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Special Report - History Lessons

Special Report - History Lessons

Airlines must understand the challenges of the past to build a stronger future

2000 was designated “World Mathematical Year”. But brilliant minds and complex equations probably wouldn’t have been enough to determine the extraordinary figures seen in aviation in the decade since.

Ten years ago, airlines were celebrating their seventh consecutive year of profitability. Although the gains were far from significant—in 2000 global industry gross profit was just over $10 billion on revenues of $328 billion—they were at least gains. Compare this with an overall deficit of nearly $50 billion since 2000.

Other figures underline the dramatic shift in fortune. The oil price hit $35 a barrel in 2000. It was considered a frightening rise, as it had doubled from its low point of $17 in January 1999. Fuel represented 13% of industry’s total costs and a total bill of $43 billion. 2010 forecasts predict an average price of $79, making fuel 26% of operating costs. The industry bill will be $132 billion. As the global economy picks up, the price is expected to rise.

There is hope. Non-fuel unit costs have been reduced by 9% since 2000. There has been a 71% increase in labor productivity, a 20% gain in fuel efficiency, and a 7% improvement in load factors (figures 1998–2008). IATA’s Simplifying the Business projects have saved $4 billion through the introduction of e-ticketing and common-use self-service kiosks. It has started new projects that promise a further $12.8 billion reduction in costs.

Other big issues have been tackled head on. The industry is safer, more secure and more environmentally friendly, even if the Single European Sky has only recently moved closer to implementation. Next-generation aircraft and engine combinations are at least 20% more fuel efficient than previous models and consume less fuel per kilometer than a small family car. Improvements in avionics are starting to allow continuous descent approaches and performance-based navigation, further enhancing safety and fuel efficiency.

The changes of the past decade or so, when seen in a modern context, provide ideas for future plans. And sometimes it is the similarities that are the inspiration. Airlines still struggle to pay investors a “normal” return—profitability has never matched the cost of capital. “Airlines must improve the efficiency of existing capital if it is to attract new investment,” says Brian Pearce, IATA Chief Economist. “But it is not an isolated quest. As airlines become more efficient, problems with the aviation value chain become exposed.”

Not all airline partners have been keeping up with the pace of change. Two areas stand out. Governments have yet to relax the rules that prevent airlines from enjoying a level playing field and operating with the commercial freedoms enjoyed by other sectors. This is a problem that has reached pensionable age. IATA’s Agenda for Freedom (AFF) initiative aims to put an end to these archaic rules. With an ever-increasing number of countries signing up to the AFF, the next decade could witness unprecedented progress on liberalization.

While refusing to give with one hand, governments are not afraid to take back with the other. A second problem is the cost burden, caused by a lack of oversight of monopoly suppliers and unjustified taxes. In 2009, airport charges rose by $2 billion despite the global recession. And 19 out of 34 Eurocontrol states announced an increase in air navigation charges, costing airlines more than $400 million.

IATA’s insistence on a charging structure developed following ICAO principles—which includes transparency, cost-related fees and an equitable framework for all carriers—has reaped rewards. Last year, it led to savings of $4.3 billion. Other work bodes well for future operations. Workshops have been arranged through the African Civil Aviation Commission and ICAO that will raise awareness among African civil aviation authorities, airports and air navigation services of relevant ICAO policies in charging.
“There is no crystal ball available, but at least airlines can face the future knowing they are more efficient than they have ever been,” says Giovanni Bisignani, IATA Director General and CEO. “Between 2004 and 2009, IATA helped airlines save $47 billion. That level of savings is not achievable in the next decade unless all industry stakeholders replicate airline efforts in efficiency.

“So the question now is how to learn from the ‘horrible decade’ that we have survived and build our future with a wonderful decade of sustainable profitability,” Bisignani concludes. “This will require even more hard work and the courage to push for even more and bigger change. Governments and industry partners must be moved into action.”

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