Adapting to Survive: An Industry Overview
Keynote address to the 14th Cannes Airline Forum
Cannes, October 26, 2005 >>
Thank you, Mr. Chairman , for those kind words of introduction, and for the pleasure of being part of this 14th Airline Forum the annual event which gives us all the opportunity to take stock of what is happening to our great aviation industry.
However, ladies and gentlemen, there are many new developments and the time available at the start of this Forum will permit only a broad overview.
About 150 years ago, Herbert Spencer quoting Charles Darwin spoke of the need for species to adapt to survive in the struggle for life.
Adapting to survive is a principle that the aviation industry has come to accept all too painfully particularly in the last decade.
All sectors have been forced to re-tool their products, their costs and their strategies to stay in business.
Unable to change, some species perished. Flag carriers and SSTs are not the first, nor will they be the last of our dodo birds .
In 1957, failing to understand that people increasingly wanted economy cars, Ford produced the Edsel.
As Time magazine wrote, “It was a classic case of the wrong car for the wrong market at the wrong time.”. Later on another business writer added that, as far as he knew, no Edsel had ever been stolen.
In previous presentations to this Forum, I’ve explored in some depth how airlines are or are not adapting to the forces of change.
This afternoon, I’d like to focus more on other sectors of our industry.
Footnote: All data used in the development of this speech come from publicly available sources. The opinions expressed here are uniquely those of the author.
Airlines after all don’t exist in a vacuum. Aircraft, government policy, airports, airways – all the players in the air transport world must adapt as well.
Aircraft
On the equipment side, we have good reason to be upbeat about our industry.
A watershed year some observers would say, but before we flip over in-flight showers. Internet access and mood lighting, let’s all remember that four critical factors make the difference between a potential dodo bird and an aircraft with legs, or shouldn’t I say, wings for the future.
These four factors are: improved aerodynamics, through brand new wings and control surfaces; the electronics to go with them, and which together continuously optimise flight performance; next, substantially reduced weight, through an unprecedented use of composites; and, finally, a new generation of engines that offer significant improvements in fuel consumption and reduced maintenance.
These factors add up to a hell of an improvement in performance, and the Boeing 787 Dreamliner and the Airbus A380 embody them all.
The Boeing 787 will use 20% less fuel on a per-passenger basis than today’s airplanes of the same passenger capacity.
Subtle aerodynamic changes to the curvature of the wing and the shape of certain fairings will contribute 3% of the fuel saving.
Innovations in avionics and electronic systems will contribute another 3%.
The extensive use of advanced composites reduces the B787’s weight by 10,000 pounds, the equivalent of 53 passengers, and contributes another 3% in fuel savings.
Another advantage of composites besides weight reduction is that they don’t corrode, and are incredibly durable. Boeing says that adds up to a 32% savings in maintenance costs by aircraft maturity.
The durability and maintenance advantages of composites also extend to the GEnx engine, one of the 787’s two possible power-plants, which, Boeing says, will contribute 8% of the 20% improvement.
Carbon fibre and epoxy resin composites, will reduce each engine weight by 350 pounds, while substantially boosting durability and extending maintenance intervals.
Rolls-Royce’s Trent 1000, the other power-plant, will deliver similar fuel consumption improvements and is designed to achieve 99.95% dispatch reliability.
Called an “intelligent engine”, it has its own health-monitoring capabilities and will be able to download key operating data to the ground.
Now those of you not asleep will realize that those savings add up to only 17%. But Boeing claims that the other 3% comes from optimising every other aspect of the aircraft from scratch.
Boeing claims to already have orders and commitments for 266 Dreamliners from 20 airlines and predicts sales of as many as 3,500 aircraft over the next 20 years.
Airbus disputes this number, just as Boeing believes Airbus’ forecast for A380 orders will not survive the reality of the marketplace.
And we know both manufacturers have countless studies to back up their numbers.
So far, 13 airlines have placed firm orders for 159 Airbus A380s. The break-even point is said to be 250 units.
The A380 was the hit of Le Bourget this summer and despite a six-month delay in its first deliveries to Singapore Airlines and to a few other first customers, this twin-decked behemoth, a giant of the skies is coming in close to its promised objectives.
Tweaks, rather than design changes, lie ahead.
