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The fuel crisis sparks change. But "everyone is watching" progress towards US-EU open skies: Qantas

23-Jul-2008

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In a wide-ranging assessment of the future of the global aviation industry, Qantas CEO, Geoff Dixon, yesterday stated the fuel price “emergency” may be the catalyst for an accelerated push towards industry globalisation. In his paper, Mr Dixon suggested the fuel price issue would lead the world’s airlines to slash 100,000 jobs this year.

But the industry veteran stressed that regulatory reform could create a “new world order” characterised by (1) a few, very large global airlines with a portfolio of interests, (2) niche airlines with specialist offerings and (3) powerful, government-backed airlines, particularly from the oil rich states. The abrupt challenge of oil prices will focus government thinking towards changes Mr Dixon believes will unfold over the next five to 20 years.

The Qantas CEO’s guarded optimism on regulatory reform is grounded in the first phase of the EU-US open skies agreement that came into force in Mar-08. He said the second stage negotiations regarding investment liberalisation is the issue “everyone is watching” and noted there are signs that the US “may be at last be prepared to accept airlines from Europe - and potentially other countries - based on their "principal place of business" rather than their ownership”.

Mr Dixon’s assessment that this would be a “groundbreaking development” is an understatement. It would be a seismic, earth-shattering event that forever transforms aviation. Will it happen quickly? Perhaps only if the current crisis is maintained is the theme of Mr Dixon’s message.

His view on the end result is instructive:

“Over time, consolidation will transform aviation. It will produce a few, very large and extremely efficient global airlines with a portfolio of interests and brands - like Air France and KLM. These players will have enormous power in marketing, in fuel buying and hedging, in aircraft purchasing, and in reach. There will still be niche airlines with specialist offerings - whether for business or leisure travellers - but these will need to be run very skilfully, and any weakness will lead to a quick death. And there will also remain those powerful, government-backed airlines, particularly from the oil rich states. These governments will continue to use aviation services as instruments of national economic development”.

All full service airlines will segment their businesses and focus on core activities, he maintains, as "no airline will be able to prop up its inefficient catering company, or freight business, or engineering function. Competition will be too tough, and the alternatives will be too attractive”.

Global alliances are also to be an integral part of the future aviation landscape. Mr Dixon stated that globally competitive networks will be as important to success as a competitive product for full service airlines, noting that Qantas had engaged in a form of “virtual consolidation” today offering 125 routes by partner airlines – 55% more than five years ago.

But the foundation of Mr Dixon’s new world order vision is strong, global aviation brands. He said the Qantas two-brand strategy had given the Group the flexibility to meet the needs of a wide range of customers while better aligning costs, revenues and product offerings in individual markets. As a result, wholly owned LCC subsidiary, Jetstar, was poised to become a pan-Asian brand, in a market he described as a “huge opportunity”.

Meanwhile, the competitive outlook among premium airlines is only going to get “fiercer” he believes, and the cycles of innovation will turn more rapidly.

By 2020, “many more” airlines will disappear, either unable to cope with “permanently” higher fuel costs, or be swallowed up in takeovers or mergers. Said Mr Dixon, “the industry structure will be on a global scale, and focused on maximum cost constraint and efficiency”.

But overall, fuel that will be the major determinant of the size of the industry in the meantime.


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