Will aviation make it to net zero? Will airlines have to sacrifice demand for sustainability? Are carriers delivering on customer service? Listen in as aviation experts Peter Davies and Patrick Edmond discuss challenging questions for European airline CEOs.

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Rush Transcript

Victoria Moores:

Hello everyone, and thank you for joining us for Window Seat, our Aviation Week |Air Transport podcast. I'm Air Transport World Europe and Africa Bureau Chief Victoria Moores. Welcome on board.

This week, I'm joined by Patrick Edmond and Peter Davies, who are two colleagues that I've known for over 20 years and I respect them as great, challenging commentators on the aviation industry. So Patrick is managing director at Altair Advisory, and that's a consultancy firm. He's an engineer by training and he's worked with many airlines and airports with a particular emphasis on regional airlines, quite often. Peter has been chief executive of several airlines and he's worked with DHL, Brussels Airlines, Air Malta, SalamAir, which is an Omanian, low-cost carrier and also South African Airways. So we've got a great mixture of expertise in our discussion today, Patrick and Peter, welcome. It's great to be with you.

Peter Davies:

Likewise.

Patrick Edmond:

Thanks Victoria.

Victoria Moores:

So the conversation that we are having today is about difficult questions for European aviation. And I'm curious, as a starting point, do you think, either of you, that the difficult questions are being asked of European airline chief executives? How about you Patrick, do you think that the tough questions are being asked?

Patrick Edmond:

Well, there's quite a few tough questions around at the moment. Tough questions can be things like, "When did you say I'm going to get my GTF engines back?" Or, "If I order that A320 from you, which decade did you say I'm going to get it in?" So we are seeing some shorter-term problems at the moment, and that, paradoxically, is leading to a supply crunch and that's leading to quite good financial performance on the part of quite a few airlines, which makes me think, gosh, capacity discipline, there's a thing now. So while those are extremely severe problems from the point of view of an OEM and an engine manufacturer, an MRO, paradoxically, they are leading to very good financial performance on the part of many airlines.

Victoria Moores:

Yep. And you've raised a couple of very cringey subjects, I imagine there, for the manufacturers that you're mentioning. So that's the geared turbofan engine and the Pratt & Whitney powdered metal issues that mean that quite a lot of aircraft, ranging right the way across the spectrum from regional aircraft up to narrowbodies, are being grounded for further inspections. And also, the predictability of aircraft deliveries, which, if you can't tell when or if your capacity is going to arrive, then how do you then plan? So I'm wondering, Peter, if you were sat there interviewing an airline chief executive right now, what would be the questions that you would put to them?

Peter Davies:

One of my fundamental concerns in the industry is the apparent lack of customer service. I've been traveling quite a lot recently and it just seems to me that, from an airport point of view, from an infrastructural point of view, and to a certain extent, from the airline point of view, life seems to be deteriorating if you are a passenger, it's becoming quite frustrating, not simply because of on-time performance problems, but simply just the lack of empathy that's given to mere passengers who happen to be traveling through the system. And it's very frustrating.

And I always point out to all the airlines I've worked for and the staff that I've employed that a passenger is in our factory, as part of the production. We don't manufacture anything as such, so you experience as a passenger all the good things and all the bad things. So I'd certainly be pointing my questions to CEOs in terms of ‘What are you doing about customer service? When was the last time you checked in by yourself? When was the last time you stood in security by yourself? When was the last time you stood in the queue waiting to board the aircraft by yourself?’ These are critical questions I'd be asking CEOs.

Patrick Edmond:

I think what we're seeing is a gradual downhill trend in terms of levels of service being delivered, but also levels of service being expected. And that's, obviously, in large part, driven by the expansion of very price-driven, low-cost carriers and the desire of, even, network carriers to compete with them largely on price. So unfortunately, that impetus towards cheaper and cheaper fares is leading to a diminution in the quality of service, which we are all, unfortunately, as passengers being forced to get used to.

The other thing it's leading to is as we drive fares further and further down and use that to increase demand, we're seeing ongoing growth in the industry, which will bring us into collision with one of the other subjects I imagine we're going to be talking about, which is sustainability and emissions reduction.

Victoria Moores:

There's this idea that passengers are very, very eco-minded, that they're really enthusiastic about managing their carbon footprint. And then, we have things like carbon offsetting for airlines where it's got a very, very low take-up historically, I think that could be changing with the corporates. But again, on sustainability, there's this gap in what people do versus what they say potentially. And I'm wondering, what are the tough sustainability questions that airline CEOs should be being asked right now?