You’ll notice I didn’t use the word “mammoth”, a species that did not adapt – and did not survive.
The A380 is quite the contrary.
Like the Boeing 787, it represents a milestone in aviation history, as significant a development as the 747 when it first appeared some 30 years ago.
Operating costs of the A380 are projected to be 15% below the 747-400.
The aircraft has about a 20% composite content because Airbus did not feel comfortable at the time to go beyond that.
Airbus is also investigating wings and winglets that deform structurally for improved aerodynamics performance at different speeds. They’re called aerolastically tailored wings.
Rolls-Royce Trent 900 engines power the A380 and like the Trent 1000s, they promise lower fuel consumption, less noise and fewer emissions simpler maintenance and reduce costs.
The A380 flight deck features information age avionics and flight management systems that deliver enhanced capability now while making it easier to incorporate future developments.
For example, a new digital radar that makes it easier to avoid thunderstorms.
The next upgrade may very well be a “synthetic vision display” that would finally deliver what Charles Lindbergh always wanted: “A pair of spectacles to see through the fog”.
Thales has led the A380’s avionics development program. It includes an in-flight entertainment system (IFE) that can hold up to 1,200 movies and 66 channels, as well as support a one-gigabyte network that puts a Web-accessing keyboard and mouse at each passenger seat.
The sky’s no longer the limit to customer demand for connectivity.
The Airbus A350, once dismissed as an A330 derivative, has now become a direct rival to the Boeing 787 Dreamliner.
With a new wing design, greater-than-initially-planned use of composites, new-technology engines, this latest version is eight metric tons lighter than the A330.
Potential buyers are becoming convinced that the A350 will deliver a productivity improvement of the same magnitude as the 787.
Airbus is targeting for 200 orders for the A350 by year-end. First delivery would start by 2010.
Doubt about productivity improvement still exists for the Boeing 747 Advanced, a stretched version of the B747-400 aimed at airlines requiring a smaller alternative, about 150 seats less, to the A380.
A GEnx engine variant will cut fuel consumption but this may not be sufficient for cost-justified replacement these days.
A go-no-go decision is expected any time (or has now been taken).
New technologies developed for larger aircraft will also benefit the smaller categories.
The next generation of A320 and 737 replacements will likely emerge early in the next decade.
It will be powered by engines that are quieter and more fuel-efficient, less polluting, and considerably lighter.
Struggling to survive in a smaller but just as vicious arena are regional plane makers Bombardier and Embraer.
Their decision to enter the larger-size regional aircraft market has also exposed them to greater competition from the two very large players, Boeing and Airbus.
Embraer was first off the mark and is delivering its first 190’s this year and is expected to deliver its 195s in mid-2006.
Bombardier, however, still needs an engine for its C Series. Pratt & Whitney (Canada) is interested but may need help from other engine part makers as well as a better understanding of the whole market to justify the $1 billion (U.S.) development cost.
To survive in this new market, Bombardier must deliver operating costs that are 20% better than any aircraft it would hope to replace, such as DC-9s, MD-80s and early Boeing 737s.
Bombardier is doing a lot better these days.
However, just as Bombardier was reaffirming its leadership of the world business jet market, a new competitor has emerged.
This new player, better known for its cars, motorcycles and personal watercraft, has rolled out a new entrant that is smaller, lighter and cheaper than conventional business jets.
The Honda jet boasts an all-composite fuselage, and nose and wings designed for less drag.
A Russian bear has also entered the regional arena.
Funding is in place and metal has been cut for the Sukoi-led Russian Regional Jet (RRJ).
Siberian Airlines has ordered 60 of the 95-seat RRJs, which is expected to make its maiden flight next year.
Snecma is supplying the engines and Boeing is helping on the fuselage design.
Sales prospects go as high as 700 aircraft, which I sincerely hope come true, since the cockpit display, communications, navigation and surveillance systems will be supplied by Thales (Canada).
With the Russians in the fight, the Chinese can’t be far behind in developing their own regional aircraft.
Their APJ 21 project was launched last year with full government and industry backing.
The regional arena may be rough but the potential rewards are great.
Boeing predicts that of the roughly 26,000 new commercial airplanes needed to meet demand over the next 20 years, more than 80% will be in the single-aisle and mid-size twin-aisle categories.
