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Aviation Industry

Aviation is ‘not such a good business’

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Yusof Sulaiman  Apr 30, 2008

KUALA LUMPUR, Malaysia (eTN) - The Airline Distribution 2008 Conference went on as scheduled last week despite no-show speakers. Held here in the Malaysian capital, the event was hosted by the Universal Air Travel Plan (UATP).

Come 200 delegates that included representatives from legacy and low-cost carriers somberly analyzed and discussed the airline industry's future in a highly competitive environment. "You can get better returns from depositing your money in a bank when airline stocks are selling per share for the price of a Sunday newspaper," noted one speaker.

"Aviation is not such a good business," lamented Waldmar Krolikowski, CEO of Poland's Centralwings. According to him, it has “become more difficult to establish low-cost carriers or secure additional financing. It's not easy to convince the banks that aviation or carrying passengers is a good business."

However, according to Airline Business, 28 low-cost carriers were launched in the Asia Pacific region, compared to 18 in Europe, 11 in the Americas, 5 in Africa and 3 in the Middle East in the last four years. "Low-cost carriers are spreading like wildfire."

Driven by the economic boom in emerging markets, low-cost carriers or "emerging carriers" have been mushrooming despite seven carriers going out of business this year so far.

Eos Airlines, which offers business class flights between New York and London, is the latest carrier to claim that record fuel prices and worsening economic conditions is forcing it to stop operations. It joins Adam Air in Indonesia and Oasis in Hong Kong, Aloha Airlines, Frontier Airlines, Champion Air, ATA Airlines and Skybus Airlines, all
of which have stopped flying.

Despite transporting more than 550 million passengers in 2007, an increase of 24 percent compared to 2006 figures, low-cost carriers have failed to turn the traffic increases into profit gains, according to Airline Business. "While the top 15 continues to turn healthy profits, the rest are struggling to post sustainable margins."

The recent spate of bankruptcies and merger talks suggest that the industry is likely to see airlines pushed into "shotgun mergers" of even legacy US carriers, including American, Continental, United, Delta, Southwest Airlines and US Air, according to industry observers. "When oil is selling above US$110 a barrel, the business is not cost effective anymore."

The looming global economic downturn, however, does not seem to faze low-cost carrier operators in the developing markets. "There will be more carnage in the mature markets because they are more opportunities in the emerging markets," predicts Joseph Schottiand from Seabury Group.

Tony Davis from Singapore-based low-cost carrier Tiger Airways sees a silver lining in the economic downturn because passengers or consumers will "downturn" during a recession. "Generally, well-run efficient low-cost carriers weather these storms better than full service carriers. If the US sneezes, Asia won't catch a cold."

As airlines chase for profitability after securing market share, management teams are focusing on revenue and yields, and turning off cheapest fare gimmicks."Our focus is to get to profitability soonest," said Air Deccan CEO Ramki Sundram which has become the world's most "unprofitable" low-cost carrier, losing nearly $300 million in the last two years.

Added Patee Sarasin, CEO of Nok Air from Thailand, which has seen competition from One-Two-Go and Thai AirAsia since 2004 in a "relatively small" domestic market, "Not many people are making money to be honest. The load factor is great, but fuel price has gone up to a point where the market is not prepared."

Carriers are putting more emphasis on getting rid of older, fuel-hungry planes in favor of more fuel-efficient models, like the Airbus A320s now favored by AirAsia. "We have put a brake on expansion and will not expand our fleet this year," said Tony Fernandes, founder and Group CEO.

Other than the traditional profit from "aircraft turnover and trading" of its fleet, including sale-and- leaseback, airline managements are now looking at "unbundling" its services as a revenue source.

Airlines around the globe are now focusing efforts at ancillary services from charging for "extras" to selling managed travel or holiday packages, corporate travel programs as the "new model" to maximize potential and profits.

According to Fernandes, while Thai AirAsia ended 2007 "slightly in the red," parent AirAsia and Indonesia AirAsia "roughly" break even.

Aviation is ‘not such a good business’

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