2009 Issue No. 2
A M A G A Z I N E F O R A I R L I N E E X E C U T IV E S
a i r l in e
h eig ht s
Happy Jetting A Conversation With â€Ś Dave Barger, President And Chief Executive Officer, JetBlue Airways, Page 14.
11 Air Malta makes big changes across entire organizations
ÂŠ 2009 Sabre Inc. All rights reserved.
20 Global carriers take various steps to remain in the black
46 Planning departments follow industry best practices to compete
By Lauren Lovelady | Ascend Staff
Shrinking To Profitability Many carriers continue to implement measures to remain solvent or regain solvency while others continue to grow their operations. Regardless of which airlines shrink and those that grow, all airlines have taken steps â€” albeit some more drastic than others â€” to cut costs and generate revenue during the most trying time in the industry.
In response to the early warning signs in the third quarter of 2008, many carriers began reducing capacity. Suddenly, airlines’ survival depended on their ability to shrink, rather than grow, to match the number of seats they offered with the number of passengers now willing to pay for the seats. Capacity cuts came in two forms. Airlines assigned smaller planes with fewer seats on routes once served by larger aircraft, or they eliminated service entirely in some markets, at times parking underutilized aircraft. U.S. carriers were the first to implement reductions. Airlines in other regions soon followed, and most initial reductions worldwide were fully in place by the first quarter. North American carriers made the largest initial reductions, cutting capacity by 9 percent. Operational statistics posted from the first quarter indicate that while capacity was reduced by 9 percent, passenger traffic declined 11.1 percent, resulting in a 2.1-point gap. This gap was significantly less than the 3.8-point gap reported for Europe and the comparatively large 6.5-point gap for Asia/ Pacific. In all cases, the fact that traffic declines outpaced capacity reductions suggests additional cuts are needed and, in most cases, are already underway. For example, as the usually busy summer travel season was ending in the northern hemisphere, U.S. carriers announced further service reductions. American Airlines now plans to cut capacity
by 7.5 percent this year, compared with the 6.5 percent previously forecasted. Delta Air Lines said it will trim capacity by 10 percent, up from the 6 percent to 8 percent it originally planned. And Southwest Airlines, which had never planned a capacity cut, plans to reduce flying by 6 percent this year. Other regions around the world are being impacted as well. Japan Airlines, the largest Asian carrier in terms of revenues, is cutting capacity on international routes by 10 percent. Asia/Pacific carriers account for nearly a third of global passenger traffic. And many African carriers, including South African Airways, Air Zimbabwe and Ethiopian Airlines, have reduced or suspended international flights and moved aircraft to more profitable regional services in response to a 12.9 percent drop in passenger traffic. The Middle East, however, appears to be the only region still not experiencing the downward spiral in passenger traffic. In fact, demand for air travel grew 9.5 percent from June 2008 to May 2009. But because the region continues to add capacity — 14.5 percent over the same period — ahead of demand, Middle East carriers are expected to lose a combined US$900 million this year. But are capacity cuts alone enough to return an airline to profitability? Probably not, say most industry analysts, but they may help stop the bleeding because roughly 50 percent of a carrier’s costs are related to capacity production, including fuel. And parked aircraft require some level of ongoing maintenance,
Traffic Growth By World Region 15%
Asia/Pacific Latin America Europe North America
Asia/Pacific Latin America Europe North America
1Q08 4.6% 13.8% 4.0% 2.2%
2Q08 3Q08 2.6% -2.2% 10.7% 10.7% 2.8% 0.8% -1.0% -3.2%
4Q08 1Q09 -8.5% -12.0% 2.0% -0.1% -2.7% -9.7% -7.5% -11.1%
Sources ATA,AEA ALTA, AAPA
The first traffic declines occurred in North America. By early 2009, North American carriers had responded with a 9 percent capacity decrease, Latin America traffic was shrinking, and other regions were posting declines near or beyond 10 percent.
