Flying through the perfect storm

IN the long term, the bloated air fare is good for the industry. “Put bluntly, if these adjustments don’t take place – and quickly – the airline industry will collapse and have a ripple effect throughout the entire world economy…Apart from the direct impact on airlines, there would be problems from constrained air travel. What rises from the ashes is not likely to be friendly to air travel,” warned Malaysia Airlines managing director and CEO, Dato’ Sri Idris Jala in his open letter to the industry sent out at the end of June. Idris stressed that airlines transport 2.3 billion passengers annually. US$3.5 trillion of business and 32 million jobs depend on the aviation industry to fly through turbulent times.

“But if those adjustments happen – in spite of the pain that it will initially cause – the ground will be laid for a more sustainable industry going forward where there will be enough returns for the industry and enough participants operating in a liberalised and open sky to keep fares fair,” he said. “The good times will return.

He reinstated his stance on how fuel could command only so much price before it crashes down. “I have said my piece about how speculation continues to fuel oil prices when rounds and rounds of derivative instruments, one built on top of another, keep pushing the price higher and higher despite there being no physical shortage of the product. In that kind of a game, something will give and the oil price will come a-tumbling down - eventually. But nobody knows when and we need to be prepared,” he said.

Drastic change in the aviation industry is imperative for airlines to survive, he said. Incremental increases are the thing of the past; air fares would increase by as much as 50 percent. Capacity would decrease by a quarter. Cost cut even further by a tenth. “These have to be done in the face of customer resistance, grounding aircraft, cutting staff and squeezing out virtually all but the most essential costs,” he summed up.

Malaysia Airlines, which has “no choice to raise fuel surcharge and fares”, will seek measures to cut cost “down to the bone” without comprising safety and service. Capacity will be cut as well. “In certain circumstances, it is better to ground the aircraft rather than fly them at net cost,” he said.

Meanwhile, the carrier is using the LCC model to its advantage with its Everyday Low Fares (ELF). “Our risks are mitigated because we have in place a inventory management system which monitors seat inventory closely so that we don’t cannibalise out own market by under-pricing our seats,” he said.

A number of carriers is banking on the delivery of efficient next-generation aircraft.

Continental Airlines, for its part, is accelerating the retirement of Boeing 737-300 and 737-500 fleets. In the first six months of 2008, Continental removed six older aircraft from service; it will retire an additional 67 Boeing 737-300 and 737-500 aircraft, with 37 of these additional retirements occurring in 2008 and 30 in 2009.

Continental will continue to take delivery of new, fuel-efficient NextGen Boeing 737-800s and 737-900ERs. Overall fuel efficiency will improve measurably as it takes delivery of 16 of these aircraft in second half of 2008 and 18 in 2009. Continental maintains its firm commitments to 111 new Boeing aircraft for delivery over the next six years, with options to purchase a total of 102 additional Boeing aircraft.

In addition, Continental also remains focused on introducing fuel-saving technologies for its existing aircraft. More than 230 aircraft have been equipped with winglets, which minimise drag by enhancing aerodynamic performance. Winglets lower fuel consumption by as much as 5 percent while also reducing emissions and noise.

Country director of Hong Kong, Macau and Southern China, Wyn Li, said, “During this difficult time with escalating fuel price, Continental Airlines is one of the few US carriers who is able to continue to replace older aircraft with fuel-efficient NextGen Boeing equipment. We strongly believe enhancing fuel efficiency is the right direction for sustainable development and long-term growth of the aviation industry. Continental Airlines will continue to explore various measures to counter the skyrocketing fuel prices.”

Side Bar

A confluence of the undesirables

Aviation industry weather forecast from Malaysia Airlines managing director and CEO, Dato’ Sri Idris Jala.

Four conditions are coming together to trigger the perfect storm. One is of course the surging oil price. And then there are the slowing global economy, overcapacity and the rapid growth of low-cost carriers or LCCs.