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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AirAsia India set to trigger price war

Courtesy AFP

Courtesy AFP

INDIA’s first carrier with foreign investment – AirAsia India – commences operations today. Owned by Malaysia-based AirAsia and India’s TATA Group, the new budget airline is likely to trigger a price war among the domestic operators.

But AirAsia is confident that it has the discipline to keep its fares low and its costs “razor-thin”, so said chief executive Mittu Chandilya. The airline has promised the lowest fare, flying between Bangalore and Goa for as low as US$17 which is cheaper than a second-class train fare

Anything goes, it seems, in India. Many carriers have come and gone, and many of the existing operators continue to incur losses. Yet the huge potential of a growing market continues to lure new investors hoping to make it big in the arena.

For now, AirAsia chairman Tony Fernandes is probably pleased that AirAsia India has beaten Singapore Airlines (SIA) to the starting line in launching AirAsia India, which is 49-per-cent owned by AirAsia. In an almost similar arrangement, SIA has also partnered TATA Group to establish TATA SIA Airlines to be launched in October. Any apparent competition between the two upstarts can only benefit TATA whichever way it swings, and, of course, the consumer as the plethora of operators undercut each other.

Is AirAsia facing partnership problems?

airasiaIs the Asian budget business overhyped as competition increases and demand matures? Or is it just a problem peculiar to AirAsia’s partnerships?

AirAsia Philippines, established in December 2010 between AirAsia (40%) and local investors (60%) but commenced operations only in 2012, has suspended all flights from its base at Clark International Airport. The reason was cited as one of cutting losses incurred by affiliate Zest Airways, which in August was suspended by the Civil Aviation Authority of the Philippines for safety violations.

However, AirAsia chief Tony Fernandes said it was because the airline was moving its flights to the main Ninoy Aquino International Airport in Manila. At the same time, Mr Fernandes vowed, “We will be going back to Clarke.”

It was ambiguous, to say the least. Is it going to be Manila or Clarke, or both? Know that Mr Fernandes has always been keen on secondary airports where it could dominate. Ever since the Malaysian capital of Kuala Lumpur moved its main airport from then Subang International Airport (which has been renamed Sultan Abdul Aziz Shah Airport) to Kuala Lumpur International Airport in 1998, AirAsia has been lobbying unsuccessfully to make its hub at Subang, which is served by Malaysia Airlines’ Firefly budget subsidiary.

AirAsia has also asked the Singapore authorities to be allowed to set up base at the smaller Seletar Airport which is currently being used on a limited basis for charters and training. Yet when a budget terminal was constructed at the main Changi Airport, AirAsia chose not to use it but insisted on operating along full-service airlines out of the main terminal. Mr Fernandes understood only too well the advantage of being where the action is, as suggested by his preference for NAIA to Clarke because the former offers “more choice, more value.” Changi’s Budget Terminal has since been closed and AirAsia may feel it has made the right decision.

However, AirAsia Philippines’ suspension of flights coming on the heels of AirAsia’s failed relationship with All Nippon Airways (ANA) in its joint venture – then named AirAsia Japan and has since been renamed Vanilla Air by ANA – may suggest more than just a temporary adjustment issue as the carrier makes plans to shift airport bases. (See Everyone loves vanilla, but do they really? Aug 24, 2013) This is not helped by the increased competition in the region and by the overrated potential that some analysts have hyped up although it is to be recognized that with Asean Open Skies, there is room for growth.

Maybe it has to do with the stars too. AirAsia’s new joint venture in India may not take off as scheduled by the end of this year because of administrative procedures. Yet the delay till 2014 may be a blessing in disguise considering the present poor market. Just so in the same way that AirAsia Philippines may resume Clark-Hong Kong flights for the Christmas season. A matter of economics?

AirAsia blames ANA for budget break-up

Courtesy Wikipedia Commons/Flickr

Courtesy Wikipedia Commons/Flickr

AirAsia chief Tony Fernandes has put the blame on All Nippon Airways (ANA) for the breakup of AirAsia Japan budget joint-venture. (See Budget business matures, Jun 12, 2013) The beef is that majority shareholder ANA as a full-service airline does not understand budget operations, giving rise to differences between the two partners in financial and management issues.

A marriage across cultures is not always an easy one, even if both partners hail from the same level. The aviation industry has seen the break-up of even the most likely partners. Ultimately it all comes down to the numbers. AirAsia Japan is not doing as well as the other budget operators, namely ANA’s other budget arm Peach Aviation with a Hong Kong partner and Jetstar Japan, a joint-venture between Qantas’ Jetstar and Japan Airlines (JAL) as major partners.

How then do you explain Peach and Jetstar being more successful? Mr Fernandes may argue that it is because Peach’s other partner is non-aviation, so is it a case of too many experts spoiling the broth? And, interestingly, Mr Fernandes said he has learnt one critical lesson from the failed tie-up; he was quoted as having allegedly said: “The lesson is I will never ever work with another airline in my life. Let me qualify that – premium airline.” That again may have also explained why he has chosen to set up AirAsia India with non-aviation partners Tata Sons and Amit Bhatia instead of with another airline or buying into an existing airline such as Kingfisher Airlines which is clutching at straws for some help.

What about Jetstar Japan, assuming it has so far not faced the kind of problems that confronted AirAsia Japan, even though JAL, like ANA, is a full-service airline and Jetstar, like AirAsia, operates the no-frills model? Or, if Qantas, instead of Jetstar, is driving the business, does it not augur ill when two full-service airlines try to operate a budget joint-venture along legacy lines? Yet the Jetstar brand has enjoyed good growth across the region.

ANA will now buy up the AirAsia stake in the joint-venture, and AirAsia Japan may then merge with Peach. Since Japan is a prized market for leisure travel, AirAsia may again seek to re-enter the market on its own. Can it do better the next time round? The longer it waits, the more it has to catch up with lost ground as the market matures.