Global Airline Traffic Back to Pre-recession Levels But Risks Remain

Airlines are beginning to see both back and front cabins fill up with load factors nearing 80 per cent. IATA (International Air Transport Association) predicts airlines will be back to profitability in 2010, but not in all regions and risks remain for the coming year.

Cautiously optimistic, Giovanni Bisignani, IATA’s director general and chief executive told the association’s member airlines at its Annual General Meeting held recently here that “this is the first global profit since 2007. It’s a reason to celebrate. But with a margin of 0.5 per cent, it will be a modest party. And we face real downside risks such as excess capacity, labour, external costs, taxation and oil price volatility.”

IATA expects airlines to post global profits of $2.5 billion in 2010, a major improvement compared with IATA’s previous forecast released in March of a $2.8 billion loss. Bisignani attributes this to the global economy recovering from the financial crisis much faster than anticipated.

However, he adds that a major part of the global industry is still posting big losses. “A stagnating economy, strikes, natural disasters, and a currency crisis have left European carriers struggling with an anticipated $2.8 billion loss.”

Challenges
Bisignani says airline workforces are out of touch with reality and calls for “pilots and crew to come down to earth.” He says that striking when airlines are struggling is being shortsighted – “labour needs to stop picketing and cooperate.”

At a CEO Forum, British Airways chief executive Willie Walsh - a portion of whose cabin crew was striking as he spoke - said that, in the past, airlines rewarded trade unions for doing the wrong thing. “We have not been brave enough in the past in standing up and saying ‘No’. And we are absolutely determined at British Airways that we are going to do that this time round.”

“The bottom line is that we are an industry that needs to change. We cannot ignore the inefficiency that we witness within our industry. It must be tackled and if we don’t tackle it we go out of business,” he argues.

But how much new realism is creeping into British Airways despite the pain it’s going through?
More than in the past, says Walsh, but there are still elements that are out of touch with reality. “We have pilots acting as cabin crew today in order to keep BA flying. I don’t think people would think that would have been possible a year ago. So clearly there are lots of people - many within the labour movement, who have recognised and acknowledged the need for change, and committed to and demonstrated their willingness to change.”

JetBlue on the other hand takes a collaborative approach so that labour issues can be resolved without the airline going to the brink every time. In the US where there are no unions, JetBlue’s chief executive Dave Barger says ‘tough love’ discussions take place so that they can collaborate and negotiate on solutions with labour. “We’re steadfast and this is a better model for us going forward.”

Consolidation - or not?
Bisignani’s vision for airlines by 2050 is of “one consolidated industry of a dozen global brands supported by regional and niche players.” Is this achievable and is this the way to go?

Ryanair chairman David Bonderman says that there are too many airlines because of a global hangover of flag carriers where every government has to have an airline. “What we have found out is that while it is very difficult for airlines to make money, it is very difficult for them to go out of business either.

Even if they do, the issue of the number of aircraft they use doesn’t change because the lessors just move the aircraft around. So one of the things that is most difficult to see is rationalisation. In most industries losers lose and go out of business, whereas in the airline business the losers lose but don’t go out of business -- they just come round with another name. Until there is some rationalisation of that, we’re going to have what we have now.”

Does consolidation mask inefficiency, protect the ‘terminally ill’, or harm consumer interests by forming a price-fixing cartel?

Consolidation doesn’t equal cartel, argues Air Canada chief Calin Rovinescu. “Aviation is the only industry on this planet where being a legacy airline and having years and years of experience and assets is actually a negative because someone can come into the market tomorrow morning with a clean sheet of paper and do damage to your model without any barriers to entry -- so consolidation doesn’t equal cartel or lack of competitiveness.”

Low-cost carriers, he says, keep showing up to put pressure on the lower end of the market. “If you want to deal with the overcapacity, then consolidation is one way (to go). But then the aircraft don’t disappear. The only hope we have in consolidation is a more efficient enterprise that can effectively compete, not only with other legacies but also with the new entrants.”

Over in the Gulf where there are several state-owned airlines, Qatar Airways CEO Akbar Al Baker says weaker carriers in the region will “simply disappear” -- adding in jest that there will only be two dominant carriers left and “you can guess which ones (they are).” To which Indian civil aviation minister Praful Patel responded: “And of (Bisignani’s vision of) a dozen airlines, three will be from India and three from China. And I leave my Gulf friends to fight it out to be some of the rest.”

 

[This article is republished courtesy of INSEAD Knowledge, the portal to the latest business insights and views of The Business School of the World. Copyright INSEAD 2024]