The airline industry is a massively different beast to what it was 10 years ago. Just count the changes: the rise (and rise) of budget airlines; the hugely increased threat of terrorism; surging fuel prices; the pressure from environmentalists for less CO2, not to mention fewer flights and airline/airport expansion. A stunningly different landscape and environment.
For this industry profile we’ve attempted to get to grips with some of the more profound changes of the last decade. We’ve focused on the rise of the budget airlines, how environmental factors are changing (and challenging) the aviation business, as well as what kind of changes we’re likely to see in the next 10 years. A smorgasbord of analysis, facts and figures and future-gazing. The established facts can’t be argued with; what’s more problematic is trend-forecasting (we’ve done our best).
Two airlines kick-started the European aviation turn-around as far back as the 1990s, Michael O’Leary’s Ryanair and Stelios Haji-Ioannou’s Easyjet. They weren’t the first. The budget flight revolution has its roots in the early seventies when US-based Southwest Airlines pioneered the concept. But Ryanair and Easyjet took the concept to Europe – and changed Europe’s airline industry forever.
First though, let’s examine how a virtually unknown Greek twenty-something pulled off his own idea of how to do it.
The Stelios factor
As the son of a Greek shipping tycoon, brawny Stelios Haji-Ioannou could have bided his time waiting for his father to die. But instead he created one of Europe’s cheapest airlines, going on to spark a host of imitators. The boss of Easyjet was blessed with the usual accoutrements of a French Riviera playboy, but this Greek-Cypriot was different. At the time just 28 in 1995, Haji-Ioannou launched his British based low-cost airline offering cut price airline tickets up to 80 percent cheaper than the competition. He stunned most of the competition.
Ventures into retailing followed. Haji-Ioannou extended his concept of low-cost consumerism to the world wide web, offering 24-hour cheap internet access from central London cyber cafes. The Greek businessman then took his no-frills formula to Europe’s £5,000 million car rental industry where he gave established players like Avis and Europcar – the two market leaders – a spirited run for their cash. But it’s his efforts in the budget airline industry that he will be most remembered for.
He’s certainly made money. It’s estimated he’s worth more than £1bn.
But how does Easyjet look today? Certainly there’s now been a steady trickle of senior management resignations. The most recent was CEO Andy Harrison after he fell out over strategy direction with Haji-Ioannou. Harrison is in fact the fifth member of Easyjet’s management team to resign in the last year, following a well worn path including chairman Sir Colin Chandler and financial officer Jeff Carr. Why the growing rift with management and its founder? Part of the reason is concern about expansion. Haji-Ioannou is concerned about the sheer cost of his airline fleet
growing from 165 to 207 by 2012.
In fact, Haji-Ioannou was so concerned that last year he refused to approve Easyjet’s annual accounts. All directors have been, it is thought, strong characters and such ructions has taken the shine off Easyjet’s plucky, happy-go-lucky image. However, the harsh reality for Haji-Ioannou is that he and his family are now minority shareholders in what is still thought of, loosely, as a family business. Haji-Ioannou though, some suggest, still thinks himself as chief pilot. Given his hemorrhaging board rate in the last 12 months, many investors will feel a little nervous – more turbulence looks likely.
But what Haji-Ioannou has done – not to mention Ryanair’s Michael O’Leary – is spearhead massive change in an industry that was crying out for dynamism and risk-taking. Low cost airlines have now become the mainstream way to fly across Europe. It’s a huge achievement. But it also means it’s increasingly tough to find new passengers and profits. And imitators keep replicating their model. Even Abu Dhabi investors are now considering a foothold into this now-ferociously competitive segment.
Can Slasher Walsh save BA?
If there’s one airline which epitomises the struggle between go-getting budget airlines and staider traditional national carriers of previous decades, it’s British Airways. Before European CEO went to press BA was in the throes of arranging a last-minute meeting to attempt a settlement on staff pay and conditions. Pay and conditions is the crux of BA’s problems currently and it’s CEO’s Willie Walsh’s biggest challenge.
Much younger budget airlines are competitive because their pension and staff pay liabilities are so much lower. In a short-haul environment where the budget airlines dominate, this is one expense issue Walsh – a forthright, mouthy Irishman charged with reining in union militancy and putting BA on a path to long term profitability – has to get to grips with. Trouble is, he has to convince around 14,000 cabin staff he’s right. He’s been to court – and won – to prevent pilots and cabin crew from striking. Staff have reason to be fearful as jobs are on the line. But the recent staff BA walk-out at Christmas greatly angered and inconvenienced the UK public; their support for striking staff members appears – not surprising perhaps – increasingly ambivalent.
