The state of the airline industry

Courtesy IATA

Courtesy IATA

IN his keynote address at the recent AGM of the International Air Transport Association (IATA) held in Doha, IATA director-general Tony Tyler said: “Our financial performance does not yet match the value that we deliver.”

No one will deny the importance of the airline business in global connectivity that is so necessary for economic growth, a point that Mr Tyler made sure is not taken for granted especially by the powers that be regulating the industry from outside the business, and on which must therefore be premised the criticality of ensuring that “airlines must be profitable, safe and secure businesses.”

The sentiment is understandable in light of what the industry has been through since the global economic meltdown in 2009 and the continuing struggle to regain past glory. But, as Mr Tyler recognized, airlines operate in a highly competitive environment. The new elasticity in demand and reduced brand consciousness as influenced by the cost of flying are not helping. There is really not much you can do about the global economy dragging its feet, or about the volatility of the fuel price which has been blamed all too often for many an airline’s poor performances, so Mr Tyler turned to the regulators with this message: “Airline efforts to improve performance further need a counterpart in governments.” More specifically, he said: “Airlines themselves remain burdened with high taxes and weak profitability.”

This brings us back to his earlier comment about what he considered to be “a mismatch between the value that the industry contributes to economies and the rewards that generates for those who risk their capital to finance the industry.”

So, if the airline industry were to collapse, who is to blame? You can be sure that governments are equally concerned about pushing the industry to the brink, and while they may be selective about whom to rescue, they would generally rally to facilitate one that flies the flag however independent and autonomous it claims to be. But governments have a wider agenda which in no surprising way may be more political than commercial, which understandably are more regional than local, and which consequently become more complex and faceted by comparison. Noteworthy is how an increasing number of governments have in recent years relented in allowing increased foreign investment in local airlines.

Taking the cue from Mr Tyler’s statement, one might ask: Are there one tax too many (apart from the quantum)? It is not uncommon for airlines to pass on these taxes or some fraction of them to their customers, the rationale being that these are collected on behalf of the governments. In the tussle between the European Union and airlines over a carbon tax that would have been implemented at the beginning of last year but for the global protest, airlines had said that they would pass it on to their customers. To the discerning air traveller, he shall not be misled by the misrepresented fare advertised by many an airline, and increasingly regulators in the United States and the European Union are taking the carriers to task for misleading advertising. Carriers that had been fined include Ryanair and Southwest Airlines.

Squeezed between the regulators and the operators, consumers are not necessarily the winner but for the saving grace in the competition and the application of the law of supply and demand. India offers a classic example of how the competition may work in the favour of consumers. AirAsia India, the first airline with foreign investment and new kid in the arena, has promised to become the “lowest-cost” airline in India, and a fresh round of price warfare is expected. It is known that many operators have come and gone, and too many of the existing operators continue to incur losses, yet the huge potential of a growing market of air travellers continues to lure would be investors. It may be the law of the jungle where only the fittest will survive, and AirAsia believes it has the discipline to keep the fares low and its costs “razor-thin”.

Mr Tyler too advocated the need for improved efficiency, as evident in the use of more fuel-efficient equipment and through consolidation and airline partnerships. Nevertheless, this raises the question: How efficient are today’s airlines?

Yet all is not gloom and doom, even as IATA has cut its profit forecast for this year to US$18 billion from US$18.7 billion made in March, over concerns of China’s economic growth and a recurring slowdown in world trade. Still it is a vast improvement, compared to US$10.6 billion last year and US$6.1 billion in 2012. Overall passenger growth is expected to remain strong in 2014, reaching 3.3 billion, up 5.9 per cent on 2013 although the premium component of that growth continues to stagger. According to IATA, for the first time, the global load factor looks set to average above 80 per cent for 2014.

Region-wise, North America is likely to be the star performer as IATA raised its profit projection to US$8.6 billion, which is US$300 million higher than the previous forecast. All the other regions will see downward estimates with the exception of Africa, which remains unchanged. Still, the prospects look bright for the industry overall.

There is another piece of good news: fuel prices have been quite stable for now, although the situation continues to be threatened by geopolitical conflicts in Europe and the Middle East.

And, believe it or not, yet another piece of good news but for the consumer: Mr Tyler said air fares are expected to fall 3.5 per cent “in real terms”. Now whom do we thank for that?

This article was first published in Aspire Aviation.

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Will IATA’s optimism for 2014 hold?

iataTHE International Air Transport Association (IATA) rings in New Year cheer for its member airlines as it predicts record profits for the airline industry in 2014, revising upward the earlier forecast of US$16.4bn to US$19.7bn.

The association cites three reasons for its optimism: cost cutting by the airlines, cheaper jet fuel and rising demand for travel.