A word about supersonic business jets.
Although the Japanese and French are studying the feasibility of developing a technically and economically viable second-generation SSBJ that could carry 300 passengers at Mach 2, there isn’t much enthusiasm yet for such a species in an aviation environment that must place a premium on operating efficiency, low noise and minimum emissions.
There’s probably more enthusiasm for commercial flight to outer space, where there’s no one to complain about noise and emissions. Over 40,000 people have put their names down for Virgin Galactic’s sub-orbital flights planned for 2008.
The first hundred asked to do so didn’t hesitate to pay a $200,000 deposit up front.
Space Adventures, the company that organizes tourism flights to the International Space Station, plans to offer trips for two around the moon and back in Soyuz capsules at $100 million U.S. per passenger, dehydrated meals included.
Branson and company may be barnstorming their way into a whole new world of airline travel.
Air Policy
In the meantime, back on earth, low noise, minimum emissions and other environmental concerns are receiving ever-increasing attention by government regulators, as are safety and security, and numerous other aspects of our industry.
Sound government policy, sensitive and adaptive to aviation’s rapidly changing circumstances is also essential to our survival.
Governments today sometimes appear supremely indifferent to the difficulties faced by our industry.
Heavy-handed solutions are imposed where a little intelligent intervention would suffice.
Recently, my successor at IATA, Giovanni Bisignani, charged that the European Union (EU) was inflicting an annual cost burden of almost six billion euros on the airline industry.
New regulations on compensation for denied boarding, cancellations and delays accounted for 600 million euros.
Failure to take responsibility for security represented almost two billion of the burden.
The remaining 3.4 billion euros went for inefficient regulation and infrastructure.
The EU needs to do better on aviation policy.
The year 2004 was the safest year ever for air transport. More than 1.8 billion passengers were carried by all airlines, and not one life was lost due to a security incident.
Cockpit doors have been reinforced and locked, passengers are screened from head to toe, biometric devices are being tested and implemented, machine-readable passports and their biometrically-enabled version or e-passports should be issued or available worldwide within the next five years, passenger data transmission has been agreed upon, at least in part, explosive detection devices have been deployed, thousands of air marshals are in the air, combat aircraft stand ready to intercept rogue aircraft.
How much more security do we need?
How much more must we pay for?
The U.S. is understandably uptight about security.
But many of its new and proposed regulations are unnecessary,very expensive to implement, sometimes redundant and conflicting with national laws.
U.S. policy requires checking of passenger manifests against a 30,000-name “no-fly” list for all foreign flights into and over the U.S. no later than 15 minutes after the plane has departed.
There have been several cases of mistaken identity where flights were unnecessarily forced to turn back, at considerable inconvenience to passengers and cost to the airlines
Another U.S. plan is to fingerprint and photograph international travellers both when they arrive at U.S. airports and when they leave.
Such unreasonable measures are turning passengers off.
Historian Arnold Toynbee once wrote: “America is like a large friendly dog in a small room. Every time it wags its tail, it knocks over a chair.”
Haste makes waste.
According to The New York Times, the U.S. government is now moving to replace or alter much of the $4.5 billion worth of security equipment rushed into service first after 9/11 because it’s fairly ineffective, unreliable or too expensive to operate.
The cost of additional security measures to the industry and flying public is over $5 billion a year.
Passengers should not have to pay for air security. It’s an anomaly; citizens are not charged for other forms of civil security.
Air travel is being taxed like the “sins” of alcohol and tobacco.
In government thinking, another industry “sin” for which air travellers must pay is environmental pollution.
Despite the fact that in the last 40 years our industry has noise at source by 75% and emissions per passenger kilometre by 70%, and that airlines now account for less than 4% of greenhouse gas emissions.
The current EU plan could add as much as $100 (U.S.) to the price of a long-haul ticket from Europe.
New generation airplanes, the B787, A350 and A380, with their 20% improvement in fuel consumption, and corresponding reduction in emissions, represent a major achievement.
Governments should understand that additional taxes limit the funds available to invest in the new technologies and will hinder rather than help the industry’s ability to further reduce its impact on the environment.
Although aviation was excluded from the Kyoto Protocol because of the legal complications of dealing with international flights over oceans and outside any national jurisdiction, IATA and ICAO are trying to get emissions trading for airlines on the agenda for the next annual U.N. Conference on Climate Change.
