Which participants in the aviation system are likely to prosper from changing relationships in the industry? By Chris Tarry
At the recent Airline Business World Air Forum, we addressed the possibility of better business outcomes, which inevitably raised the question, "better for which participants in the aviation system"?
Our starting premise was that airlines are the necessary element in the system that enable most, if not all, others to make money. If this is the case, why should there be any pressure on the others to change? But the near and medium-term operating environment may result in relationship changes in certain parts of the world.
For manufacturers, the best outcome is to ensure programmes become cash positive as quickly as possible and, once they have, to sustain the production rates at the most cash-generative rate.
RESIDUAL VALUES
However, there are changes ahead with the launch of the Airbus A320neo and Boeing 737 Max narrowbodies resetting a number of parameters, including the cost to produce the new aircraft compared with existing models and the residual values of these models (which plays an important role in financing decisions).
While there was an order fest at Le Bourget, Airbus is suggesting it is prepared to step up its levels of customer financing and there are also plenty of stories about falling lease rates for existing lessors and for new aircraft. It is one thing to place an order, quite another to finance it. Traditional aircraft finance is not only becoming scarcer but perhaps, as a result, more expensive. This is even before alternative sources such as bonds, likely to be more expensive still, are considered. All of which may result in risk transfers.
For airports, a continuation of the status quo would clearly be the best option for most but for regional airports in particular - and those where there is an increasing need for or dependence on low-cost carriers - the balance of power increasingly favours the airlines.
While some airports will continue to do the minimum possible under its service level agreement, there is evidence of change - and not only among those airports that see volumes as a necessary condition of success.
Ryanair's first-half statement notes that: "European airports compete aggressively to win our route and traffic growth." Here, whether these airports' objectives are profit or satisfying wider stakeholder objectives, remains to be seen. Of course the traffic benefit may be short-lived, given the ease with which low-cost carriers can redeploy aircraft.
Governments clearly have different views on the role of air transport. While there is universal recognition of its importance in economic development, in Europe particularly the attractions of its revenue-generating potential via taxation is unlikely to diminish and may increase.
In the UK, despite the planned introduction of the EU emissions trading system, passenger departure tax, which is used for general expenditure purposes, will continue to be collected. In this respect, the key for governments is to ensure such taxation does not result in diminishing returns.
For airlines the best outcome would be one with lower unit costs and higher unit revenues, but for most this looks unlikely. Recent news from, among others, Air France-KLM, American Airlines, Qantas and Iberia, has not only reinforced this view but refocused attention on the need for companies to adapt, not just to survive but to prosper.
Similarly, it brings to mind the concept of the "managerial prerogative", which broadly suggests managements have "unqualified authority to exercise authority in certain areas without discussions or union agreement".
While this is evident in some airlines, the reality for most is somewhat different. As a result, fundamental change is not only difficult but costly, which generally means it needs exceptional circumstances for meaningful change to occur.
Although the 2008-2009 downturn resulted in a number of cost-reduction programmes, the recovery in 2010 meant they were not fully implemented or in some cases, not implemented at all.
What is clear is that business as usual is not an option. What is uncertain, particularly for airlines where the operating environment has become more challenging, is the extent to which the necessary structural changes have occurred, and which participants in the industry have played a role to effect this change.
Source: Airline Business