Cost cutting measures are really recovery measures more than the cause of good results if the experience of the industry is anything to go by in recent times. More importantly should be the issue of making this a daily discipline, in good times or bad, so as to sustain a well deserved profitability. Lauding it post-trauma can be deceptive, and may lead to complacency.

Cheaper jet fuel is of course good news, but the volatility of the product is not something that one can bet on. So it is as good as it is known, with no sign of a major political flare-up in the main oil producing regions in the offing. The cost of fuel has been an easy factor to blame for most airlines’ poor performances; if they continue to slide despite the good news, then they may finally get to where the real problem lies.

Demand for travel is swinging back, albeit not quite as fast as expected. All eyes are on Europe, where the trouble has been deep-seated for a long time. Yes, more people are travelling, but the real test will be one of yield. IATA said profit margins would be squeezed, noting much higher revenues of US$743bn generating an estimated profit of US$19.7bn next year compared to revenues of $579bn generating a profit of US$19.2bn in 2010.

IATA chief Tony Tyler said: “It is a tough environment in which to run an airline. Competition is intense and yields are deteriorating.”

Competition is a given. The good news is that despite its growing influence, the airlines according to IATA will turn in a record profitable year. Of course, if expectations are not met, this can always be cited as a reason.

But then, IATA is known to revise its forecast once too often. Can you blame it? Things change, you see.

Chinese carriers’ results attest to industry volatility

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons

MORE dismal results from other Asian carriers only attest to the continuing volatility of the airline industry, and this is reflected in a region said to be the beacon of the business that analysts had predicted to be finally heading back into far healthier numbers.

China’s three major state-owned airlines – Air China, China Eastern Airlines and China Southern Airlines – posted big decline in annual profits because of the weak global economy, higher jet fuel prices and smaller foreign currency gains. Profit plunged by half for China Southern and by a third for Air China and China Eastern.

The results for 2013 may yet show an improvement on the poorer performance reported for 2012, so it is still a wee bit too early to expect the International Air Transport Association (Iata) to revert to downgrading its forecasts as it did ever so often in the past three years. The signs for now though are not all that encouraging.

Plunging Cathay profits: What went wrong?

Photo courtesy Cathay Pacific Airways

Photo courtesy Cathay Pacific Airways

WITH Cathay Pacific Airways – one of the world’s leading airlines – announcing an 83-per-cent plunge in annual profit, one must begin to wonder what went wrong.

Almost five years since the onset of the global economic crisis, the fortunes of the airlines can be best alluded to the unpredictable movements of the yo-yo. It was only at the end of last year that the International Air Transport Association (Iata) could with some confidence finally revise its profit forecasts upwards instead of downwards: from US$4.1 billion to US$6.1 billion for 2012, and from US$7.5 billion to US$l4 billion for the current year.

Could Cathay be an exception to the rule? For all the hype about product improvement all round including the new Premium Economy class and a new regional business class, the Hong Kong-based airline posted a net profit of HK$916 million (US$118 million), down from HK$5.5 billion a year ago.

Cathay has attributed its poorer performance to a number of factors.

First, higher fuel costs. Cathay reported that throughout much of 2012, fuel prices were at sustained high levels and the Cathay Group’s fuel costs increased by 0.8 per cent compared to 2011. What’s new anyway, when this should similarly affect all airlines across the industry? Yet, in spite of that, some airlines such as Japan Airlines are reporting improved performances. The volatility of the fuel price has been an easy target to blame no matter what degree its impact is on performance. It may not apply to Cathay, but in fact the average jet fuel price had been falling from Sep to Dec 2012 before rising again.

What is more of a concern is the reason for the decline in the fuel price, as explained by Iata chief Tony Tyler: “The reduction in fuel prices is a great thing for the airline industry but they are coming down because of concerns over world economic activity. If the world enters an economic slump, that will be even worse for the industry than the higher fuel price was on its own.”

Second, a drop in demand for corporate travel. This is a more cogent argument as the industry continues to be hard hit by the economic stagnation or slow recovery if at all it is happening, particularly in Europe and the United States. Cathay, which banks on its premium product, is naturally affected more than other airlines that thrive on the low-end traffic.

In a statement issued by the airline, Cathay chairman Christopher Pratt said: “Premium class yields were affected by travel restrictions imposed by corporations.”

Again, this is not a new lesson gleaned only yesterday but widely recognized during the global financial crisis which all but favours cheaper alternatives. Cathay is not alone in this predicament; rivals such as Singapore Airlines (SIA) and Qantas face the same threat.

In a counter-move, Cathay introduced the premium economy class to retain downgraders and attract those who are prepared to pay a little more but not that much more to upgrade to enjoy the frills of an in-between class. It is tempting to conclude that this strategy – perhaps to the relief of SIA which has until now snubbed the idea – is not working judging by the results posted by Cathay, but its full impact is yet to be realised. If the global economy continues to weigh down, it may well prove to be Cathay’s lifeline.

