Costastic From , joined Dec 1969, posts, RR: Posted (7 years 12 months 3 days 2 hours ago) and read 3265 times:
Record oil prices and a slowing global economy has left airlines in a worse state than after the 9/11 terror attacks, said Brian Pearce, chief economist at IATA. Aviation is facing its biggest crisis in 30 years.
Slz396 From , joined Dec 1969, posts, RR:
Reply 2, posted (7 years 12 months 3 days 2 hours ago) and read 3051 times:
Yes, but contrary to aviation crises in the past, this latest one is not a global one.
Sure, margins at ALL airlines suffer because of the exorbitantly high fuel prices and the wordwide economic slow-down, but it seems that while some have to cut a leg off to survive (UA only today), others can still announce very nice results.
In my view, the high price of oil in itself is not what is killing certain airlines since they basically can charge it on to their pax. Pax numbers may drop as a consequence if ticket prices get too high, especially at those airlines that transport a large number of leisure travelers, but other than that, high fuel prices should not have such devastating effects as we see today.
What is problematic for some airlines is the pace at which the price of oil has increased over the last 2 years: it means that those airlines which weren't all too efficiently run, had too large networks, offered too much frequencies and had ageing fleets flying for them are now facing a though time. Those which planned ahead, invested in efficient planes, had a network that matched the needs and weren't all too obsessed with frequent point-to-point flying are doing much better today.
One can argue the US market is a much more competitive market than any other aviation market (although the EU market is a very good runner up in this regard) and that US airlines don't have the advantage of a strong currency like EU airlines, but it is my feeling that the key differentiator which makes most of Europe's and Asia's airlines relatively successful in relation to their US counterparts, is the fact they use more modern fleets, while being less obsessed with frequencies as well as non-stop services.
A 50% load factor on that 2nd daily point-to-point medium haul flight, or on that daily non-stop long haul flight with a 15 year old plane may have been good enough to live from 3 years ago, but it looks like it isn't today. Either you fill your flight up with people almost entirely, or you re-route them through your hubs, yet in either case you serve the flight with the most efficient planes you can find... the alternative is to cut, shrink, cut, shrink, cut... till nothing is left.
Looking at it from a different perspective (not oil/poor management):
You are correct in that it is an isolated problem. And part of the problem, in my opinion is the ease in which new companies and airlines can infiltrate the business. While you could argue that this is true in almost every other nation, capitalism and free enterprise, legacy’s lack of protection (at least initially) from new competition certainly makes it very easy to start an airline in the US. I read a very interesting OP/ED in the Wall Street Journal, that while not perfect (written by a pilot addressing the issues with mergers), he does make a few very good points. Such as:
· Any capacity reductions will only be temporary: “Any reduction by legacy airlines will simply be filled by enthusiastic new entrepreneurs and new airlines who will buy airplanes on the cheap and backfill the markets pulled down. The airline business has always been a romanticized, ego-attractive venture for new entrants. Everyone wants to try their hand at this business, which has not made a cumulative profit since the Wright Brothers first invented the airplane. This is why we have had people like Howard Hughes, Richard Branson, Warren Buffet, Carl Icahn, Marvin Davis and the like venture into and out of the airline business. It is a business very attractive to big egos.”
· Inventory management: “My belief is that there should always be one empty seat on every flight.…Seats sold beyond your inventory cost you three ways; first you charged too little for the inventory; and second, you now have to pay your customers to use alternative transportation with free tickets, upgrades, overnight hotels, etc. The third way this increases your costs is that it disenfranchises your customer and destroys his or her brand loyalty and it reduces your product to a commodity. When I regularly see flights oversold by 30+ customers I wonder what the reaction would be in other businesses selling seats! Would you tolerate a long planned evening at the theater to see a favorite show only to be told when you arrived that your seat was also sold to three other people and that you may not attend the show?” (Okay perhaps the frustration of the difficulties of non-reving is evident here, but it is an interesting point none the less)
· Capacity reduction is a bugaboo: “When industry pundits assert that there is too much capacity in the airline market and that consolidation is the appropriate response, I wonder how often you have flown on empty airplanes lately?…(Not a perfect argument for all cases, as there are routes that consistently go out with terrible loads or full loads subsidised by frequent flyer programs or sold out coach—another problem in itself, but still valid for many of the domestic markets today)
If I understand deregulation (which was before my time), US airlines have not enjoyed the protection that many other legacy/flag carriers around the world have enjoyed. And while many traditional “flag carriers”, like AF or BA, for example are now privatised, they certainly enjoyed protection from competition while government had stakes in them (how many airlines are in France/Germany/Spain today?)
