World's airlines in fight for survival

BY ROELAND VAN DEN BERGH

Faced with their biggest crisis in history, airlines from throughout the world gathered in Kuala Lumpur to take stock and swap survival strategies.

"Numbers can tell powerful stories," International Air Transport Association director-general Giovanni Bisignani told his audience of 500 airline representatives at their annual summit.

Airlines are expected to collectively lose US$9 billion (NZ$14b) this year as falling demand, lower yields, broken consumer confidence and the swine flu pandemic threaten to wipe out US$80b in revenue.

Those losses will come on top of last year's US$10.4b deficit thanks to the double hit from record high fuel prices and the collapse of the world economy.

"The ground shifted and our industry was shaken," Mr Bisignani says.

Airlines are in survival mode and in desperate need of help to see them through the crisis and allow them to emerge with a business model that delivers a financially sustainable future.

All important corporate travel budgets are being slashed and video conferencing is now a strong competitor for airlines, Mr Bisignani told the summit.

Mr Bisignani wants the summit to be remembered for its members passing a resolution to be carbon growth neutral by 2020.

In reality, it will remembered for the year that the previously constant, and ignored, calls for liberalisation and an end to profiteering by airports and air traffic control providers turned into cries of anguish.

"Today's situation is unprecedented, the most difficult ever. Governments and partners must understand that we are struggling to survive with a new and harsh reality," Mr Bisignani says.

The assumptions of the past are no longer valid and change is critical. "The failure to act by governments would be irresponsible."

The global economic recession and record fuel prices have claimed about 50 airlines in the past 18 months.

But despite the risk of wider spread failures British Airways asked its staff this week to work for free for a month to help stave off possible bankruptcy airlines are not looking to join the queue for government bailouts.

Instead, they want governments to ease the restrictive international bilateral agreements that govern where airlines can fly and make most cross-border mergers impossible.

Consolidation through mergers is crucial even if it results in widespread airline failures in the short term.

"It is a different world. Our future depends on drastic resizing and reshaping by governments, partners and airlines," Mr Bisignani says.

Progressive liberalisation of key routes would help stimulate the economy by creating 24 million much-needed jobs and US$490b in economic activity, he says.

But no-one is holding their breath for a quick response.

Those who can afford it say the ability to adapt quickly to the changing environment and invest in new planes and the latest cabin features are the best survival strategies.

Qantas chief executive Alan Joyce says airlines need to have "the strength, the flexibility, the aggression and the decisiveness in order to cope with a wide range of scenarios".

His airline is relying heavily on budget arm Jetstar, which has added flexibility, to cope with the downturn by swapping capacity between the two brands.

Although Qantas is suffering as a full-service airline, Jetstar is having a record year and will deliver the group's international growth next year by adding 30 per cent capacity to offset a 20 percent reduction that Qantas will fly.

Air New Zealand chief executive Rob Fyfe says Air New Zealand's small size has allowed it to respond faster than its much bigger competitors.

It is also critical to keep investing in new aircraft, cabins and airport facilities, Mr Fyfe says. "Our view is that if there are not enough passengers to go around then we need to make sure we are giving them the reasons to be on our aircraft rather than on competitors'.

"So at a time when the industry is under pressure, our strategy is to invest more in our business and not less."

Air New Zealand has also built its strongest cash position in two decades.

"That is what has allowed us to remain profitable through this cycle and our projections at the moment are that we will continue to be profitable."

However, often lengthy employment contract negotiations involving 47 union agreements have been one of the biggest impediments to the airline's agility, Mr Fyfe says.

But while the airlines struggle for survival, those who live off their custom continue to make record profits.

Air traffic control authorities and airports have increased their charges by a total of US$1.5 billion in the past six months. "This is simply unacceptable," Mr Bisignani says.

In some cases, taxes collected from airlines under the guise of protecting the environment have instead been funnelled to bail out British banks, he says.

Compounding the capacity woes are the 4000 aircraft ordered during the good times, partly to provide growth, and due to be delivered over the next three years.

Airlines will struggle to fill those extra seats profitably.

Mr Fyfe says airlines are the cows to be milked by everyone else in the value chain, but there is no value left in the cow.

"We are in a situation now where demand is down and there is surplus capacity. That means our load factors are down and our yields are down."

Yet, the big plane makers are beginning to receive government subsidies to allow them to continue production by offering finance to airlines who would otherwise not have been able to afford their planes.

That will feed more aircraft into a system that is already oversupplied," he says.

"It is like a drug user that you are trying to put into rehab and you just keep feeding the drug in through the intravenous system.

"Until such market interference is removed and a system with the right commercial pressures introduced, we will not make progress."

All eyes are on freight volumes for an early sign that the industry is emerging from the nightmare.

Air freight accounts for about 35 percent of international trade by value. Volumes collapsed in the second half of last year and remain about 21 percent below their previous-year levels.

If that picks up to be about 15 per cent down, it will provide a clear signal that the economy is improving, Mr Bisignani says.

But he sees no signs to support the optimists' view, pointing to "green shoots" of economic recovery by the end of this year.

Airline revenues fell 7 percent after the September 11, 2001, terrorist attacks, but recovered within three years, fuelled by strong economies, Mr Bisignani said.

By comparison, this time airlines face a 15 per cent drop in revenue and a global recession.

Malaysia Airlines managing director Dato' Sri Idris Jala believes China will provide an early sign of a recovery as the "world's factory".

"When China starts to produce more and more goods, we will begin to see an upturn."

Qantas' Mr Joyce says signs are already beginning to emerge.

Freight volumes between China and the United States are building, suggesting the export market is starting to recover.

"There is a lot of discounting going on, but at least the volumes are starting to show some growth."

Cathay Pacific chief executive Tony Tyler says even when the recovery arrives it will be off an extremely low base. "It will be some time before we are back to where we were."

DISEASE ALERT

Airlines are blaming the World Health Organisation's pandemic assessment scale for causing unnecessary alarm among travellers. The industry wants the WHO to add a second assessment scale which indicates the severity of the disease alongside the existing scale that measures the spread of a disease. Malaysia Airlines managing director Dato' Sri Idris Jala said the one-dimensional rating system had created a degree of panic among travellers. "There are signs of people cancelling their flights because they are beginning to panic", even though no government has imposed travel bans, Mr Jala said. "The reality is that this virus, as it moved out from the epicentre from where it started in Mexico, the virus has become less virulent."

Roeland van den Bergh travelled to Kuala Lumpur courtesy of IATA.

- © Fairfax NZ News