A conscionable call as oil price plummets: Will airlines reduce airfares?

AS the oil price plummets – some 55 per cent since June last year – the question topmost in the mind of the consumer must be: Will airlines reduce airfares?

Many of them have chosen to be silent on the subject, the excuse being that the historical volatility of the market is such that the trend can turn any time. But it has taken a while, and long enough for some conviction from the airlines, now that analysts are convinced that the cost of fuel is likely to stay low for at least another year.

Travellers on American carriers can stop wishing to share in the bounty, even as US carriers are reporting hefty savings as a consequence. Southwest Airlines estimated it would save US$1.7 billion on fuel in the current year, and Delta Air Lines more than US$2.0 billion. Other airlines that include Untied Airlines and Alaska Airlines are forecasting similar cost reductions. But, say the airlines, fare reduction is not on the card. Instead, shareholders will reap the benefits while the airlines themselves see this as a well deserved windfall and respite to recoup past losses and pare down debts.

Courtesy Getty Images

Courtesy Getty Images

United Airlines spokesperson Megan McCarthy delivered the cold reality of the business when she said: “It has been our position all along that fares are not cost-driven. They are demand-driven.”

That, we all know, is the simple economics of the law of supply and demand. So consumers have themselves to blame. Airlines are enjoying near-full loads that there is no incentive for them to want to lower the fare. In Europe, even budget carriers such as easyJet and Ryanair are looking forward to even higher profits from not only savings on fuel costs but also higher fares. So McCarthy was darn right there. But airlines too have learnt to make the formula work better for them, ceteris paribus, as they reduce capacity particularly in the US with merged operations to hold up demand and maintain airfares.

The consumer’s best hope lies in competition as how it should work in the liberal world, but with consolidation which has seen the merger of big entities in the US, raising questions about the assumed competition itself. Today four airline companies control more than 80 per cent of the US market. Little wonder how US carriers have collectively signalled that airfares will not fall in response to the falling fuel cost.

Where competition does not work, the consumer can hope that some conscionable authority will be able to address the fair fare issue. On that second score, you might fault McCarthy for turning a blind eye, but United, like any other, would contend with some validity that it cannot be both operator and watchdog. Company with conscience is a preacher’s prerogative, more idealistic than operative.

Still, the likes of United may be reminded that back in the days not too long ago when the fuel price reached giddy heights, airlines were raising fuel surcharges as many as four times within a year. Strange as it sounds, they have always maintained that the surcharge is not part of the fare, but not as far as the consumer is concerned. Even so, the corollary must apply as the fuel price dips. No lesser a person than Toby Tyler, director general of the International Air Transport Association (Iata), has said that airline fuel surcharges should begin falling as the drop in oil price works its way through the aviation fuel system. Tyler said: “In many cases, airlines operates now with a basic fare and a fuel surcharge of some kind and the fuel surcharge in many airlines is directly linked to the price they’re paying for fuel.”

Courtesy Airbus

Courtesy Airbus

But it looks like it is not happening quite as quickly as Mr Tyler was convinced that it would when he said in October last year: “You’ll see the fuel surcharge very quickly come down.” Still, better late than never. Better somewhere else if not in the United States. Japan Airlines (JAL) announced lower fuel surcharges for international flights from February 1, recognizing the genesis of introducing such levies back in February 2005 in response to rises in the cost of fuel. Now that is one conscionable airline. JAL said it would revise the surcharge, whether upward or downward, if the fuel price fluctuates further. Fair enough. American and other carriers waiting on the sideline, take note.

Qatar Airlines has also announced it will reduce the fuel surcharge although it has not committed to a date for implementation.

Courtesy flyertalk

Courtesy flyertalk

Australian airlines are among the first to drop airfares in response to the falling oil price. Two forces are at work: competition and the authority. Nowhere else in the world is there more bitter rivalry than that between the two Australian carriers of Qantas and Virgin Australia. Virgin took the lead, and Qantas followed suit. Virgin said it would not get rid of the fuel surcharge altogether, but incorporate it into the fares; however it is packaged, the bottom line should see a reduction. Virgin said the “reductions reflect the benefits of the decline in global oil prices” following monitoring over recent months and “in anticipation that fuel costs will continue to remain at lower levels than the record highs seen in recent years.”