Emissions trading is a better way to go. Allowing airlines to buy and sell the right to emit CO2 would be a more efficient way to tackle climate change.
The E.C. has now recommended that airlines be included in the scheme.
Almost as good as planting trees in the Sahara, one of my earlier proposals.
I remember when the U.S. championed deregulation .
It’s somewhat ironic that the U.S. rejected the European Commission proposal for a Trans Atlantic Common Aviation Area (TACAA).
The E.U. Transport Ministers were not in agreement either.
The E.C. has since softened its demands.
The 25 E.U. Transport Ministers unanimously approved earlier this month the Commission’s plan to re-open talks with the U.S.
Following a telephone conversation two weeks ago the E.C. Commissioner, Jacques Barrot, and U.S. Secretary for Transportation, Norman Mineta agreed to re-start discussions this year.
In the meantime, like-minded countries in other regions of the world are opening their markets:
Russia and China appear interested in an open-skies style of agreement with the EU;
Countries bordering the Mediterranean are interested in an agreement with the EU; and
A recent accord between four members of the China-Pacific Economic Cooperation (APEC) may well serve as a blueprint for other regions .
India has been making significant moves towards complete market freedom.
Its new, much more open aviation policy has resulted in considerably liberalized agreements with the U.K., the U.S.A. and China.
I have been advising my own government, Canada, about moving faster towards a wider opening of Canada’s air transport market.
I believe the next stage should be to seek total integration of aviation markets in North America as part of the North American Free Trade Agreement (NAFTA) and to develop an open skies agreement with the EU.
Unless air transport is a country’s strategic industry, say in an island nation almost uniquely dependent on tourism, there is little need for a “flag carrier” as such.
Airports
If the deregulation of air travel markets is proceeding too slowly for some, where airports are concerned, it’s proceeding too quickly or at the very least with insufficient safeguards.
This can lead to some abuse. Staying with my country for a moment, fees in Canada are among the highest in the world.
Toronto Airport is without a doubt the most serious offender.
Similar complaints are being heard from other airlines around the world where airports large and small are becoming owned by private investors.
In June, the Hungarian government invited bids for the privatisation of Budapest airport.
Other airport privatizations are under way or being considered in India, Hong Kong and Mexico.
Even Aéroports de Paris, which includes CDG and Orly, is for sale.
The airports are being bought by four or five major, emerging consortiums like BAA of the U.K., Fraport Group, and Macquarie, the Australian fund.
Because airports are essentially monopolies in their respective cities or regions, their control by large private consortiums make it critical that governments take measures to ensure that profits are adequate to finance the high cost of new infrastructure, but not excessive.
But airlines must also concede that airports face a lot of challenges not always understood by operators.
Terminal and runway congestion chokes growth as effectively as excessive fees.
Chicago’s O’Hare and other major airports have had to limit the number of flights, and not just at peak hours.
Poland’s airport development needs to cope with passenger volumes that have increased by over 40% in the last three years.
In India, the government’s new policy of open skies could be undermined by increasing gridlocks and substandard airports.
New terminals and runways will cost more than $20 billion (U.S.) over ten years in India’s case.
U.S. airports will need some $72 billion over the next four years. The FAA has now endorsed the City of Chicago’s 15 billion USD O’Hare Modernisation Plan.
Not only is it very expensive but also it’s not that easy to expand runways.
Neighbouring communities are very vocal about the nuisance factors of noise and emissions.
After years of discussion with local farmers, Japan finally approved an extension of the second runway at Tokyo Narita.
Studies have shown that the benefits outweigh the disadvantages by a ratio of 5 to 1.
More dialogue with the community and special interest groups can persuade them to support rather than block airport development and expansion.
Adapting to the A380 may not be as big a challenge for airports as was first foreseen.
The aircraft was designed to fit in the “80 by 80” box of available apron space and gate separation.
And because of its 20-wheel main landing gear, weight distribution doesn’t exceed that of aircraft already in service.
At this juncture, we anticipate that about 20 major hubs around Europe, North America and the Pacific Rim will be ready to handle the A380 by late next year or early 2007.
And another 40 airports are expected to follow by the end of the decade.