irline growth has traditionally been viewed as a key indicator of airline profitability. The addition of new routes and expansion of existing ones as well as delivery of new aircraft appeared vital to sustaining this growth and increasing market share and revenues. Until last year, there were few, if any, examples of airlines successfully shrinking their operations — reducing capacity, delaying or canceling aircraft deliveries, scaling back or eliminating service, and slashing jobs — to achieve profitability. After all, these measures are somewhat risky and could potentially result in the loss of market share, revenues and customer loyalty. Then in early 2008, airlines began to experience the effects of the oncoming global economic downturn, after barely recovering from the aftermath of Sept. 11, seven years earlier. Oil prices spiked. At one point in the year, fuel comprised 40 percent of an airline’s costs. And airline traffic growth rates slowed as companies and individual consumers alike tightened budgets. North America was the first region affected; Asia/ Pacific, Europe and Africa soon followed. Still the Latin America and Middle East regions seemed to be holding their own. But by the first quarter, even traffic in Latin America was impacted, and other regions were posting declines near or exceeding 10 percent. Only the Middle East was experiencing a growth in passenger traffic due, in part, to increasing trade activities and development of the tourism industry within the region. According to the International Air Transport Association, North American airlines alone lost US$5.1 billion last year (due in part to soaring fuel prices), and worldwide industry losses this year are forecasted to be around US$11 billion. North American airlines are expected to lose around US$2.6 billion, European carriers about US$3.8 billion and airlines in Asia/Pacific and Africa close to US$3.6 billion and US$500 million, respectively. Additionally, Latin American airlines are forcast to lose US$900 million, and Middle East carriers are expected to lose US$500 million. The global recession is impacting not only passenger traffic but freight volumes as well. IATA’s 230 carrier members are forecasting freight volumes to fall by 17 percent. “There is no modern precedent for today’s economic meltdown,” said Giovanni Bisignani, IATA’s director general and chief executive officer, during his recent address to 500 of the airline industry’s top leaders at the 65th IATA Annual General Meeting and World Air Transport Summit. “The ground has shifted. Our industry has been shaken. Our future depends on a drastic reshaping by partners, governments and industry.” So what does the future hold for the worldwide airline industry?
2% 0% -0.1%
1Q09 versus 1Q08
Capacity And Traffic Change By World Region 1Q09 versus 1Q08
-2% ASK RPK
-14% Latin America
Sources ATA,AEA ALTA, AAPA
North American capacity reductions of 9 percent approximately equaled traffic declines of 11.1 percent. The 2.1-point gap was lower than the 3.8-point gap for Europe or the fairly large 6.5-point gap for Asia/Pacific.
and preparing them to return to service is expensive. “Most airlines owe money on their aircraft, either for loans or leases,” explained Jim Corridore, an airline analyst at Standard & Poor’s. “So as long as they can generate enough money from the plane to cover at least some of the payments, they’re often better off flying the plane — even at a loss — rather than parking it.”
The Demise Of Business Class
In the past, many airlines have relied on business travelers, who generally purchased higher-priced, last-minute fares, as a steady source of revenue. But with the recession impacting virtually all business sectors worldwide and subsequently individuals, many travelers are now forced to choose price over customer loyalty, convenience and preferred amenities — if they even utilize air travel. Among European flagship carriers, for example, British Airways is leading the way in the elimination of costly amenities that had previously distinguished the airline from low-cost carriers. Cutting meals in economy class on short-haul flights will save the airline approximately £22 million (US$36 million) annually. At the same time, British Airways’ trans-Atlantic, business-class-only subsidiary, OpenSkies, recently dropped service between Amsterdam and New York and shelved plans to add four more jets serving other European cities by the end of the year. In the United States, some airlines have begun charging 22 ascend
extra for drinks on long-haul flights and others have increased the fees for checked baggage. Bottom line, some airlines now view ancillary services that don’t generate additional revenue as unnecessary, and passengers and businesses are now refusing to pay the price for a seat in first or business class, particularly on short-haul flights. According to the latest figures released by IATA, the number of premium ticket holders dropped 23.6 percent in May — the 12th straight month of declines. “On short-haul flights, business class is on the way out and might even disappear within the next few years,” said Panmure Gordon Analyst Gert Zonneveld.
