More people are flying than ever before, yet still the airlines are in trouble, says Simon Nixon. But what's new? The airlines are always in trouble.
How tough is life for the airlines at the moment?
They are all suffering. British Airways (BA) grabbed the headlines last week when staff shortages at Heathrow forced it to cancel scores of flights, leaving thousands of passengers stranded and forcing hundreds of people - including a party of elderly German choristers - to sleep on the terminal floor. But other airlines are in far worse shape. Alitalia, the Italian state airline, could run out of money by the end of this month. Several US airlines, including US Airways, Delta and Northwest, are negotiating with unions in an attempt to avoid Chapter 11. Ryanair and Easyjet, two of Europe's most profitable airlines, have issued a series of profit warnings this year. Ryanair boss Michael O'Leary has warned of a bloodbath' in the European market this year and predicts several bankruptcies.
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Why are things so bad?
Things are always bad in the airline industry. Warren Buffett likes to point out that the airline industry has been a serial value destroyer since the maiden flight of Kitty Hawke. Richard Branson often jokes that the definition of a millionaire is a billionaire who bought an airline. Nonetheless, the last few years have been among the toughest in aviation history. The sector has had to deal with the aftermath of September 11, an economic downturn, SARS, and war in the Middle East. Airlines were forced to ground planes, cut routes, reduce flights and lay off staff. Several US airlines were forced into Chapter 11. That said, the situation at the start of this year looked promising. Thanks to the economic recovery, more people are flying than ever before. Yet still the airlines are in trouble.
What is the problem now?
A combination of rising costs and falling fares. Analysts are particularly worried about the effects of rising oil prices. Fuel prices account for about 15% of an airline's costs. Analysts say that an oil price of $33 a barrel is required for the industry to break-even. So far this year, the average price is $34 a barrel, and prices this week have been above $42 a barrel. Every $1 rise in the oil price is reckoned to add $1bn to the cost of the airline industry globally. BA has warned that its fuel bill could rise by £225m to £1.1bn this year. The problem is made worse by the fact that airlines are unable to pass these higher fuel costs on to passengers. As a result, the international airlines association, IATA, predicts high oil prices will send the industry into the red this year.
Why can't they pass these costs on?
Because competition between airlines is so intense. Put simply, there are too many seats chasing too few customers. As a result, average fares have fallen. The average cost of a flight from the UK to western Europe fell by a third between 2001 and 2003. This reflects the emergence of low-cost, no-frills airlines in Europe, some 30 years after they first made an impact in the US. Budget airlines are leasing aircraft grounded by the big players at cheap rates and using them to undercut established operators. Dozens of small players have emerged across Europe over the last decade. Now even Ryanair and Easyjet are being squeezed, with both reporting falling average revenues per customer.
How have the major airlines responded?
Some have tried to emphasise their reliability - although BA's debacle at Heathrow last week showed that things can go badly wrong for even the best-run airlines. Others have focused on offering superior service in the hope of attracting more business customers. But this has proved no defence, since business and first-class fares have also been slashed. On the London-New York route, business and first-class fares fell about 40% between 2000 and 2003. Ultimately, all airlines have been forced to compete on price, which has forced them to look for ways to cut their costs. Most have failed.
Why have they failed?
Because the airline industry remains one of the most heavily unionised in the world. Among European airlines, this is a legacy of decades of state-ownership. Even BA, by far the most successful at cutting costs, having shed 13,000 jobs - or 25% of its workforce - in the last three years, remains constantly at the mercy of the unions. Last month, it narrowly avoided a strike by ground staff and it is daily forced to tolerate levels of absenteeism that would make an old print worker blush. Last week's chaos at Heathrow was the result of 20 ground staff at Terminal One calling in sick. The average employee takes 17 sick days each year. Similarly, BA pilots insist on long lay-offs between flights, even though they fly well below the official maximum of 900 hours a year. This is a preference they share with their US brethren: it is the pilots who are holding US airlinesto ransom
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