Patrick Edmond:

Well, my favorite tough sustainability question, just at the moment, for airline CEOs is, when do you expect your emissions to peak? Because what we see at the moment is a lot of airlines expanding very fast, while at the same time, talking about the nice new fuel-efficient, lower-consumption aircraft they're getting. It's very good that they have newer aircraft which are reducing emissions by 15%, for example, 20% compared to older aircraft, but if their fleet is expanding by 50%, then their total emissions are considerably higher.

And I think there's a bit of greenwashing going on in the sense that airlines are fond of saying, "Look at us, our emissions intensity (in other words, grams of CO2 per passenger/kilometer) is coming down. We've got the lowest in Europe, or we've got nearly the lowest in Europe." There's a bit of an Irish-Hungarian match going on there at the moment as to who has the lowest, and I think the Hungarians are winning on that, if not on drinkable beer.

But the issue is that we can claim that we have the lowest emissions intensity, but if our total emissions are going up as an airline, that doesn't really get us anywhere. And I think the industry overall is not facing up to its longer-term emissions reduction imperative. And again, we can talk about that quite a bit. We're behind the curve in terms of rolling out sustainable aviation fuel production, and I think we're going to be back around the table within a couple of years saying, "Oops, we're off course again. What are we going to do?"

Peter Davies:

The tough question I'd like to ask on sustainability is, not so much a short-term, but a more longer term one. Certainly the new engines are producing fantastic reductions in emissions and fuel and obviously, are financially beneficial. I'm not a technician to the extent I don't know, is that a one-off? Will the next breed of engine, which would still be, effectively, jet kerosene, will that create the same emission reductions? I don't think so.

My question to the CEO would be, in five years time, seeing as you are responsible to the shareholders, staff and customers for the profitability of this company, what will SAF be as a percentage of your total revenue? And how do you intend to recoup that through your fare structure?

Victoria Moores:

And it's a significant additional expense right now. And that then brings in the question about demand as well. It's a subject that appears to not be at the center of discussions. I know that Airlines for Europe, which is the body that represents the largest European carriers, in their Destination 2050 report that they put together with the rest of the industry in Europe, they did talk about demand reduction, but it doesn't get talked about very often. So will demand have to reduce because of sustainability?

Patrick Edmond:

I think there's an implicit reduction in demand that comes from fares being higher. The goal, however, is not to simply price everybody out of the market because we have to recognize, there are different reasons for travel, some of which are, let's call it more sustainable than others.

So one of the challenges is how do we move forward into a situation with perhaps slower growth, or no growth, but where there is still a degree of equity in how that growth takes place? So, for example, outside Europe, we see markets such as India, which are going to be growing extremely fast and we have to recognize those are growing off a very low base, whereas a market like Europe or North America, which is starting from a very high propensity to fly, is not going to be able to continue to grow at the same rate.

Victoria Moores:

Does European aviation need continued growth to be sustainable?

Peter Davies:

Yeah, I mean, any company needs continuous growth. It's a question of how you tap into that growth in the most efficient way that generates employment, that generates profits and understands at the same time that we have a responsibility to reduce the emissions. It's a delicate balance, but it's not insurmountable.

And my question is, I just don't think enough CEOs and boards are looking at that question on a long-term basis. I think it's a question today. I certainly agree with the greenwashing, just tick the boxes and look good, but that has consequences ultimately. And I need to understand, if I was an investor in the aviation business, what's it going to look like in three, four, five years time? There's lots of guesstimates, but nothing very specific, and that's a bit scary hairy.

Patrick Edmond:

And just circling back to what we were talking about a few moments ago where grounded aircraft, because of, for example, GTF engine problems or other issues, are causing a reduction in capacity growth this summer. And as a result, airlines are showing very significant profits. And I don't see any passengers demonstrating outside an airport terminal with placards complaining that they can't fly to all of the airports they wanted to fly to. So I think there are alternative approaches to growth at all costs.

Victoria Moores:

You've got a dichotomy there that the two of you are describing where the industry needs growth in order to be economically sustainable, but also, that we can't continue to just bring on board passengers that are going off for whatever reasons on an unnecessary trip. So that means that fares have to go up, but then, demand goes down while airlines remain economically sustainable?

Patrick Edmond:

Well, if we talk about economic sustainability, I can understand why each individual airline wants to grow because if they don't grow and their competitors grow, clearly they lose market share. And I've spoken to a couple of people at high levels in the industry who have essentially said, "We'd really like it if we were regulated more strongly, so that the playing field was level and it affected all of us." In other words, "Please, legislate for virtue because I can't do it by myself."

Victoria Moores:

I'm going to move over to Peter there because you've worked with a lot of government-owned airlines, you've had that relationship. Do you think there should be more regulation for virtue?

