen that people have started exercising that. What Boeing needs, is the FAA, the Federal Aviation Authority of America, to come out and say that the aircraft is fine. But another issue that has happened in the industry, is that because the FAA approved in originally, a lot of governments or their aviation authorities – who have always treated the FAA as the gold standard of the industry – have said, we’ve gone along with you in the past. Maybe we’re going to make a bit of a more self-informed decision, in the future.

{audio:0:34:22} The original intention was that everybody could go, hey, the FAA has done it, let’s go. Now people are saying, we’re going to be participating in this. You’re getting this big grouping of governmental authorities, all wanting to be involved. It might not happen in one go. It might be that some people aren’t willing to or take longer or have their own due process, which is their right.

{audio:0:34:50} I want to speak about coming out of a crisis and what you’ve seen in 2008, 9/11, about how behavior of executives changes but also, demand bounces back. How did you see load factors increase or demand come back to market, in 2008/2009?

{audio:0:35:12} It was a slow process. The first thing that you could really see was happening was the share market responded. It was in the first quarter of 2009 that smart money went back into the American market. I was surprised, because it had already decided, even though Lehman Brothers had fallen, I think, in about August 2008, maybe a bit earlier, that the smart money was already saying, we’re going to come out of this. There’s an interesting debate going on about, is the smart money already doing it now and that, we can have another conversation about. That’s a pretty tough one, but I think there are still a lot of risks now. I was surprised when I saw the market going up and we did start to see the traffic come.

{audio:0:36:03} We were really pushing it. We were advertising, putting in big rates with the tour operators, other different forms of distribution, a lot of tactical advertising. But it did get a heck of head of steam on it and by the second half of the year, we were pretty much back to normal.

{audio:0:36:21} I had some charts here earlier, that I dug out and some of them are just staggering, how quickly things responded to recovery rates. Economically, it doesn’t work like that. If you look at something like air traffic growth from IATA, in 2008, you see that huge chasm that goes down there, that red line, that just went down and back and it was all over in a year. When we went into it, I thought, this is the Depression, much like we’ve been feeling about this one. How bad is this really going to get? Yet, somehow, we got through that. At one point, we were all afraid our individual banks would fail and whatever we’d saved up was going to go to the wall. A lot of people have felt that experience now. So far, people have been able to keep it in very good shape and I think there’s a more optimistic attitude out there now, than there was a couple of months ago. That was like the 2008 crisis. As I said, first quarter, the US market started to lift and by mid-year, we were really going. It was incredible. And we were resuming these aircraft, at least one a month. We started to expand, heavily, into America and connected to the Indian sub-Continent and the Indian market really started to boom, for that area of the world.

{audio:0:38:01} How do you think today is different, where you’re actually at zero and you’ve got to go from zero to much higher load factors?

{audio:0:38:12} Tougher, for sure. It is so different because, a financial crisis, if you’ve got the money in the bank and you know, when you come back, you’re still going to be okay, it’s not a health risk. The health risk is a much bigger deal. You look at England. Where do the big traffic flows go? Europe. So people are going to be very encouraged to start there. That’s what we found after 9/11, back in 2002. The initial traffic recovery was short haul, no question, because it was safe. People could go to Europe, they felt safe, it was only an hour and a half away, at the most and that’s where the recovery will come from.
{audio:0:38:56} Once they got that trip out of the way and got a bit of confidence, they started going long haul, back to Asia. Australia really did take a beating, for a while. But it did come back and when it did, there was a lot of pent-up demand, so it did well.

{audio:0:45:44} What was your biggest challenge as chief strategy and planning officer at Etihad?

