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Current economic conditions are threatening survival for many aviation players. Tremendous scaling back is needed to avoid bankruptcy, says Ratan Lal Bhagat of 4Ps B&M
“Students open your textbooks to page number nine, chapter 11,” stoutly commanded the elderly professor. The students, who dreaded calculus, knew that their worst nightmare had just begun.
Players in the aviation sector dread Chapter 11 too, but not for the reasons that the students do. This is the chapter that airlines have to open when their flawed business models throw their business calculus (read profits, revenues) into complete disarray. They now have to look into the ever dreaded Chapter 11 (bankruptcy) despite loathing it from the bottom of their hearts.
According to a report by Centre for Asia Pacific Aviation (CAPA) more than 30 airlines the world over, like Frontier, Skybus et al, have been forced to shut ‘hangar’ and file for bankruptcy in the past 12 months. Many others like Continental Airlines, US Airways, Southwest Airlines, Alaska Airlines, et al are all passing through bad times and are on the verge of being grounded.
“The revenue outlook is not encouraging, but we remain competitively well-positioned. We are seeing declining revenues on international routes, but these are still good markets for us,” explains Larry Kellner, Chairman & CEO, Continental Airlines to 4Ps B&M. Delta Airlines and Northwest Airlines, wich have already swallowed the bitter pills of bankruptcy (in 2005) have come together to avoid a round two of the heart shattering episode. “Given the difficult economic environment we face, the flexibility in the system is even more crucial and we are moving quickly to create a flight schedule for 2009 that optimises the profitability of every route,” professes Jimmy Eichelgruen, Regional Director Sales, India, Middle East and Africa, Delta Air Lines exclusively to 4Ps B&M.
Many of the players who had dialed the frightful number in 2008 were hard hit by the sharp surge in fuel prices. However, while the economy was relatively strong, many airlines found that they were able to pass on these cost increases to passengers in the form of fuel surcharges, which added to the already high fares. The global economic slump is perhaps a more challenging situation than high fuel because airlines have limited ability to maintain demand and yields in a softening economic environment. “The current economic downturn is extremely challenging for the airline industry. There has been a particularly pronounced fall in premium class and cargo revenue. In December 2008, premium class traffic in Asia declined 24% year-on-year. Not only are airlines finding that fewer passengers are flying, yields too are declining,” explains Binit Somaia, Regional Director, CAPA. And it is evident that the current economic mayhem might prove to be the culprit bird that could get sucked into the propellers of these airlines, forcing them to crash land.
The accumulated loss for airlines was a whopping $5 billion loss in 2008. All these have been fuelled by the global international cargo traffic, plummeting by 22.6% in December compared to December 2007. Whereas a similar comparison for international passenger traffic showed a 4.6% drop. The international load factor stood at 73.8%. Moreover, throughout 2008, international cargo traffic was down 4%, passenger traffic showed a modest increase of 1.6%, and the international load factor stood at 75.9%. All the aforesaid factors, along with the gradual decline in the cash reserves of these players over a period of time, seems to only add pace to their fall and force them to file for bankruptcy.
Furthermore, the International Airport Transport Association (IATA) forecasts a further loss of $2.5 billion based on a fuel price of $60 per barrel in 2009. It further states that there would be a decline of 3% in passenger volumes, 5% in cargo traffic and yield deterioration of 3%. Moreover, industry revenues are expected to contract by $35 billion yoy to reach $501 billion in 2009. “2009 is shaping up to be one of the toughest years ever for international aviation. Keep your seatbelts fastened and prepare for a bumpy ride and a hard landing,” said Giovanni Bisignani, Director General and CEO, IATA. Somaia straight-facedly sums it up, “It is likely that we will see more carriers enter bankruptcy in 2009.”
The only way out is through controlling costs, cutting down on fleet size and maintaining a sustainable cash reserve. “In an environment of declining demand, the most effective solution is to reduce capacity, which would mean grounding aircraft,” explains Somaia. The Delta-Northwest joint collaboration is already applying such measures. Testifying to the fact, Eichelgruen of Delta explains, “We are cutting international capacity by 3-5%.... We are watching each route very carefully to ensure we are matching capacity to demand.” Surely, Delta has set its priorities right. A lot of such cuts in operations will be needed before the players get their business calculus right in order to avoid turning to the dreaded chapter 11!
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Source : IIPM Editorial, 2009
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