My Account Menu

CAPA Login


Register to trial CAPA Membership!

Airline change – or not. Lambs to the slaughter

4-Jun-2008

This is the Perspective from today's edition of Europe Airline Daily - the comprehensive new pre-digested daily update on strategic news from Europe, saving you time and keeping you right up to date. Complimentary subscriptions to this report are currently available. Register now!

The airline business is peopled by some of the more intelligent and market-savvy managers of any industry. They have to be to survive. Airlines are so complex and the competition so intense, while external, uncontrollable influences are so extensive that a merely average leader will fall at the first hurdle.

But, put them together and the collective behaviour of this exceptional leadership group takes on the shape of small woolly animals.

And so a large flock of sheep gathered this week in Istanbul. The annual meeting of IATA repeated many times to each other that the industry was foolish, that its financial margins did not justify investment and that drastic systemic (de)regulatory change has become inevitable.

But this year was different; there was an apparent keenness to encourage and assist that change – although, when push came to shove, few appeared ready to run out onto the field unless someone else first created the mythical level playing field for them.

This apparent enthusiasm for change was caused by the overpowering shock of the last few weeks’ oil price increases. The airline business, already dysfunctional, seems to become generally unsustainable when a barrel of oil costs USD135 (although, in reality, sustainability also depends on what fares the airlines charge, but that’s another story).

Hence the consensus at IATA was that, once the northern summer season was over, everyone would need to start cutting capacity. Not now, because demand is holding up reasonably well and a lot of people have already booked and paid. But later, where it now looks as if demand is starting to slacken and when pushing prices up to compensate will not be possible.

That all sounds pretty reasonable. Although, if things are really as bad as it seems, one could be excused for asking why not do it now? Pre-emptively, before the pain becomes crippling. Competition laws prevent collusive action such as mutual, synchronised action by airlines, but seriously, wouldn’t it be a good idea if one or two were to do it? In the long run, the only way to remedy the airlines’ dysfunctionality is for someone to take the lead.

And, more importantly, there’s another story. Right now, everyone is fired up for change because prudent risk management planning now requires an assumption of fuel above USD100 – and probably a lot higher.

But meanwhile, Tim Clark, CEO of Emirates, who has no intention of cutting back and plans to go on growing capacity at 20% annually as his battalions of A380s are delivered, has a view about fuel prices. He believes that the “normal price” of oil is USD65 to 85, but that external forces are currently inflating it.

So, if he is right and the price of oil actually does halve this year, will the urge for change still fire up the dysfunctional industry’s lust for change?  Perhaps – but you would get very long odds against it.

And that’s a pity, because governments aren’t going to do it. The impetus will only come from the airlines themselves. IATA’s CEO, Giovanni Bisignani knows that and is leading from the front. Sadly, despite a lot of supportive rhetoric, it looks as if the flock is in reality not so keen to follow. And that even their dubious resolve will quickly vapourise if oil prices drop.


Want more analysis like this? CAPA Membership gives you access to all news and analysis on the site, along with access to many areas of our comprehensive databases and toolsets.
Find out more and take a free trial.