Podcast: Has Europe’s Air Transport Recovery Hit A Ceiling?

Leaders from ACI Europe and IATA share their views on the European recovery, following a lively debate at Routes Europe in Poland. Listen in as Olivier Jankovec and Rafael Schvartzman discuss the state of the market.

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Rush Transcript

David Casey:                 Hello everyone and thank you for joining us for Window Seats, our Aviation Week Transport Podcast. I'm Route's Editor in chief, David Casey, and I'm joined on this episode by my colleague Victoria Moores, Europe and Africa, Euro Chief ATW.

                                    This week's episode is being recorded live at Routes Europe 2023, which is taking place in the Polish city of Lodz. The event brings together more than 1,100 delegates from airlines, airports, tourism organizations and suppliers to discuss new and existing air services. Here at Routes Europe, we've so far had the privilege to hear from two leading voices in the aviation industry. Olivier Jankovec, the Director General of ACI Europe, and Raphael Schvartzman, the regional Vice President for Europe at IATA. And I'm delighted to say that both are here with us on this week's episode of Window Seat.

                                    ACI Europe has released a report this week which talks about the shifting dynamics within the industry as airlines increase the power over airports. I'm keen to hear more about this during the podcast. But there were a few other things that I know you, Victoria, wanted to pick up on first.

Victoria Moores:           Yeah, absolutely. David, one of the first things that stood out for me that I hadn't heard before was that Olivier was talking about how in 2023 in the year to date so far there was still 11% down on traffic levels compared with pre-pandemic. But you mentioned, Olivier, that you feel as though we could be hitting a recovery ceiling and I'm curious to hear a bit more about that.

Olivier Jankove...:          Yes, thank you Vitoria. I think it's just coming from the fact that when we look at the monthly data we have so far this year, so January, February, March actually we don't see any more progress in terms of getting closer to the pre-pandemic volumes. So we are stuck at minus 11, minus 12%. And that is different from what we've seen towards the end of last year where months after year we could see that the data was improving, that we were getting closer and closer to pre-pandemic volumes in terms of the percentage gap.

                                    So that's a legitimate question to ask I think when you see the data not progressing anymore, are we indeed coming to a recovery ceiling, or are we going to see in the coming months throughout the peak summer months the recovery getting closer to the pre-pandemic levels and hopefully exceed the pre-pandemic levels? Question mark.

Victoria Moores:           So there's the question of whether this is a lull and a bit of a stabilization before going into further recovery or not. Rafael, what are you seeing on that?

Rafael Schvartz...:          Well, I guess from the airlines side, I listened to the presentation of Olivier today. Obviously, I'm not totally familiar with the study. But today we have something Olivier mentioned and I think I mentioned we have a high degree of uncertainty. So it could be possible that in certain areas we have actually either are seeing the limitations of this recovery in certain sectors let's say.

                                    Because the one thing I also notice, if you look at, again, in this case the map of Europe, you also see a bit of a... We tend to see things in one. So this is Europe, but because of the many things that are happening today geopolitically, the limitations that we have in aerospace, the limitations that we have in certain markets in the east let's say; and even the shift in economic strategies in terms of manufacturing, I think there is a shift a bit on the lanes that we are used to project things on.

                                    And this is not necessarily something we have done a lot of studies. Is just by talking to a lot of the members and seeing the strategies of what capacity they're putting up. So, it could be that we are going to find, let's say, limitations in certain areas and probably higher potentials in others. And even the surprise I would say, if I can say that, that you are seeing a lot of leisure travel taking up premium seats.

                                    So again, this is a bit of some shift that we have seen after the pandemic and I think all these analyses are valid. But because we are in a very uncertain time, we need to put them on the table and probably really see what are the options here and what should we do? Right?

Victoria Moores:           Yeah, that really brings me back into another two comments from this morning's discussion, which one of them is about the new demand patterns that have emerged through the pandemic. I think you had a slide, Olivier, that said ‘are they here to stay?’. You mentioned that perhaps now's the time to delete the question mark.

Olivier Jankove...:          Yes, clearly, we saw over the last two years that the bulk of the recovery was coming from leisure and VFR, that it was boosted by a few intra local carriers adding massive capacity into the market, so clearly, leveraging the crisis of the pandemic as an opportunity to grab market share. And of course we had the travel restrictions which focused very much the recovery on the intra-European demand, then to certain extent later to North Africa and transatlantic.

                                    What surprises me is that as we moved into 2023, we still see those patterns remaining broadly unchanged. I mean business traffic is coming back, but it's still way below where it was in 2019. So, I think behind that it's time to ask ourselves the question, are those recovery patterns indicative of a new market structure overall for European aviation?

Victoria Moores:           And along those lines, one of the trends that you brought out during your presentation, it surprised me to hear that Russia is back to pre-pandemic levels already with the conflict in Ukraine.

