J-Class
23rd Nov 2001, 18:31
FYI
Airlines
The unpalatable truth
Nov 24th 2001
From The Economist print edition
The shock of September 11th has forced airlines to face an awkward fact: in some respects, aviation is a declining industry
LAST Thanksgiving a record 2.2m Americans took a flight to spend the holiday with family and friends. This week even the most optimistic airlines were hoping for only 1.8m. Air traffic in October and November is down by about 25% on a year ago in the world's biggest aviation market, thanks to a combination of recession and the attacks on September 11th. International travel from America has been hit even harder: the number of Americans flying across the Atlantic is down by over 30%. Never mind that more people are killed on America's roads every three months than have died in the entire history of commercial aviation. The recent disasters continue to instil terror.
As a result, despite cutting capacity, the big American airlines are still flying with planes barely 60% full—a figure that would be much lower were it not for hefty discounts. Boeing and Airbus, the two manufacturers of large jetliners, are offering airlines finance to pay for their purchases in order to stave off outright cancellations.
America's big airlines, such as American and United, are each bleeding cash at a rate of $10m-15m a day. In the third quarter, they lost a combined $2.6 billion, even after receiving state aid worth over $2 billion. Analysts now expect the American carriers to lose a total of $8 billion-10 billion this year, even after receiving another $2 billion or more of aid. The last time the airlines were in such straits, during the Gulf war and recession in 1990-91, it took them four years to return to profit, even though traffic recovered within a year.
The situation in Europe is no better. Two flag carriers, Swissair and Sabena, have collapsed since the terrorist attacks. Other big carriers, such as British Airways (BA) and KLM, are being driven into loss for this year and 2002. Traffic within Europe fell by over 10% in September and October, while traffic from Europe to America and Asia fell by 35% and 17% respectively.
During previous slumps, airline bosses have consoled themselves by pondering the industry's long-term growth prospects. They cite the steady 5% a year by which air travel grows—a rate that, after a blip, they see stretching out into the future. Who can blame them? After all, air travel has grown in all but one of the past 15 years—the exception being the Gulf war year of 1991.
But the financial reality is not so rosy. Although air travel, measured by number of passenger-kilometres flown, has long risen faster than economic growth, airline revenues have lagged world GDP growth for the past 20 years in real terms. Revenues and profits per seat have been falling because of greater competition springing from deregulation, first in America and then within Europe and across the Atlantic. As Andrew Sentance, chief economist at BA, points out, even before the latest slump only a third of mainstream airlines in Europe, America and Asia earned enough to cover their cost of capital, which is 8% on average. In most industries, such a situation would quickly lead to mergers. But this is not so easy for airlines, hemmed in as they are by national ownership rules and rigid international regulation of routes.
As they strive to become leaner, America's airlines are retreating to their strongholds in the hub airports they dominate, such as Dallas-Fort Worth (American) and Atlanta (Delta). Most airlines have cut at least one “wave” of co-ordinated flights in and out of their hubs. If additional security checks are introduced for transferring passengers before they board their outbound flights, and the handling of such travellers thus slows down, some observers expect the airlines to switch to fewer flights in larger aircraft.
So far, however, the biggest effect has been for airlines to drop non-stop (“point-to-point”) flights rather than those that go through hubs. “We got rid of point-to-point in markets where demand no longer justified non-stop service,” said Don Carty, American's chairman, earlier this month. In other words, the network economics of hubs becomes more attractive for big carriers when times are tough. A study of America's changed airline-route map by Kiehl Hendrickson, an aviation consultancy, commissioned recently by the New York Times, shows that large carriers are cutting non-stop flights to cities where they do not operate hubs by more than they are trimming hub flights.
Austin Reid, chief executive of bmi British Midland, a mid-sized carrier, thinks that the industry's recent woes will also force airlines to get tough with unions and suppliers over restrictive practices that raise their costs. Between them, American and European airlines have already shed about 200,000 staff, on top of which their biggest supplier, Boeing, plans to cut 30,000. Few of these jobs will come back given that big carriers are looking to bring their operating costs down closer to the level of the low-cost carriers, the only airlines making money these days.
Another side-effect of the slump will be a smoother path for the “virtual merger” of BA's and American's transatlantic operations. Both carriers are encouraged by soothing noises from regulators in Europe. Washington insiders expect the Justice Department to approve the deal with some conditions, provided a looser bilateral “open-skies” agreement can be signed between Britain and America. The pressure is on the usually recalcitrant British to open up Heathrow airport to more American carriers before the British cede the power to negotiate open-skies deals to the European Commission, probably next spring.
Even if the American government's swift bail-out prevents airlines such as America West, United and Northwest toppling into bankruptcy, more consolidation is likely over the next year. In Europe, where the failure of Swissair and Sabena has shown that there is room for only a handful of mainstream carriers rather than today's 14, a shake-out is already under way. BA and KLM have revived talks about fusing their European networks. Meanwhile, Britain's low-cost carriers are expanding into continental Europe, as it becomes clear that mainstream airlines such as BA will struggle to make money on intra-European routes: this week Ryanair said it will open an operating base in Germany. As Mr Reid says, the whole face of aviation is changing.
Edited for format.
