A good year ahead for airlines

Courtesy AP

Courtesy AP

The International Air Transport Association (Iata) has raised its profit forecast for 2014 to US$19.9 billion from the earlier prediction of US$18 billion. Encouraged by falling fuel prices and recovery of the world economy, Iata director-general Tony Tyler said “the industry outlook is improving.” The association representing some 250 airlines expects a record US$25 billion profit for the global airline industry next year.

It is a long year ahead, but the industry is more certain now about its prospects as airlines are reporting higher profits. Oil prices continue to slide. In fact, airlines are yet to enjoy the full impact of the falling fuel prices. Of course, there is the usual caveat of political unrest and conflicts that can turn the tables.

Is there good news for passengers as well? According to Iata’s prediction, average return fares will be 5.1 per cent lower next year. Keep your fingers crossed, as no airline has yet to boast openly about taking the lead to lower the fuel surcharge.

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.

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.

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.”

Air France to axe 5,000 jobs

It is no coincidence that Air France has announced it will cut more than 5,000 jobs – about 10 per cent of its workforce – by end 2013 to reduce costs, on the heel of the grim message delivered by the International Air Transport Association (Iata) at its recent annual summit in Beijing that more airlines would go bust this year.

European carriers are most vulnerable in light of the continuing Eurozone crisis. Earlier in the year, Spanish carrier Spanair and Hungary’s Malev went bust.

Other airlines that have previously made similar moves include Qantas, whose restructuring of its maintenance and catering divisions will render 500 positions redundant, and the number could be higher.

It is interesting how Air France chief Alexandre de Juniac prefaced the move with the following statement: “Air France is facing a fundamental choice about its future. Our business plan has two ambitions: to ensure Air France returns to profitability and to better serve our customers.”

Staff retrenchment is a bitter pill to take, and in many countries this may meet with industrial unrest. So customers share in the attribution. How exactly will they benefit? It would be good to know.

Perhaps Mr de Juniac has a point there. While airlines should be managing their costs with discipline no lesser in good than in difficult times, the worst thing to happen is when they are clutching at straws, loyal customers are switching allegiance.

 

US Department of Transportation introduces new passenger protection rules

UPHOLDING the air traveller’s rights is a tricky matter. The European Union (EU) has introduced laws that bind airlines to compensate their customers for service lapses such as flight delays and cancellations. Canada has also introduced a passenger bill of rights that spells out specific passenger entitlements.

Come Jan 24, it will be illegal for airlines in the United States to advertise the fare without including all taxes and surcharges. Until now, airlines publish only the base fare, which watchdog consumer protection organisations say is deceptive.

One would think that the rule is fair and reasonable, yet it has met with opposition with some operators claiming it to be violating an airline’s right to free speech and contradicting the spirit of the Airline Deregulations Act. It’s all fluff. No airline has the right to mislead its customers by withholding information. The present practice makes comparative shopping difficult and does not help consumers make an informed decision.

In some countries including the US, it is normal for retailers not to include taxes in the prices of their goods and consumers must expect the additional cost. But there is a noticeable difference here. Add-ons vary from airline to airline not only in amount such as the fuel surcharge but also in the range of fees such as weekend surcharge. There is no knowing for sure how much more you would have to pay on top of the base fare.

The airlines have also argued that showing the full cost of the ticket may give the impression that prices have gone up. It only goes to show how selective information can shape the perception, whether well-intended or otherwise.

Nevertheless, despite the protest from airlines, travel agencies and other aviation bodies which are petitioning to defer implementation of the new rule, the US Department of Transportation (DOT) looks set to push ahead with it along with other measures “to enhance the air travel environment for consumers.”

In fact, this is an extension of a rule that is already applicable to online advertising. In Aug, DOT fined Air Canada US$50,000 for deceptive price advertising online. The Canadian flag carrier failed to disclose the amount of taxes and fees that passengers would have to pay in addition to the advertised fare. US Transportation Secretary Roy LaHood said: `When passengers buy an airline ticket, they have a right to know how much they will have to pay.”

The new rules will also apply to foreign carriers, and the International Air Transport Association (IATA) claims they are an infringement of extraterritorial rights. Considering the context of their application, IATA will have to do better than citing the same argument that it had used against the European Union’s carbon emissions trading scheme.

Other measures to be introduced by DOT include:

• full disclosure of baggage fees and allowances for carry-on and checked baggage;
• adoption of a tarmac contingency plan to allow passengers the opportunity to deplane if the plane is grounded for more than three hours (domestic flight) or four hours (international flight), and the relay of information every thirty minutes to include the reason for the delay, if known’
• an increase in the minimum compensation for denied boarding.

Of these, airlines are most concerned that increasing the compensation for involuntary offloading may discourage voluntary offloading – a common practice in the US when a flight is oversold – unless higher incentives are being offered.

Airlines seem concerned that the new rules would adversely affect their bottom-line. Apart from the costs of revamping procedures, systems and advertising materials to accommodate new requirements, they are perhaps more concerned about how the competition may be affected by better informed passengers.