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Solutions for Airline Profitability

Light at the end of the tunnel

Solutions to these challenges require fresh thinking. “More eff ective partnerships are required among stakeholders in the air transport industry,” says Tony Tyler, IATA’s Director General and CEO. “Efficiency gains are a win-win for all concerned. We have seen that with the adoption of 100% e-ticketing and the introduction of global self-service standards. Not only did partners in the industry benefi t, but consumers gained great value through more effi cient and convenient processes. The Profitability and the Air Transport Value Chain study points to the active collaboration needed to find even more such solutions.”

Ideas to rejuvenate the airline sector not only focus on partnerships but also on improving effi ciency through new technology, considered regulation, and enhanced processes. Partnering with airports could open doors for both parties. Like airlines, the airport sector is also struggling to meet WACC but this is largely owing to US airports that are not run for profit and the large losses experienced by some airport groups, such as Spain’s AENA. And unlike airlines, airports have good credit ratings on the whole, meaning they can bear risk more
easily than airlines.

Angela Gittens, Airports Council International (ACI) Director General, says airlines and airports should work together to take cost out of the system. “While airports and air carriers feud over airport charges, the bigger cost threats come from exogenous sources,” she says. Gittens notes that cost can also be taken out of the operating side. “ACI has developed a standard protocol for the information-sharing that facilitates Airport Collaborative Decision Making and is looking to have that adopted by IATA,” she says. “With the Airport Community
Recommended Information Services feature, air carriers can use their proprietary systems at multiple airports on a “plug-and-play” basis to use common systems and share operating information.

“Let’s face it,” she continues, “the biggest cost for air carriers at airports is the time their airplane spends on the ground when it could be ready to go. Some of this requires a new mindset for both airport operators and air carriers—sharing information, getting more engaged in each other’s processes, but with both needing to shed costs yet provide the right passenger experience, uphold environmental stewardship and accommodate growth,
things have to change.”

Greater effi ciency and reducing costs takes many forms. Hub airports remain very powerful, however. Incentivebased regulation could be part of the solution but partnering with airlines will be equally important in terms of improving effi ciency and customer service. Joint ventures with airports on duty free, for example, should enhance revenues for all concerned. And the passenger experience at some airports could be improved through a collaborative approach. Long security lines damage an airport’s reputation and hurt retail sales as
well as limiting the appeal of air travel. The Checkpoint of the Future could play a major role in resolving these issues just as IATA’s Fast Travel project will improve airport processes to the benefi t of both parties.

Partnerships with manufacturers are also on the agenda. So-called “power by the hour”—engine rental—is being touted alongside ideas for forms of airframe leasing in conjunction with the manufacturers that could ease any under-utilization. There are only two players in the large aircraft market and just three in the engine sector. Greater understanding between airlines and these suppliers would help balance risk and reward even further.

There are improvements to be had in the aftersales market too. Greater vertical integration could help control the considerable aftersales costs as could proper cost benchmarking. But Chris Tarry, Principal, CTAIRA, warns that the task is far from easy. “It’s difficult to boil it down
to a cost per Available Seat Kilometer as there are so many factors involved,” he says. “Airlines operate different business models in diff erent markets. Often, you’re not
comparing like with like.”

Meanwhile, effi ciencies in distribution and freight forwarding should enable airlines to participate in some of the robust revenues enjoyed in these sectors. IATA’s New Distribution Capability will allow consumers to access the same travel information regardless of the sales channel used, bringing benefi ts to all. This will help stem commoditization of the airline product by providing consumers with more choice and will also boost ancillary revenues. With companies like Google entering the fray as well, it seems certain that distribution is about to change. In freight forwarding, airlines are collaborating with freight forwarders to introduce the electronic air waybill, which will shave cost through enhanced efficiency.

“Clearly, at the moment there is not an equitable share of risk across the system,” says Tarry. “But while the potential of true risk-sharing partnerships as opposed to “you buy/we sell” relationships is acknowledged the challenge will be in implementation. But this challenge must be overcome if airlines are to achieve meaningful and permanent structural change.”

The road to jobs and growth

The last word on airline sector restructuring perhaps rests with government regulations. Greater efficiency is needed at air navigation service providers, for example, and the long story of the Single European Sky illustrates the point. More generally, fresh thinking must replace ill-designed regulation and high taxes that make it difficult for airlines to develop the connectivity that is so important in the modern world.

Consolidation could be the key to sustainability. “The inability to merge across borders coupled with the commoditization of the airline product has proven disastrous for airline profitability,” says Pearce. “It means competition is intense and the fi ght for market share is reduced to a price battle. Load factors may be at record highs but it means nothing if the yield
remains weak. “Investment is not easy to come by in the modern market even with an excellent track record,” he concludes. “We desperately need to restructure the industry to adequately reward equity investors in the airline industry. Otherwise airlines will not attract investment to the detriment of the airlines, the global economy, and the individual consumer.”

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