The Rise Of Low-Cost Carriers
As price-sensitive travelers search for the cheapest fares, the demise of business class on full-service carriers has brought about the rise of low-cost carriers with their minimal operating costs and relatively few amenities. From early on, it became evident that budget airlines around the world were weathering the recession better than their full-service counterparts. A detailed view of the comparatively data-rich U.S. marketplace during the first quarter reveals low-cost carriers Southwest Airlines, AirTran Airways and JetBlue Airways had some of the smallest traffic declines, ranging from 4 percent to 8 percent. In addition, these declines more closely matched capacity reductions. While some full-service carriers
had comparatively large gaps between traffic declines and capacity cuts, possibly signaling the need for further capacity reductions, traffic declines for most low-cost carriers approximately equaled capacity cuts. In other regions, low-cost carriers appear to be faring even better. In the face of mounting losses by European flagship carriers, both London-based easyJet and Ryanair, Europe’s largest budget airline, are expected to post pretax profits this year. Asia’s fledgling low-cost carriers are also benefiting from bargain-hunting travelers, lower fuel prices and the opening of the region’s routes to competition during the last decade. Singaporebased Tiger Airways, for example, is flying 50 percent more passengers this year than the same time last year. “These times are very good for lowcost carriers,” said Bruce Buchanan, CEO of Melbourne-based Jetstar Airways at a conference earlier this year. “We’re seeing quite strong demand. Six months ago it was a much tougher environment.” The only threat to the continued rise of low-cost carriers in Asia/Pacific, agree industry analysts, is if governments return to protectionist policies in an attempt to save jobs at full-service flagship carriers, many of which are state owned. Similar to businesses such as Walmart and McDonald’s in the retail and restaurant sectors respectively, it appears low-cost airlines have become the beneficiaries of increasingly cost-conscious consumers seeking more value for their money.
Canceling Orders, Delaying Deliveries
Recent airline capacity reductions and budget cuts have undoubtedly impacted aircraft orders and deliveries. Boeing and Airbus have been grappling with falling orders as the global economic crisis forces airlines to delay or cancel plans to acquire new aircraft. And tightening credit rules have made it more difficult for potential customers to secure financing to update their fleets. While most airline/aircraft negotiations are ongoing and confidential, carriers worldwide have hinted at or announced plans to cancel or delay orders. British Airways, for example, has delayed delivery of 12 new superjumbo Airbus A380s and is reviewing the status of 24 Boeing 787 jets it ordered in 2007. In China, government authorities have urged state-run carriers to cancel or delay aircraft deliveries. Ireland-based Aer Lingus has postponed the delivery of five new aircraft until at least 2013 and beyond and has terminated existing leases on two more to significantly reduce its capital expenditure for the next three years and strengthen its balance sheet. Qantas said its strategy to save US$1 billion in the short term so it could take advantage
Reduction In Workforce
Mounting financial losses, capacity cuts, declining passenger travel and failed business ventures have ultimately equated to massive airline job losses — thousands upon thousands of them — in every area ranging from airport and flight services to maintenance and administration. The airlines’ decision to shrink their operations has had a domino effect on aircraft manufacturing jobs as well, which now face an uncertain future as current orders for aircraft dwindle. In the United States alone, airlines cut nearly 28,000 jobs last year, with the majority coming from full-service carriers. However, many low-cost and regional carriers also laid off employees as they, too, struggled with high fuel prices and the worsening global economic crisis. By the end of 2008, the country’s airlines employed about 391,900, down 6.6 percent from the year before. Headcount reductions at most airlines worldwide have continued this year. In fact, one of the largest international carriers in the world, American Airlines, is now operating with staff levels similar to those it had in the 1980s. Employees fortunate enough to still hold jobs within the industry face pay cuts or months or years of salary freezes. In addition, a few airlines are asking employees to work for free. British Airways urged thousands of staff members to work unpaid for up to four weeks this summer, following the lead of Chief Executive Officer Willie Walsh.
