US and EU cross swords on carbon emissions

COME January 1, 2012 all airlines that land or take off from any point within the European Union will be subject to the carbon emissions trading scheme (ETS).

The United States has objected to the scheme, perhaps a little too late even though the US House of Representatives had two months ago directed the US transport secretary to prohibit US carriers from participating in the plan. That is now seen as a veiled threat with little bite, with no real option for US carriers. A spokesman for EU Climate Change commissioner Connie Hedegaard said the EU would not bow to pressure from the US. Sauce for the gander is sauce for the goose. It is to be seen what the US would do next, with the latest threat from an official no less than Secretary of State Hilary Clinton warning that the US would respond with “appropriate action” if the scheme went ahead but stopping short of saying what action.

Naturally the US is concerned about its carriers being disadvantaged by the EU ruling and would prefer the matter to come under the ambit of the International Civil Aviation Organization (ICAO). But ICAO has done little to develop or promote concerted alternatives, let alone efforts by some airplane manufacturers and individual airlines demonstrating their green commitment.

The US has argued that the ETS is an infringement of the Open Skies agreement, but that has been refuted by the EU, which has rebutted that it is a regulation implemented within EU territory, in all likelihood no different by comparison how other countries have also imposed certain local charges within their own jurisdiction. The International Air Transport Association (IATA) is lending support to the US’s argument, saying it is “extra-territorial”, hence an infringement n the rights of airlines flying in international airspace.

IATA also claimed that the EU initiative is a tax on carbon emissions, and this breaks international conventions. But spokesman Isaac Valero Ladron of the EU Commission refuted that argument, saying: “This is not a tax, it’s pollution saving.” How much more is this a tax than, say, the fuel surcharge that permits airlines to unilaterally pass on additional fuel costs to their customers with no considerations of efficiency? At its very best, though punitive, the ETS is supposed to motivate airlines to be more fuel-efficient in their operations.

Canada, China and other countries in Asia and Africa – practically almost the rest of the world – have also expressed their disapproval of the EU’s regulation. So far Australia is the only country outside the EU that may be following in its footstep by the middle of next year. For now, there are concerns that the EU ruling may lead to a trade war, which Airbus and some national carriers are keen to avoid, urging the EU to modify its plans. Airbus chief Tom Enders said it was “madness to risk retaliation” from these countries.

There may be compromises yet the EU has indicated it may consider exemption for airlines whose countries are implementing similar ETS plans, suggesting reciprocity. But Mr Ladron made it clear that “we (EU) don’t work on the basis of threats, but on discussions.” ICAO may be wishing it had long ago started working on an acceptable global system.

Advertisements

Lion Air joins the premium carrier competition

FOLLOWING on the heel of Qantas’ announcement that it would set up an Asia-wide premium carrier – RedQ – to be based in either Kuala Lumpur or Singapore as part of a restructure to stem the loss of its international operations arm, AirAsia said it would also introduce a premium carrier – Caterham Jet – that will operate from Kuala Lumpur to destinations that include Singapore, Jakarta and Bangkok. At the same time, compatriot Malaysia Airlines also announced its plans for a new premium carrier. It is likely that this will be a collaborative effort with AirAsia although it is not known if Malaysia Airlines is also talking about Caterham Jet.

The focus seems to have shifted from budget carriers to regional premium carriers as Indonesia’s Lion Air becomes the latest airline to join the regional premium carrier competition. However, while Qantas, AirAsia and Malaysia Airlines plan to fly their offshoots in 2012, Lion Air’s Space Jet will not take to the skies until 2013. It will begin with operations within Indonesia, looking to increasing its share of the domestic market from 47 to 60 per cent, before going international.

According to Lion Air’s president-director Rusdi Kirana, the move was necessary to ensure that the airline company remains competitive. The rationale may sound all too obvious, but its relevance cannot be ignored. Lion Air as a hybrid carrier that offers both economy and business classes faces stiff competition from budget carriers as well as full-service airlines, most of whom are driving a two-prong strategy to capture the full spectrum of the market. The situation will become critical with complete liberalization of Asean skies in 2015, if Lion Air chooses not to go where its rivals are heading.

Lion Air is Indonesia’s largest private carrier, operating to more than 60 destinations (the majority of them domestic), but it suffers from a poor reputation of safety concerns. It is banned from operating to the European Union and denied membership of the International Air Transport Association (IATA). According to the Indonesian transportation authorities, Lion Air recorded the worst on-time performance (OTP) out of six airlines nationwide in a survey conducted from January to April this year.

