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A complete restructuring of the industry November 2001 Download PDF

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It is becoming a little clearer what September 11 has precipitated for the airline industry — a complete restructuring akin to, perhaps greater than, that caused by US deregulation in the late 70s and early 80s.

But first of all, we have not yet changed the traffic and supply/ demand forecast published n the October Aviation Strategy. The numbers coming from the AEA and ATA in October tend to confirm our initial estimates of traffic declines (September- December 20001) of 30% for US domestic, 40% for US international, 10% for intra–Europe and 30% for European international.

Several subscribers have suggested that the recovery and rebound will take place more quickly than we forecast. We hope so, but there’s no evidence for this as yet, and one of the differences between the current situation and that of the Gulf war is that there is no end in sight for the conflict in Afghanistan — it could go on for a very long time.

On the supply side, the manufacturers have stopped giving estimates of 2002 output levels as they absorb the airlines' demands for deferrals and swaps (like that between American and Qantas). Finding a parking space in the Arizona desert is getting a bit more difficult. How many of the parked aircraft are going to be there permanently is impossible to verify — see pages 5–6.

Given the state of the industry, many observers are expecting governments to resume their traditional role and fully protect their flag carriers. Yet, despite intense lobbying the EC has not succumbed (see pages 2–3). In taking this attitude the EC is creating a lot of short–term grief but enabling a very necessary structural change to take place.

One reason that governments should not intervene is that the industry is still financeable from private sources. A number of multi–billion aircraft–backed bonds, EETCs, have been sold in the US,albeit with increasing pricing. In the UK easyJet succeeded with a rights issue intended to partly finance fleet expansion, while Qantas’s rights issue was 50% oversubscribed.

Money is following the airlines which have got some evident competitive advantage at the moment. In the not too distant future it will come back for those carriers, like BA, Air France, Delta or whoever, whose market position and strategies make commercial sense.

If governments intervene they will end up pouring taxpayers' money into bottomless pits. Just how insolvent some flag–carriers are is becoming clearer — Sabena’s creditors, including most of Europe’s leading investment, are now owed over $2.1bn by the bankrupt carrier.

So far the Swiss government, Swiss banks and a range of Swiss corporations have somehow been persuaded (or pressurised) to invest $2.4bn in the "new Swissair", but the chances of the rescue plan succeeding are diminishing by the day. First, the creditors of the former Swissair are not just going to forget about the $10bn of debt they own; interminable litigation against the Swissair residual company, the banks involved, UBS and CSFB, and Crossair itself, can be expected. Second, Crossair is going to have to take on Swissair flying staff at their former rates and use the old Swissair licences to operate the longhaul network, which is going to completely undermine Crossair’s cost reduction strategy. Third, integrating Swissair managers into the very different Crossair culture will be excruciating.Flag carriers do not have a divine right to exist. Those that do not have a commercial basis will disappear, albeit painfully slowly, but their markets will still be there. Who captures these markets is the next question. The answer would appear to be a limited number of network carriers with extensive long–haul operations and a limited number of point–to–point low–cost airlines operating purely intra–continental services. However, the latter may even come to be regarded as mainstream carriers and the former as niche carriers.

There are also new entrant possibilities. There is, for example, a demand for intercontinental services from Europe’s smaller and/or peripheral capitals — Dublin, Athens, etc . If the flag carrier disappears and the network carriers only offer services connecting via their hubs, is there a commercial role for low cost, long haul operators?

  Domestic International  
US airlines* -37% -32%  
  Intra- N. Atlantic Europe-
  European   Far East
AEA airlines** -10% -36% -15%
* Sept 16-Sept 30 ie excluding airspace shutdown ** Sept 10-Oct 14

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