Olivier Jankove...:          Yes, I would add a note of caution on this because we don't have data for all of our Russian members, so it's partial data. But still, I think it's indicative indeed that Russian airports are probably at the level where they were in 2019 in terms of our overall volume simply because the traffic they don't get and the demand they don't get from the EU market or from North America has in part shifting to the domestic market in Russia, which is huge. And also, other markets outside Russia, especially Central Asia, but more broadly Asia as well.

Victoria Moores:           Maybe that's a thread that we've got coming through the conversation. So far is that it's coming back but it's not the same. So both for the airline side in terms of the traffic, it's maybe a different demographic. For Russia, they're restoring some of their traffic, but it's clearly not coming from some of their historic markets. Final question from me before I hand back to David again is you mentioned that history is back with a vengeance. I'm curious what you meant by that.

Olivier Jankove...:          Well, it's a comment more about the big fundamentals that are shaping, not just aviation, but the economy these days about the fact that our word is becoming much more fragmented, rife with risk in terms of geopolitics. And we thought that we had reached a level of stability of economic integration and globalization that was here forever, and we thought this was a given. And what we're realizing now, especially with the war within Europe, is that this is not a given and that we see geopolitics really now reshaping our world and not for the better. And of course, with more tension and more risk for economic actors across the board and in particular for those economic actors that rely on globalization like aviation.

Victoria Moores:           And what are your thoughts on that, Rafael?

Rafael Schvartz...:          Well, I agree. I mean we are in the sense that we are in a moment of let's say of shift. We are shifting because there are many elements here which we just mentioned, for example Russia. Knowing I was aware of what's going on in Russia, but at the same time we have to be similar to many of the other analysis we have to conduct careful because it's obviously done because there is as well a high level of incentives to do certain things.

                                    That's to the point that we are using probably historical and you mentioned ways of evaluating things when maybe things require a different perspective of evaluation, which is to the point made in terms of what are the type of markets that might be the ones that develop, and what are the type of markets that might be even either leveling or maybe potentially decreasing?

                                    I think you are seen already initiatives and I was talking to some of the big cargo integrators where some of them are already finding fairly good solutions to not having to overfly Russia, for example. So if those solutions are in place, then maybe that concept that we need to have that open might be not necessarily a limitation, let's say in, and this is on the cargo passenger, obviously it's another story because there are more components in terms of the Chinese market, et cetera.

                                    But I think there are elements there that require us to look more carefully, maybe even sub regionally because we're talking about Europe. And I see when I talk to the western side of Europe what the traffic pattern is. And when you look at the eastern side of Europe, what the traffic pattern is, and you have seen some creative solutions being brought by even people on or models on the eastern side. You have Finnair, for example, operating and adapting quite rapidly and efficiently to a very dramatic change.

                                    So I think again, there are a lot things changing. The study that was presented by Olivier is good because it's in a sense thought-provoking. You need to look at things a bit differently than just straight line projections. So I believe there are high levels of uncertainty, but I do also believe to be honest, there are important opportunities because there is an important shift on let's say how things are seen strategically.

                                    And maybe an example could be the production of sustainable aviation fuel or hydrogen. I mean we all know that that's not going to be done purely in Europe because we don't have enough to do it. So that means Europe will need to find places that you can have legal certainty, a rule of law framework, partnerships that you can build to be able to do that.

                                    And because if we're serious about Fit for 55, we have no choice. So again, these are all patterns that will shift how do we travel, where do we travel. I think those patterns will shift a bit, but I do agree still that there is a bit of a high level of uncertainty where things can go. And I'm not thinking that we should treat it all as historically the same. This is in my perspective.

David Casey:                 Thanks for that and Rafael. Now I should just say we are all friends here in this room. But ACI Europe have released a new report today which looks at competition between European airports and it describes a new aviation market paradigm where airlines have increased their power on airports. It says that airports are over regulated with price caps and limited commercial freedom. So Olivier, can you just give us a little bit of context about this report and what is it you actually want to see from European regulators?

Olivier Jankove...:          Yes, thank you. We based this report on a study that was done by Frontier Economics, which looked in depth at the market dynamics in terms of the airport-airline relationship over the past years and especially through COVID. And what Frontier economics tells us very clearly is that we've reached yet another level in terms of the way airports have come to compete with each other in the sense that it's no longer just airports competing when they serve the same catchment area. But we've moved to a situation where it's really airports competing on a pan-European level because airlines are much more footloose because of the rise primarily of the local carriers, but also because of network carriers actually consolidating moving to operate around multi help strategies and being able to leverage more market power vis-`a-vis airlines.

