The airline sector is in trouble. Losses this year could reach $6.1 billion, more than wiping out the $5.6 billion that airlines made
in 2007. Falling demand and rising costs are re-shaping the industry.
Giovanni BisignaniLife is getting tougher in the air cargo industry and that’s official. Latest figures from the International Air Transport Association show that international freight traffic has shown its first fall since 2005, as environmental concerns, the cost of fuel and the economic downturn all take their toll.
So it is not surprising that the market has seen moves towards further consolidation with British Airways, American Airlines and Iberia seeking approval for a closer alliance.
IATA points out that the 0.8 per cent decline in international freight traffic in June follows several months of falling manufacturing sector confidence indicators.
“The global economic turbulence clearly shows in the 0.8 per cent drop in freight volumes compared to last year,” said Giovanni Bisignani, director general and chief executive officer of IATA. “Although the passenger demand grew by 3.8 per cent, this is the slowest growth that we have seen since the industry was hit by the SARS crisis in 2003. With consumer and business confidence falling and sky-high oil prices, the situation will get a lot worse.”
Asia Pacific airlines led the contraction with a 4.8 per cent year-on-year decline while Latin American airlines recorded the largest fall (12.7 per cent) as the region’s cargo sector continues to re-structure its capacity.
European carriers saw freight demand growth fall to 0.7 per cent in June from 1.4 per cent in May while North American carriers saw freight demand growth slow to 4.0 per cent in June from 4.6 per cent in May and African airlines recorded a 1.9 per cent year-on-year decline in June.
Only the Middle Eastern carriers appeared buoyant with 12.1 per cent growth (up slightly from the 10.7 per cent recorded in May).
Passenger demand growth fell to 3.8 per cent, the lowest level since 2003. Passenger load factors dropped to 77.6 per cent, 1.2 percentage points below the 78.8 per cent recorded for June 2007.
“The airline sector is in trouble. Losses this year could reach $6.1 billion, more than wiping out the $5.6 billion that airlines made in 2007. Falling demand and rising costs are re-shaping the industry,” said Bisignani.
“To survive the crisis, urgent action is needed. Airports and air navigation service providers must come to the table with efficiencies that deliver cost savings. Labour must understand that efficiency is the only path to job security. And governments must stop crazy taxation and give airlines the freedom to merge and consolidate where it makes business sense.”
In the light of these market conditions it is not surprising that British Airways, American Airlines and Iberia have signed a joint business agreement on flights between Europe and North America and plan to expand their global co-operation.
They are currently seeking anti-trust immunity for the arrangement which would enable them to co-operate commercially on flights between the United States, Mexico, Canada, the European Union, Switzerland and Norway and expand their codeshare agreements on flights within and beyond the EU and US.
Oneworld members Finnair and Royal Jordanian are included in the anti-trust immunity application.
The combined route network of the three airlines would cover 443 destinations in 106 countries with more than 6,200 daily departures. The airlines argue that by working together to provide links for connecting passengers, they could support routes that would not be economically viable for the individual airlines.
The deal is fiercely opposed by all the airlines’ rivals – most vociferously by Sir Richard Branson of Virgin Atlantic.
Sir Richard said: “Make no mistake – if this monster monopoly is approved it will be third time unlucky for consumers. It will still be bad for passengers, bad for competition, and bad for the UK and US aviation industry.
“BA argues that the aviation landscape has changed since their last failed application – I disagree, nothing has changed. Open Skies has not delivered the greater competition that was promised because Heathrow is full. BA/AA and Iberia would still be unacceptably dominant, with nearly half of all the slots at Heathrow, leaving competitors powerless to take them on.
“The current economic slowdown is also no justification for agreeing to this alliance. The job of the regulators is to assess the long-term impact of the alliance on competition, not to provide special protection from the immediate challenges of the economic cycle, with which every other airline has to deal.”
However, BA and American argue that far from being dominant players on the north Atlantic, the new grouping would simply provide effective competition to the other two big alliances, Star and Skyteam, which already have anti-trust immunity.
Virgin counters that BA/AA would have nearly 60 per cent of all Heathrow – US frequencies. “BA and AA have over 200,000 slots a year at London Heathrow. Virgin Atlantic has 17,000.”
According to Oneworld’s figures, Star, which includes Continental, United, BMI and Lufthansa, has 27 per cent of US-EU bookings. Skyteam, which includes Delta, Northwest, Air France and Alitalia has 28 per cent. Oneworld says it would have just 21 per cent.
It will take the lawmakers on both sides of the Atlantic some time to come to a conclusion. The European Commission has announced that it is to open an investigation into the proposed alliance. In the US the presidential elections in November mean a decision is unlikely to be made until the middle of next year.
Virgin, it has to be said, is also looking to do a deal. Sir Richard has argued that it would make sense for Virgin to merge with BMI, but this could be problematic given BMI’s relationship with Lufthansa.
For shippers of air cargo, there has been at least some relief from the rapid increases in surcharges over the summer as the price of oil has fallen from historic highs. At the end of August, for example, British Airways World Cargo announced it was cutting its fuel surcharge to 72 pence.
Adam Carson, senior manager revenue management, said: “This is the third fuel surcharge reduction we have made in recent weeks, following corresponding decreases in the cost of fuel.”
Worryingly though, Opec is now cutting production.