There is no doubt the airline industry as a whole enters 1996 in a much stronger state than perhaps it has ever enjoyed. Restrust- uring has swept away many of the inefficiencies and most carriers now have in place the necessary tools to capitalise on good years and minimise the effects of poorer trading conditions. These tools include the physical items - yield management software, direct marketing tools, codesharing, computerised systems, modern aircraft with low fuel consumption and minimal maintenance needs.
Hopefully carriers also have the 'software' that they need - lean, mean management teams who are not going to be carried away by their egoes into expanding too aggressively or making doubtful acquisitions.
Still, in this business the rosy scenario can be blown away all too easily. The fundamental airline management challenge is to keep the key variables of unit costs, unit revenues and load factors in balance. In 1996 several factors at play make caution the wise course:
* Economic slowdown. In most western economies, growth is likely to be sluggish at best. Exciting growth will be limited to hotspots like China, Vietnam, India and, maybe, Japan. But elsewhere economists expect a significant slowdown compared to 1995, and this will hurt traffic growth. Many are predicting yet another recession in 1998-9.
* Labour dissatisfaction. Tired of relentless demands for productivity concessions and below-inflation pay rises, the airline labour force is beginning to revolt. The next round of cost cuts will be very hard to achieve, especially for airlines that are reporting healthy profits.
* Intensifying competition. With hundreds of codesharing alliances in place, the majors now have the rudiments of global carrier systems, and they will be competing hard - especially for the high yield passenger. Meanwhile, startups abound everywhere and some longer established medium sized carriers - like Southwest, Emirates and EVA Air - are now having a significant impact on the majors.
* The recovery has not affected all carriers equally. Several airlines have not been able to turn themselves around sufficiently, and there may not be enough time for them to do so before the next downturn.
* External events can always wreak havoc. A sudden rise in fuel prices could wreck the recovery. Airlines remain vulnerable to increases in airport and air traffic control charges. And governments may levy new taxes or increase existing ones.
While Iata talks of $5 billion in industrywide profits for 1996, this may well represent the peak of the current cycle. During the year, wise carriers will concentrate on careful husbandry - cautious expansion, circumspect capacity increases, the paying down of as much debt as possible, and more improvements in productivity.
The electronic ticketing revolution is now well under way, and further initiatives in this area can be expected. Ticketless travel, yield management and frequent flyer programmes represent a golden triangle of marketing techniques which are beginning to distinguish the winning carriers from the also-rans. Technology is now allowing sophisticated carriers much more direct access to their customers than they have ever had.
The structural issues are always the hardest to predict. United decided not to buy USAir, but the discussions placed consolidation back in centre stage. There may well be significant merger activity in 1996 as carriers try to strengthen their global market position. USAir remains the focus of most US analysts' attention, and KLM is mentioned most often in Europe.
Aeropolitics seems to have reached a dead end. Europe is clearly not ready for joint talks with the US, and the prospects for new deals between the US and the UK and Japan are no better than 50:50. The US strategy of picking off European countries for individual deals may result in anti-trust immunity for more transatlantic codesharing alliances. Meaningful progress towards a multilateral regime is not likely in the near future.
Richard Whitaker
Source: Airline Business