                                    So I think for us, this is something we needed to do because indeed what the market has changed has evolved, the way we are regulated has not, and we're still as airports treated more often than not as monopolies when it comes to regulation. And I think the regulatory models we have today actually quite antagonize airports against airlines and vice versa, and are not necessarily productive of better outcomes in the sense that they don't incentivize more commercial interactions that would reflect the actual reality of the market where I think it would be potentially better for both parties to move on and to get more win-win outcomes potentially.

David Casey:                 And how do you respond to that, Rafael?

Rafael Schvartz...:          Well, I don't know the study obviously, and I'm not let's say in a position to say if there is... I don't have a measure of airlines gaining more over airports or not. Honestly, I cannot justify that. But one thing that I've been seeing very after the pandemic is that, as we know, there are you mentioned different models reacting in different ways or embracing these opportunities in different ways. I think also we have to look at, I think when the airlines went into the crisis and similar happened to many airports, not all of them came out of the crisis.

                                    Probably if you would take in an opportunity of a crisis to maybe do the changes and adjustments that you need, they always said you shouldn't waste the crisis. So I think we have seen some airlines and I think some airports who have not wasted a crisis and came out stronger after in the sense that they've been able to either structurally reduce costs, were able to maintain a very strong people prepare for the growth for different reasons.

                                    But at the end of the day, you have structurally better prepared set of airlines and set of airports and structurally not as well- prepared set of airlines and set of airports because I think again, for many reasons, some might have had the opportunity, some might have wasted opportunity, I don't know that.

                                    But you can see obviously now that there is a big separation even, well, I think on the study shows the increase of capacity put by the local carriers, but you also see, you have seen the performance of even the big groups in Europe, which is quite strong actually at the same time.

                                    So something was done that has given the ability to separate even farther from most of the others. And I think that's also something to analyze properly as well as link to what Olivier was saying. We should obviously always look for an opportunity to probably set up or reset the relationship in a way that we have a win-win relationship. That's definitely what we should aspire for because this is a totally independent system, so we cannot ignore that. So this is what I see, let's say. Right?

Victoria Moores:           And one of the things you said this morning, Raphael, was that on the grand scheme of things, perhaps there's bigger fish to fry than airlines and airports fighting one another over commercial arrangements, charges, regulation. And I think the reference that you made was to sustainability, and of course that is very high up on everyone's agenda.

                                    And I guess the different perspective to airline airport relations is probably what's going on at Schiphol at the moment with the regulator attempting to impose capacity cap and the kind of ripple effect that that's had through the industry of this idea of literally capping growth, stopping growth of air travel almost regardless of what the industry can do to make its operations more efficient. So I was wondering what your thoughts were on that.

Rafael Schvartz...:          Well, my thoughts on Amsterdam. I believe [the government] didn't comply with the basic rule that is there are signatories of this account convention. You have to go through the balance approach. And before what the end result will be, you have to go through that process, and et cetera. But okay, besides that, I think the other reflection I would add to that because I think it's totally correct what you're saying in terms of I believe the bigger fish to fry here is sustainability, for sure because otherwise the business will be kept. That's or heavily impact let's say.

                                    But we have the potential to look at this again a bit differently. I mean in the sense that we maybe have an opportunity to demonstrate, if I can say, that we are not going to fragment Europe in the process of becoming sustainable.

                                    And we have a perfect analogy to this with Single European Sky, a fragmented airspace that has not been solved for 30 years. And now we have the example of Amsterdam, a unilateral decision. So how far are we going to take this fragmentation when we have the biggest challenge of all in the European Union with a very novel cause, which is we want to lead the world in sustainability, but we still want to keep fragmentation?

                                    But that doesn't add up. So maybe it is a bit of a micro view, but my frustration would be more of how many more of these actions are we going to be seeing that go against what we all want? So you find the common objective, you want to be sustainable. Whatever Amsterdam can do for the environment will not solve the challenge that we have in Europe.

                                    So I'm sorry I've been very blunt and direct here, but I think this is an opportunity that we have. Because Single European Sky should have taught us already this, we are going to have a summer where we're going to be impacted by not having this Single European Sky quite heavily. Right? Customers are going to be unhappy and they're going to blame the air transport system.

Victoria Moores:           And also you made the point earlier of in a way we are not seeing the fragmentation where we actually need the fragmentation because we have Fit for 55 as a global package affecting as a global across Europe. Whereas what we need to see is national policies into setting up sustainable fuels.

Rafael Schvartz...:          Exactly.

Victoria Moores:           And pushing that forward. So the area where we need the national action is in a coherent approach coming together for a European objective. And Olivier, your comment this morning really struck me about the change in this license to grow from sustainability.

Olivier Jankove...:          Yes. I think clearly what the decision of the Dutch government is about when you look at its impact on our industry beyond Schiphol is about questioning not just our license to grow, but our license to keep operating at current levels. So the risk of seeing more demand management as a policy response to the need to accelerate climate action.

