Chinese airlines dominate top rankings by net profits

IN the latest world airline rankings by Airline Business, three carriers from mainland China are listed in the top ten airline groups by net profits in 2011. Air China ranked second with a net profit of US$1,095 million, China Southern Airlines third (US$944 million) and China Eastern Airlines ninth (US$689 million). Cathay Pacific Airways, based in Hong Kong, ranked eighth (US$729 million).

An interesting point of note is that these airlines were outside the top ten positions in last year’s rankings: Air China ranked 12th, China Southern 14th, China Eastern 16th and Cathay Pacific 17th. One may quickly point out that while the rest of the world, particularly Europe and North America, suffer the fallout of the global economy, it is Asia that manages best at keeping its nose above the water.

 

 

Courtesy of Airline Business, these are the airlines in the top ten rankings:

  1. Japan Airlines Group, net profits US$2,366 million (previously 11th)
  2. Air China, US$1,095 million (12th)
  3. China Southern Airlines Group, US$944 million (14th)
  4. Delta Airlines, US$854 million (3rd)
  5. United Continental Holdings, US$840 million (2nd)
  6. International Airlines Group, US$776 (7th)
  7. Ryanair, US$774 million (28th)
  8. Cathay Pacific Group, US$729 million (17th)
  9. China Eastern Airlines, US$689 million (16th)
  10. Aeroflot Russian Airlines, US$526 million (32nd)
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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.

American Airlines joins upper economy class competition, Singapore Airlines will not fly premium economy

AMERICAN AIRLINES calls it Main Cabin Extra, but it is really a move towards an upper economy class differentiation. The seats in this cabin – installed in its Boeing 777-300ERS aircraft – will boast an extra four to six inches of extra leg room over a regular economy seat. The comfort comes at a price of between US$8 and $108 additional per flight segment. For that extra cost, passengers will be accorded priority boarding.

American’s move is to be expected, after United-Continental’s earlier announcement of Economy Plus seats on long haul flights from Newark to Europe. Delta is also in the process of introducing the upgraded product.

This trend has gained more attention since Cathay Pacific Airways started selling premium economy seats for flights taking off April 1 between Hong Kong and the destinations of Sydney, Toronto, Vancouver and New York. London will be added in May.

However, Singapore Airlines (SIA) which is widely reputed for its premium class service is not convinced that this too is the way for it to go. In a post by Aspire Aviation (Mar 8, 2012), an SIA spokesperson was quoted as saying, “We do study the concept of Premium Economy from time to time, SIA but we have determined that it is not something that we will introduce at this stage.” It looks like the airline would not be distracted from the true-blue premium market.

In the present economic climate, the demand for premium travel has weakened somewhat. There has been a fair amount of seat substitution as travelers downgrade for cheaper alternatives, resulting in the growth of economy travel at the expense of premium travel which is largely hurt by the weaker demand within Europe and from Europe to Asia. Airlines are banking on an upper economy product to capture not only downgraders but also travellers who may want something better than the regular economy product but are not prepared to pay premium class fares.

Will SIA lose market share if more airlines, especially its close rivals, go that way?

The truth is that premium economy has been around for a while without stirring nary a storm even in a teacup. Except for a small measure of additional leg room, it is still very much an economy class product (and the tag that is being used even until today is unfortunate). In fact, full-fare paying economy class passengers of most airlines stand a good chance of being offered these seats gratis sort of. American Airlines has said certain frequent flyers and passengers who pay a full economy fare will receive the Main Cabin Extra product free.

However, if there is one factor that could give the upper economy concept a more vigorous boost, it is how the prolonged sluggish economy has changed travel habits and preferences. And Cathay more than any other airline is likely to set a new benchmark for the product and bring it to the next level. Unless it holds its own as a unique permanent feature and not just as a stop gap alternative between now and when the good times roll back, SIA may be wiser biding its time.

United-Continental offers premium economy as air travel trends upwards

THE competition is moving upwards. As the gap between budget and full-service airlines narrows and as the global economy revives, airlines are betting their dollar on an upward shift in the class of travel. Maybe not quite the big leap yet from economy to premium, but to a sub-class of premium economy.

United–Continental becomes the latest operator to offer premium economy seating. The reconfigured Boeing 757 aircraft will feature 45 Economy Plus seats, making up 30 per cent of economy seats. These are being offered for long haul flights from Newark to Europe.

To be expected, rival Delta is also equipping its aircraft with a similar premium economy (Economy Comfort) product.

In Asia, Cathay Pacific Airways will from March offer new premium economy from Hong Kong to destinations that include New York, Toronto and Vancouver. Cathay’s General Manager for Product Alex McGowan said: “It’s for people in economy who want more space, more exclusivity, and a few details like better catering and wine. It is also about capturing people who may want not to travel in economy but can’t afford to travel in business class.”