At the same time, the Australian government is putting pressure on the airlines to respond to the drop in fuel costs. Rod Sims, chairman of the Australian Competition and Consumer Commission (ACCC) said: “It is not against the law to introduce a surcharge – what is against the law is to mislead customers.” The ACCC announced it was investigating the matter. In a statement that it released, it said: “The ACCC has confirmed that it is considering whether representations made by airlines imposing fuel surcharges, following the fall in wholesale aviation fuel prices, are misleading. Under the Competition and Consumer Act 2010 businesses must not make misleading, deceptive or false representations about the price of goods or services. This includes when making representations about the reasons for rising fuel costs.”

In this connection, Qantas said: “The bottom line for consumers is that Qantas fares already in the market are some of the cheapest in years. Fuel surcharges are already included in the advertised price and those fares remain extremely competitive.”

The issue is not about the fares already being the cheapest in the market but rather whether they should be even cheaper as a result of lower fuel costs that have saved the airlines millions to billions of dollars.

Meantime the British government is studying the need for intervention. British Airways circumvents the issue with no clear commitment, saying it has launched several sale initiatives. Virgin Atlantic said it has reduced the fuel surcharge before last Christmas and will “continue to monitor the situation and fuel surcharges under review to make them as affordable as possible.”

Courtesy Delta Airlines

Courtesy Delta Airlines

It is a world of ironies. The consumer may as well confront the hard truths about the market. The door does not always swing both ways. As the global economy improves, the demand for seats picks up. And when demand exceeds supply, the game belongs to the airlines so much so that Delta CEO Richard Anderson has suggested to passengers who are looking at reduced fares to “shop around”. He said: “The marketplace is incredibly competitive, and there are always differences in fares.” The consumer can only hope that competition is well and alive without the need for state intervention. If Anderson had come across as being somewhat arrogant, he probably knew he could afford it. But heed his advice anyway.

This article was first published in Aspire Aviation.

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.

No easy trot for SIA’s stable in Year of the Horse

GreenHorse2014-110ACCORDING to the International Air Transport Association (IATA), airlines can expect to gallop in the Year of the Horse. It has predicted record profits for the airline industry, revising upward its earlier forecast of US$16.4 billion to US$19.7 billion for 2014. (See Will IATA’s optimism for 2014 hold? Jan 7, 2014)

IATA’s optimism is premised largely upon cheaper jet fuel and rising demand for travel. For the first time in a long while, airlines operating in a less volatile fuel market because of improved political stability in the Middle East will have to find some other monster to blame if they fail to meet expectations. Budget carriers without the hedging capability of legacy airlines will find the news of cheaper jet fuel particularly welcoming in view of their cost structures.

There is more certainty now of the rising demand for travel across the globe although Asia has held its own while other regions dodder. However, while numbers increase, yield will be squeezed. IATA chief Tony Tyler said: “It is a tough environment in which to run an airline. Competition is intense and yields are deteriorating.”

Against this backdrop, what then is the outlook for Singapore-based airlines and Changi Airport?

sia logoIt will be a better year but not an easy trot. Singapore Airlines (SIA) for one is projecting higher advance bookings in the months ahead. The economic recovery in Europe and the United States will be a big boost since traditionally SIA has relied heavily on long haul routes to those regions and has only of late begun to increase focus on Asian operations.

SIA faces stiff competition from Middle East airlines and in particular the Qantas-Emirates alliance on the kangaroo route. Trans-Pacific, it is challenged by major Asian airlines for traffic not only to their home bases but also beyond to destinations in India and other regional points including Singapore. Cathay Pacific’s short transit time via Hong Kong is a strong contender. So while the global pot may be growing larger, SIA will be challenged to maintain its market share, which will in turn exert a lot of pressure on yield.