That has not deterred Lion Air from continuing to expand its network. The airline made headline news in November when Boeing announced its biggest order ever – 230 airplanes with a list price of almost US$22 million. Including options for another 150 aircraft, the total deal would add up to more than US$35 million.

It looks like Lion Air is serious about its intent and is ready to impress the world – if it could in the meantime work at improving its OTP and allay concerns about its poor safety record.

Airlines face new challenges

THE real question is not whether the airlines would survive another recession so soon after the 2008/2009 global economic meltdown. In an industry dominated by national players whose fate goes beyond commercial considerations, willy-nilly the majority of them will pull through, perhaps struggle to stay afloat, and emerge badly bruised.

While experts generally do not foresee a trough as deep as the previous one, the signs aren’t all that encouraging with recent reports of the American economy still floundering, the debt of Greece widening, no letting up of the political unrest in the Middle East, the prospect of the China market contracting, Japan still reeling from the aftermath of natural disasters, stocks across the world plunging, and a sinking oil price that ironically should and yet not completely be good news for the airlines.

According to the International Air Transport Association (IATA), airlines are reporting better than expected passenger demand, but profitability has not kept pace. In a simple profit and loss equation, it can only mean higher costs or lower yield, and for some airlines, perhaps the growth of capacity outpacing the demand. In its latest forecast, IATA expects lower profit for 2012 in a very tough environment, projecting it to fall to US$4.9 billion from US$6.9 billion expected this year even as passenger demand grows by 4.6 per cent compared to 5.9 per cent for the current year.

But it is not all gloom and doom according to IATA Director General and CEO Tony Tyler, who said: “Relatively stronger economic growth will help Asia-Pacific airlines to maintain their 2012 profits close to 2011 levels at $2.3 billion. The rest of the industry will see declining profitability. And the worst hit is expected to be Europe where the economic crisis means the industry is only expected to return a combined profit of $300 million. A long slow struggle lies ahead.”

Indeed, it will be a long, rocky road to recovery for most, if not all, airlines, if the world economy continues to slow down, moving backward as it moves forward. The prolonged volatility of the global market only serves to confirm the lessons of the previous downturn – lest they have been forgotten – and to provide an opportune respite for the airlines to re-strategize, at least for those who have wised up to know that going forward, it cannot be business as usual.

Market shifts

The market has definitely sifted downward. It is worth reiterating how during the 2008/09 financial crisis, the demand for air travel fell and people who must fly were looking at cheaper fares, which explained the flourish of budget carriers and the misfortune of major carriers which thrived on the premium market particularly when corporations downgraded executive travel. We have witnessed how the aviation landscape quickly became dotted with budget upstarts, particularly in Asia-Pacific (understandably so since it is comparatively a new phenomenon here than in Europe and the United States), and more recently how full-service airlines themselves are setting up budget subsidiaries and joint ventures to protect their turf in light of the competition posed by independent carriers and be where the business is heading.

The most anticipated entry into this arena is probably Singapore Airlines (SIA)’s fully-owned yet-to-be-named budget subsidiary which is expected to commence operations in 2012. SIA has indicated that the new offshoot will not be used on routes below the 4-hour duration normally operated by the traditional budget model, as it is eyeing the more lucrative North Asian markets such as Korea. SIA is pushing the evolution of the budget model from a mere no-frills entity in a segregated market to a viable competitor in the total air travel business – something that has already happened in Europe and the US and preceded by budget long haul flights such as the operations of AirAsia under the AirAsia X banner from Kuala Lumpur to Paris and London.

Interestingly, India’s Kingfisher Airlines has decided to exit the budget market – closing down Kingfisher Red – and focus on full-service operations. In spite of India’s booming low-cost traffic which has increased to 50 per cent of the country’s total traffic from 39 per cent two years ago, Kingfisher CEO Sanjay Aggarwal’s decision not to “compete in the low-cost segment” may be a case of foresight of an impending saturation of the no-frills market. He said: “Capacity induction of the LCCs (low cost carriers) has outpaced the demand growth in the domestic market. The induction of so many aircraft in the low cost segment will potentially lead to substantial overcapacity and a price war with declining yields.” But the vacuum vacated by Kingfisher Red is likely to be quickly filled by rivals and new upstarts.

