Northern Hills Homeowner's Association

The sky’s the limit

Mar 09, 2001

Mar 8th 2001
From The Economist print edition

Airlines are making money again, but they are also making their growing number of passengers miserable. They need to find ways of doing the one
without the other, says Iain Carson


CIVIL AVIATION is a tale of two contrasting trends: one is strong growth in sales and profits for the world?’s airlines, the other is increasing misery and dissatisfaction for travellers, especially in America and Europe. For an industry that collectively lost $15 billion in the first few years of the 1990s, the past five years have brought a welcome change. The net profits of
all scheduled airlines worldwide rose from $4.5 billion in 1995, when the boom began, to $8.5 billion two years later. Although in the past few years profits have been dented by the knock-on effects of the Asian crisis and the tripling of oil prices, they remain substantial. However, the airlines are having to work harder and harder for them. The average consumer is paying 70% less per passenger-mile in real terms than 20 years ago, and revenue per seat is declining by an average of 2% a year.

At the same time consumer dissatisfaction with air travel has reached a new peak in America after two summers of appalling disruption. Hardly a day goes by without some congressman berating the airlines for their general inefficiency, their callous disregard for passengers, and their greed in gouging business travellers with steep fare increases on popular routes.
Hollywood has even started making movies that incorporate the horrors of air travel in the plot. For American consumers, airlines have taken over from HMOs (the controversial health-care companies) as public enemy number one.
The announcement last May of a merger between mighty United Airlines and its smaller rival US Airways met with universal hostility. Seeing what a poor job the airlines were doing, Americans refused to believe that bigger would mean better.

Moreover, the airlines are now being attacked by environmentalists for contributing to global warming as well as causing noise pollution around
airports. Although jet engines today are much quieter than they were even ten years ago, the huge rise in the number of flights makes the problem more pervasive. To cap it all, consumer groups are now lambasting airlines for squashing in too many people. Sitting still for long periods in cramped conditions, they say, can cause a condition known as deep-vein thrombosis
(the formation of potentially lethal blood clots). Some carriers, including American Airlines, are taking out a few rows of seats to create more space for economy passengers to move around in. But dissatisfaction keeps rising.

Why is the industry failing to keep its customers happy? One answer is that it has been growing so fast, even in a supposedly mature market such as
America, that the airlines, and the air-transport infrastructure of airports and air-traffic control, have simply not been able to keep up. Although the airlines like to say that 70% of delays are caused by the weather (ie, are
not their fault), many of these delays could in fact be avoided or shortened if the system worked better.

But consumer pressure in response to gridlocked skies is only one force for change in the air-travel industry. Equally important are the parallel trends of privatisation and liberalisation, which are proving unstoppable. In
America airlines have always been private, but elsewhere one national flag carrier after another is passing from government ownership into the private sector. The 70-odd airlines in which governments still have a majority stake
will gradually be sold off. In the past few years the biggest wave of privatisation has been in Europe. National carriers such as Germany?’s
Lufthansa, Air France and Spain?’s Iberia have all been opened up to private capital, following the example of British Airways, which was sold off in
1987. Now Asian airlines may be going the same way.

As governments are relieved of the burden of financing the investments of these often loss-making concerns, they become less anxious to protect them with rigid bilateral air-traffic agreements. This has already led to liberalisation in Europe (some 20 years after America), and is progressively opening up other international routes. Liberalisation within Asia is also proceeding rapidly. The combination of privatisation and liberalisation has created a new force for change. As Chris Tarry, transport analyst at Commerzbank in London, points out, airlines are no longer just chasing increased revenues or market share: ?“Shareholder value is increasingly seen as the key performance driver.?” In other words, airlines have joined the rest of the business world.

It is a puzzling paradox that an industry which has done so much to foster globalisation has itself been stuck in a regulated environment with a purely national ownership structure and protectionist trade rules. In 1945 the
number of passenger journeys made by air was only 9m; last year it was over 1.6 billion. Some 40% of the world?’s manufactured exports (by value) is
transported by air. In order to serve businesses that operate on a global scale, the airlines are having to find ways around the constraints.
Multinationals with factories and offices around the world want one-stop shopping with an airline that can send passengers to any corner of the
globe. This has prompted the creation of airline alliances, which attempt to weave the operations of separate airlines into a coherent network but stop short of full mergers.

The number and shape of such alliances will be governed by another force for change?—the consolidation of the industry that is now under way in America.
As America scales down its Big Six list of top airlines, the world is likely to end up with three or four big alliance groupings. ?“The number of alliances will be as many as there are large US partners,?” says Friedel
R?¶dig, who ran the Star Alliance (dominated by United Airlines and Lufthansa) until last month. ?“It is vital for each alliance to have a
footing in the US.?”

This may look like a worrying return to the oligarchy in the airline industry that prevailed in America before deregulation in 1978. But
alongside the mainstream carriers and their alliance partners now fly the low-cost carriers, such as Southwest Airlines and Jet Blue in America, and EasyJet and Ryanair in Europe. They offer an alternative model of air traffic?—short-haul, point-to-point flights?—which has been so successful that it is now exerting further pressure on the mainstream carriers to shape up.
Southwest and Ryanair have the highest margins and returns on assets of all the airlines.

-Jack Saporito US-CAW.