In the beginning, major airports were content to let the low costs operate at under-utilised, less expensive secondary airports, such as London’s Stanstead.
But as the more recent recession reduced the business activity of the major hubs, they decided to go after the low-cost trade by modifying sections of existing terminals for their exclusive use, where costs and fees could be kept down and services tailored to their no-frills strategy.
Such discrimination does not sit well with the full-service airlines, however, and in a decision last year concerning Berlin’s Schoenefeld Airport, the court ruled that all airlines have to be treated equally.
One approach, is to develop low-cost terminals open to all carriers.
Singapore’s non-discriminatory LCT, expected by year-end, is a relatively cheap, $24-million, single-storey building without jet-ways, lounges, escalators, elevators, or seats at gate areas.
Fees will be 20-25% cheaper.
Malaysia, Indonesia, Thailand, and India are considering similar terminals.
At the other end of the adapting-to-survive scale is Lufthansa’s first-class-only terminal in Frankfurt, which offers all the luxurious amenities executives and rock stars feel they richly deserve.
Another is planned for Munich by 2006, to go with its new first-class-only airline serving Munich-New York.
I’m not sure these are breakthroughs. Didn’t British Airways have a separate terminal for the ultra-first-class Concorde? Of course, the Concorde didn’t survive.
Airways
If planning “within the box” is the key to adapting terminals for a new generation of aircraft, it will take some thinking “out of the box” for air navigation service providers to match the 20% efficiency gains being demanded of airframe and engine manufacturers and other sectors of our industry.
IATA thinks that “optimal air traffic control” could reduce the airline global fuel bill by 18%.
The “Single European Sky” (SES) concept has been accepted in principle and streamlined air traffic control rules are being pushed through. But the European continent’s 34 separate ATC centres won’t disappear anytime soon.
Abolishing borders in the sky is a political minefield.
In an attitude that goes back to World War II, many EU countries still enshrine air traffic control as a matter of strategic national importance.
Even the next step, creating “functional airspace blocks” (FABs) has yet to be been given full political clearance.
Continent-wide application of the gate-to-gate concept, i.e. not allowing an aircraft to leave a departure gate until the arrival gate is available, would be a good start.
Saving a minute of fuel burn on every flight would save $3.6 billion in operating costs, as well as 4.2 million tons of CO2 emissions.
Since this computation was based on $40 oil, the potential saving is much greater at today’s prices.
That’s worth a lot of “out-of-the-box” thinking.
The recent reduction of vertical separation minimums over Europe, the Atlantic and North America was accomplished smoothly and safely.
It required all operators to have equipped their aircraft with more precise and costly instrumentation but the benefits are enormous.
Airways capacity has almost doubled.
Over the U.S. alone, airlines are expected to save $400 million in fuel and operating efficiency during the first year, and more than $5 billion over the next decade.
Other promising developments:
GPS satellite navigation, which has helped create new routes over the Pole, will be tested on a small number of transatlantic flights;
Galileo, the proposed European Satnav system, should be operational by 2008.
Testing is underway of a “free-flight” operating concept that will allow pilots with specially equipped aircraft to choose their own flight paths.
Synthetic vision and other new avionic tools will remove the “visibility” factor in terminal operations;
Knowing where wake turbulence is not will reduce final approach spacing by half;
Airport authorities are considering “paving down the middle” to add a third or even a fourth runway between two existing, parallel runways.
All of these developments and more are somewhat down the road but taken together, they would more than triple current ATC capacity.
That’s a considerable improvement in airways productivity.
Air Transport
Cost pressures on the air transport industry as a whole continue unabated.
Recently, oil prices hit a scary, all-time high of $70 a barrel.
At an annual average of $43 a barrel, airline industry losses alone were projected to reach $5.5 billion in 2005.
IATA released a new forecast last month calling for a 7.4 billion USD loss.
Every $1 per barrel increase costs the industry $1 billion and only a fraction of the increase can be passed on to the passenger before the elastic snaps.
Improving productivity will continue to be a primary necessity for all industry players.
IATA is leading a program, called “Simplifying the Business”, that leverages technology to reduce the cost of complex industry processes.
Priority areas being pursued at an industry level include passenger ticketing and cargo invoicing, check-in, and baggage handling.
