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When IATA’s airline leaders meet for their annual aviation summit in Istanbul next week, they will have a lot on their minds. Profits will not be foremost.
Instead, the words on many lips will be the B,M,C (and E) words: Bankruptcy, Mergers, Cutbacks – and the looming giant, the Environment. 2008 is shaping to be the beginning of the new aviation world.
Rarely has the outlook for the world’s economy and the airlines themselves looked so suddenly grim – and this, a mere matter of months since the airlines appeared to be firmly in one of the sweetest spots of all time.
Fuel is the immediate cost threat which is prompting action, as share markets punish the industry outriders. But the key underlying issue is in fact slowing demand, as ripples spread from the US economy and consumers keep their hands in their pockets.
This ill wind is not evenly distributed yet. Asia Pacific and Middle East international markets are still making relatively strong showings, with the US deepest in the doldrums and Western Europe already feeling the cold blast. Clearly though, it is spreading.
Times have changed however. While just a few years ago, many airlines would have looked for refuge in protection and artificially reduced competition, in today’s more liberal/deregulated market, the pressures will actually accelerate calls for regulatory change, to allow rationalisation (read mergers), so that airlines can become financially sustainable companies.
As well as merger, rationalisation also means market exit. For much of the 20th century, it was joked that it was harder for an airline to exit the market than to enter it. This is changing, even if there are still walking dead in the US and in Europe. Use of Chapter 11 bankruptcy provisions in the US has helped perpetuate a marketplace that is fundamentally flawed and, despite the EU’s aggressive stance on government support for airlines, one or two well-known ghosts still walk on that side of the Atlantic.
Now, instead of propping up unwieldy operations, the message is: time to move on, establish a new system where airlines can – and must – behave like other businesses. That means changing airline ownership rules and, even more difficult, old attitudes. Markets generally need to be opened up to competition.
In the meantime, there will be capacity cutbacks. Shareholder responses to some of the already-announced cutbacks are evidence that the market likes the thought of airlines reducing losses in this way. But they need to be strategic, removing service from marginal routes, where long term prospects were not good in any event; they need to remove old equipment – easier to do where the aircraft values are already written off and better for the environment that they stop flying (in some cases too, in ways that will in due course contribute to formal reduction requirements for emissions).
Then, amid all of this turmoil, the dark cloud of climate change hangs over the industry. The immediate responsibility and the commercial challenge to the airline industry that now arises is going to be massively costly, in areas like carbon offsets and emission reductions, in researching new technology and, sadly and perhaps most expensively, in responding to the cacophony of conflicting government positions.
But the industry is populated by some resilient and highly innovative leaders. They are aware that with this time of adversity comes a unique opportunity. Massive forces of change are needed to provoke system-wide regeneration and a new environment.
Like it or not, those forces are building. And the unique opportunity they represent has the potential to support a quantum leap to the next generation of airline commerce.