That brings us to the third point as to what went wrong then. Cathay attributes it to increased competition. Mr Pratt said: “An increasingly competitive environment added to the difficulties.” That may be true, but when an airline such as Cathay which is among the world’s most successful carriers resigns to that, it comes across as being somewhat less plausible and lame, and smacks of something amiss.

Competition is a given in this industry. So what has Cathay done or is doing to check the competition? To be fair, it has done much more than most airlines. It has rolled out new product improvements and improved its in-flight service. The airline is ranked consistently among the industry’s favourites, particularly its business class, by air travellers. By all account, its strategy should place it in the forefront of the competition, so what is missing that it should ascribe its falling performance to increased competition? If there’s such a thing as a success formula to suit different environments, has it got the equation not quite right?

Fourth, the weak cargo demand in major markets, particularly from Asia to Europe. No doubt this has affected Cathay’s overall profitability. If it is any consolation, close rival SIA is also similarly afflicted. There are no clear signs that the situation will improve substantially in the near term. In light of the weaker outlook, Cathay has cancelled an order for eight Boeing 777-200 freighters but instead placed an order for three Boeing 747-8 freighters which will carry 16 per cent more revenue-producing freight than predecessor Boeing 747-400. Cathay chief executive John Slosar said the larger airplane would result in fuel savings for the revamped fleet.   

Fifth, high operating costs, especially of the long haul routes that according to Mr Pratt were dominated by “older, less fuel-efficient Boeing 747-400 and Airbus A340-300 aircraft”. Last year, the company announced plans to accelerate retirement of the less fuel-efficient 747-400 as it continues with the fleet upgrading programme for both airlines in its fold – Cathay and Dragonair. In January, Cathay ordered 10 Airbus A350-1000 and converted 16 of its existing order for A350-900 to the larger A350-1000. These 350-seaters will ply high-density routes which include non-stop flights to Europe and North America.

The future should look rosier. Mr Slosar said: “This is an important strategic development for Cathay Pacific. The A350-1000 aircraft will bring us world-beating fuel efficiency.” 

Last, incommensurate cost-cutting measures that include offering unpaid leave to crew and reducing capacity on some routes which unfortunately, according to Mr Pratt, “were not enough to offset in full the effects of high fuel prices and weak revenues.”

And we have come one full circle. So what makes one airline more likely to succeed than another when almost every one of them alike ascribes its failed performance to the same factors?

Mr Pratt said: “Our core strengths remain the same ever: a superb team, a strong international network, exceptional standards of customer service, a strong relationship with Air China and our position in Hong Kong. These will help to ensure the success of the Cathay Pacific Group in the long term.”

Sounds familiar, you may say, except for specific references applicable only to Cathay.

Optimism returns to aviation

London celebrating New Year . Photo courtesy Reuters

London celebrating New Year 2013 . Photo courtesy Reuters.

THERE is renewed optimism for the airline industry, going by the latest International Air Transport Association (Iata) forecast that 2013 will see an improvement in global airline profitability from US$6.7 billion to US$8.4 billion. This has been revised from an earlier estimate of US$7.5 billion.

Iata chief economist Brian Pearce said: “I think we are past the low point, which was earlier this year.”

The positive mood was encouraged by slightly higher economic growth and slightly lower fuel prices than expected. Of course, there remains the caveat that fuel prices continue to be volatile and susceptible to hikes and the world economy is moving slowly, if at all it is recovering. So, do not raise your hope too high.

Iata director-general Tony Tyler admonished: “It is of course good news that the outlook is moving in a positive direction, but let’s keep the figures in perspective. The industry is keeping its head above water. But only just.”

Indeed, the past few years have demonstrated how the industry has been saddled with more uncertainty than confidence moving forward. But starting the New Year on a positive note may in itself give a needed boost to the morale as the airlines in general may have for too long tried to adjust to the gloom and stay with it rather than shake themselves out of it.

In the next couple of years, the industry will be invigorated with airlines making plans to upgrade cabin products to include more comfort in premium class and enhanced in-flight entertainment in all cabins. Major US carriers such as United, Delta and American will introduce seats that can be converted to flat beds that are already available on international flights, on cross-country domestic flights. Ground facilities such as airport lounges will get a makeover.

United Airlines chief executive Jeff Smisek said: “In 2013, you will start seeing a lot of product development. We have to catch up for many years of underinvesting.”

In Asia-Pacific, airlines such as Qantas, Cathay Pacific Airways and Singapore Airlines have also announced plans to improve cabin products. The New Year is likely to see a re-focus on the premium product even as budget travel continues to grow in the region.