SIA’s planned launch of new cabin products in 2014 costing US$150 million to include ergonomically designed seats and a touch screen entertainment system will improve SIA’s competitive edge as it catches up with rivals such as Cathay Pacific and Qantas which have upgraded their products in the past two years. Recently announced tie-ups with Virgin Australia and Air New Zealand may help check market erosion in Pacific southwest. However, cost will continue to override loyalty in the early days of the global economic recovery.

tigerBudget carriers can look forward to higher volumes as short haul travel into and out of Singapore continue to grow, particularly as the region heads towards full implementation of Asean Open Skies by 2015. But the competition will intensify with new operators and the incumbents expanding their links aggressively. Scoot, Tigerair and Jetstar will compete with AirAsia and Indonesia’ Lion Air to dominate the Asean skies. AirAsia has already set up bases in Indonesia, Thailand and the Philippines. Scoot is partnering Thailand’s Nok Air in a new budget venture. Qantas has been actively pushing the Jetstar brand across Asia. However, Tigerair seems to be less fortunate in this aspect, entering into a joint venture with loss-making Mandala Airlines of Indonesia and SEAir of the Philippines, the latter of which it is selling to Cebu Pacific Air. Now Tigerair is even competing with sister airline Scoot on some routes. The sibling airlines have announced recently an agreement to cooperate and complement their operations. SIA may find it necessary to redefine the role of the carriers within its stable, particularly when Scoot begins to grow at the expense of the parent airline.scoot

The nature of the point-to-point budget business is such that it is dependent on the economic and political stability of the two points as well as their attraction as tourist destinations. Singapore is well placed in all three aspects, adding to its advantageous location as a convenient hub for connections. However, the current political uncertainty in Thailand and Cambodia are not giving the Year of the Horse a promising start, although normalcy is expected to be restored before long. There may be more concern about the standoff between China and Japan over territorial sovereignty, although diplomacy too is expected to prevail.

300px-SilkAir_Logo_svgThe Year of the Horse is unlikely to be any more exciting for SilkAir which after 25 years as a regional airline squeezed between legacy and budget operators will continue to grow but slowly. In fact, SilkAir reported more than 40 per cent drop in profit for the first half of the financial year. Going forward, its growth will be enhanced by the acquisition of new generation jets that will enable it to fly farther to points in Japan and northern China. However, unlike Cathay Pacific’s regional carrier Dragonair which enjoys the support of the large China hinterland, SilkAir’s operations face stiff competition from national airlines as well budget carriers in the region. (See SilkAir at 25, stepping out of SIA’s shadow, Jan 23, 2014) While it has reiterated its intention of stepping out of SIA’s shadow, it cannot downplay its role as a feed for the parent airline.

Courtesy Changi Airport Group

Courtesy Changi Airport Group

Changi Airport, more than the airlines, will find favour with the galloping horse. The economic recovery in the West, continuing growth in Asia, more liberalized Asean policies and Singapore’s attraction as a destination will bring more travellers to and through the airport. The challenge for Changi is keeping pace with the gallop.

SilkAir at 25, stepping out of SIA’s shadow

Photo courtesy Boeing

Photo courtesy Boeing

AT 25, SilkAir is still around and growing not much or rather slowly. It has reiterated its intention to step out of Singapore Airlines (SIA)’s shadow and distinguish itself as one in its own right, but it cannot deny its role as a feed for the parent airline.

This year SilkAir is announcing new destinations that include Kalibo in the Philippines and Mandalay in Myanmar, secondary destinations that may best be served by budget carriers. Therein lies the ambiguous positioning of SIA’s regional airline, which, unlike Cathay Pacific’s Dragonair that enjoys the support of the large China hinterland, finds itself squeezed between legacy and budget operators and faces competition from national as well as budget carriers in the region.

In fact, SilkAir reported more than 40 per cent drop in profit for the first half its current financial year with a worse Q2 performance of S$8 million (US$6.27 million) compared to S$19m for the same quarter last year, attesting to the intense competition in the region. The plunge of almost 58% was attributed to passenger carriage growth not keeping pace with capacity increase apparently aimed at developing new markets in the region. The inability to fill up capacity points to the limited growth facing SilkAir.

However, SilkAir is optimistic that its growth will be enhanced by the acquisition of new generation jets that will enable it to fly farther to points in Japan and northern China. But it will not be an easy trot for the airline in the Year of the Horse as it faces even stiffer competition in the bigger arena. Ironically, SilkAir may also face competition from sister airline Scoot as the latter expands its network. It is something that parent airline SIA will have to reassess, redefining the role of the various carriers including Tigerair in its stable.

