To mark 20 years of the publication of this magazine, we look back over the past two decades, while leading boardroom experts offer their views on where the industry is heading
History, even contemporary history, is founded on two principles that have alas become commonplace truisms: its lessons are ignored at our mortal peril and its lessons repeat themselves. These truths apply even to a relatively narrow wedge of time – the 20 years since airlines began serious traction with the first large-scale liberalisation: the US experience of deregulation.
In the pages following this report, seasoned industry experts, with years of experience of the airline boardroom, offer their personal observations on what the following decade or two may bring. Nobody, not even the genies of Wall Street, knows for sure of course what the future holds, but the only certainty is that it will be a refraction of the past, even if distorted by the lenses of bitter forces such as war and disease, fuel spikes, worker anger and new dynamics that we dare not predict.
So as the saying goes: the more things change, the more they stay the same. A glance at the introductory words in the pilot issue of Airline Business shows how today’s boardroom faces almost exactly the same list of challenges as their predecessors did in 1985. “Airline executives must now keep up to date with the effects of political decisions like deregulation, fluctuating fuel prices and exchange rates, changing travel patterns and manpower difficulties,” the magazine wrote of the unparalleled changes in the business. Sound familiar?
A cover from each year over the past 20 has been selected to offer some visual cues to how the industry has ebbed and flowed. The first ever issue featured the chief executive of Eastern Airlines Frank Borman talking of his carrier’s struggle to finance international expansion. It was a struggle the carrier would never resolve, finally liquidating in 1991 after a vicious strike forced it into bankruptcy under a successor – Frank Lorenzo.
Eastern’s fate and Lorenzo, featured on the cover of Airline Business in January 1989, were a portrait of what was to come as the new forces and the new economics of lower fares and higher wages overcame managers such as Borman, and as managers like Lorenzo saw a future driven by short, brutish, and nasty forces.
Whether Lorenzo was a visionary can be debated, but in hindsight he may have seen the coming storm more clearly than others – more clearly perhaps than he could articulate or than people could accept.
The first issue also saw Professor Alfred Kahn, the architect of US deregulation, assessing how far a liberated US market had progressed since the 1978 Airline Deregulation Act. The past 20 years have seen the US market profoundly transformed by deregulation, but latterly more fundamentally reshaped by the economic downturn of the turn of this century and then forced into crisis by the 2001 terror attacks.
Even as he aged though, the gnome-like Kahn never lost faith in his vision of freer markets. And even when a troubled airline once made him late to testify at a much-awaited US Senate hearing, Kahn told a reporter he had few doubts. As the years began to slow him, Kahn kept an abiding faith. After Delta and Northwest Airlines went into bankruptcy reorganisation within an hour of each other in September, Kahn said that the evolution was inevitable after deregulation – but declined to say where he thought it would end.
Airline Business has expended thousands of words analysing the US deregulated journey. A similar number have been penned on developments across the Atlantic. During the 1980s Europe too was talking deregulation as it built up to the European Commission’s Single Market of 1993 onwards. The liberal mood was far from confined to the West. In October 1984 Beijing decreed to dissolve the Civil Aviation Authority of China’s (CAAC) monopoly on air services and almost overnight the country’s airline boom began. Two decades later China’s centrally controlled manipulation of the air transport industry has brought about the emergence of the big three airline groups. New entrants are being allowed, but at a restrained pace.
Other big themes that have emerged over this period include the environment, airport and airspace capacity, privatisation and alliances, the power of the global distribution systems, the internet and the global emergence of low-cost carriers.
Fledgling deregulation
Airline Business was created to report on the business, commercial and financial aspects of airline management on a global scale. It launched into an era of fledgling deregulation, an agenda that is still far from finished twenty years later. It was launched at a time when the business was growing and profitable (see chart on page 67), even though net margins virtually never managed to claw their way over 3% in any one year. The data presented in these charts is taken from the Airline Business Rankings for the world’s top 100 carriers, which dates back to 1989, and augmented with ICAO figures for the previous four years.
The 20-year overview shows an industry with steadily rising revenues – an average of 6.8% over the period – that only halted briefly in 2001. Traffic too has climbed strongly. Global growth threatened to stop altogether in 1991, but picked up quickly after the first Gulf war. The sharpest fall is in modern times, post-2000, and took longer to recover before spiking sharply last year.
Profitability is another story. For nearly the first halves of both the 1990 and 2000 decades the industry globally was in the red. As all our commentators note (see pages 68, 70 and 73), this performance is simply not good enough for an industry that soaks up billions in capital each year.
This global view does however obscure the fact that some carriers have consistently been profitable, and that some regions have tended to fare better than others. The top three carriers in the first Airline Business Top 100 of 1989 in terms of profit margin were all from Asia: Singapore Airlines (SIA), Cathay Pacific and Thai Airways. SIA and Cathay also made the top 10 list in this year’s ranking. The USA, sadly, is a different story. Even in the good times US carriers struggled to turn strong sales into decent profits, with only Delta and Southwest Airlines making it into the top 20 list in 1989 with net margins of 7.1% and 5.7% respectively.
The Asia-Pacific’s airline industry has grown in importance since 1989. In that year the region’s airlines represented 20% of the industry’s global sales. By last year that proportion had risen to just over 26%, mainly at the expense of North America, which fell over the same period from 43% of revenues to 35.6% last year. Europe’s portion of global revenues has stayed virtually constant.
The rankings also reveal those that have succeeded and those that have failed or vanished under the weight of merger. In a business that has seen many calls for consolidation over the years, it is perhaps surprising how few big names have actually disappeared. Some of the highest profiles are from the USA, which has called time on Eastern, Pan Am and TWA, either through failure or merger. But the big names persist. For example, from the class of 1989’s top 20 largest carriers ranked by revenue the only ones missing today are Swissair and Pan Am. By 2004 their places had been taken by Emirates and Southwest which have muscled their way into the top league.
The list of new starts is unsurprisingly dominated by low-cost players seeking to take advantage of liberalised markets. There is also a strong showing from Asian carriers, with Korea’s Asiana Airlines and China’s Hainan and Shanghai Airlines making their debuts in the past 20 years.
These new entrants are almost exclusively financed by private money. Government ownership, while still commonplace, has waned. During the 1980s British Airways and Japan Air Lines were privatised, with Air France albeit partially at first), Lufthansa and Qantas following during the 1990s and Iberia in 2001. Some, like Air New Zealand, have been privatised and then when trouble loomed, renationalised.
Alongside the changing business of airlines, the suppliers of their prime hardware have seen equally massive changes. It is now a two-horse race between Airbus and Boeing to supply large jets, with McDonnell Douglas and Lockheed assigned to the commercial aircraft history books.
In the regional sector British Aerospace, Dornier, Fokker and their renamed reincarnations and successors are out of the game leaving just two players in this market. Now, Bombardier, once dismissed as a mere collector of the unwanted designs and facilities of others, and Embraer, once dismissed as a questionably oddity of the new world, have solidly established themselves as the twin forces of the regional jet and the arsenal of the new strategic tools for the industry.
When it comes to new tools, the advance of the internet, perhaps more than any other technology, has played a critical role. The magazine first reported on “web fever” back in 1997, and its influence has grown exponentially since then. Where this influence goes over the next five, 10 or 20 years is anyone’s guess, but only one thing is certain: we will be writing about it.
MARK PILLING/DAVID FIELD/FABRICE TACOUN
Source: Airline Business