Peter Davies:

Absolutely not. I think the airlines that complain the most are the ones that are losing huge amounts of money. And everyone complains, "Oh, it's unfair, it's unfair!" They have a much cheaper operation because of some sort of pseudo benefit that they get. It's a clever businessman who makes lots of money or even a profit, let alone lots of money, in this business. And there are lots of good CEOs around, but unfortunately, like any business, there's lots of bad CEOs around.

Victoria Moores:

That brings me on to the question of what makes a good CEO or a bad CEO for an airline?

Peter Davies:

A good CEO, in my opinion, understands that there are three groups of people who are fundamentally important to the success of their airline. And I've always put them in the following order, staff first, follow closely by the customer, and a long way third is your shareholder. And often, I've not got the job because the shareholder's taken a dim view of that.

And these are not platitudes, I think I've got a bit of a record in the business which suggests that I do concentrate on those principles, those tenants, which I think create... As a CEO, your job is to create the right environment in which others can work to the best of their ability and provide the service, and that's what I've always concentrated on. So a good CEO, for me, concentrates on those three elements.

Patrick Edmond:

Yeah, I wouldn't disagree with that at all. And I think, given that we're in a service business, I think making sure that that level of service can consistently be delivered - and consistent is an important word here - I think that's really the key to all of this. We like to think of airlines as different to everything else, they do rely on the same law of gravity, but there are enough differences. It's important to think of how successful airlines operate. So just trying to build an airline that runs exactly like a sausage factory is unlikely to work in the longer-term, and the sausages will complain.

Victoria Moores:

And that brings us back to the idea of the importance of passengers within the business. We are coming to the end of the time now, and there are a couple of other questions that I would like to ask you. First one is, will aviation hit net-zero by 2050?

Patrick Edmond:

Right now, there's quite a bit of skepticism in the industry that we're going to hit, for example, the SAF production targets. I think that, from my point of view, I think there's a good chance that we will hit net-zero by 2050, but I don't think it'll be in the form that we're currently projecting. In other words, I think that the currently projected growth rates are not going to be realistic. And I think if we hit it, it's going to be on the basis of quite a lot of SAF, but rather less growth and a lot more, sadly, regulatory interventions to reduce the amount of unabated growth. So I think we'll get there, but not the way it looks today.

Peter Davies:

On the basis, I think, medium and long haul, probably not, but I think there's great advancements from a regional perspective, globally, with hydrogen and other forms of propulsion. So I think there'll be great strides made on the regional side, so that will have an impact in terms of reducing the emissions. But I think in medium-, long-haul, I think they're going to be struggling to do that. And I come back to the point that Patrick, which I concur with, in terms of the balance between the cost of SAF and how that implements the balance sheet going forward, and we don't know that. I would like to see the models that suggest the positioning in 10 and 20 years time.

Victoria Moores:

And Peter, you work with a disaster response company called Airlink who do some fantastic work. So obviously, you are in contact with the idea of disaster and crisis a lot. Do you think that the industry is ready for the next crisis, whether that be a pandemic or something else?

Peter Davies:

That's a very good question. The trouble in that sort of pandemic is that the responsibility is effectively taken away from everyone and left with the politicians, so that question should be more directed towards politicians. What are politicians and governments doing to make sure that, should a similar pandemic happen, how can we avoid the decisions where, probably quite rightly, it were taken two or three years ago to avoid that again, because the world simply can't absorb that sort of financial consequence.

Airlines, I think we've always been highly adaptable. That's our business to make sure that we overcome adversity and provide a safe environment. And I think the airline and airline management can cope with whatever's thrown at us in that respect.

Victoria Moores:

Patrick?

Patrick Edmond:

I think that the pandemic taught us an awful lot of lessons and crisis is, to some extent, the normal operating mode of airlines. We're dealing with closed Russian airspace. We're dealing with airspace issues around Ukraine around the Middle East. We're dealing with summer, which is going to bring more operational challenges. We talked earlier about a lack of aircraft. We're going to see increasing pressures on sustainability. I think that, if airline people woke up one day and life was normal and there were no crises, they'd kind of wonder why they were in the business. I think we'll see a new range of crises ahead, but that's just how the industry functions.

Victoria Moores:

So business as normal then?

Patrick Edmond:

Absolutely.

Victoria Moores:

That's all that we've got time for today, so I would like to thank Patrick and Peter for joining us today. I really do appreciate your very candid insights on the industry. And also, thank you to our producer, Cory Hitt. Finally, thank you to our listeners. And please make sure that you don't miss us each week by subscribing to the Window Seat Podcast on Apple Podcasts or wherever you listen. Until next week, this is Victoria Moores disembarking from Window Seat.