The corollary is one of opportunities offering better returns in a reviving albeit slowly reviving full-service market while others shift their focus away from it. Mr Aggarwal said: “While there are currently five airlines participating in the low-cost carrier segment, there are only three full-service carriers. We believe that competition will be far more intense in the low-fare space than in the full service space.” He was optimistic that full-service yields would far outweigh additional costs on things like global distribution and in-flight catering.

Yet, as the competition flattens across the broad aviation terrain, nomenclature will become less important, even redundant. The demarcation between budget and full-service is beginning to blur. The competition will be decided by the consumer’s perception of value, whether budget or full-service, and less so by image.

The future of premium travel

Just because the market has shifted downward, it would be wrong to assume that premium travel is heading for oblivion. Major airlines such as Singapore Airlines, Cathay Pacific Airways and British Airways (BA) have reported the numbers clawing back. The premium market will continue to constitute an important aspect of the business, considering that, as in the case of SIA, the revenue generated by class has traditionally been 40/60 premium/economy against 16/84 premium/economy by seats offered.

But as the competition becomes heightened by budget carriers shifting upwards, again flattening the playing field and putting pressure on the kind of margins that full-service airlines once enjoyed, full-service airlines face a new challenge of marketing not only intra-airline but also inter-airline class distinction, whatever the nomenclature. The rebranded Virgin Australia, going international, is eyeing the business market. Qantas’ subsidiary Jetstar has long introduced business class. EasyJet of the United Kingdom reported healthy bottom lines derived from the introduction of business class travel.

It may be back to the generic two-class configuration of upper (call it First, Business or whatever) and lower (economy or coach) as more airlines begin to downsize or eliminate First when it becomes more economically profitable to market Business (which could well be First in status) as the upper class difference. Some airlines have done away with First in their configuration, including SIA on certain sectors. Cathay in introducing Premium Economy is making the same move selectively. The in-between class which, as its name suggests is a better Economy package aimed at netting down-graders and luring borderline up-graders, has long been experimented by other airlines including early pioneer EVA Air in a limited way, Air Zealand with its Skycouch and BA with its World Traveller. It has yet to achieve shaker status, and Cathay faces the challenge of unravelling the magic that would make it so.

Geographical positioning

While the rest of the world churns in economic turmoil, Asia has emerged as aviation’s Holy Grail. In the words of Qantas chief Alan Joyce, the Australian flag carrier would “increase our focus on the world’s fastest growing aviation region” to avert an Australian “tragedy”. Qantas had earlier declared setting up a budget joint-venture with Japan Airlines (and Mitsubishi Corporation) and plans for an Asia wide-premium service to be based most likely in either Singapore or Kuala Lumpur. Not to be left out, Virgin Australia is also looking at opportunities in the region. SIA’s new budget subsidiary to reach Asian ports beyond the 4-hour flight time is perhaps also a correctional move to balance its exposure to markets in Europe and the US, which during the financial crisis until now have weighed down its profitability. It is understandable when Europe and the Americas generate 40 per cent of the revenue by routes.

Soothsayers are so overwhelmed by the huge potential of China and India that any possible contraction of the regional economy is unthinkable. But when it happens, it will be a different game. Sufficient to say that survival in aviation competition is a gold rush mentality.

Alliances in times of need

Especially in times of need, having friends helps indeed. Alliances help extend an airline’s reach and improve its visibility, provide transparent transfers between airlines and better flight meshing for the partners’ customers, strengthen the concerned airline’s competitive edge, and garner benefits for the partners in shared costs and opportunities. The recently announced SIA/Virgin Australia alliance would provide seamless transfers between SIA and Virgin flights and allows SIA access to Australian ports outside its network – a move that causes rival Qantas some concern, or, to quote Virgin Australia CEO John Borghetti, “a nightmare for Qantas international operations”. Virgin Australia has been busy shopping to ink strategic partnerships with airlines across the globe.

During the last financial crisis, many airlines were compelled to cut services and exit some routes. It made economic sense to co-operate to utilize excess capacity. Qantas is said to be working out possible extensive code-share arrangements with OneWorld partner BA to exit some stations served by both airlines. Some analysts think this would be a costly mistake for Qantas, which would lose visibility and control over the traffic it feeds into BA. The downside of alliances of this nature is that airlines soon begin to lose their individual distinctness and identity; weaker carriers may be advantaged by leaning on the good name of their more reputable partners, but the latter are less likely to relish the association.

