Business Travel Tech Talk London, 16 October,
Business Travel Awards Europe, 30 October, JW
3rd Annual Business Travel Intelligence Summit
The mad world of airline economics
The conference in London last week was entitled: "The Aviation Debate: can the growth continue?"
Airline executives glumly surveying their bottom line and shrinking passenger numbers, might well have remarked ‘What growth?' Figures from the International Air Transport Association (IATA) last week were again bad.
International passenger traffic dropped for the fifth consecutive month in January by 5.6% compared with the same four weeks in 2008. In Europe numbers were down 5.7% after a 2.7% fall in December. The Association said the figures showed a "deepening, year-on-year demand slump."
Its director general and ceo, Giovanni Bisignani, grantedly not a man readily associated with optimism, added: "Alarm bells are ringing everywhere. Every region's carriers are reporting big drops in cargo.
"And, aside from the Middle East carriers, passenger demand is falling in all regions. The industry is in a global crisis and we have not yet seen the bottom."
But the question and theme of the London conference were relevant from two angles: the environment and in terms of airline economics.
The first asked whether in the longer term, beyond the recession, aviation can go on growing at the same rate as the last few years. It may, just now, be responsible for only about 2%-3% of the world's total emissions of CO2.
But if the current rapid rate of growth continues, it will be the industry responsible for a greater volume of emissions than all others within 40 to 50 years. All gains by cutting emissions from cars, and everywhere else will be lost because of the growth of flying.
It is this scenario which provides environmentalists with one of their strongest arguments against the third runway at Heathrow: a government which is committed to cutting greenhouse gas emissions by 80% by 2050 is promoting an industry which is likely to scupper any chance of achieving that objective.
But the conference also looked at aviation growth from the point of view of economics. This was even less comforting. Chris Tarry, a consultant with CTAIRA and one of the leading air analysts in Europe, made the simple point that airline economics are not actually connected with real life economics.
While he did not use the phrase, delegates were left in little doubt that airline economics belonged in a mad world. While other industries increased profits through growth, airlines did not. Despite flying many more customers than in the past and serving many more destinations, airline were no more profitable now than they were in days when they were much smaller.
A shopkeeper who opens a second or third store would expect them to increase his profits as well as his turnover. A hotel chain which opened more properties would expect something similar. But this does not seem to happen with airlines.
In fact there even seems to be a Catch 22 situation with airlines, their growth and their profits. Mr Tarry told the conference: "Airlines are filling more seats but the number they have to fill to break even has grown. This is profitless growth. A lot of airlines are on knife edge instability."
So it would seem the more they grow, the less likely they are to be profitable.
But the economics seem to get madder. Mr Tarry said that the price some carriers charge for fares covers only 25% of the cost of the flight. Instead they rely on passengers buying extras, like food or using a mobile phone, or by paying to check-in luggage and, if reports are to be believed, by going to the toilet.
Again a supermarket analogy seems apt. These shops frequently tempt passengers with loss leaders but not to the extent that they might endanger not just their profits but also their existence. They are not going to sell their entire stock or even a quarter of it at 25% of its value. Yet Mr Tarry cited one fortunately for them unnamed carrier which needed a 132% load factor to survive. Presumably it didn't.
But there is a way out of this morass which is clear to Mr Tarry and probably to most others not directly involved. There are too many carriers and, more specifically, too much capacity. When this is the situation, cutting prices might seem like a good idea. But ABTN's Comment reminds readers that when hotels, faced with a sharp drop in demand, considered a 20% cut in rates, they realised they would need a 50% increase in customers to maintain their revenue. It is likely to be something similar for airlines. Nor would a price war be a good idea for most airlines just now.
The solution would seem to be to take out capacity. But this will not happen instantly in the aviation industry. It will take time as orders for new planes are cancelled or postponed, networks are rationalised and routes assessed.
By the time it has all got underway, demand will have entered one of its growth cycles so the whole daft merry-go-round will start again. And then after a few years of misleading profit, the decline will set in again. How the corner shop owner must look on with disbelief at the antics of these so called businessmen.