The difference lies in trading up instead of down – the confidence reflected even more in rival Hong Kong Airlines’ bold plans to operate all-business class flights to London, a move that some analysts wonder if it is premature, if not unwise, in present times.

Cathay considers switch from OneWorld to Star Alliance: Is it a matter of choice?

Rumor is rife that Cathay Pacific Airways is considering switching from OneWorld to Star Alliance. The reason: Cathay objects to fellow members British Airways (BA)’s and Qantas’ support of the HNA Group’s Hainan Airlines joining OneWorld. The HNA Group has a 46 per cent stake in both Hong Kong Airlines and Hong Kong Express, which are Cathay’s competitors.

Cathay’s chief executive John Slosar (who took over the helm in March 2011) apparently once said he “cannot rule out” such a move.

Alliance membership is not cast in stone. Shanghai Airlines left Star Alliance in October last year to join SkyTeam, to be in the same stable as parent China Eastern Airlines. Star Alliance is courting Shenzhen Airlines, which is owned by member Air China. That makes OneWorld the only one of the three major airline alliances without any mainland China connections – something of a setback since China is one of the world’s fastest growing economies and airlines are looking to tapping its potential.

If Cathay switches, so too will Cathay-owned Dragonair.

Cathay’s change of heart is therefore no more than part and parcel of a business decision. It makes sense when Cathay is a stakeholder of Air China and has a 49 per cent stake in Air China Cargo, a joint venture set up by the two airlines. Cathay’s membership will also strengthen the Star Alliance, whose members include Singapore Airlines (SIA), United Continental, Lufthansa, Air Canada, Air New Zealand and All Nippon Airways (ANA). The strong list of possible replacements should allay any concern Cathay may have about losing the benefits of any existing tie-ups with OneWorld partners such as BA, Qantas, American Airlines and Japan Airlines.

Any further development now hinges on: (1) whether Cathay’s threat to leave OneWorld is strong enough for OneWorld to reassess its position, basically how important it is to the alliance to stake a vigorous presence in China (before it is too late) with the enrolment of Hainan Airlines vis-à-vis the benefits of a strong partnership with Cathay (better a strong than weak partner), (2) whether behind Cathay’s veiled threat, Cathay still prefers to remain in OneWorld, its predicament being a case of the push rather than pull factor, (3) whether Star Alliance member SIA has any objection to Cathay moving into the same house since both airlines are known to be keen rivals not only in the region but also for the long haul, and (4) whether Cathay itself also relishes that idea of co-existence.

Prior to the establishment of largely sectarian multi-airline groups – Star Alliance (1997), OneWorld (1999), SkyTeam (2000) – individual airlines have engaged in agreements of co-operation that include flight code-share, first preference for passenger transfers, station representation and joint use of common facilities such as CIP lounges. This practice has continued inside and outside of the alliances, even between rival group members. For example, Air Canada not only code-shares flights between Vancouver and Singapore with fellow Star Alliance members SIA and ANA but also with OneWorld member Cathay.

While any alliance is supposed to promote the collective interests of its members, the reality is that in the game of survival, the dominance of self-preservation is not easy to disguise. Qantas, hungry for a greater presence in China is likely to favor the candidacy of Hainan Airlines that together with Hong Kong Airlines and Hong Kong Express may complement its wider network including that of subsidiary Jetstar. If endorsed by OneWorld, it is up to Cathay to choose to go or to stay.

In the rival camp, SIA that openly champions competition is unlikely to make an issue of objecting to Cathay joining Star Alliance which includes regional competitor Thai Airways International. Viewed positively, there could not be a more formidable force than a partnership between Asia’s two most usccessful airlines to confront and check the growing competition posed by budget carriers in the region. So again it is up to Cathay to decide where it wants to belong. According to reliable sources, Cathay is more likely to switch camps than to compromise to stay in OneWorld. However, one wonders if it is really a matter of choice.

Yet in the end, it may matter little, considering how promiscuous alliance relationships have become and that membership is no protection against even intra-group, let alone inter-group, competition.

Air Canada levies baggage fee, risks losing customers

Travel light, which may be the message if you want to save bucks. But for Air Canada, it has come across as a matter of additional revenue to charge passengers who purchase tickets on Sept 7 and after for travel to the United States a fee of C$25 for the first checked bag. The current charge of C$30 for the second bag will also be raised to C$35. That makes a total of C$60 for two checked bags added to the fare.

Naturally, Air Canada customers are upset. Many of them see it as a money-grabbing move that is not only ill-timed when the market has become extremely price-sensitive but also deceptive. On the one hand, the airline may be advertising a cheap fare of, say, C$99, but it is collecting an additional fee in taxes and other ancillary charges – that can amount to as much as C$150. Only recently was Air Canada fined by the US Department of Transportation for deceptive price advertising online. The Canadian flag carrier did not disclose taxes and fees that would be added to the advertised fares.