That’s how the aviation landscape has changed consequent to the financial crisis. When you book on a preferred airline but end up flying on another, brand – and the loyalty that comes with it – no longer is an important consideration. Airlines will have to rethink the game as to what now has become more important to the discerning customer and how they can individually preserve their good name and retain customer loyalty.

The irony of a falling fuel price

During the 2008/2009 crisis, the soaring fuel price had often been cited as a key contributor to the woes befallen upon the airlines which until today still warn that this will continue to be a concern in light of the unabated political unrest in the Middle East. Ironically, the unanticipated fall in fuel prices following on the heel of the crisis caused many airlines million-dollar hedging losses. In its current five-year-plan, Qantas did not rule out more rounds of a fuel surcharge hike but recognized there was a limit to how much more an airline could resort to such a measure. The fuel price has fallen from the erstwhile high; by all indications, it should be good news, but if this is a sign of the worsening economic downturn, it does not forebode well for the industry.

Cost and the discerning customer

Most – if not all – airlines reacted to the last crisis by trimming costs. Looking back, rationalizing for consolation, we might attribute the setback to a period of forced correction whereby airlines became conscious of waste, unconscionable runaway costs, and frivolous and unnecessary expenses. At the same time, the customer became more discerning, discriminating and driven by a greater awareness of value relative to his or her needs and propensity for excesses as well as the availability of alternatives.

It was a stitch that might have come too late for the unfortunate few which did not have the strong books of SIA or a ready life-line from white knights. Going forward, the cut would be deeper if airlines forget the lessons learnt in the event of a recurrence of similar or worse circumstances. The new challenge is to seek out cost-savings that go beyond the elimination of an olive in a martini through more efficient equipment and methods of operation without sacrificing service standards, such benefits that will also favour the customer directly.

The pressure of environmental concerns

Whether or not the economic situation improves, there will be added challenges posed by developments in other world arenas. The pressure on airlines to go green will increase. Conscious of this, SIA recently announced its membership of the Sustainable Aviation Fuel Users Group (SAFUG) which pledges to accelerate the development and commercialization of sustainable aviation biofuels. But if airlines – which contribute about 3 per cent of the world’s total carbon dioxide emissions – choose not to heed the call to help the environment, the authorities may regulate to bring them in line.

The writing is on the wall. UK Energy and Climate Change Minister Greg Barker said: “The aviation industry, in the same way as other industries, needs to play its part in reducing emissions.”

The European Union (EU) has plans to include any airline landing or taking off on EU territory in its emission trading scheme, which is being challenged by North American airlines. In response to the American argument that this was a violation of the Open Skies Agreement, European Court of Justice Advocate General Juliane Kokott said: “The inclusion in the EU emissions trading scheme of flights of all airlines from and to European airports is compatible with the principle of fair and equal opportunity laid down in the Open Skies Agreement.” She added: “Indeed, it is precisely that inclusion that establishes equally of opportunity in competition, as airlines holding the nationality of a third country would otherwise obtain an unjustified competitive advantage over their European competitors if the EU legislature had excluded them from the EU emissions trading scheme.”

Australia is the latest country to pass a bill for the controversial carbon tax, to be paid by polluters for each tonne of carbon dioxide emission. Slated for implementation on July 1, 2012, the tax will evolve into an emissions trading scheme in three years like the one in Europe. Airlines then can expect to face the same fate.

Will the defaulted airlines willy-nilly pass on the “penalty” costs to their customers or will this force them to become more efficient? It is not that simple in a competitive environment. The discerning customer is not likely to want to pay a second fuel surcharge, this time for a carrier’s inefficiency.

The cry for innovation

Necessity is the mother of invention. New engines designed to reduce fuel use has been the driving force at aircraft manufacturing facilities, with Airbus and Boeing claiming to be leaders in the field as they rolled out the A380 and B787 Dreamliner respectively. Qantas has just placed a US$9.5 billion order for 110 Airbus aircraft – 32 A320s and 78 A329neos, no doubt to be expected following announcement of its Asian expansion plans. The next-generation A320 neo is said to be 15 per cent more fuel efficient than the original A320.

More than just innovation in the field of hardware, the industry is badly in need of new sparks ine way the business is executed. The problem with the nature of the industry is that ideas often take too long to be realized or implemented while the impact of external events can happen in a flash.