(c) 2001 The Economist Newspaper Limited
[ 23 November 2001: Message edited by: J-Class ]
Airlines
The unpalatable truth
Nov 24th 2001
From The Economist print edition
The shock of September 11th has forced airlines to face an awkward fact: in some respects, aviation is a declining industry
LAST Thanksgiving a record 2.2m Americans took a flight to spend the holiday with family and friends. This week even the most optimistic airlines were hoping for only 1.8m. Air traffic in October and November is down by about 25% on a year ago in the world's biggest aviation market, thanks to a combination of recession and the attacks on September 11th. International travel from America has been hit even harder: the number of Americans flying across the Atlantic is down by over 30%. Never mind that more people are killed on America's roads every three months than have died in the entire history of commercial aviation. The recent disasters continue to instil terror.
As a result, despite cutting capacity, the big American airlines are still flying with planes barely 60% full—a figure that would be much lower were it not for hefty discounts. Boeing and Airbus, the two manufacturers of large jetliners, are offering airlines finance to pay for their purchases in order to stave off outright cancellations.
America's big airlines, such as American and United, are each bleeding cash at a rate of $10m-15m a day. In the third quarter, they lost a combined $2.6 billion, even after receiving state aid worth over $2 billion. Analysts now expect the American carriers to lose a total of $8 billion-10 billion this year, even after receiving another $2 billion or more of aid. The last time the airlines were in such straits, during the Gulf war and recession in 1990-91, it took them four years to return to profit, even though traffic recovered within a year.
The situation in Europe is no better. Two flag carriers, Swissair and Sabena, have collapsed since the terrorist attacks. Other big carriers, such as British Airways (BA) and KLM, are being driven into loss for this year and 2002. Traffic within Europe fell by over 10% in September and October, while traffic from Europe to America and Asia fell by 35% and 17% respectively.
During previous slumps, airline bosses have consoled themselves by pondering the industry's long-term growth prospects. They cite the steady 5% a year by which air travel grows—a rate that, after a blip, they see stretching out into the future. Who can blame them? After all, air travel has grown in all but one of the past 15 years—the exception being the Gulf war year of 1991.
But the financial reality is not so rosy. Although air travel, measured by number of passenger-kilometres flown, has long risen faster than economic growth, airline revenues have lagged world GDP growth for the past 20 years in real terms. Revenues and profits per seat have been falling because of greater competition springing from deregulation, first in America and then within Europe and across the Atlantic. As Andrew Sentance, chief economist at BA, points out, even before the latest slump only a third of mainstream airlines in Europe, America and Asia earned enough to cover their cost of capital, which is 8% on average. In most industries, such a situation would quickly lead to mergers. But this is not so easy for airlines, hemmed in as they are by national ownership rules and rigid international regulation of routes.
As they strive to become leaner, America's airlines are retreating to their strongholds in the hub airports they dominate, such as Dallas-Fort Worth (American) and Atlanta (Delta). Most airlines have cut at least one “wave” of co-ordinated flights in and out of their hubs. If additional security checks are introduced for transferring passengers before they board their outbound flights, and the handling of such travellers thus slows down, some observers expect the airlines to switch to fewer flights in larger aircraft.
So far, however, the biggest effect has been for airlines to drop non-stop (“point-to-point”) flights rather than those that go through hubs. “We got rid of point-to-point in markets where demand no longer justified non-stop service,” said Don Carty, American's chairman, earlier this month. In other words, the network economics of hubs becomes more attractive for big carriers when times are tough. A study of America's changed airline-route map by Kiehl Hendrickson, an aviation consultancy, commissioned recently by the New York Times, shows that large carriers are cutting non-stop flights to cities where they do not operate hubs by more than they are trimming hub flights.
Austin Reid, chief executive of bmi British Midland, a mid-sized carrier, thinks that the industry's recent woes will also force airlines to get tough with unions and suppliers over restrictive practices that raise their costs. Between them, American and European airlines have already shed about 200,000 staff, on top of which their biggest supplier, Boeing, plans to cut 30,000. Few of these jobs will come back given that big carriers are looking to bring their operating costs down closer to the level of the low-cost carriers, the only airlines making money these days.
Another side-effect of the slump will be a smoother path for the “virtual merger” of BA's and American's transatlantic operations. Both carriers are encouraged by soothing noises from regulators in Europe. Washington insiders expect the Justice Department to approve the deal with some conditions, provided a looser bilateral “open-skies” agreement can be signed between Britain and America. The pressure is on the usually recalcitrant British to open up Heathrow airport to more American carriers before the British cede the power to negotiate open-skies deals to the European Commission, probably next spring.
Even if the American government's swift bail-out prevents airlines such as America West, United and Northwest toppling into bankruptcy, more consolidation is likely over the next year. In Europe, where the failure of Swissair and Sabena has shown that there is room for only a handful of mainstream carriers rather than today's 14, a shake-out is already under way. BA and KLM have revived talks about fusing their European networks. Meanwhile, Britain's low-cost carriers are expanding into continental Europe, as it becomes clear that mainstream airlines such as BA will struggle to make money on intra-European routes: this week Ryanair said it will open an operating base in Germany. As Mr Reid says, the whole face of aviation is changing.
Edited for format.
(c) 2001 The Economist Newspaper Limited
[ 23 November 2001: Message edited by: J-Class ]