5 December 2008
editorial
Johannesburg — IF AIRLINES were to be likened to the aircraft they operate, you would have shaken shareholders, with oxygen masks strapped to their mouths and their heads between their knees, reassuring each other that all will be fine.
In the cockpit, perspiring airline executives would be reaching for check lists and barking out orders as they try to extinguish the bleeping and flashing warning lights on the instrument panel.
In one of the worst years in living memory, the global airline industry has notched up cumulative losses amounting to $4bn in the first three quarters of this year. In the past two months, hundreds of aircraft have been lying idle and many airlines' balance sheets are swathed in red.
It started with the oil price surging to a record $147 a barrel in July before falling just as rapidly to below $50 now, catching many airlines wrong-footed. The global credit crisis has resulted in a rapid slowdown in passenger demand and dried up access to much-needed financing.
In response, airlines have slashed their networks and cut capacity. A knife was taken to costs and employees shown the door as the airlines battled to return to profit. Many did not make it and close to 30 airlines have rolled down the shutters on their ticketing offices for the last time.
Adding to the turmoil, the US and European Union (EU) earlier this year opened their skies to further competition. This has sparked unprecedented consolidation in the industry that is likely to see four mammoth airlines dominating the sector.
Earlier this year, Delta and Northwest airlines agreed to merge, creating the world's largest airline by traffic.
Over the Atlantic, British Airways is holding talks with Spanish carrier Iberia over a possible merger, which in turn would pursue an alliance with American Airlines. At the same time, British Airways is courting Australian airline Qantas, while this year it launched Open Skies, a new airline operating transatlantic flights from Paris and Amsterdam.
Not to be outdone, Lufthansa, which some years back bought Swiss International Airlines, this week edged closer to a deal to buy Austrian Airlines, while it is poised to take control of BMI. It has also recently walked away from talks to buy Alitalia, opting to launch a new airline in Italy called Lufthansa Italia last week.
Hovering in the shadows is Air France-KLM, which is hoping to build on the merger of the Dutch and French airlines some years back. It is poised to take advantage of the tie-up between Delta and Northwest, in which Air France-KLM holds a significant stake.
What exactly this breathtaking corporate activity will ultimately achieve is not immediately clear. What is certain is that these airlines seek economies of scale: the bigger the airline the better the deals it will achieve on fuel, aircraft and other costs. Presumably lower costs will mean lower fares.
But bigger airlines also mean bigger market share and there must be some concern about monopolistic behaviour on some routes, allowing the big four to squeeze out smaller competitors and ratchet up prices.
We can only hope that once the industry settles down, passengers will be offered a wider choice, pricing and connectivity. It would be the death knell of liberalisation if these deals killed the competition they were intended to create.
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