{audio:0:45:55} That’s a good question. We bought, in 2008, the biggest aircraft deal in history; 100 airplanes. Split, pretty equally, between Boeing and Airbus. That cost about US $20 billion. Putting that to the principle stakeholders was an extraordinary undertaking. Convincing them that it would work and why it would work and why it was in the interests to do it, that was a big deal. To say to myself, do I truly believe this company is capable of such a massive understanding, that was a big deal. We did negotiate it. It was a huge series of negotiations, enormous value and it did work. It changed Etihad from, when I joined, 17 aircraft, to a company now, of about 150. Parts of that were replacement of older, antique aircraft; very old aircraft that had been gained, on lease, when we came in, and stuff like that. But it was still a massive and undertaking and it was successful. But I took that very personally. Anything you do, you can’t divorce it from your own creditability. It’s like you saying to your partner, in life, I’m going to make this work for us and, if you’ve got kids, I believe this will be in the best interests of the children. You’ve got to have that sense of personal commitment or responsibility at work, or your creditability will die or it won’t be as good.

{audio:0:47:46} What was the rationale around that huge order, from the OEMs?

{audio:0:47:52} You could see it was happening. You could see that there was this colossal demand. Where the Gulf is, you could connect all of Europe, down to all of Asia and Australia and you could sit right in the middle of it. It was about six hours, either way, unless you went to Australia and New Zealand, which was longer. You could fly to America, which was more like 14, and you could connect up to the Indian sub-Continent. You could see the traffic was there. The growth rates on some of this stuff was unfathomable.

{audio:0:48:31} It’s much harder for British Airways to operate. Unless it goes from Heathrow, it doesn’t fly long haul. Whereas we would fly into multiple different cities – London, Birmingham, Dublin, Manchester and so forth. We would do all that and we would take traffic from them all and connect you with 20 cities in Asia, plus a whole lot around the Gulf area, plus Australia. It gave people a lot of preference. We were even taking traffic from the East Coast of America, to Australia. Almost unfathomable. And it worked.

{audio:0:49:07} Why did you buy directly from Airbus and Boeing, versus the lessors?

{audio:0:49:15} Because we could get the capital and an aircraft order of that magnitude was just so colossal, you could gain anyone’s attention. It was the biggest aircraft order in history. You could sit down with the most senior people and drive tremendous pricing. It’s like Tesco or anyone buying in bulk, you always get an advantage and it doesn’t matter what you’re buying. It means that they sell a lot of their production line in and it does make sense, because it’s one big deal done. It is cheaper for them and has efficiencies, as opposed to doing that in 20 independent deals. Certainly, the material cost hasn’t changed, but it’s just a lot more convenient and it sells it a lot of the line.

{audio:0:50:08} What do you think is the biggest challenge for an airline exec, today, assuming they’ve got the capital and they’re going to stay alive and they’ve passed the first liquidity test? Strategically, maybe you can split it between low cost carriers and the typical flagship carriers, what do you think is the biggest challenge?

{audio:0:50:31} You’ve got to work out what your niche is. I think the world has just changed and we just don’t know what it will be. But if we went back to pre the coronavirus, there was so much capacity around and so many people going for so much growth and so many low-cost models that emerged, that it was a very crowded marketplace. The industry grows at, roughly, 5% per year, but everybody was trying to get a stake of it. All that does is put a lot of pressure on the price. You really had to be, increasingly, watching the margin on everything and the cost on everything that you did. That’s okay as it brought a lot of benefit to the consumer. But it, largely, homogenized, a lot of the products that were being in the market and they were taken for granted.

{audio:0:51:27} I think, post-crisis, we don’t know what it will be. A lot of that depends on how long does it go on for and is there a medical solution or not or how long it takes to get it. That’s probably a better way of putting it. I think it’s certainly going to be very different, but we don’t know what it is.

{audio:0:51:50} Wayne, I think that’s a great place to end. It was a pleasure.

Airlines: Outlook on Travel Demand

Former Chief Strategy and Planning Officer at Etihad Airways

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Wayne Pearce

Former Chief Strategy and Planning Officer at Etihad Airways

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Airlines: Outlook on Travel Demand(April 28, 2020)

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