An expected fall in the cost of jet fuel – or the price holding steady at least – because of political stability in the Middle East will favour SilkAir as it should all other carriers, only that low-cost operators without the hedging capacity of legacy airlines will find this news especially welcoming in view of their cost structures. There are more certain signs now of economic recovery in Europe and the United States, and this will be good news for SIA, which in turn will also benefit SilkAir as its feed carrier – the extension epithet that SilkAir at 25 wants to shirk off. Full implementation of Asean Open Skies by 2015 will fan the growth of low cost operators in the region and SilkAir too will be able to ride the wave of increased demand for travel. In the bigger arena, the continuing growth across Asia will also provide opportunities for SilkAir to grow beyond the region.

But like other airlines, SilkAir will face stiff competition and pressure on yield. While the International Air Transport Association (IATA) has predicted record profits for the airline industry this year, revising upward its earlier forecast of US$16.4 billion to US$19.7 billion, IATA chief Tony Tyler has also warned: “It is a tough environment in which to run an airline. Competition is intense and yields are deteriorating.” SilkAir’s foray into secondary destinations will be challenged by Lion Air and budget carriers such as AirAsia, Jetstar, even Tigerair and Scoot. Not surprisingly, SilkAir CEO Leslie Thng has reportedly said when referring to the airline’s apparently “aggressive growth plan”, that “time and resources would be required to nurture these routes – to build up the awareness of and demand for these routes.” Unfortunately, the luxury of time is a costly affair that not many airlines can afford; an advantage that perhaps SilkAir with the backing of a rich parent could take comfort in.

The SilkAir model seems strangely outdated yet unique in an environment that appears to favour the extremes of affordability. As major airlines work at reviving premium travel with constant upgrading and some of them providing a bridging product such as premium economy which is becoming increasingly popular, and as budget carriers offer even lower fares to compete with not only rivals in the same class but also legacy airlines at their low end, SilkAir’s middle-of-the-road package is seen less as an alternative in its own right but more as a by-product of parent SIA with fewer perks. It is not altogether a bad thing, as it does not suffer the unfavourable public assessment of Tigerair vis-à-vis other budget carriers. With SilkAir there is no other to compare with, the same kind of benefit Scoot is presently enjoying in its association with parent SIA.

One may even be tempted to ask whether launching audio and video streaming for passengers to download onto their smartphones and tablets as SilkAir has planned as part of the programme to forge an upgraded identity would make that much more a difference.

At 25, SilkAir may feel it is time to spread its own wings, hence the battle-cry to step out of SIA’s shadow. Not quite sure if it is the best way forward when half of its passengers are connectors on SIA. One thing is clear; Mr Thng said: “We never wanted to match SIA.”

Singapore Airlines disappoints

Courtesy Singapore Airlines

Courtesy Singapore Airlines


Singapore Airlines (SIA) prefaced its report on its annual performance (2012/13) with attribution to high fuel prices and lower yields owing to a weak global economy for its lacklustre results. The announcement concluded with an equally dismal outlook, saying very much the same thing, warning that “the global economic outlook remains uncertain with the ongoing weakness in the Eurozone and sluggish recovery in the United States” and that “yields are likely to remain under pressure amid weak economic sentiment.”

So what’s new, indeed?

While the results per se disappoint, the presentation disappoints even more so, simply because it does not provide any excitement going forward, almost in resignation to whatever the circumstances that will decide its fate. Perhaps it is because we have come to expect so much more from an airline that has for a long time been considered one of the world’s most profitable, most innovative and most gungho airlines.

Group operating profit fell 19.8% to S$229 million (US$184 million) with only the parent company registering an increase of 3% from S$181 million to $187 million on the back of a growth of 7.3% in passenger carriage, and cushioned by the surplus on sale of aircraft spares and spare engines. SIA Engineering and SilkAir reported lower profits, the former from S$130 million to S$128 million (1.6%) and the latter from S$105 million to S$97 million (7.6%). Losses for SIA Cargo deepened by more than 40% from S$119 million to S$167 million.

The not so-good-signs for SIA the airline are falling yields, a weak fourth quarter of losses and relatively flat demand in forward booking for the next few months. In fact, SIA’s last quarter performance ran contrary to industry performance which, according to the International Air Transport Association (Iata), saw air passenger travel growing by 5.9%, boosted by emerging markets. Iata chief Tony Tyler added: “Strong demand for air travel is consistent with improving business conditions.” However, developed markets were experiencing relatively low growth. That could explain SIA’s limited growth – operating largely in mature markets that are highly competitive.

