12 Feb 2018, Global – Last week’s Singapore Airshow Aviation Leadership Summit saw top airline executives warning about Tech’s disruptive impact, according to CNBC. Henrik Hololei, director-general for mobility and transport at the European Commission summarized it best when he said, “Once a company flies a drone, it may have more ambitious plans in the pipeline”. This was followed by Emirates President Tim Clark’s ominous warning about Tech in an interview with Business Insider; “….. there’s a storm coming and if you don’t get on it and deal with it you will perish”. Public statements aside, there remains the question whether the airline industry will actually follow through with substantial Tech investments of their own or is this all just marketing hype, i.e. Hot Air?
IF YOU DREAM BIG, YOU CAN ALSO LOSE BIG
Airlines are willing to invest billions on aircraft orders because they know how to generate returns on these assets and worst case scenario – most aircraft types have good resale values. The same does not apply to Tech investments where investing in the wrong technology can result in large total write-offs, e.g. Amazon’s Fire Phone, Alphabet’s Google Glasses, Microsoft’s Windows Phones. While Amazon, Alphabet and Microsoft simply shrugged off these losses and achieved success with their other Tech investments, it remains to be seen whether airlines have the same appetite for risk.
WHY INVEST IN RISKY TECH WHEN IT IS MUCH EASIER TO SEEK GOVERNMENT SUBSIDIES AND PROTECTION?
To the casual observer, it is inconceivable that any industry is only beginning to invest in Tech as a revenue driver but delve deeper and one will see that the global airline industry remains stuck in an earlier time; a situation inadvertently created by government subsidies, protection and sometimes even enabled by powerful labour unions.
The primary goal of governments that subsidize and protect their airlines, is to channel as much international traffic to their aviation hubs as possible (even at a financial loss or at the expense of domestic passengers). Everything else is secondary and these airlines’ top management are chosen based on their ability to achieve their government backers’ goal.
As for the airlines’ powerful labour unions, they obviously will not appreciate being told that there will be redundancies and extensive retraining required so that the airlines can reinvent their corporate cultures and become more like tech companies.
The result is a highly nationalistic airline industry that is uninterested in using Tech to create new revenue streams because that doesn’t align with the priorities of its backers/protectors – governments and labour unions. For such airlines, it is much easier to seek government subsidies and protection than to undertake risky Tech investments.
It is not coincidental that the airlines making the biggest moves towards Tech as a revenue drivers are not recipients of government subsidies and protection, e.g. AirAsia, Ryanair, Singapore Airlines. (Note: Not referring to airport subsidies which is a separate matter altogether)
DO AIRLINES NEED TO DEVELOP THEIR OWN TECH SINCE THEY CAN JUST BUY FROM SUPPLIERS?
To be fair, airlines have little proprietary technology and essentially operate hardware and software purchased from suppliers, examples (Not Comprehensive):
- Aircraft – Airbus, Boeing
- IFE – Panasonic Avionics, Rockwell Collins, Thales
- GDS – Amadeus IT, Sabre, Travelport
Airlines and their suppliers have a symbiotic relationship so if their suppliers are willing to invest in Tech that can increase airline revenues, the airlines can continue this relationship simply by buying even more from them. Unless ….. Emirates President Tim Clark’s warning turns out to be true and the Tech giants start disrupting the industry.
RESISTANCE IS FUTILE – THE AIRLINES WILL HAVE TO WORK WITH THE TECH GIANTS, THE ONLY QUESTION IS THE EQUITABILITY OF THE PARTNERSHIPS
The combined current market capitalisation of the top 20 largest airlines in the world amounts to US$313 billion and the average market cap of each airline is US$16B. Whereas the average market cap of the top 20 largest tech companies that monetise user data as a core business is 13 times larger at US$220B and the combined market cap of these tech companies amounts to US$4.4 trillion!!!
Chart: Top 20 Largest Airlines in the World by Market Capitalisation (2018)
Chart: Top 20 Largest Tech Companies that Monetise User Data as a Core Business in the World by Market Capitalisation (2018)
ALPHABET’S CASH BALANCE ALONE IS EQUIVALENT TO THE MARKET CAP OF THE THREE MOST VALUABLE AIRLINES IN THE WORLD
At the end of 4Q17, Alphabet’s cash balance alone amounted to US$102 billion. This is equivalent to the market capitalisation of the three most valuable airlines in the world – Delta Air Lines (DAL:US), Southwest (LUV:US), Air China (753:HK) or the combined current market capitalisation of the 7 most valuable airlines in the Asia Pacific region, namely Air China (753:HK), China Southern Airlines (1055:HK), China Eastern Airlines (670:HK), ANA Holdings (9202:JP), Japan Airlines (9201:JP), Singapore Airlines (SIA:SP) and Hainan Airlines (600221:CH).
Chart: Alphabet’s cash balance is equivalent to the market capitalisation of the three most valuable airlines in the world (2018)
Chart: Alphabet’s cash balance is equivalent to the combined current market capitalisation of the 7 most valuable airlines in the Asia Pacific region (2018)
TOP 20 TECH COMPANIES SPEND AVERAGE OF US$6.5 BILLION ON R&D ANNUALLY WHEREAS R&D DOESN’T EVEN EXIST AS A MAJOR COST LINE ITEM FOR AIRLINES
The average annual R&D expenditure by the top 20 largest tech companies that monetise user data as a core business is US$6.5 billion with Amazon topping the list at US$23 billion. As for the top 20 largest airlines, R&D expenditure doesn’t even exist as a major cost line item and accounts for less than 1% of an airline’s total revenue. In contrast, the top 20 largest tech companies that monetise user data as a core business allocates 12% of their annual revenue for R&D expenditure on average.
Rather than seeing the Tech giants as a threat, airlines should see this as an opportunity of a lifetime and accelerate their Tech investments. The only thing that top airline executives should be concerned about is how to position their airlines to get the best possible partnership deals with the Tech giants.
Chart: Research & Development Expenditure of Major Tech Companies during latest financial year (2016/2017)
Chart: Major Tech Companies Research & Development Expenditure as % of Total Revenue during latest financial year (2016/2017)
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