It is easy to argue that air transport is fast descending into a state of near anarchy, where management strategy has been replaced by the need to respond to a chain of uncontrollable and unpredictable events. It may be a tempting argument but it is not necessarily true. For certain, the airline industry has had more than its fair share of chaos over the last few months and been battered by factors beyond its control. But beneath the headlines there are still the same old fundamentals at play as markets consolidate and segment. If there is the appearance of chaos, then it comes from the fact that these issues are now being played out at breakneck speed. For an industry badly in need of some momentum for change that may be no bad thing.
Large sections of the air transport industry have long been on notice that a wholesale shake-up would one day be required. The crisis that has followed 11 September has brought that day to hand. And instead of the grinding consolidation that would have had to be played out over the months of the coming recession, the change has come all at once. Witness the extraordinary rush of news over the past three months.
In less exciting times, the collapse of a single flag carrier would have been headline news. In the space of a few weeks the world has seen the failure of Swissair and Sabena in Europe, mirrored by Ansett Australia on the other side of the world. Others could all too easily follow suit. Canada 3000 has already gone after the brief flicker of hope that it could mount a credible challenge to Air Canada. Among the traditionally conservative Japanese market, Japan Airlines has just announced that it will snap up Japan Air Services.
At the same time, major carriers on both sides of the Atlantic have made unprecedented cuts to labour and networks, while low-cost carriers - especially in Europe - have seized their chance to shine with equally unprecedented growth plans.
None of these events taken individually change the world. But taken together they could just add up to the starting point for some fundamental structural change. At the very least, they provide a backdrop against which it is suddenly possible to think the unthinkable. Governments, regulators, airline managements and even labour unions appear to be doing just that. Witness the new momentum behind US-UK open skies, or even the go-ahead for London Heathrow's Terminal 5.
But where could this brave new thinking lead? It looks increasingly certain to be a world dominated by only a handful of majors. The US market is already dominated by three giants - American, Delta and United Airlines - who account for half the domestic market. They could take more if politicians are now more inclined than before to allow through the final round of mergers which they have so far blocked.
Europe is still highly fragmented, but it is looking increasingly as though the big three - Air France, British Airways and Lufthansa - will come to hold a similar position. Certainly no other European player has made a convincing case that it will be able to join them as a major player on the global stage. Nor will Brussels stand in the way. If anything the European Commission has been cheering the prospect of consolidation on from the sidelines. It appears to understand that preserving a mass of small carriers does little to ensure a competitive market for consumers in Europe's overcrowded market.
What is changing the market in Europe, as it already has in the USA, is the apparently irresistible rise of the low-cost sector. The first reaction of the majors may have been to compete head on, but that is a battle that they are unlikely to win; at least not profitably or in the near term. Rather, the game is to put clear blue sky between the low-cost offering and their own full-service global networks. In short, to leave behind the days of being all things to all men and to focus more clearly on core business and premium leisure markets where they can make the most of the hubs, connections, alliances and loyalty programmes which are their greatest strength. Along the way they will need to reform the price and service differentials over which business travellers are in revolt.
But the big question is over is what will happen to those second-tier flag-carriers and independents who continue to sit in the middle - not big enough to compete with the giants, but still encumbered with the trappings and costs of offering a full service product. The collapse of Swissair is a warning over the dangers of attempting to gain entry to the big league through acquisition. As it discovered, there is usually a good reason why an airline is up for sale. Air New Zealand discovered that too.
The fate of the middle tier would seem to come down to the need to find a niche role, either in terms of geography or service, and possibly to pursue that as a specialist player within the safety of a global alliance. Not all can or will achieve such a role
Further upheavals are certain as the crisis plays itself out, but behind the turmoil there may just be some sound long-term strategy beginning to emerge.
Source: Airline Business