                                    And I think I see that as a major risk for the industry. I think beyond the risk for the industry, they are political risk for Europe because I see a lot of divergencies also in terms of approaches between the core of Europe: Germany, the Netherlands, the Benelux, France, UK, and the periphery of Europe because for the periphery of Europe, air connectivity is a matter of continuing to live, to support livelihood, and to support the economy.

                                    So I think if Europe pushes us too far and pushes it too far from really having only the stick but not the carrot to help us decarbonize, I think potentially there's a risk of a major popular backlash against climate action and against Europe. And I think that's not something we want to see happen. We want to see people supporting climate action, a climate action that goes in the right direction, which at the same time supports their income, their likelihoods and cohesion and territorial equality. And this is really what it's about.

Victoria Moores:           Yeah, again, we need to have the joined up part in the right place rather than things potentially undermining the very real objectives that they're set to create. And you mentioned today about the potential for airports to have a role as ‘enerports’.

Olivier Jankove...:          Yes.

Victoria Moores:           So going beyond aviation, I was curious about that.

Olivier Jankove...:          Yeah, I think as Rafael said earlier, in all this shifting environment and new challenges, there are also opportunities. And I think for airports this comes with the ability to transform themselves by being not just transport hub but also energy hub. So hence the concept of moving from being an airport to an enerport, which means rethinking capacity and development, not just in aeronautical terms, but in terms of the ability for the airport to generate, why not produce on site and distribute green energy not only to the users of the airport, primarily the airlines, but also to their communities? And I think that opens up possibilities for airports to really reset their societal relevance and in that process earn their license to keep operating.

Victoria Moores:           And there's been quite a theme during the conference about this idea of being more joined up. So we're talking about countries being joined up more with the European level strategy. And now you were saying perhaps that joining up are being energy providers and then also this idea of what we need to do to continue to keep Europe joined up.

David Casey:                 And we've obviously been talking a lot about sustainability, which is a more long term focus. Bringing it back to the short term. And here and now, Rafael, you said Europe's going to be heavily impacted this summer by not having Single European Skies. I just wanted to get your thoughts before we finish on what the outlook is for the northern summer season here in Europe. Is the system quick to cope with the expected traffic demand or will we have scenes that we had last summer?

Rafael Schvartz...:          Well, I would say the biggest challenge we will have is on air traffic management. I mean that's clear and obviously that's going to have an impact on the airports because if you have delays it causes an impact. I mean it's nothing unknown there. I think there has been a lot of discussions with the many ANSPs with Eurocontrol. There are plans in place. I would say many, they're performing good in terms of trying to take over areas where we have the problems. Let's say, clearly France and Germany for different reasons. In France of this... I mean it's unacceptable for all of us that you have strikes being called, not only that they're being called, that they call a strike one day, but they actually come into work that day. So that means they could have managed the flights. Right?

                                    Because they're not included in France like most of the other industries in the law, which is mandated that they will have to declare. For I think it's either 48 or 72 hours the capacity. So you can plan. Once you can plan, you might be able to operate maybe 50%, 75% and not cancel everything assuming minimum operation. Right? Or more or less. So that's one particular case, which has been dragging on for ages.

                                    I mean example last March, I mean strikes one example only, I'm sure there are many: 4,500 flights cancel, 750,000 people impacted. Is that fair? I don't know. It's an important question. Now, the second one is the case of Germany where we have problem and has been dragging on for years.

                                    Meaning those people should have been there, trained, and in place. So obviously, again, I'm not questioning the safety because that is operating very well in Europe, but obviously this is affecting all of Europe. And then that means you are deviating traffic and many of the NSPs around those countries are doing a fairly good job trying to manage it, but is still putting a lot of stress on the system.

                                    On top of that, you have to add the aerospace restrictions we have today because of the conflict on these. So can we expect important challenges in the summer? Yes. You cannot overcome this. Europe was never designed to have an excess capacity that you can actually... It was designed to be efficient. But the next efficiency level is again, integration and not fragmentation. Right?

Olivier Jankove...:          I can't agree more with Rafael. Obviously, I think looking at this summer, we are certainly more reassured in terms of avoiding the massive disruptions we had last summer because I think airport together with airlines and NSPs have really worked a lot to prepare in anticipation to have more joined plans. Eurocontrol with the network manager has also been playing a key role in aligning all the stakeholders earlier. I agree with Rafael that the major risk are with ATM capacity and especially strikes. I think this is where the criticalities are going to be.

David Casey:                 Well, with that, I think we're all out of time for this week's Window Seat podcast. So I'd just like to thank Olivier and Raphael for joining me in Victoria here in Lodz today. It's been fascinating to hear your thoughts and we really appreciate you spending the time with us. So if you enjoyed this episode, please make sure you subscribe to Window Seat Podcast on Apple Podcasts or wherever you listen. Until next week, this is David Casey signing off from Window Seat.