The leaders of airlines from every continent jetted into Beijing last week, escorted by their hosts to a banquet in the very heart of China’s political establishment – the Great Hall of the People in Tiananmen Square. Given the red carpet treatment and majestic setting, few onlookers might have thought this was an industry in crisis. Yet when the talking started, the state of aviation was summed up in a word that belies the traditional macho swagger of airline bosses: fragile.
The annual global summit of the International Air Transport Association (Iata) has resembled a United Nations of airlines, filled with delegates from the flag carriers of countries around the world. But the borders are becoming less distinct as the likes of British Airways and Iberia, Air France and KLM merge and consolidate, seeking to cut costs rather than struggle on alone.
This is an industry that has already made a multibillion-dollar global loss in seven of the last 12 years: and for European airlines, in the eye of the economic storm,
Tony Tyler, the genial president of Iata, refused to predict names or numbers but, when pressed, conceded that more airlines would doubtless go bust soon – and even the biggest names were not immune. Perhaps only the cash-rich Gulf carriers can sit easy. From the platform, Akbar al-Baker, the chief executive of Qatar Airways, delivered an unnerving prediction with a grin: “When we meet again next year,” he declared, “there will be far fewer of you sitting there.”
Gone already from the Iata conference hall this year were Malév, the Hungarian flag carrier for 56 years, and Spanair, the fourth largest airline in Spain until it nosedived in January.
The current travails of Qantas, the Australian carrier, will have sent a further chill down executive spines. Traditionally, governments have sought to maintain their flag-carrier airlines: Australia’s Qantas Sale Act prevents it falling into foreign ownership. But can the current state of affairs continue?
Earlier this month, Qantas shares fell below A$1 for the first time since the carrier was privatised 17 years ago, following a profit warning blamed on a combination of hard-up Europeans cancelling their holidays and sharply rising fuel costs. Attempts to restructure the airline last year led to a dispute that saw the entire fleet grounded. “Akbar told me I should put the union leaders in jail,” joked Qantas boss Alan Joyce, to the conference, hastily adding he wouldn’t seriously like to do that. There is no doubt that he feels vulnerable: it emerged last week that the airline had hired investment bankers to come up with a bid defence strategy in case a predator comes knocking.
Qantas’s biggest problem is the ever-more competitive environment. The rapid ascent of Middle East airlines and their hub airports, pioneered by Emirates in Dubai, lately joined by the rampant Etihad from Abu Dhabi, is prising the market for long-haul routes away from Qantas’s backyard. While the “Flying Kangaroo” still dominates on domestic routes, only one in five Australians choose the flag carrier to travel abroad.
Qantas, like all airlines, has seen its fuel bills balloon. Escalating oil prices mean fuel now represents on average a third of airline operating costs, from about 13% a decade ago, according to Tyler, putting profits were “on a knife edge”. Globally, Iata forecasts $3bn profits this year for the entire industry, on revenues of more than $600bn. Even those razor-thin margins are down to a handful of major carriers that continue to boom in China and the Asia-Pacific countries.
Joyce, speaking in his other role as Iata’s new chairman, says: “The number of airlines in the industry is too many. It’s too fragmented, and consolidation is a good thing.”
Consolidation, most agree, will continue and accelerate. Willie Walsh,International Airlines Group (IAG) chief executive, bluntly agrees that there are too many carriers. “Many will disappear. And you won’t see new airlines appear. The barriers to entry are much higher now.”
Consolidation, in Walsh’s view, won’t be down to the kind of takeover he recently finalised – the £186m acquisition that will see BMI integrate into BA. The future, he says, will be waiting for the weakest “to go belly-up – it’s the cheapest form of consolidation”.
Walsh points to the US, where the consolidation of major airlines has left, he says, a “stronger, more rational industry over time”. The IAG boss has said “synergies” between the British and Spanish airlines he controls will take until 2015 to be fully realised.
Christoph Franz, the chief executive of the German carrier Lufthansa, which has swallowed up both the Swiss and Austrian national carriers in the last five years, is equally adamant that other airlines need to go. “We have 50 airlines in Europe. In America you have six [major network carriers].” Competition rules, he says, will exacerbate company failures. “In the last decade it was acquisition and mergers. Now, with BMI, you see you have to provide expensive remedies and give up slots” to acquire rivals – in this case, a dozen prized landing slots at Heathrow.
According to Franz, “it means the smaller airlines can’t be bought – only go bankrupt. The current competition regime is triggering consolidation through bankruptcies.” Carriers that traditionally applied for state aid no longer can, he says, “and if they don’t get it, it’s very difficult”.
The big rationale for consolidation, says Douglas McNeill, a transport analyst at Charles Stanley, is that it concentrates control in an industry that has tended to grow too quickly in good times. Too many seats keep fares low and eat away at profits. “The fewer airlines there are, the less of that capacity indiscipline there will be.”
Ownership rules that limit foreign shareholdings (to 49% in Europe and Australia, to 25% in the US) are perhaps the only thing holding back full-scale consolidation. “You can spend a lot of money buying shares but you can’t get control, so what’s the point of that? 49% is seldom of much use,” says McNeill at Charles Stanley. “In my opinion, it’s not a wise investment.”
Some suggest Qantas could thrive in an alliance with Emirates, looking to the Gulf carrier to provide an onward network rather than sustain its own routes to Europe. But Emirates has said it is not looking for an alliance. Neither, says al-Baker, is Qatar. In the face of the Middle Eastern carriers, Qantas’s long-haul future may just wither away. Either way, an industry of fewer global players looks inevitable, and the kangaroo may not be the last to have its tail clipped.