Foggy skies ahead

All said, it’s still foggy skies ahead. Between SIA and Kingfisher as representative of the initiatives across the aviation landscape, it may even be said many of us are far more clueless than we claim to be about what the future holds as we await the next revised forecast by IATA.

Once bitten, twice prepared

YET again, in just a little over three months since December, Singapore Airlines (SIA) raised its fuel surcharge thrice. Qantas did it twice in as many months, following in the footstep of British Airways (BA). Most other airlines had already jumped on the bandwagon.

By all indications, the upward trend is likely to persist as the continuing unrest in Libya and neighboring Middle-East countries threatens to further escalate the price of oil. And while analysts re-paint a gloomy forecast following the catastrophe in Japan wrought by the recent earthquake and tsunami, the irony is that a fall in demand for seats this time round may not necessarily trigger a fall in the fare.

Not just that the airlines are better prepared after the deleterious blow in 2008 when the oil price breached US$150 per barrel before plummeting to US$34 per barrel, though there definitely have been lessons learnt.

One, before Libya, many of the major airlines reported better-than-expected profits in 2010 as the world economy recovers. Cathay Pacific Airways for one almost tripled net earnings to US$1.80 billion (HK$14.05 billion). Qantas posted a four-fold increase in half-year net profits to US$247 million (A$241 million). SIA reported an operating profit of S$380 million in the first six months against a loss of US$339 million (S$428 million) the previous year, and expected the profitability to hold up for the full year in spite of the uncertainties of the oil price.

Hence, airlines are likely to be buoyed by the momentum of the current economic recovery, even if it should slow down. Reported healthy forward booking helps to cushion the latest bout as airlines tread cautiously and make the necessary adjustments. It is an opportune time to raise the fuel surcharge, if not the base fare, to add to the cushion.

Two, note how swiftly the airlines responded to the current squeeze on the fuel price. The lesson is to act before it is too late. And so long as the world is not tumbling backward headlong into the erstwhile long-drawn financial meltdown, when air travel was drastically curtailed, most of the airlines will be able to get by with raising the fuel surcharge, if not the base fare as well. The Japanese crisis is likely to be short-term as Japan will bounce back quicker than anticipated. Besides, the specific impact is more regional than global.

Three, in the yet-to-be-forgotten global financial meltdown, the airlines were saddled with overcapacity and the reduced market for air travel took a toll on the competition. Those that have successfully crawled back into profitability are leaner today, and with a second oil crisis looming and for those airlines that are also impacted by the Japanese crisis, they are likely to keep a lid on capacity growth, adjust schedules to match demand and be circumspect about putting back erstwhile frills so as to contain costs and keep the fare up. Growing businesses and pent-up demand for leisure travel are likely to survive incremental fuel and other surcharges.

The situations then and now are not quite the same, and air travelers, more than the airlines, are likely to be the ones to bear the brunt of today’s crunch, at least in the near term.

Four, reconstruction of Japan will add to the squeeze on the demand for fuel. This provides yet another reason for airlines to up the fuel surcharge – legitimately, it would appear. Ironically, as the spending power of air travellers goes up, the easier it is for airlines to implement add-ons.

Five, Opec nations are rallying to stabilize the oil price. Already the market is showing signs of easing. Saudi oil minister Ali Al-Naimi said: “Saudi Arabia will continue to reliably meet the world’s petroleum needs.”

Six, in the last recession, airlines were dealt a double whammy of soaring fuel price and hedging losses. Airlines will continue to hedge as part of the business, but they have become wiser about making knee-jerk decisions.

Seven, do not ignore the power of the PR machinery of industry watchdog International Air Transport Association (Iata) that warns against possible collapse of the industry that the world can ill afford if prevailing conditions are not made supportive, that forestalls additional levies and operating restrictions by governments and authorities that may add to the financial woes of the airlines, and that pre-empts and cleverly softens public reaction to surcharge and fare increases.

It is the cry of the underdog and the consumer is frequently being reminded of the millions an airline would incur with every dollar increase in the price of oil, that by comparison the increase in the fuel surcharge is paltry. So too are we told the surcharge can never recover the full impact of the fuel price. Air travelers should be grateful to know their journeys have been subsidised.

Iata chief Giovanni Bisignani warned that the industry is “balancing on a knife’s edge.” Yet the last word may belong to Iran’s Opec minister Mohammad Ali Khatibi when he told the Reuters news agency, summing up the situation as being “psychological.”

