Aviation's secondary infection Apr 28
by Stephen Bartholomeusz
Aviation's secondary infection
Alan Joyce and Brett Godfrey are being given a refresher course, as if they needed one, in the reality of the airline industry. Murphy’s Law always applies.
In an industry already reeling and under acute pressure from the impacts of the global financial crisis and recession, the last thing the Qantas and Virgin Blue chief executives would have wanted to learn of was the outbreak of what could develop into pandemic influenza.
More particularly, with both carriers now bleeding from the sudden escalation in competition on what was once one of the most profitable of Qantas’ international routes, neither could afford fresh threats to traffic emanating from the Americas.
The two Australian carriers – Virgin through its fledgling V Australia brand – are embroiled in a four-way dog-fight with United Airlines and Delta Airlines on the transpacific route to the west coast of the US that once generated an estimated 15 per cent of the Qantas group’s profits.
The entry of V Australia and Delta to that route coincided with the steep downturn in passenger volumes and yields caused by the global crisis. Joyce recently conceded that Qantas would lose money on the route amidst deep discounting while Godfrey has said that he expects to lose more than V Australia’s start-up costs of $60 million in its first year of operation.
Delta, the world’s largest carrier, last week described its entry to the route and plans to increase capacity as a ‘disaster’ for Qantas. It alone will increase capacity on the route by 25 per cent. Fares are estimated to have fallen nearly 60 per cent in the past six months, with premium high-margin traffic – a segment dominated by Qantas – particularly hard hit.
Add the swine flu epidemic to the existing deteriorating economics of the route and it will be a disaster for all the carriers, not just Qantas. V Australia has already rescheduled planned deliveries of new aircraft in response to the altered circumstances on the route. The US carriers will be even harder hit, given the impact on their domestic networks and their Latin America traffic.
It is too early to draw any meaningful comparisons with the SARS (severe acute respiratory syndrome) outbreak in 2003, which devastated airline traffic, particularly in Asia, in 2003.
That crisis knocked more than one per cent off the GDP of Asian countries and at its worst reduced passenger volumes in the region by more than a third. It also produced Qantas’ first loss as a listed company, albeit only for a half year.
The SARS outbreak came just as airlines were recovering from the impact of September 11. This time the global financial crisis had driven passenger volumes down for the first time since 2003 and they were still falling.
If concerns about air travel continue to grow, the new threat could add to the existing severe pressures on the sector and force a broader and deeper restructuring of a flawed industry than might otherwise have been the case.
On the transpacific route, it might bring some rationality and a realisation that in the current global economic climate a four-cornered contest characterised by deep discounting and unsustainable load factors is suicidal. At least one and more likely two of the airlines will be forced from that route if the losses continue to mount.