[The over-arching position of this brief is that airlines are on the verge of a new golden age, an era of sustained profitability. The rationale articulated below is not based on recent benign fuel prices. More fundamental and structural changes are happening within the industry – and re-structured airlines are poised to reap the rewards. The paper does not discuss strategic options for any airline though it proposes a foundation.]
INTRODUCTION
Jet travel triggered the so-called ‘golden age’ of aviation in the 1960’s. However, most airlines were government-owned, so there was no burden of profitability. Commercial flights, in those times, were destined to the elite and flag carriers were emotionally protected by the concept of national pride.
A round of privatisation started in the 1980’s driven by governments’ new agenda to no longer bankroll increasingly loss-making national carriers, the most aggressive being Thatcher’s drive at British Airways. This turned out to be momentous since, from 1990 to 2015, these ‘traditional’ or ‘legacy’ airlines were going to be even more severely impacted by:
new airlines without a high cost legacy (eg. Virgin Atlantic);
more efficient business models (low cost airlines, hub carriers);
high fixed cost of modern aircraft development (safety, new technology, environment);
high/volatile fuel costs;
security risks leading to high insurance costs and lengthy airport procedures;
increasing airports costs driven by ‘privatised monopolies’ such as BAA in the UK; and
a major economic crisis in each of the last three decades.
In the face of so much adversity, the industry was compelled to re-invent itself.
STRATEGIC EVOLUTION
New pointers seem to indicate the beginning of a new era of profitability for airlines. This stems from the macro-economic environment but also, critically, from internal structural changes achieved by various airlines.
Politics & Economics
The advent of Open Skies blocs such as the EU or the Gulf Cooperation Council.
The gradual acceptance of privatisation by governments and voters alike.
More liberal national air policy (foreign participation limits in airlines increased in India from 25% to 49%; major M&As passing anti-trust legislation: AF/KLM, BA/Iberia, AA/US Airways).
Substantial funds available for capital investment, whether from wealthy countries or various ‘quantitative easing’ monetary policies (US, EU).
A mushrooming populist shareholder base (and culture) – yet many airlines around the world have to launch IPOs.
New, strong demand from highly populated regions’ (Far East, China, India) burgeoning middle class but also from the ageing ‘silver generation’ in Europe/US.
The emergence of Africa’s fast-growing middle class with mobile technology.
Operations
Increasingly safe operations (annual fatalities stable in the last 20 years whilst traffic increased 300% over the same period).
Larger and more efficient engines allowing for more economical twin-engine operations on a longer range.
Larger aircraft mitigating restrictive bilaterals agreements and slots constraints – whilst lowering cost per seat for lower fares.
Low or reasonable fuel price due to the structurally downward trend in ‘fossil fuel to GDP’ ratio, increasing supply and the emergence of alternative fuel.
Streamlining of air space control (reduction of vertical separation minima, more direct air ways) to increase air traffic capacity and lower flight times, translating into lower fuel burn and passenger convenience.
Progressive (continuous) aircraft maintenance programmes reducing aircraft downtime.
Increasing use of flight automation reducing pilot workload, pilot error and aircraft wear and tear.
Airports
An erosion of airports’ monopolies due to secondary airports intent on courting airlines.
The understanding by airports, and even by governments, that the airline passenger is a driver – and even an economics multiplier – of revenue and employment (direct and indirect).
The gradual shift in airport revenue sources from airlines (B2B) to passengers (B2C) through retail operations.
Higher capacity and more efficient airports with more security lanes and e-gates enabling immigration process of … 30 seconds.
A reduction in lost luggage due to Radio Frequency Identity (RFID) tracking.
Strategic focus
Economies of scale achieved due to larger airline size (organically or through M&As).
The drive for small and medium-sized airlines to merge (or even to be acquired) for sheer survival (eg. Etihad/Air Seychelles) and economies of scale.
Divestment from hotels, catering, etc. to avoid management distraction and focus on the core airline business and passenger Marketing.
Streamlined industry processes to cut cost driven by IATA’s ‘Simplifying the Business’ initiative.
Strategies to drive efficiency such as fleet commonality to reduce the holding of spares.
Cockpit commonality within different types of aircraft allowing for dual-rated pilot training to reduce cost and increase pilot utilisation.
Optimised, technology-enabled yield management from Real Time Dynamic Pricing (RTDP) algorithms.
The removal of costly manual processes and middlemen (paper tickets, travel agents and even e-mails replacing costly SMS for passenger notification).
Social media consumer-tracking software enabling lower cost but more targeted/profiled Marketing.
New revenue-earning opportunities from internet connectivity during flights.
The notion, at last, that airlines are not the perceived glamour industry for billionaire owners (eg. the Vijay Mallya/Kingfisher disaster) emphasising the need for a strategic/specialist investor – or, at least, rigorous technical and financial management.
CHALLENGES
Obviously, some major challenges remain:
Protectionism, even in large, developed countries due to the ‘bilaterals’ framework.
Stringent and high-cost regulatory environment (security, insurance, maintenance).
Shortage of pilots leading to high cost.
Efficient high-speed rail (high volume, cheap electricity, subsidies, no airport processes) on distances below 1,000 km in Japan, Europe, China.
Irrational competition creating market distortion with still too many new, small and unviable airlines being set up.
However, as articulated above, the challenges can be mitigated. Airlines have never been in a better position to seize the opportunity and reap the rewards of profitability.