Air travel is increasingly a tale of diverging realities

The wholesale closure of European airspace in mid-April while a cloud of volcanic ash drifted toward the continent offered a painful reminder of two truths about jet travel: Modern society can’t funct

The wholesale closure of European airspace in mid-April while a cloud of volcanic ash drifted toward the continent offered a painful reminder of two truths about jet travel: Modern society can’t function without it, and the whole system is easily thrown into chaos.

The shutdown, which left roughly 10 million people stranded, was only the latest in a long line of predicaments for the industry. In recent years, airlines and passengers have struggled with terrorist threats, a fuel-price spike and a global economic meltdown. These difficulties have punctuated a backdrop of more mundane headaches including bad weather, over-stretched infrastructure, broadsides from environmental activists and calls for greater taxation of air travel.

But it took the cancellation of more than 100,000 flights to make the world think a bit harder about the future of air travel. Aviation officials are hoping that the episode will persuade governments to help โ€“ or at least unfetter โ€“ their battered sector.

“The crisis has put in stark relief the critical role aviation plays,” said European Union Transport Commissioner Siim Kallas in late April as he outlined measures to prevent a similar fiasco. “Sometimes we do not appreciate something until it’s not there.”

With luck, the painful episode will result in improvements for both passengers and carriers, such as better air-traffic control and faster crisis-management. But recent history suggests commercial air travel will simultaneously make big strides forward while also reinforcing its worst traits. Europe’s shutdown neatly illustrated the industry’s split personality: Some carriers adapted their operations to help stranded passengers while others left customers struggling to get home. Air travel is increasingly a tale of diverging realities.

Split Personality

For richer fliers, the future looks fairly bright. Carriers will keep adding services such as in-flight connectivity and business-only jetliners to woo their highest-paying customers, particularly on long-haul flights. But for the majority of air travellers, flying is likely to become an increasingly unpleasant experience with short hops resembling a form of aerial bus travel as carriers attempt to cut costs faster than their rivals.

Airlines will be offered promising new technologies to boost efficiency, passenger comfort and safety. But many will struggle to afford the advances, or will be blocked from capitalizing on them by bureaucracy.

Governments, meanwhile, show no sign of ending a forked-tongue approach: Tout the benefits of aviation while piling on fees and reluctantly improving infrastructure.

A key factor in determining which trends will prevail is the performance of the global economy โ€“ the volume of air travel, and therefore the performance of the airlines, closely tracks economic growth. Airlines tend to invest during the good times and hunker down during the lean years. Few have traditionally been able to afford counter-cyclical investments.

That’s changing, however. Budget carriers including JetBlue Airways Inc., Ireland’s Ryanair Holdings PLC, Britain’s easyJet PLC and India’s IndiGo all supercharged their growth by placing big plane orders during the industry’s slump after 2001. Their bets paid off and helped reshape their respective markets. Rivals have taken note.

And while all airlines suffered during the recent economic crisis, bigger carriers with deeper pockets have been able to ride it out best, strengthening their competitive positions. The shift appears set to continue as consolidation in the U.S. and Europe yields a handful of giant network operators and cash-rich budget carriers who can gobble up or steamroll smaller rivals.

A pair of takeovers that formed two of the world’s biggest airlines โ€“ Air France’s acquisition of KLM Royal Dutch Airlines in 2004 and the Delta Air Lines Inc. buyout of Northwest Airlines in 2008 โ€“ has put pressure on rivals to follow suit. The impact of the two deals was amplified by transatlantic links between the carriers through the SkyTeam marketing alliance.

In response, Germany’s Deutsche Lufthansa AG has snapped up Austrian Airlines Group, BMI British Midlands and Brussels Airlines in the past two years, following its purchase of Swiss International Air Lines in 2005. Lufthansa’s main U.S. partners in the Star Alliance โ€“ Continental Airlines Inc. and UAL Corp.’s United Airlines โ€“ are finalizing a merger to create the world’s largest carrier by traffic.

British Airways PLC is also working to seal a merger with its European partner in the oneworld alliance, Spain’s Iberia Lineas Aereas de Espana SA. The flurry of deals is likely to prompt more linkups as industry wallflowers try to avoid being sidelined. At the same time, SkyTeam, Star and oneworld are becoming the focus for the growth strategies of international carriers because the alliances offer a way around long-standing limits on cross-border airline mergers.