The airline industry is an unwieldy animal. The real impact of any change in the environment comes lately, and by then the dark clouds could have dissipated. But one never quite knows for sure as the world becomes increasingly unpredictable. However, the message to air travelers is clear: brace yourself for more rounds of the fuel surcharge increase.

Fuel surcharge goes up, up, up

BE prepared for more rounds of fuel surcharge hike even as airlines are reporting improved profits. The culprit, they will tell you, is the rising cost of jet fuel which makes up as much as 27 per cent of an airline’s operating costs.

In less than three months, Singapore Airlines (SIA) has increased its fuel surcharge twice. The latest bout of increase, which also applies to SilkAir flights and effective from end-January, ranges from US$3 to US$27 depending on the flight distance and class travelled. In December, the surcharge was up between US$3 and US$25. SIA spokesman said: “The adjustments will only offer partial relief from the higher operating costs arising from increases in the price of jet fuel.”

The International Air Transport Association (Iata) warned that higher fuel costs would be the biggest challenge faced by airlines this year. The price has hit US$120 per barrel, though still below the peak level of the economic crisis in 2008 when it breached US$150 per barrel before plummeting to US$34 per barrel. The upward trend looks certain to persist in light of the political turmoil spreading across the Middle-East and North Africa.

SIA is not alone in the game. Within as short a period, British Airways too has raised its fuel surcharge twice. Other airlines across the globe – Qantas, Cathay Pacific, Air France, South African Airways and Delta Airlines amongst them – have followed suit.

So, you may say: What’s new? Yet the issue is exactly that it is one that has become too familiar.

The fuel surcharge is a powerful financial and marketing tool adopted by the airline industry. Propagandized and largely accepted as a necessary evil, it legitimizes increasing the cost of air travel any number of times at short notice. The airline is often presented as a victim of unfavourable economic circumstances which the consumer has come to acknowledge as the common enemy. Airlines would have their customers believe it is not the airfare that has gone up, but the fuel surcharge.

In fairness to the airlines, the issue is not the price hike but the packaging. The deception of treating the fuel surcharge outside the cost of an air ticket even if it is unintended is unwarranted. It misleads the customer into making erroneous decisions in price comparisons when a low fare may be compensated by a high fuel surcharge. Ultimately what matters to the consumer is the bottom-line, however that cost is apportioned. Ryanair was fined for misleading the public through its advertisements into believing its fares were the lowest in Europe.

In the United States, while some airlines are introducing fuel surcharges for domestic travel to deal with the rising cost of fuel, others such as American Airlines have opted to raise the base fares instead. However presented, it is a price hike. Some consumers may have been convinced of the transient nature of the fuel surcharge. Airlines will remind them of the rare occasions when they reduced the surcharge. What, then, should prevent airlines from similarly shaving airfares of excessive charging?

The issue is complicated by how the fluctuating fuel price impacts the different airlines in varying degree. Yet when one airline triggers a hike, it sets off a chain reaction across the aviation business in what may appear to be an opportunity not to be missed, however justified. Interestingly, even as the Asia-Pacific region is growing at a faster rate than the rest of the world, a report published by the Civil Aviation Department of Hong Kong in February shows that the majority of the airlines that are raising fuel surcharges are based in Asia.

While many airlines will insist that the fuel surcharge only partially recovers the increased cost of fuel, how the burden is apportioned between the airline and its customer is abstruse. Conversely, when airlines deem it fit to reduce the fuel surcharge when the price of fuel plummets, the consumer never quite knows if he gets a fair share of the benefit. Definitely not in the aftermath of the 2008 economic crisis when many airlines incurred hefty hedging losses as the trend reversed.

It is a fact that in good times an airline’s bottom-line may be boosted by hedging profits. That’s bonus to the airlines when the gamble pays off – though not entirely undeservedly on account of capable management. In times of soaring fuel prices, the fuel surcharge serves as the protector against declining profitability.

Of course, the consumer’s guardian angel against rising costs is competition. However, in an industry where the options are limited and where the players move almost in tandem, it is often the piper that calls the tune. It takes a major financial catastrophe, like the recent economic meltdown that led to a large-scale downgrade and curtail of air travel, to shift the ground somewhat. Besides, frankly, few governments if any want to see their national airlines fold their wings.

Iata chief Giovanni Bisignani warned: “The recovery cycle will pause in 2011. The industry is fragile and balancing on a knife’s edge.” That admonition not only attempts to forestall additional government levies on the airlines but also forebodes further increases in the total cost of an airfare. Mr Bisignani’s concerns will be recognized as being Delphian if the current unrest in Libya and other Middle-Eastern nations causes the fuel price to escalate to new heights.