Geography also seems to play a big role in this. The US is a large and populated country. It would be foolish to say that government protection that other international carriers have traditionally enjoyed is the only difference. Even countries similar in size to the US, such as Australia and China (which exceeds the US in population) don’t have the vast network of large/midsized cities throughout them. Both China and Australia’s populations are concentrated to a handful of city centres. Both countries have populated and advanced coastal populations while the interior remains largely uninhabited and/or populated by rural agrarian oriented villages with little contact to the rest of the nation. To my knowledge, the US is only country that has a populated/market oriented interior in addition to populated coasts, which brings my argument back to the problem of capacity reduction backfills (in the article).
Ikramerica From United States of America, joined May 2005, 22176 posts, RR: 59
Reply 5, posted (7 years 12 months 2 days 20 hours ago) and read 2640 times:
Quote: "This could signal the end of the surge in dollar-based commodities which have attracted buyers who see it as a hedge against inflation," Robert Laughlin with MF Global said in a research note.
Let's hope so.
Dollar strengthening, oil demand by SUBSIDIZED companies shrinking (subsidies and price fixing distort markets), even leading into the high demand season.
As soon as it's not seen as a hedge, profit takers will bail. Freefall is possible, as there's no fundamental reason the price is as high as it is, and there is very little underlying value to the product as history has shown.
Oh, and it's been rumored that George Soros is now selling oil short…
Of all the things to worry about... the Wookie has no pants.
Slz396 From , joined Dec 1969, posts, RR:
Reply 6, posted (7 years 12 months 2 days 13 hours ago) and read 2518 times:
Quoting UA772IAD (Reply 3): You are correct in that it is an isolated problem.
The problem seems to be widespread in the USA though.
Since I can't just accept US airlines are willingly more 'messy' than others, there must be structural reasons for their inability to adapt to the changed economical environment in a way that LH, AF, IB, SQ, QF etc have all successfully done.
Quoting UA772IAD (Reply 3):
Part of the problem, in my opinion is the ease in which new companies and airlines can infiltrate the business. While you could argue that this is true in almost every other nation, capitalism and free enterprise as well as the legacy's lack of protection (at least initially) from new competition certainly makes it very easy to start an airline in the US.
That's a very fair point indeed!
The US deregulation has opened the US domestic aviation market in a way which will destroy it in the long term. While it can be argued deregulation has brought prices down, it also created a continuous basis for structural overcapacity and thus chronically un-profitability of the domestic network. In the long run this is not sustainable and it must lead to reconsolidation at some point, after which the game of growing the capacity can start all over again... or you could (party) regulate the market again, to avoid from going through this cycle every 10 years.
Quoting UA772IAD (Reply 3):
Any capacity reductions will only be temporary: "Any reduction by legacy airlines will simply be filled by enthusiastic new entrepreneurs and new airlines who will buy airplanes on the cheap and backfill the markets pulled down.
Even if the 10th LCC goes bust, you can bet your life over it that somewhere else, somebody will come up with what he thinks is a revolutionary new concept, which is in essence just the 11th LCC and starts competing full scale with the legacies once more. The number of start-up competitors is simply inexhaustible so it seems and the funny thing is, although most of them don't make it, their continuous presence on the market sustains the overall un-profitability for those who manage to hold on.
You could argue that this should be of no worry to the consumer since he's benefiting from low prices and an ample choice of airlines thanks to deregulation, but it will turn into a sudden worry for him if all most airlines allover the country throw their towel in the ring because they simply can't stand the heath any longer. Such a massive and collective implosion of the system is not purely theoretical: it can happen when the basic pillars are pulled from under the system: 9/11 almost brought the implosion along because pax numbers dropped dramatically and it seems like the surge of fuel prices is able to cause the same. It is another reason to regulate the domestic market again.
Another element which is contributing to the fact that US airlines are in a far worse state than most other large airlines around the globe is in their relatively small intercontinental networks. In the EU we've also opened up our domestic market to competition and in many ways we've seen the same evolution as in the USA, although here the number of start-up LCC has been relatively modest compared to the USA (probably because important lessons were learned), but what most legacies have done to protect themselves is to focus on the part of the market which is still regulated: that of the long haul flights. They've even made it their focus point, competing amongst each other on the intra-European open market. And they've even turned themselves into global network carriers, bringing pax from Asia to the USA or from Africa to Asia for instance. US airlines have traditionally been too focused on their domestic market and on linking the US to the neighbouring countries (even if they are on the other side of the Atlantic/pacific Ocean). How many US airlines fly to Eastern Europe? How many go to East/South Africa? How many go to Central Asia or India? It seems they've only just recently discovered those places on the map, although there are billions of people living there! And if they go there, they do it predominantly for point-to-point pax, as US airlines don't seem to bother turning themselves into global network carriers. Nobody seems to be going from central America to Eastern Europe with US airlines, they all do it on European airlines. It really is a mentality problem within US airlines, or in fact even in US society, because whereas other countries see this kind of transfer traffic as an opportunity, the USA sees it as a risk and imposes visa on transit pax....