At many airlines, staff and pay cuts have been met with resistance from unions and government mediators called in to avoid crippling strikes. In some regions with recently liberalized or still-restricted markets, the fear is that government officials will take measures to protect local employment and secure the short-term stability of their flagship airlines, impeding the long-term progress of deregulation worldwide. “We cannot reshape without flexibility,” said Bisignani. “This is not the time for salary increases. To protect jobs, we must modernize work practices, and we must all do more with less.”
In other more regulated markets, governments have injected funds into stateowned airlines to keep them alive while allowing smaller players to compete on their own. In his state of the industry address, Bisignani noted that liberalizing key routes would generate US$490 billion in economic activity and 24 million jobs. “We don’t want bailouts,” he said. “All we ask for is access to global capital. If we cannot pay the bills, saving the flag on the tail will not save jobs.” Most industry analysts view the current market situation as a unique opportunity for airlines to rethink and reshape the airline business — to join forces where advantageous to strengthen themselves and the industry as a whole. To do so, carriers must: Revisit their costs structures, Slash expenditures in the short term, Launch programs designed to return to long-term profitability. For some carriers, capacity and headcount reductions and delaying or canceling aircraft orders will not be enough to remain in service. In such cases, struggling airlines face a handful of choices. First, they can seek financial assistance from external sources, such as governments or private investors, knowing bailouts will not be without stipulations. Second, they can fold and cease operations. Or they can consolidate and pursue mergers, acquisitions or alliances to improve market position; provide access to new markets; eliminate redundancies; and create
Consolidations, Mergers And Alliances
It is the critical issue before the global airline industry at this moment: how many airlines can the current world market support? Most in the industry already know the answer: not as many as there are now. By the end of 2008, a reported 31 airlines had ceased operations during the year. Who will survive the global recession? The answer is complex and highly dependent on each region’s market structure and level of regulation. In competitive, deregulated markets, only the healthiest carriers should survive. In the current market situation, that appears to be mainly low-cost carriers. However, as some industry analysts point out, are some airlines considered “too big to fail”? What then?
Traffic Change Versus Capacity Change — Top 11 U.S. Carriers — 1Q09 Versus 1Q08 2% Capacity Change 0% -14%
US Airways JetBlue
Capacity dropped more than traffic
American Traffic dropped more than capacity
-8% -10% -12% -14%
Sources U.S. SEC 10-Q filings
Erring on the side of larger capacity decreases appears beneficial so far. While low-cost carriers seem to be riding out the storm better than network carriers, it’s likely that both models will need to make further reductions. It’s evident that airlines with the courage to make larger capacity reductions seem to have been rewarded.
of long-term potential growth is now possible because it has delayed aircraft deliveries. And the list seemingly goes on and on. “While the commercial aviation industry is facing a significant downturn, it is cyclic and has a long history of declines and upturns,” said Randy Tinseth, vice president of marketing for Boeing’s commercial airplane division. Despite current difficulties, Boeing projects the commercial airplane market will stabilize and economic growth will return over time. It expects a market for 29,000 passenger and cargo planes valued at US$3.2 trillion during the next two decades and maintains a record backlog of more than 3,500 orders. Still, creeping fuel prices, aging fleets and environmental concerns are pressuring some carriers to retire older, less-efficient aircraft sooner rather than later, which may be financially beneficial to them in the long run. Houston, Texas-based Continental Airlines recently took delivery of two new, fuel-efficient Boeing 737-900 ER jets with winglets and removed from service four Boeing 737500s. The U.S. carrier also plans to acquire seven additional Boeing 737s by yearend and remove 29 more 737-300 and 737-500 aircraft by next January.
Change In Profitability Versus Change In Capacity
Profitability Change operating margin, points
10 JetBlue Alaska United Frontier -14%
US Airways Continental American -8% -6%
Sources U.S. SEC 10-Q filings
Carriers with the most capacity reductions realized improved profitability, as measured by change in operating margin. Those making fewer reductions often faced profitability declines, and carriers with medium-sized reductions posted more mixed results, with the worst case being a nearly flat change in profitability.
operational economies of scale and cost synergies. Approximately 50 of the world’s largest airlines are members of one of the three main global alliances — oneworld, SkyTeam or Star Alliance — and, together, they carry more than 60 percent of the world’s air travelers.