So, indeed, what’s new when it appears the man-in-the-street can do little but in good faith be resigned to the inevitability of having to pay more to fly? Yet his best safeguard is awareness of what he is paying for, these days when flying comes strapped with a plethora of add-on charges besides the base fare – whether these charges are integral or optional. And, know that the total cost of the ticket may be much more than it is advertised.

The vulnerability of air cargo carriage

THE interception by security officials in the UK and Dubai of two explosive devices uplifted in Yemen and bound for the United States has accentuated the vulnerability of air cargo transportation. European and US aviation security experts are meeting to take stock of current measures and surveillance systems.

The risk exposure of air cargo is not unknown. In May, the Canadian government for one announced a robust five-year plan – costing C$95.7 million (S$123 million) – to “ensure that air cargo shipments are resilient from the threat of terrorism”. However, faced with limited resources, overseers of air transportation across the globe are often constrained in their exercise of priorities.

Ever since 911, a plethora of measures have been introduced to tighten security for travel on passenger flights, but only in August this year did the US make it mandatory for 100 per cent of cargo loaded on to these flights be screened for explosives.

Checks applied to freighters are comparatively less stringent. Even the technology used is less sophisticated than that for baggage. Requirements are largely based on systemized trust. For example, the British government uses a system of “known consignor” whereby the cargo of audited companies that are certified as trusted shippers may not be subject to the same level of checks as that of uncertified shippers.

Clearly, practices vary from country to country in a wide spectrum of multi-layered to patchy or nil screening. Some experts think this is the problem – the absence of a universal screening standard. However, the difficulty lies in how some regions and their airlines are more at risk than others. Yet one cannot overlook how danger will lurk in the most unlikely places.

Therein lies the real problem – the element of surprise. Governments face the challenge of being steps ahead of would-be arsonists, as recognized by the Untied States Homeland Security chief Janet Napolitano who said: “The threats of terrorism we face are serious and evolving, and these security measures reflect our commitment to using current intelligence to stay ahead of adversaries.”

Recognizably many preventive measures are reactionary to specific incidents, as in the recent American ban on cargo carriage from Yemen and Somalia. Drawing lessons from history should help prevent copycat acts, but from shoes to printer cartridges, the industry’s headache is preempting what next would be employed to hide explosives.

The question of adequate security checks is unfortunately often tempered by cost concerns of airlines and shippers, such as costly flight delays and the rising costs of yet more checks. Shippers are concerned too about idle warehousing costs and time-loss when speed means money.

The International Air Transport Association (Iata) has warned against knee-jerk response to the Yemeni incidents as it could harm the air travel industry, which handles over a third of the world’s goods traded internationally. Iata chief Giovanni Bisignani said: “Effective solutions are not developed unilaterally or in haste.”

However, the current mood of panic is likely to press for more checks, as is already seen in how passenger security screening in the US has become more invasive. International Pilots Association spokesman Brian Gaudet has shot an early salvo: “We believe that current standards in air cargo screening are inadequate.”

Governments can certainly cooperate on two fronts. First, the developments of new and more effective technology that will make the carriage of freight safe without slowing down the speed of processing.

Second, the sharing of intelligence all the way up the process or supply chain. Technology alone is not enough. It was a tip-off by Saudi Arabia intelligence that the explosives in printer cartridges uplifted in Yemen were intercepted. Spokesman Mansour al-Turki of the Saudi interior ministry said: “Saudi Arabia believes in the importance of promptly exchanging security information of intelligence nature as a fundamental tool in combating terrorism.”

Yet any system is only as good as its handlers. The industry is plagued by poor service and the lack of professionalism of security staff. Many agents appear to be inadequately trained. This variable human factor continues to loom large as the industry’s Achilles’ heel.

Singapore Airlines or Cathay Pacific: Who will be driving the competition?

IN a new aviation era ushered by the global economic recovery, we can expect competition among old rivals to resume. Which airline in the Asia-Pacific region which, according to the International Air Transport Association (Iata), will register the highest growth – 16 per cent compared to the global 10 per cent – is most likely to lead the field?

The choice seems obvious: Is it Singapore Airlines (SIA) or Hong Kong-based Cathay Pacific Airways?