The pressure on yield will continue to be a challenge – and with time, a bigger challenge – as SIA faces increased competition from rival airlines for not only the long haul but also regional routes. Middle-East airlines such as Emirates, Etihad Airways and Qatar Airways in particular have become very aggressive in the premium air travel segment, investing heavily in the product and forging strategic partnerships with other operators. Their increased popularity is likely to also shift hub airport activity to the Middle East, threatening Singapore Changi Airport’s hub status in east-west connections between Asia-Pacific and the regions of Europe and Africa. No doubt SIA will benefit from Changi’s ability to remain a favourite hub among airlines and their customers.

At the lower end, SIA also faces exposure to cheaper options from regional and budget operators that in pre-economic crisis days would have been scoffed at. Consequently SIA is adopting a broad catch-all strategy – that saw the launch of budget subsidiary Scoot last year – which may not necessarily work in its favour as it dilutes its premium product and compromises yield. The other airlines in its fold are not exactly star performers: Little has been reported of Scoot’s performance to date; Tiger Airways in which SIA has a 33% stake is losing money; and SilkAir is operating below capacity growth.

SIA needs a more robust and focussed strategy than that – to lead, rather than follow, and to pro-act, rather than react. In a highly competitive environment, the player that sets the rules wins. High fuel prices and the continuing sluggish state of the global economy are by now givens since they are woes that cut across the industry, and they should be viewed as challenges and not as excuses for poorer performances. The success story of Japan Airlines’ turnaround in spite of these circumstances provides a lesson on not accepting things as they are; the Japanese carrier emerged from bankruptcy to become the world’s most profitable carrier in 2011. Certainly the credit must go to the man at the helm – honorary chairman Kazuo Inamori, who very humbly attributed his success to hardworking employees.

Some observers think that SIA is hugely disadvantaged by its lack of strong partners, but the airline has a speckled history of failed relationships, notably its acquisition of stakes in Virgin Atlantic and Air New Zealand in 1999/2000. Both stakes were later relinquished at a loss. SIA also failed to buy into China Eastern Airlines, which today has entered into a codeshare arrangement with Qantas. To be fair to SIA, a number of other airlines have also bought lemons. The International Airlines Group which owns British Airways and Iberia has reported a first-quarter loss of 630 million euros (US$808 million) – almost five times more than the 129 million euros loss in the same quarter last year – attributed to the poor performance of the Spanish partner.

The choice of the right partner is key to success. SIA has recently increased its stake in Virgin Australia from 10% to 19.9%, added to extensive marketing cooperation in schedule meshing and the use of each other’s premium lounges int heir networks. While there is potential in Virgin making big forays in the international arena, the alliance at best will present a stronger domestic presence for SIA in Australia for now and pales by comparison with the mega alliance (albeit a non-equity partnership) between Qantas and Emirates which is an attempt to shift the traditional competition to a new playing field such as replacing Changi with Dubai as Qantas’ hub for flights on the kangaroo route.

It is always with great interest and perhaps somewhat unfortunately with high expectations that the industry awaits moves by SIA to regain its lead in the business of flying. But the introductory and closing remarks of its latest result announcement provide little to excite the imagination. Somehow it seems SIA prefers to bide its time. SIA chief executive officer Goh Choon Phong said at the results briefing: “We think at some point there’ll be a recovery, and we’ll be well positioned to tap the recovery with the growth and the partnerships that we’ve established within Asia and other parts of the world.”

However, telling the same bleak story may be consoling, but it can also be dangerously self-fulfilling in resignation. The good neBut it seems SIA prefers to bide its time. SIA chief executive officer Goh Choon Phong said at the results briefing: “We think at some point there’ll be a recovery, and we’ll be well positioned to tap the recovery with the growth and the partnerships that we’ve established within Asia and other parts of the world.”ws is that many still believe in the airline’s ability to do better, in spite of gloomy weather. Backed by a strong balance sheet, not many of its rivals have the privilege of believing still that the game is theirs to lose.

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.