Why London Heathrow will define the future of world aviation?
Published: 07 Jul 2008
British Airways recently announced slowing traffic for the month of June, caught between the Scylla and Charybdis of higher costs and falling demand. Along with its would-be operational merger partners, oneworld's American Airlines and Iberia Airlines, cutbacks, higher fares and increased code share operations appear to be the prescription for survival.
This battle for survival will be resolved around slots at Heathrow, which for many years has been a key to North Atlantic competition. Now that struggle could take on global implications, as competition authority approval will almost certainly focus on how many slots the oneworld airlines must relinquish, to gain approval.
As BA seeks to retain a higher than industry average profit margin, it has pushed fares up and begun to rationalise growth to protect itself from higher oil costs. During the summer peak tourist season, typically highly discretionary, this strategy will cost BA some customers. European passenger numbers were down 2.0% for the June month, compared with the same month last year (although RPKs grew 2.1%, against ASK expansion of 6.7%, showing an increased accent on longer sectors).
The resulting lower load factor (-3.3ppts) is a concern, even assuming that it reflects higher yields; the economic slowdown has not really started to bite seriously in Europe yet, and this suggests that offsetting higher fares for lower traffic may be a risky approach.
Meanwhile, across the Atlantic, BA's potential partner in the operational merger, American Airlines, was announcing likely job cutbacks of 7,000 staff and further aircraft groundings.
And, pending a full strategy announcement in September, Iberia, 13%-owned by British Airways and the third likely partner in the merger, will reportedly cut back on its European operations and continue to upgrade its profitable services to Central and South America.
Not everyone is happy with the proposed linkage, including local competitor, Virgin Atlantic (which is keen to get hold of bmi's Heathrow slots) and Star Alliance's Lufthansa (also keen on bmi's slots). Meanwhile, Air France-led Skyteam, with anti-trust authority for its Delta-Northwest alliance looking safe, can also be expected to protest at the power the combination would deliver.
It would deliver oneworld a powerful triangle of US, European and South American growth, and allow valuable rationalisation across the three carriers, while simultaneously entrenching Heathrow – and BA's now highly effective Terminal 5 – as a major strength for oneworld. BA also has a comprehensive commercial joint venture with Qantas on its South Pacific route, further enhancing the alliance's global reach.
So it can be expected that the defining issue for competition bodies, as well as for the respective viability of the airlines involved, will be: just how many slots will BA and partners give up at Heathrow in return for approval.
The outcome will rebalance the power of the three global alliances, whose value to its members may be increasing, as the need grows for capacity reduction and price increases.
(Analysis by Centre for Asia Pacific Aviation)
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