You will hear a lot about this program and its successes tomorrow morning.
Let me give you a little preview , as a teaser for tomorrow’s session.
Electronic ticketing is now approaching 40% worldwide.
The goal is 100% by 2007, which could save the industry $3 billion a year.
The motivation is strong, as non-compliant airlines will eventually have to issue their own paper at more than 10 times the cost of e-ticketing.
Doing away with paper tickets also means the check-in process can be completely overhauled.
Bar-coded boarding passes will eventually allow travellers to print out their own at home.
Several airlines already allow online check-in over the Web.
The next step is to extend online check-in to mobile phones.
In the meantime, another component of IATA’s plan offers more immediate benefits.
Self-service kiosks, which are already popping up in airports around the world, save the industry as much as $3.50 per check-in while improving customer service.
Switching from airline-specific kiosks to “common-use self-service (CUSS) ones, which can handle passengers from several airlines, will be even more efficient, and will enable even small carriers to offer self-service check-in.
There’ll be more on CUSS(ing) later on the agenda .
Long check-in lines are not the only reason for passenger cussing.
Complementing passenger e-ticketing is a program to eliminate all paper involved in handling cargo by the end of 2010.
Some shipments entail as many as six different forms, each of which costs approximately $6.
Although less than 1% of the 1.5 billion bags carried on commercial flights each year go astray, that still represents about 10 million bags and a corresponding number of angry owners.
Mishandled baggage costs the industry as much as $1.6 billion a year, and gives rise to such unfortunate remarks as Mark Russell’s observation that “the rings of Saturn are composed entirely of lost airline baggage.”
Thanks to those great photos from NASA, we now know better.
Radio-frequency identification (RFID) technology, thanks to the greatly reduced cost of RFID tags, now down to a few cents, will substantially reduce the number of lost, delayed and mishandled bags.
Industry savings will be equally substantial.
All of these technologies – electronic tickets, remote check-in, self-service kiosks and RFID tags – have already been adopted, to varying degrees, by forward-thinking airlines and airports around the world.
The priorities established by IATA are only a few of the areas in which costs can be lowered through technology.
From Web-based wireless FIDS for smaller airports to low-cost simulators for low-cost airlines, the air transport industry is responding as never before to the survival imperative.
Airlines
Another good way of simplifying the business and promoting the survival of the fittest, is to simply let failing airlines fail.
Bankruptcy laws, some industry leaders would argue, are preventing a full restructuring of the industry by providing artificial respiration to failed ventures, allowing them to lower their costs and re-enter the competitive arena at shareholder, employees and investor expense.
Not all business leaders advocate taking sick airlines off life support.
General Electric, the leading aircraft lessor within America, has over half of its 1,350 planes leased to American carriers.
A liquidation or two would release a flock of planes on the market, further depressing second-hand value and leasing rates.
Despite passenger traffic growth forecasts of around 8%, as I said earlier, the world’s airlines will likely suffer another overall loss this year, bringing the total loss for the period 2001-2005 to a whopping $40 billion plus.
No wonder Warren Buffett once quipped that if a capitalist had been present at Kitty Hawk, he would have done future investors a big favour by shooting down that first flight.
Once again, the financial health of the industry differs by region and by type of airline.
And among the failures to adapt, there are some successes.
For U.S. carriers, there is little good news.
United Airlines (UAL Corp.) posted a second quarter loss of $1.43 billion and has been granted a tenth extension to its bankruptcy reorganization.
Northwest lost $225 million in the second quarter and Delta $382 million.
Both carriers have now filed for Chapter 11 protection.
A rare bright spot in a troubled industry is Southwest Airlines, which continues to benefit from a shrewd use of fuel hedging.
Hanging on with a modestly profitable second quarter are American, Continental, and Alaska Air.
The best news for the U.S. industry is growing support for mergers and consolidation.
The U.S. Airways and America West merger has been approved, and there’s an emerging consensus that the U.S. doesn’t need that many low-cost carriers.
An interesting development is Jet Blue breaking the low-cost model by buying up to 100 aircraft from a different manufacturer, all with one third fewer seats than its A320 fleet.
Industry analysts are shaking their heads over this breach of the fleet efficiency mantra.
Elsewhere in the Americas, Air Canada has emerged from bankruptcy protection as a possible poster child for legacy airlines adapting to survive.