US Transportation secretary Ray LaHood ruled: “When passengers buy an airline buy an airline ticket, they have a right to know how much they will have to pay.”

President of the Consumers’ Association of Canada Bruce Cran lampooned Air Canada’s new baggage fee as “another one of their schemes to drag a little more money out of us.”

In defence, Air Canada spokesman Peter Fitzpatrick said: “This new policy puts us in line with the majority of airlines flying in the transborder market, who have been charging for first bags for a long time.” He added; “Everyone understands that airlines are under tremendous cost pressures and I think they can appreciate that we need to take some steps to ensure our financial sustainability.”

Mr Fitzpatrick could be thinking about how US carriers collected US$5.7 billion last year from baggage and cancellation fees alone. But he would be sadly mistaken to think that doing as the US carriers do means better positioning for Air Canada and that its customers would remain loyal.

One, Air Canada would lose its differentiating advantage now that its customers have lost another reason to stick by it. And Air Canada is by no means cheaper to fly by comparison. Already, Canadians living in border towns and cities including the main hubs of Toronto and Vancouver are crossing the border on land and flying out of the US to take advantage of lower fares and taxes.

Air Canada also risks losing customers to compatriots Calgary-based WestJet and Toronto-based Porter Airlines, neither of which said it had plans for a similar first-bag fee. WestJet, which is Canada’s other major airline, charges C$20 for a second checked bag, plus C$50 each for a third and subsequent bag. Porter Airlines, which operates out of Billy Bishop Airport in downtown Toronto, is hopeful that some Air Canada customers may be encouraged to try its service.

Two, Air Canada cannot expect its customers to sympathize with its poor financial performance which best measures the efficacy of its management policies. In its latest financial report for the second quarter of 2011, the airline incurred a net loss of C$46 million, which was in fact an improvement of 85 per cent compared to a net loss of C$318 million year-on-year. It was a result that Air Canada President and CEO Calin Rovinescu said he was happy with, noting its achievement in spite of rising fuel prices and a 3-day strike by airport workers. Mr Rovinescu pledged the airline would “continue to explore additional cost reduction opportunities” and “to increase fares and fuel surcharges where competitively feasible, and to make adjustments to capacity as required.”

The question now is whether imposing a first-bag fee for US-bound and return flights is “competitively feasible.” And, next, whether this signals a levy of more such fees in the offing.

Presently, travellers flying on Air Canada to South America, Europe, Africa, the Middle-East, Asia and Australia do not pay a first-bag fee. But the fee for the second checked bag will be raised from C$50 to C$70 (which has already been in place for Europe and India). While some airlines, largely Asia-based, are still offering free carriage for up to two checked bags, it is unlikely Air Canada can push ahead with a first-bag fee for services beyond North America unless the fee structure is sufficiently changed to reflect the real cost of flying that may actually benefit some travellers without – or seeming to be – unreasonably overcharging others.

Charging for checked baggage carriage is apt to result in a spill-over of bags carried into the cabin although there are rules limiting its number, size and weight. If the situation becomes unmanageable, imposing a fee may be the best limiting measure. Already one American carrier – Spirit Airlines – is charging a fee for carry-on bags. The Detroit-based carrier, which prides itself as America’s first ultra-low-cost carrier, states on its website: “We empower you to save money on air travel by offering ultra low fares with a range of optional services – including bags – for a fee, allowing you the freedom to choose only the extras you value.”

You are what you do or not do. So too the corollary that you do or not do for what you are. Air Canada has to decide.

Interestingly, the move by Air Canada to levy a fee for the first checked bag for travellers to the US comes at a time when the airline is seeking approval from Canada’s Competition Bureau to enter into a partnership with Chicago-based United Continental, the world’s biggest airline. The two airlines would co-operate on a number of trans-border flights that would see a joint-monopoly for some routes. The Bureau has blocked the deal as it views it as a merger in disguise. Air Canada, on the other hand, warned that objection by the authorities would “impede Air Canada’s ability to compete, would have significant adverse effects on Canadian consumers and the development of Canada’s hub airports, and would relegate Canada and Canadian air carriers to a marginalised regional or local status in the international air transportation world.”

However, Canadians have become increasingly concerned about the Americanization of their country’s industries. The first-bag fee may well be trending towards a general practice that airlines, reluctant or unable to raise base fares, are seeking compensation in additional revenue derived from ancillary services. It is a lesson full-service airlines are humbly learning from low-cost carriers, except that it is only one side of the equation. For Air Canada, it is a worse problem of being seen to be carelessly and indiscriminately following a practice just to be in line with US carriers south of the border.