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May 2019, London

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Airline disruption set to continue in 2019

Against a backdrop of gyrating oil prices, extreme weather, strikes and delays, the drive to digitalises continued to shift airline business models

If there was a definitive airline story in 2018 it was of disruption – but of quite the wrong kind, and 2019 is promising more of the same. Carriers and their passengers were at the mercy of gyrating oil prices, striking pilots at Air France, Virgin, Ryanair and elsewhere, pilot shortages, militant baggage handlers around the globe and extreme weather. On top of all of that, the major engine makers, Rolls-Royce, Pratt & Witney and GE and plane manufacturer Boeing all still have major product problems that have grounded planes.

The scale of the delays competed for the headlines and won, pushing down column reports on technical innovation.  However, while it is no longer the stuff of ‘hot news’, digitalisation continues to force a shift in business models as airlines increasingly realise they can no longer focus solely on controlling their ticket sales and leave other businesses to capture the ancillary revenue. Yet, what is grabbing attention here is the speed at which Google and Uber are moving to offer to do a better job than the airlines in connecting passengers with the transport solutions they want.

What is grabbing attention…is the speed at which Google and Uber are moving to offer to do a better job than the airlines

As Forbes magazine points out, “Google Flights, a simple travel shopping app, is now starting to show baggage and other restrictions along with schedules and fares. It’s a safe bet that this functionality will improve before long to show the right combination for each customer — simplicity itself. Meanwhile, the airlines continue to layer on complexity.

“Less apparent to the consumer, this capability will enable Google to capture richer data about the demands of customers, based on what they search for and click on. For Google, this creates opportunities to sell more targeted advertising, which commands a higher price.”

 A very different endeavour by Uber, albeit a ‘blue-sky one’ at this stage, is its white paper outlining possible plans to develop a network of on-demand, electric air taxis over congested cities like Los Angeles and Sao Paolo. “It’s not that farfetched,” adds Forbes. “Last year, Uber partnered with the European airline Transavia to offer UberESCAPE. For one week, customers were able to grab a flight on the app as easily as a car!”

Amazon is also moving in, although only to cargo handling at this stage, having committed $1.5bn toward building an air cargo hub at Cincinnati's airport.

Consolidation and stabilisation  

When not computing the impact of the ongoing flight chaos on airlines’ bottom lines, the aviation analysts were enjoying the take-over rumour mongering that is sweeping through Europe and Asia. Consolidation among the budget airlines is forecast for both continents.

In Asia flights costing less than a dollar, multiplying budget airlines and long plane order books caused online flight magazine Simpleflying.com to echo calls for consolidation.  “Asia has a problem. The skies above their respective cosmopolitan nations are full,” was its dramatic warning last month, adding:

“A rapid merger of several airlines into more powerful blocks will lead to industry stabilisation, wage growth and more consistent service for passengers.” It picked up on talks between India’s struggling major airline Jet Airways and the Indian leading business family, the Tatas (who have a JV with Singapore Airlines), and in Indonesia on the bid by troubled national airline Garuda for loss making rival Sriwijaya Air.

A rapid merger of several airlines into more powerful blocks will lead to industry stabilisation, wage growth and more consistent service for passengers

The major carriers in Europe have long warned that smaller airlines will go on going bust, arguing that consolidation – with them snapping up the minnows – was the way forward for the industry. British Airways parent IAG is repeatedly reported to be eyeing Norwegian Air, which has defied predictions from a year ago and kept aloft, but is still sustaining losses. Perennial struggler Flybe has put itself up for sale and Cobalt and Primera Air ceased trading in the autumn.

“European consolidation is slow. It may be time to think the unthinkable,“ comments Sydney-based international aviation think-tank CAPA. “ There could arguably be some cold industrial logic behind many …… hypothetical combinations, but the heat of opposition on political, labour relations and cultural grounds makes them virtually unthinkable in most of the above examples (although Lufthansa/SAS may be more thinkable).

“There could also be concerns about such mega-deals on competition grounds. Although such big market shares exist in North America as a result of mergers in that market, this is no guarantee of acceptance by regulators in Europe.”

These constraints have caused Finnair, for example, to announce that it has dropped hopes of taking part in any industry consolidation. It says politicians “oppose relinquishing state control”, so instead, it told news agency Reuters, it is looking to Asia to expand alone.

Consolidation is history in the US, and massive it was, leaving the airlines with other concerns.  In the industry’s view a major concern is over-regulation, says the Wall Street Journal, with the carriers arguing that the Department of Transport is preventing them from offering customers innovative fare programmes. For example, it is prohibiting airlines from advertising “free” travel where they offer zero-fare tickets but consumers are required to pay applicable taxes and fees.

The three US majors have been making changes in business class and premium economy, with Delta and United focusing on their new plans, and American Airlines tinkering around the edges with business as it too rolls out a new middle cabin. American Airlines has made the unusual and perhaps surprising choice to reduce the number of business class seats on board by nearly a third when it installs premium economy on its Boeing 787-8 Dreamliner aircraft.

Asia rising

Trends to watch include the growing numbers of international budget-priced services introduced by the major or existing carriers as travellers become ever more price sensitive. Another is Asia’s increasing dominance of digital travel, having overtaken North America, with its digital travel sales growing more than 21% in 2017 to reach $215.92bn, according to eMarketer. Almost half of Asian internet users travel abroad at least once a year, and against that background local brands such as Singapore Airlines are at the forefront with new apps.

Broadband in the sky will be a $130bn market by 2025

New sources of revenue targeted by Inmarsat, a leading satellite supplier to airlines, whose London School of Economics study predicts that broadband in the sky will be a $130bn market by 2025, thanks to it facilitating various ancillary revenue streams. These include: charging customers for using broadband, e-commerce, in-flight advertising and offering premium content (such as live sports matches) via video streaming. The figure might tempt the considerable number of airlines whose passengers cannot yet connect to Wifi!

For all the tales of woe, the industry body, the International Air Transport Association (IATA) has just reported that most regions made more money in 2018 than last year, Europe being the exception. IATA had predicted in June an outcome of net profits of $33.8bn for 2018, but now it looks as though higher oil prices and slower economic growth will produce a figure of $32.3bn. (The figures include non-IATA members like Ryanair, AirAsia and Southwest.)

For 2019, albeit with provisos that oil price and economic growth trends and political developments are again uncertain, it predicts a net profit figure of $35.5bn. This would be “the tenth year of profit and the fifth consecutive year where airlines on the whole deliver a return on capital that exceeds the industry’s cost of capital...”

Not so good for travellers, IATA forecasts that passenger traffic will grow six per cent in 2019, outpacing the forecast capacity increase of 5.8 per cent and driving load and yield numbers up. So, no disruption for investors, but travellers must await their fate!

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