SIA is achieving an impressive load factor of more than 80 per cent. in June. Growth for passengers carried continues to outstrip capacity growth, achieving double-digit improvement. By all counts, the airline is heading back into profitability after losing S$39 million last year, encouraged by advanced bookings and recovery in demand for business class travel.

Yet it looks like a subdued year ahead for SIA. This seems quite out of character that the airline, which was used to making headline news of bold and unprecedented moves, should be treading so cautiously.

SIA intends to keep a lid on capacity to improve the breakeven load factor. Even when there is an apparent crunch on seats, the airline is not demonstrating much of its erstwhile conviction that capacity will create demand – a familiar battle cry when it was actively pushing for open skies. In the current year, the SIA fleet will show a net increase of only one aircraft, totaling 109.

So far, the only new product development that SIA is rolling out is an electronic version of its three inflight magazines – Silver Kris, Kris Shop and KrisWorld. The initiative will later be extended to cover menu cards, newspapers and other magazines. It is a commendable move to be saving the environment while the airline will also save fuel from the reduced weight.

Rival Cathay is also upbeat about its future. Performing better than expected in the first six months of 2010, analysts are forecasting a record full year. The airline posted a net profit of HK$6.84 billion – its best-ever six-month performance – up from HK$812 million a year ago. Passenger numbers rose 8.5 per cent to 13 million.

By comparison, SIA carried 4 million passengers in the first quarter of financial year 2010/11.

Cathay will be boosting its 166-strong fleet with new orders of up to 30 A350-900s from Airbus and exercising purchase rights to acquire another six B777-300 ERs from Boeing – for fleet replacement as well as for growth. Herein lies a distinct divergence in the strategies of both SIA and Cathay. The former subscribes to the larger A380 while the latter prefers the smaller aircraft which can be deployed to secondary cities in Europe and the United States where demand is insufficient to fill larger planes.

Both airlines recognize the lingering uncertainties in the near term. SIA chief executive officer Chew Choon Seng said: “We are not out of the woods by a far stretch.” Cathay chairman Christopher Pratt warned: “Our results would be adversely affected, and very quickly so, by a significant further increase in fuel prices or any return to the recessionary economic conditions of 2008 and much of 2009.”

However, Cathay seems more ready to embrace behavioral shifts in the industry. While SIA stakes its optimism on the rebound of premium class travel, Cathay is deliberating on a possible launch later in the year of a Premium Economy class which it sees as a new opportunity to win business from competing carriers. Cathay chief executive Tony Tyler told Bloomberg: “There are pretty good arguments for it.”

In shrugging off the concept of a middle class between business and economy, is SIA marginalizing itself as a niche premium player?

Think back to when the business class concept was first introduced. Then, reputable airlines such as Swissair and Japan Airlines were slow to accept it. In fact, the Swiss carrier pooh-poohed the idea. Today, many airlines are shedding first but increasing the capacity for business.

Premium economy is not a new concept. However, considering the widening gap between business and economy, and the increased price elasticity of demand, some carriers are beginning to see new opportunities in its introduction. Air New Zealand has earlier announced its version of this subclass – the Skycouch.

No doubt SIA will continue to thrive on its superior inflight service, especially in the front cabins, though the same cannot be said of its ground support. This, however, will be challenged by the market’s price sensitivity within a comparable range.

At a time when the aviation industry is taking a backseat in product development, Cathay is stealing a march on SIA to bring some excitement back into the business of flying. It has announced plans to fit its entire fleet (including Dragonair services) with full broadband Internet access, a mobile phone service and live television by 2012. While this looks set to be an inevitable global trend, the PR plug in these insipid times is being first.

Other airlines known to be also updating their fleets with WiFi systems include Delta Airlines and Virgin Atlantic Airways.

SIA used to boast Connexion by Boeing in first and business class on some routes – WiFi connections that allowed passengers to surf the Web, send and receive e-mail and view broadcast TV channels. But that was discontinued. A spokesman of the Singapore carrier said the airline is looking into WiFi reintroduction.

While Cathay takes big strides ahead, the industry is waiting to be surprised by SIA. For now, the latter seems more intent on consolidating its position after the global recession. But it is not one known to be shy after being bitten. Or has it become so?

Cathay operating from the doorstep of China will enjoy plenty of potential for growth. However, SIA has never been discouraged by geographical disadvantages. It will need to step up product innovation to stay ahead of the competition, and demonstrate why not only is it still a great way to fly but also great value for its fare.