It is one of the oldest jokes in the travel industry…how do you make a small fortune? Take a large fortune and buy an airline! For the last two years this has been depressingly true as the world’s airlines have lost cash by the billions. The red ink has flowed everywhere, often drowning airlines that couldn’t stay in business. Globespan and Skyeurope are just two among the dozens of airlines that couldn’t continue. In Asia, JAL, one of the biggest names, filed for bankruptcy protection. It is now undergoing painful deep cuts, which are guaranteed to change the face of Japanese aviation.
From continent to continent, IATA estimates that airlines lost more than $11bn last year. When added to previous years’ losses versus miniscule profits, over the years airlines have comfortably lost more money than they have made since the Wright brothers first flew.
In this spirit IATA’s recent announcement that the industry would return to profit in 2010 was welcome news indeed. The organisation is forecasting a profit of $2.5bn in 2010. But before you bring out the balloons and start celebrating, this is a tiny amount of money, reflecting less than one half of one per cent of $524bn in global revenues. In other words most airlines would probably still be better off putting the cash on a roulette wheel and enjoying the thrill.
Nor are the gains evenly spread across the globe. Asia and the Pacific region remains the powerhouse. The US will make money. So will Latin America and the Gulf. It is poor old Europe that remains the sickly dog of the aviation world, with multi-billion dollar losses.
These facts make the current industrial action hitting European carriers seem a bit bizarre. In the past twelve months there have been industrial rumblings at Lufthansa, Alitalia, Air France and of course the worst, at British Airways where cabin crew have been involved in major rolling stoppages. It seems airlines in the weakest economic zone, have the most truculent workers who are determined to fly in the face of economic reality.
If trying to get the staff to work harmoniously has its ups and downs the airlines have had a bit more success in the vexed issue of consolidation. For too long there have been too many airlines chasing too few passengers. It was inevitable that there would have to be a cosying up leading to eventual deals.
The transactions are usually large and complicated but where airlines in one country wish to merge it is pretty straightforward. In the US Delta bought Northwest and now United is merging with Continental. Unfortunately where cross border deals are concerned it is much more tricky. International laws do not allow for a simple meet, match and marry with carriers from different countries. Air France-KLM finally invented a complicated structure to make such deals work. This is a template which has been followed by Lufthansa as it bought Swiss, Austrian, Brussels and BMI. British Airways and Iberia are using the same model for their merger expected to complete later this year.
As these airlines get ever bigger, those carriers left behind are having to seriously question where they fit in the future. American Airlines was once the world’s largest after it bought TWA, but will soon rank third behind United and Delta. American’s CEO Gerard Arpey told me he doesn’t need to do a deal to survive…but he hasn’t ruled one out either. In Europe Virgin Atlantic will soon be nutcrackered by the enlarged BA/Iberia and is now saying it may well have to merge if it is to stay in business. This is an astonishing admission from the airline which made a virtue of independence (albeit part owned by Singapore Airlines).
No thought of airline economics would be complete without mentioning the Gulf carriers. Emirates recently announced a billion dollars in profits, the other major gulf players, Qatar Airways and Etihad admit they are losing money but say they are still building their networks for the future. These airlines are forces to be reckoned with as they open up new routes in India and Asia, funnelling passengers through their hubs onto established destinations. They are challenging the legacy carriers and taking market share.
Who could not fail to be impressed by Emirates’ announcement that it is buying a further 32 A380s. Added to those on order, it will take its superjumbo fleet to 90 which is more than four times larger than the next biggest airline Qantas. Emirates president Tim Clark said these new planes were the last link in the airline’s plans for expansion in the next decade and were justified by Emirates’ rate of growth. Rival airlines growl that this is an unjustified increase in capacity which will ultimately destroy yields as they dump seats into the market.
All-in-all airline economics have rarely made sense. From the early days of aviation when flying was a luxury, through the strict regulation of the middle of the last century, to the latest ‘open skies’ laissez-faire model today, there have always been horrible losses. It is an industry which flies state of the art equipment, but follows rules and regulations set five decades ago. Change is glacial. Often it seems to be an industry run by executives who love planes more than profits.
It would be a terrible shame if the lessons of the great recession did not lead to real, meaningful change. Without that the airline business will remain a basket case; it will be a case not asking if they will lose money…but when.
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Richard Quest is a CNN correspondent based in London, host of the weekday one-hour program “Quest Means Business”. For program highlights and more, go to www.cnn.com/qmb
