Recently, we sat down with Nuala McMahon, Head of Aviation and Transport Research at Goodbody, to discuss the key themes and trends shaping the aviation and transport industry. Nuala examines digitalisation and sustainability and presents her views on the industry’s future.
Tell us about your role …
The Aviation and Transport sector in Goodbody is an exciting one with our combined coverage spanning a market capitalisation of €51bn. Our team focuses on producing daily research insights, longer term fundamental thematic research documents and hosting niche sector-specific events, which we in turn use as our main products to support our broader Investment Banking business in Goodbody.
Through these products, we actively engage with market operators and
our institutional client base, providing an educated view on the industry,
which ultimately helps investors to make informed decisions on where to deploy
capital in the sector.
Now, let’s delve a little deeper into the aviation and transport industry. Covid-19 caused widespread and prolonged groundings for airlines, how is the sector recovering from the pandemic? And what challenges does it face post Covid?
The same way we are all recovering, it’s been staggered! Long haul operators continue to be impacted by the stop-start nature of the reopening in some international markets such as China, while the North Atlantic recovery has been evident since the lifting of US restrictions in early November. The biggest and most obvious recovery in Europe can be seen from the short haul carriers such as Ryanair, Wizz Air and easyJet. Volumes for these operators are expected to be back at close to or at pre-pandemic levels for summer ’22, highlighting people’s willingness to travel after two years of travel and social curfews.
The industry’s cargo and shipping operators were the one bright spot during the pandemic and the supportive trends witnessed during Covid-19 have continued into 2022, with Irish Continental Group a key beneficiary of this trend.
Overall, while the recovery in domestic and international travel is clearly evident, the industry is now being impacted by geo-political risks which is manifesting in higher fuel costs. As such, operators need to manage their capacity and pricing accordingly to offset part or all of these costs.
Operationally, the anticipated volumes this summer
require the industry to re-hire and re-train staff to ensure the traveller’s
journey doesn’t see further disruption. While some operators, such as Ryanair,
took these costs on in advance of this year, the disruption from not being
operationally ready is currently being seen in longer wait times at airports
and some cancelled flights for airlines.
Covid-19 accelerated the digital transformation across the industry: what digital priorities are airlines focused on?
Interesting question – and one we put to the experts from JetBlue, Datalex and easyJet recently at the Goodbody Aviation Investor Forum event. The key priorities are focused on the continued improvement of the customer experience via digitalisation and removing touchpoints, further AI automation, a stronger ability to interpret data for analysis and customisation, and improvements in the payment options for customers.
The need for more customisation
stems from the fact that flexibility has become a feature of choice for
customers, which airlines will look to price within offers. Broad based
commentary from airline executives globally sees over 90% saying they will
start an AI project this year but interestingly only 30% of the industry’s
pricing strategies are dynamic, which highlights the reason why AI adoption by
airlines is a top priority in terms of improving returns for shareholders.
Sustainability is a key theme for the sector: how advanced are airlines with integrating sustainability into their strategy? And what will it take to scale sustainable aviation fuel (SAF)?
As guided by the UN Sustainable Development Goals and various industry bodies, a large proportion of the industry is aware of what needs to happen in order to support a more sustainable strategy.
Given this, some industry operators are more advanced in terms of how sustainability is built into their strategy. For example, some management teams have linked their remuneration to achieving their stated sustainability objectives while other airlines are more advanced in investing in new SAF technology and initiatives. At this stage, you are lagging not leading if you haven’t accounted for it.
The key in terms of achieving SAF scale for airlines will be through investments in partnerships with producers, such as SkyNRG, Neste and Velocys. However, achieving scale will unfortunately take time given less than 1% of flights globally are powered by SAF.
Union (EU) regulations are aiming for 5% of flights to be powered by SAF by
2030 and 20% by 2035 but further government support is needed through the
issuance of grants in order to help with R&D on new technologies to support
SAF initiatives, while more funding is expected to come through from the EU
Emissions Trading System (ETS) carbon offsetting scheme.
Finally, what does the future for the aviation and transport industry look like?
I can safely say if you asked me ten years ago Brexit, Covid-19 and a geopolitical crisis in Europe wouldn’t have been included, and all of which have had a significant impact on the industry. Knowing that, and thinking about the industry going forward, there’s no question one of the biggest issues the sector needs to grapple with is ESG concerns and how to accelerate initiatives on SAF and the associated technology to support operators.
AI adoption within airlines has started but not on mass scale so more digitally savvy airlines will be a feature of the future and provide a competitive advantage to those that invest in digitalisation now. Furthermore, and while we’re behind our US counterparts on this one, the industry will see further consolidation in Europe, which will make for some interesting clashes in strategies and management teams!
More broadly, consumer-related concerns will remain at the core of the industry for obvious reasons, so in terms of trying to navigate investors through the sector over the next few years, our approach remains to find best-in-class operators who can effectively and efficiently manage ESG headwinds while keeping a handle on costs in order to continue delivering the required returns to shareholders.
For more information on the Goodbody airlines and travel sector, visit: https://www.goodbody.ie/for-corporates-and-institutions/investment-banking/equity-research/airlines-and-travel.
This Q&A was originally published in the Corporate Advisory Newsletter, Q2 2022 on 9 May 2022.