Declining IT Investments
For the first time in several years, airlines are drastically reducing their IT investments in an attempt to cope with unprecedented financial losses. In the 2009 Airline IT Trends Survey, co-sponsored by SITA and Airline Business, IT spending as a percentage of revenue is forecasted to be just 1.7 percent this year, the lowest level since 2002. The survey is an independent poll of senior IT personnel working within the top 200 passenger carriers. This year, 116 airlines responded, including 27 percent classified as airlines carrying more than 20 million passengers and 11 percent low-cost carriers. Undoubtedly, airlines are in survival mode: 72 percent of survey respondents intend to renegotiate IT supplier contracts and 70 percent will invest in solutions that lower overall enterprise costs. Most airlines have already begun rationalizing IT suppliers, consolidating IT infrastructures, reducing headcount and outsourcing, where possible. “We are living in the most challenging times any of us have seen in the air transport industry,” said Paul Coby, SITA chairman and 24 ascend
British Airways chief information officer. “We should not be surprised that when survival is the issue for many airlines, that all but the most essential of IT investments has been put on the back burner. “But it is important to recognize that IT is also part of the solution to our challenges. Used well and effectively, IT will cut costs and protect revenues,” he said. “The survey tells us that IT has already accomplished a great deal in reducing distribution costs and expanding self-service functionality.” For the first time, all survey respondents said they sell tickets online, indicating Web sales are among airlines’ most important distribution channel. Web check-in is now at 60 percent and is expected to reach 92 percent in the next three years. During the next three years, carriers will prioritize IT investments in a number of areas, including IP telephony, service-oriented architecture, software as a service, Web 2.0, cloud computing, data security and biometrics. “Again, no one should be surprised by this,” continued Coby. “It tells me that airlines absolutely understand the importance of technology for the future, and what we are seeing here is an immediate and necessary response to the global recession. “Now every airline in the world also knows that IT is going to be key to
future success when we come out of the recession with smart use of technology addressing not just the 1.7 percent of airline costs but addressing 100 percent of the airline cost base and 100 percent of airline revenues.” According to the survey, airlines plan to add more functionality to their Web sites by the end of 2010, including: Change/cancel/rebook facilities, Alternative payment options, New products to improve revenue, Booking portal for corporate customers, Frequent flyer redemption functionality, Booking portal for travel agencies, Online shopping tools. The use of efficient self-service technologies is becoming increasingly widespread with 74 percent of all airlines planning to increase the number of kiosks for either check-in or new functionality. Both Web and kiosk check-in will reach almost 100 percent by 2012.
An Industry At The Crossroads
As a whole, the airline industry has never been profitable over the entire business cycle. Instead, short periods of profitability, accompanied by rapid expansion, are typically followed by periods of heavy losses that on an accumulated basis place the industry below the breakeven point. During the past decade, for instance, the industry only experienced three years of positive net profits while overall losses exceeded US$25 billion. Perhaps the idea of shrinking to profitability should not be the primary objective for the majority of airlines today. Rather, the focus should be on trimming the excess from an industry that has grown too fast in some areas and strengthening areas that have not grown enough. To survive and thrive, the industry needs financially and operationally sustainable airlines. Most carriers will have to respond to the economic downturn with continued cost-cutting initiatives and revenue-generating programs, and those that emerge with healthy balance sheets will have the opportunity to reshape their market segments and firmly establish their positions in this ever-evolving industry. a
Lauren Lovelady can be contacted at firstname.lastname@example.org.
Taking your airline to new heights © 2009 Sabre Inc. All rights reserved. email@example.com 2009 Issue No. 2 A M A G A Z I N E F O R...
Published on Dec 8, 2010
Taking your airline to new heights © 2009 Sabre Inc. All rights reserved. firstname.lastname@example.org 2009 Issue No. 2 A M A G A Z I N E F O R...