Airlines face bleak future

Airlines around the world are scrambling to head off the potentially devastating impacts of a sustained period of extremely high fuel prices.

Non-fuel costs are under attack, and airlines are attempting to raise revenues where they can. Despite strong past-year results, it is clear that all airlines are now feeling the chill winds of economic downturn sweeping across the world.

But moves by several carriers to raise prices or surcharges can risk undermining increasingly fragile demand.

So what are the keys to surviving times such as these?

Michael Bishop, chairman of British carrier bmi, this week said the slowing world economy and record fuel prices would lead to a clear division of airlines into the “haves and have-nots”.

Sir Michael said the “have-nots” are start-up airlines and airlines with insufficient scale. In the region, the Centre for Asia-Pacific Aviation believes carriers locked into highly competitive domestic markets also join this category.

In this region, the Centre sees the “haves” as carriers with:

* Good levels of fuel hedging in place, or some form of government support, such as jet fuel tax relief;

* Low (or falling non-fuel) costs;

* Access to growing markets/economies;

* Established alliance relationships;

* Strong positions at powerful and growing hubs;

* Favourable exchange rate positions against the US dollar (which form a natural hedge against rising input costs, such as fuel and aircraft).

But many of the “haves” in the Asia-Pacific region could quickly become “have-nots”, particularly as hedge positions unwind this year, leaving them exposed to the relentless increases in fuel prices.

In advance of this, several carriers are now aiming to preserve cash by deferring any unnecessary expenditure, while raising the productivity of their labour forces and cutting costs elsewhere in their businesses.

Thai Airways joined Qantas this week in announcing extensive cost cutting plans as the operating environment becomes more hostile by the day.

Thai has signalled its widebody fleet order may be reconsidered and even downsized. This is a potentially major step that other large carriers in this region may be forced to follow if extremely high fuel prices persist. Thai has been notably slow to respond to market changes in recent years and also increased its fuel surcharges last week.

Qantas, meanwhile, is raising its underlying fares by up to 3.5 per cent this month, as part of an acceleration of initiatives to protect its profitability as fuel prices reach record highs. Qantas also confirmed it had implemented a hiring freeze, cutbacks to non-essential expenditure and suspended its share buyback.

Qantas and QantasLink domestic fares will increase by 3.5 per cent. However, Jetstar is still only “reviewing” its fare levels at this stage, as Tiger Airways refuses to introduce a fuel surcharge.

Nevertheless, Virgin Blue announced it too would implement a price increase across its domestic and Pacific Blue international networks. Pacific Blue’s New Zealand domestic fares currently remain “under review”, but are now likely to rise following Air New Zealand’s move to hike fares by a further 3 per cent on May 6, following a similar increase in March.

Air New Zealand this week revealed it has also raised long-haul international fares by 4-8 per cent over the last two months.

Overall, the price of travel is increasing (in some, but not all markets), which risks taking the edge off demand at a time when airlines need to grow the market to fill fresh capacity entering their fleets.

Qantas chief executive Geoff Dixon warned recently that quite a few of the less robust carriers, the “have-nots”, could disappear, if demand is hit by carriers raising fares to offset record fuel prices.

In the US, where airlines are pushing through increases to fares and ancillary items on almost a weekly basis, the pressures on the system are so intense that several carriers have already passed breaking point.

Meanwhile, the LCC sector in the US, Europe and the Asia Pacific region continues to boldly expand.

Tiger Airways is bringing forward A320s deliveries, due to strong demand for its services, and some of the additional capacity is bound for the Australian market.

AirAsia has received regulatory approval this week for an Islamic bond issue that will help fund its ongoing fleet expansion, while Indonesia’s Lion Air and Australia’s Jetstar continue to add new aircraft to their fleets to continue their short-haul route expansion.

It all adds up to massive pressure on the airline industry and dangerous times for the “have-nots”.

Discussion about consolidation in this region will inevitably surface, as airlines look for a safe haven in mergers or alliances. But any cross-border mergers in Asia will be extremely difficult, if not impossible, to achieve.

The global airline alliances will play an enlarged role in this environment. But they tend to deliver longer-term benefits. Airlines need some thick winter coats right now.

Go to  www.centreforaviation.com for updates on structural aviation changes.

Derek Sadubin is the chief operating officer of the Centre for Asia-Pacific Aviation

A Report by The Mole