One result of consolidation is a growing focus on hub airports, which attract traffic because of their scale and alliance links. When Boeing Co. launched its 787 Dreamliner almost a decade ago, the company promised the super-efficient plane would allow airlines to fly profitably between cities such as Warsaw and Kuala Lumpur. Airlines are still eagerly awaiting the much-delayed plane.

But many long routes with limited traffic, such as Dublin to Los Angeles and Bangkok to New York, have fallen from schedules. Instead, secondary markets link through hubs. Unsurprisingly, most big hubs are near the world’s main business centers, which reinforces their ability to attract disproportionate amounts of money.

The lion’s share of revenue is therefore earned by the big network players who dominate their hubs and enjoy stronger pricing power.

Traffic to European airports told the consolidation story in 2009: The traffic through secondary hub airports such as Copenhagen, Dublin and Vienna fell by 6.1%, according to the Airports Council International Europe, a trade group in Brussels. Major hubs such as Paris and Frankfurt lost a more modest 4.7% of their traffic, according to ACI Europe.

For consumers, airline consolidation is likely to mean less choice and higher fares. Surviving carriers work to boost profits by capitalizing on their power to control their markets’ supply of seats and set fares.

“These mergers have to exploit anti-competitive pricing power,” says Hubert Horan, a former airline executive in the U.S. and Europe, and now an independent aviation consultant. Mr. Horan said merged carriers must raise fares to cover high implementation costs, such as wage increases to buy labor peace.

As a result, fares across the Atlantic — where consolidation has been most dramatic — have risen three times faster than within the U.S. since 2003, Mr. Horan calculates. Airlines argue that competition still disciplines them and consolidation is necessary for the industry’s financial health. “The cyclicality and fragility of the industry has got to stop,” said Jeff Smisek, chairman and chief executive of Continental Airlines when he announced the United merger.

If carriers can achieve financial stability, they will be better able to invest in new equipment and provide better service. Spending power allows airlines to replace worn-out seats, invest in cutting-edge safety equipment and buy fuel-efficient new jetliners.

The larger carriers also have the muscle to negotiate with governments on regulatory issues โ€“ although the industry shows few signs of becoming a top priority for policymakers. In Europe during April’s closure, airlines pressed authorities to reassess their zero-tolerance approach to volcanic ash. But it took the powers-that-be five days to reach a decision.

Calls by European carriers for a unified EU air-traffic network, meanwhile, went largely unheeded until millions of voters were grounded in April. The volcanic cloud overwhelmed Europe’s ability to manage air-traffic. EU officials have now promised to speed up work on knitting their skies together. Still, even at a faster pace, the project will take years to complete. In the U.S., a parallel air-traffic modernization project faces similar political and technological difficulties.

Revenue Source

Although governments will struggle to manage aviation more efficiently, they’re unlikely to stop viewing it as a revenue source. The financial crisis has muted calls for environmental penalties on aviation, but few airline executives doubt they will escape paying more to operate for long.

A return to economic growth could paradoxically come with fresh calls to increase environmental taxes or other fees on flying, particularly in Europe. The UK government, for example, plans to increase the country’s Air Passenger Duty for the second time in two years. Such levies could stifle whatever revival carriers are able to muster.

“The difference in economic impact between the ash-induced shutdown and what the British Treasury or other governments are doing with tax increases is just a matter of degree,” says Craig Jenks, head of Airline/Aircraft Projects, an aviation consulting firm in New York.

Despite the airline industry’s proven track record of destroying shareholder value, it nevertheless draws a steady stream of lenders and investors. That ability to raise funding promises to keep air travel moving despite all the sector’s woes. It even helps hold down ticket prices by sustaining the supply of seats.

Yet access to capital is arguably the industry’s greatest undoing. Easy money helps start-ups to enter the market and keeps struggling carriers from failing, which in turn fuels the sector’s chronic overcapacity.

“There are too many people in this industry who are happy running at breakeven,” says Andrew Herdman, director general of the Association of Asia-Pacific Airlines. “In other industries, that’s just the starting point.”

About the author

Avatar of Linda Hohnholz

Linda Hohnholz

Editor in chief for eTurboNews based in the eTN HQ.

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