Michael Skapinker
11 October 2001
analysis
While there have been mass retrenchments, there has been no reform in the industry structure
The airline business has seen crises before, including the 1970s oil shocks and the Gulf War, but not since the Second World War has it endured a month this harrowing.
Four of its aircraft were used as flying bombs in the September 11 attacks in the US. Public confidence in air travel was badly shaken. In the week after the attacks traffic on US airlines fell by 35%, and in the rest of the world by 20-25%, according to the International Air Transport Association.
Airlines worldwide have made 120000 employees redundant. Two European airlines, Swissair and Sabena, face collapse and are being kept alive only by emergency injections of government aid. British Airways has said it cannot pay an interim dividend this year and may not be able to pay a final dividend either. Iata expects the world's airlines to record losses of more than $10bn this year.
The US government is offering airlines a 15bn package to compensate them for the four days US air space was closed after the attacks but also to ensure the carriers' survival. The European Commission will soon announce proposals on how to save the industry, including what subsidies governments will be allowed to pump into failing airlines.
In a draft paper seen by the Financial Times, Brussels said it did not want to prevent the consolidation of Europe's airlines, which were far smaller than their US counterparts, but European carriers should not be disadvantaged by the US government's baleout of its own airlines. The commission may also reassure airlines that they will not lose airport take-off and landing slots they have failed to use because of the disruption.
But September 11, while traumatic and financially damaging, was not the cause of the airline industry's problems. The attacks accelerated an industry crisis that has been unfolding since the US began deregulating its skies in 1978. The freeing of the US airline business lowered fares and led to the emergence of Southwest Airlines, the world's leading low-cost carrier. The creation of a single European aviation market in the 1990s also produced a new generation of cut-price carriers such as Ryanair and EasyJet.
Worldwide passenger numbers have grown by an annual 5% on average over the past five years, to reach 1,6-billion last year, but the international airline industry has been incapable of generating profits on a sustained basis. The industry recorded an average operating profit margin of just 3% last year. During the buoyant 1990s operating margins did not exceed 6%. Airline shares have regularly underperformed the market.
The industry's costs are so high, a fall in passenger numbers drives airlines into loss; and a severe crisis such as after September 11 would drive them out of business altogether were it not for government assistance.
Robert Ayling, former CE of BA, argues the industry has failed to devise a structure that would ensure long-term profitability. "The airline business is structured in such an appalling way," he says. "It's highly capital-intensive. When revenues evaporate, the costs don't. There needs to be a new model that allows airlines to shed costs as quickly as they shed revenues. We need a much more flexible method of providing aeroplanes."
The current system, under which airlines lease their aircraft or own them outright, is too inflexible, Ayling argues. Leases commit the airlines to holding on to aircraft for specified periods regardless of market conditions. While airlines with excess capacity store their aircraft in the US desert, what they really need to be able to do is decide each week how many aircraft they need.
Someone else should take on the risky business of owning aircraft, he says. No one has shown much appetite for doing so. When Ayling ran BA, he asked Boeing and Airbus to come up with new ideas for providing BA with short-haul aircraft. He said BA wanted to fly the aircraft without owning them. Boeing and Airbus failed to come up with any proposals.
Another factor undermining the industry's viability is what Chris Tarry, aviation analyst at Commerzbank, calls aviation's "distorted pay structure". A strike, or even the threat of one, results in passengers deserting an airline for its competitors. Threatened with industrial action, particularly by pilots, most airline bosses cave in quickly. After a three-day strike this year Lufthansa awarded its pilots a 15% pay increase. Delta Air Lines and United Airlines gave their pilots substantial pay increases. Delta suffered an 89-day strike at Comair, its regional subsidiary, but the pilots eventually walked away with up to 20%.
Many airlines reacted to September 11 with a level of redundancies they have been longing to make for years. But many in the industry regret that the US government did not make its $15bn package dependent on fundamental reform to its industrial relations.
But then governments have long been part of the industry's problem. In spite of the deregulation of the past 20 years, they have insisted on retaining control of the industry. The US deregulation was extensive, but it was for US airlines only. No foreign company can own more than 25% of the voting stock of a US airline. And while the US government has signed "open skies" agreements with many countries (with the notable exception of the UK), these merely allow foreign airlines to fly to any airport in the US. They do not allow foreign companies to set up domestic airlines in the US, the world's biggest aviation market.
Europe will also not allow foreign control of its airlines, limiting stakes by non-European Union shareholders to 49,9%. While EU airlines are allowed to fly anywhere within Europe, the bilateral agreements with the US mean carriers can fly across the Atlantic only from their own airports. Lufthansa cannot fly to New York from London; Air France could not start flights from Frankfurt to Los Angeles.
The foreign ownership restrictions have prevented worldwide mergers of the sort that have taken place in the pharmaceuticals and oil industries. Instead, airlines have been restricted to forming alliances that, while allowing them to sell seats on each other's flights, have not allowed them to cut costs.
Another problem has been governments' refusal to allow their national carriers to go bust. No one argues that every country needs a national retailer or shoemaker or umbrella manufacturer, but most countries retain a fervent belief that an airline is as important to their identity as a flag or a national anthem. The US has allowed airlines, including Pan American, one of its most illustrious, to disappear. But even the US has insisted it needs a national airline policy. Its "Fly America" programme means travellers on government business have to use a US airline.
The Europeans have resisted the idea of their airlines going out of business at all. The Swiss government provided Swissair with an emergency SF450m cash injection. Yet Swissair is renowned for its customer service. If the airline were allowed to go bankrupt, someone would want to take over its brand and routes. Sabena, which has been promised a loan of à 125m by the Belgian government, would be less of an attraction; but Brussels, an important hub, would soon get services.
The European Commission will make it clear what government support for airlines it will tolerate. All European governments whose airlines are struggling will be watching.
Ayling urges Brussels to abandon its "watered-down and woolly approach" to subsidies. "It's got to be tough on members that have a predilection for state support. They've got to make short-term sacrifices for longterm advantage." Financial Times.
Be the first to Write a Comment!
Copyright © 2001 Business Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
