How quickly those long, dreary years of recession are forgotten. Now the airline industry can return to what it's good at - ordering hundreds of shiny new aircraft, talking about ambitious takeovers, launching new routes, employing more people, and starting new airlines.
Wait a minute. Is this the same industry that just recently was retiring aircraft, abandoning mergers, withdrawing from routes, laying off thousands of employees, and in which bankruptcy was commonplace? If so, what has happened to change everything so completely?
Of course, this has always been a cyclical business, but just recently the cycles seem to have become more extreme. Following four years of bust, we are now in the boom. But is it sustainable, and for how long?
The answers to these questions are vital to airline strategists. They can be found by examining this boom, its causes and its magnitude, and then projecting forwards.
A number of elements have come together this year to create almost universal good news. Among these are:
* Buoyant demand.
* Limited capacity growth.
* A dearth of fare wars.
* Stable, relatively low fuel prices.
* Lower cost structures, particularly on labour.
* Few negative external influences.
For the majority of airlines, the result has been a winning combination - lower unit costs, higher load factors and improved yields. Since the airline business is a marginal one, small changes in these operational numbers produce a large swing in profitability. Indeed, it is no exaggeration to say: 'If you can't make money this year, you probably never will.'
Of course, there are exceptions. Some carriers have not attacked their cost structures aggressively enough and others have suffered from unfavourable exchange rates or local fare wars. But the general picture is healthier than at any time this decade.
The real question now is whether 1995 has simply seen a fortunate juxtaposition of positive elements, or a sustainable recovery. Unfortun- ately, the former looks more likely.
Consider each of the six elements of success listed above. Demand is driven largely by economic circumstances, with GDP growth feeding both business and discretionary travel. The outlook? Most economists expect GDP growth to slow down. If demand falters, fare wars become more likely as lower tariffs are a proven method of filling unwanted capacity. In addition, the plethora of startup carriers can also be expected to reduce yields.
Nobody can really predict future trends in fuel prices, much less external influences such as wars. That leaves unit costs. Here the scope for reductions becomes narrower as financial success returns. A profitable company finds it much more difficult to convince employees to improve productivity or reduce costs, and is more likely to commit to capital expenditure as it plans to acquire new aircraft or its competitors.
In addition, several cost elements are increasing, including airport landing fees and, in the US, fuel as a result of the reimposed fuel tax. Against that, marketing costs are expected to reduce as airlines cut agency commissions and develop ticketless travel and direct bookings on the Internet.
Even within the next two years, it is quite possible that faltering demand and yield pressure as a result of competition could combine with flat unit costs to produce a rather less exciting industry result.
Fortunately, most airlines - and, crucially, their employees - realise this. The painful restructuring of the early 1990s has been designed to bring lower unit costs for the long term. Many carriers are now focusing their efforts and resources only on the core business of carrying passengers and cargo, with support and non-core activities spun off and, in some cases, sold.
High productivity and low costs have become mantras for many carriers. They have imbued a new culture which insists upon gradual improvements in the cost base every year - not just when times are bad. These airlines will survive and thrive in the future. Those whose restructuring has been less comprehensive, and those without this cultural change, will slip back into losses all too easily when the going gets tough. Next time, they may not survive.
Source: Airline Business