Its exit loan has been paid off, fleet renewal is underway, and the airline made $169 million (CAD) in the second quarter.
WestJet also reported a profit but it was 70% less than last year.
The good news in South America is first-half traffic growth of almost 14% by the 22-member carriers of the Latin American Airline Association (AITAL).
A big contributor to this growth are new low-cost carriers like discount leader Gol Linkas Aereas Inteligentes of Brazil.
Founded in 2001 by a 32-year old college dropout, Gol, the Intelligent Airline, is now the second largest carrier in Latin America, with 34 jets serving 40 destinations across Brazil.
Meanwhile VARIG saddled by 3.3 billion USD of debt had to file for protection under Brazil’s new bankruptcy law.
Other contributors to the good news are Brazil’s TAM and restructured airlines like Chile’s LAN, both of which reported record quarterly profits.
I was hoping Mexicana and Aero Mexico could have merged but the holding decided that they should be privatised separately.
Unfortunately, privatisation alone is no panacea for airlines with chronic losses and floundering flag carriers are not easy to unload.
The Hungarian government is struggling with its fourth attempt to sell Malev.
Olympic Airlines is for sale and may even face liquidation after the European Commission ordered the return of the 530 million Euros in aid from the Government.
The Polish government is trying to streamline loser LOT before even attempting privatisation.
Since no one wants Alitalia, the EC has approved a recapitalization plan that splits the airline into two companies, one for airline operations and the other for maintenance and ground services.
Five struggling Russian regionals are forming an alliance, AirUnion, that eventually could become a single airline under a new brand.
The European experience proves that restructuring and consolidation can produce positive results. Among the successes:
The Air France-KLM Group nearly doubled projected pre-tax earnings for the first half of fiscal 2004-05 and traffic is up for both carriers;
Lufthansa is back in the black and the EU has cleared its move to acquire Swiss International;
SN Brussels Airlines, created in 2002 from a recast unit of defunct Sabena, posted a full-year operating profit in 2004 and acquired Virgin Express earlier this year;
Cost-cutting British Airways beat market forecasts in May by announcing a 33% increase in annual operating profits.
British Airways now plans to refocus on fleet renewal, mergers and acquisitions, and service.
Air Berlin, founded in 1978 as a charter airline, is poised to become Europe’s third-largest low-fare airline, along with Ryanair and Easy-Jet, after placing what was last year’s largest civil aircraft order – 110 Airbus A320s;
Ryanair increased pre-tax profits in its first quarter to June by 32%, despite doubling of its fuel costs;
EasyJet also swallowed soaring fuel prices by cutting costs and raised its full-year profit forecast to match last year’s $111 million (UK pounds).
For Asia/Pacific carriers, the challenge is to adapt to internal markets that grew a phenomenal 20% last year, and are projected to continue at a double-digit pace over the foreseeable future.
It’s not surprising that Asia/Pacific airlines achieved a record $3 billion profit in 2004, that Singapore Airlines pulled in unprecedented earnings or that Cathay Pacific had the second best year in its history and will probably do as well in 2005.
What may be surprising, however, is that a billion of that $3 billion came from Chinese airlines.
China is expected to lead the world in air travel growth over the next decade.
To meet the needs of a modernized, rapidly expanding economy, China’s passenger fleet requirement over the next 20 years will expand to as many as 2,600 aircraft according to Boeing’s latest forecast.
By 2010, in just five years, the country will have 200 airports.
In March, Air China and Cathay Pacific were reported to be in “advanced negotiations” on a consolidation that would include Dragonair.
Such a new airline could rival the Air France-KLM merger in size.
In July, Fed Ex announced plans to build the Asia/Pacific’s largest trans-shipment hub at Gangzhou.
Although India remains far behind China in number of passengers and aircraft, a fully liberalized air policy, an equally booming economy, and a rapidly growing middle class, have transformed a stagnant two-carrier government monopoly, notorious for poor service, into a vibrant, highly competitive air industry growing at 20% a year.
Privately-owned Jet Airways and more recently Air Sahara pioneered the transformation with good service and great in-flight amenities.
Now everyone is making money, including, it seems, Air India and Indian Airlines.
Eight new carriers have taken off or are scheduled for takeoff this year alone.