According to Iata, US airlines will continue to improve their profitability while European carriers collectively will break even. Now that’s good news especially for Europe, considering its long-running saga of the euro debt crisis. Asia-Pacific, hitherto touted as the region of growth, will turn in mixed performance but “overall profitability has not deteriorated as much as expected, despite weakness of cargo markets.” With 40 per cent of the global cargo market, the region’s carriers are most exposed to weak cargo demand. All other regions are also expected to show improved profitability, even if it is marginal.

I reiterate: It is always good to start the New Year on a positive note. For now, it is still a long year ahead to be concerned about unexpected turns in the road.

Grim future for airlines: Is consolidation the answer?

ACCORDING to Qantas CEO Alan Joyce, the airline industry faces an overcrowding problem. At the recent International Air Transport Association (Iata) summit in Beijing, he said: “The number of airlines in the industry is too many. It’s too fragmented, and consolidation is a good thing.”

Mr Joyce is re-championing an old strategy that more than 20 years ago was predicted to inevitably see the number of competitors reduced to a few mega airlines. One suspects that Qantas, struggling with a money-losing international operation, is crying foul over the competition posed by better-geared airlines that also provide superior customer service such as Emirates and Singapore Airlines (SIA),

Not foreseen then was the impending flourish of budget carriers, which became more than just a temporary nuisance but a threat to the more established airlines like Qantas. Qantas would meet with more competition when Scoot, a new budget subsidiary of SIA, commences services between Singapore and Sydney.

The recent spate of new mergers, particularly of giants like British Airways/Iberia, Air France/KLM, Continental/United and Delta/Northwest, seems to suggest a return to a strategy that was a bitter pill for SIA to swallow when it bought stakes in Virgin Atlantic in 1999 and Air New Zealand in 2000. The Virgin stake was a not-so-glamorous-after-all marriage which SIA has for some time now indicated interest in dissolution if it could find a suitable buyer. The Air NZ marriage turned out to be a fiasco, and was subsequently dissolved at a loss. That perhaps explains a more cautionary approach that SIA seems to be adopting today, preferring a less binding collaborative relationship such as the commercial arrangement  inked with Virgin Australia.

Consolidation is expected to come with the merits of sharing costs and risks, and the hope of confining, reducing or eliminating competition. In the present climate, cost is likely to be the primary driver in this direction. The LATAM merger, made up of Chile’s LAN and Brazil’s TAM, is expected to save US$700 million in operating costs over four years.

Unity is strength, but a good marriage demands more than just an exchange of vows, particularly when it crosses culture and geography, when it is held together by unequal strengths, and when both parties uphold different management ideologies. Qantas itself went through that rough patch with British Airways, which outbid SIA for a 25-per-cent stake in the Australian flag carrier in 1993, then ending the partnership in 2004. In 2008, rumours resurfaced of a possible Qantas-BA merger that never did materialize.

Yet as circumstances change, with the global economy continuing to languish and fuel prices remaining volatile, joining forces and leveraging on each other’s advantages in whatever form may provide the stabilizer in stormy weather.

China optimistic about its aviation future

Courtesy travelchinaguide.com

CHINA is optimistic about its aviation future even as the International Air Transport Association (Iata) for the third consecutive year slashed its annual profit forecast by at least half. This year’s profits are expected to fall from last year’s US$7.9 billion to US$3.0 billion. Iata chief Tony Tyler said: “The industry’s profitability is balancing on a knife edge.”

But China has reasons to smile. After all, Asia is the industry’s star player and China its main driver. Last year Chinese carriers contributed to half of the industry’s global profits. Going forward, China has announced plans for 70 new airports in the next three years and expansion of 100 existing airports – an unprecedented move on such a scale by any country.

Chinese carriers too are poised for expansion and growth, both domestically and internationally. Li Jiaxiang, director of the Civil Aviation Administration of China, said the country would add more than 300 aircraft a year from now until 2015. Air China for one, which has a fleet of 250 aircraft, will expand its fleet to 700 in five years.

Foreign carriers eyeing the Chinese pie too have reasons to smile. Qantas is launching Jetstar Hong Kong in a joint venture with China Eastern Airlines, and has not given up on an Asia-based premium airline to cater to China’s growing nouveau riche. Air Canada becomes the latest foreign airline to express interest in a budget carrier connecting North America and China and other Asian destinations, noting how Chinese carriers have also increased their presence in Canada.

It looks like 2012, which coincides with the propitious Year of the Dragon of the Lunar calendar, belongs to China, whose optimism provides a valuable lesson for the rest of the aviation world: the engine of growth must be sustained. Waiting helplessly for some more airlines to join busted European airlines Spanair and Malev may well turn out to be a self-fulfilling prophecy.

So said one of the speakers, Qatar Airways chief executive Akbar al-Baker, at the Iata summit:: “When we meet again next year there will be far fewer of you sitting there.”