Still the ‘World’s Favourite Airline’? That’s rather more doubtful now. And the fundamental economics for BA is still skewed: there’s more cash going out than there’s coming in. Its pension liabilities, present and future, are colossal. It also has a fleet of 55 ageing 747s it desperately needs to replace. The world does not, unfortunately, owe this once illustrious flag carrier a living. So more pain to come for Walsh. Meanwhile, how about teaming up with a low-cost carrier like Ryanair? Such thoughts wouldn’t have crossed Walsh’s mind a year ago. But now?
Airliners versus the environment – round one
It’s not quite all-out war between the two camps in the last decade – but you could be forgiven for thinking otherwise. Recently UK airline bosses committed themselves to halving their CO2 levels by 50 percent by 2050. The announcement was made following pressure from environmentalists anxious that the aviation industry – and consumers – were ignoring global warming. Step forward BA boss Willie Walsh; he helped mastermind the initiative which should see aircraft companies, airports and airlines all slash emissions in the coming decades.
However, critics of the plan say the moves aren’t sufficient. Especially as much of the changes rely on offsetting. The environmental impact will also change further if airlines expand (witness the increasing popularity of budget airlines). More efficient flying would certainly help the environment. Better integrated air traffic control systems are being planned. These would help put an end to the endless zig-zagging planes have to fly in order to accommodate national air traffic control systems and boundaries. For airlines that there’s a potential win-win situation with the battle to cut emissions. If they can snip these they can also cut fuel costs.
Yet airliners need to make a profit meantime. Currently operators like BA are investing in new luxury business class services such as Face to Face, a move to try and persuade people that business deals are more successful and more likely if done one-on-one. It will make sense, of course, for some. But technology has also improved hugely over the years and alternative conferencing facilities offer a convincing alternative to expensive, long and short-haul business meetings. But that’s not what BA will tell you, of course.
Certainly the recession has also knocked confidence; airline profitability is closely linked to business confidence. On balance, though, the environment is far higher up the agenda than it was a decade ago. That has to be a thumping win for the environment – despite the present rate of unacceptable emissions.
2000 – 2010 – A safer decade?
Has safety improved in the last decade? No is the honest answer. Safety standards have evened out however. Aviation safety continuously improved up until about 2003, according to David Learmount at Flight International. However, since that time, improving the safety record of aviation players has been more of a struggle he thinks. Statistics for the year just ended are likely to confirm that global airline safety has stopped improving Learmount thinks – and there is no reason to believe that 2010 will be any better.
“Since 2003,” he wrote recently, “the number of fatal airline accidents has levelled out so, if 2009 figures show the same, this is beginning to look like an established trend. Meanwhile, the fact that the industry is not ready to make any fundamental changes in the way in which it manages safety performance would reinforce a prediction that things will not get any better.”
Accidents in 2009, as in the previous decade, demonstrate that pilot failure to manage difficult, challenging situations in the air has allowed many serious accidents to occur says this industry analyst. “This can only be corrected by improved training but, especially with financial results as bad as the industry is showing now, no increased investment in training is going to happen at the moment.”
2010 and beyond – climbing costs will bring consolidation
The airline industry has struggled for years to shed losses. Part of the problem, as already pointed out, is age-old legacy structures. The growth of young airlines like Ryanair was made possible because they started with no hinterland, no existing structures that would suck cash out of the company. Like pensions or hefty staff wage bills; operators like Ryanair and Easyjet was able to start from scratch.
But what of the next year and beyond? The International Air Transportation Association (IATA) now predicts global airlines could lose $5.5bn in 2010 – a figure far bigger than originally predicted – thanks to rising fuel costs. However, it’s not all bad news. Air freight business is on the rise according to IATA with cargo demand “rising faster than world trade as depleted inventories are rebuilt.”
But it is fuel costs that threaten to undermine much airline profitability. Reuters has reported that crude oil prices are expected to reach an average $75 per barrel in 2010 compared with $61.80 in 2009. “North American airlines would see their losses shrink to $2bn, with Latin American carriers the only profitable regional grouping, it [IATA] found.” The upshot? Smaller, more fragile airlines will increasingly come under pressure. Access to credit has also hardened in the last year. So expect continued consolidation while more companies tighten their belts.