India’s airlines expect to take delivery of as many as 100 aircraft by the end of 2005 and 570 by 2023. The government has earmarked $3.3 billion to upgrade Bombay and New Delhi as well as build new airports at Bangalore and Hyderbad.
The only casualty so far in India’s air travel explosion is the country’s fabled but creaky rail service.
First-class bookings on some inter-city routes are down 30%.
India, along with Malaysia, Singapore, Thailand, and just recently, China, have become fertile ground for discount airlines.
Even recalcitrant Korea is now considering establishing a budget carrier.
Japan has been trying for years but a natural penchant for regulation, as well as congested airports, have chocked the wheels of liberalization.
Since Air Asia of Malaysia started in 2001 with two aircraft – it now has 30 – as many as two dozen low costs have appeared in the region.
However, high-priced fuel, a mishmash of still-regulated landing rights, tougher competition from full-service carriers, a shortage of flight crew and technicians, and the tsunami effect will sink a number of new-starts and others will consolidate.
Until recently, Singapore had three new discount carriers – Valuair, Tiger Airlines and Jet Star; now Jet Star has acquired Valuair.
Qantas is another airline that seems capable of withstanding the fuel price onslaught. Net profit in the year ended June 30 rose by 18%.
Finally, a comment about Middle East carriers that is sure to have airline analysts contradicting themselves all over the place .
Last year at Farnborough, Etihad Airways, founded by the government of Abu Dhabi just a year earlier, announced a $7-billion order of four Airbus A380s, eight A340s, and twelve A330s.
The government also announced plans to spend $6 billion to expand the airport.
Now, Etihad is expected to announce another major aircraft order at the Dubai air show in November.
The year before, Emirates Airline spent $19 billion for 45 Airbus A380s and other aircraft, and wants to expand its fleet to around 120 by 2010.
Dubai International Airport is now undergoing a $4 billion expansion, and a new airport, Jebel Ali, is being built 25 miles away.
Qatar Airways has announced plans to acquire up to 80 aircraft worth $15 billion.
These huge investments will create airlines at least six times as large as their domestic markets would justify.
Emirates’ strategy is to emulate Singapore Airlines and KLM in becoming primarily 5th and 6th freedom carriers.
Etihad makes no bones about its longer-term goal of achieving 40% transfer traffic.
But in a coming era when almost any destination in the world can be reached non-stop is that a viable strategy and sound investment?
Ladies and gentlemen, the subject may not be exhausted but I am. Some studies suggest that the average man speaks 25,000 words a day.
It feels like I just exceeded my quota.
I do want to end on the serious note that this subject deserves, however.
The year 2004 may have been the safest year ever for air transport but this year’s seven crashes, all but one involving small airlines is a strong reminder that safety must never be taken for granted.
As the industry increasingly deregulates commercially, it is essential for governments to be increasingly vigilant in ensuring that all carriers scrupulously adhere to the highest possible safety standards.
The EC suggests that airlines with unsatisfactory safety records should be blacklisted on the Internet. The U.S.A. has been issuing a list now for some years.
This idea may have merit but I believe a less punitive and more fruitful measure would be much tougher and more frequent independent safety audits of countries conducted by ICAO and of airlines by IATA under the its Operational Safety Audit Program (IOSA).
This year, more than 100 airlines will be audited under the program.
Travellers can check the IATA website to see whether the carrier of their choice is participating.
To summarize as we’ve seen this afternoon, all components of the air transport industry are with varying speed adapting to survive.
Substantial progress has been made in many areas. But our evolution into a hardier species is far from complete.
The price of oil still threatens. The pressure on yields is relentlessly downward and cost cutting is not complete.
Fleets are in need of renewal and new airplanes will further lower operating costs.
Market liberalization only lumbers along.
Government regulation remains excessive in some areas and insufficient in others.
Congested terminals and airways are potentially choking growth they need to expand in a more cost effective way.
Costs can be further reduced by simplifying the business.
More than a few carriers are in urgent need of consolidation.
Environmental concerns and safety are again an issue.
And despite the substantial and sustained demand growth the airline industry as a whole continues to lose $5 to $10 billion a year!
I look forward to the day when our airlines will rise from the ashes of the Dodo bird into a Phoenix!
Thank you.
