Airline failures and consolidation inevitable, says IATA

Since 2008, 29 global carriers have halted operations, but more shutdowns are needed, as well as a round of blockbuster mergers and acquisitions, says the International Air Transport Association. IATA is pushing governments to raise foreign ownership limits on airlines and also allow consolidation across borders to help resolve the problem of too many airplanes chasing too few passengers.

“We are not asking for bailouts, if you see what governments in the States and other parts of the world have given to financial institutions, banks or the car industry,” IATA director-general Giovanni Bisignani said during a conference call Tuesday. The association’s members account for 93 per cent of global scheduled air traffic.

IATA wants governments to embrace “open skies” by approving new routes, even cases of “cabotage,” where foreign carriers would fly point-to-point within another country.

For instance, British Airways PLC flies between Canada and London’s Heathrow Airport; with cabotage, it would also be allowed to fly domestically between Toronto and Vancouver, for example.

—  Jang, Brett.  “The problem according to IATA: Too many airlines.” Globe & Mail, 15 September 2009.

I agree that there are a lot of airlines chasing fewer and fewer passengers.  But I don’t think this problem will be fully remedied by allowing, for example, Emirates Airways to fly domestic routes in Canada (although I do think that would help).  The fundamental problem is that air travel is damned inconvenient and unpleasant.  The long lineups for security screening; the waste of time and energy in having to show up a couple hours early; the bare basics no-frills service; the harried staff who are clearly not having a good day.  Or career.  Nobody wants to fly unless they absolutely have to.  Air travel needs a reboot all right, but the airlines have largely created their own brand of misery.

Ever since the discount airlines started eating away at their bigger cousins’ profit margins, the industry has been locked in a suicidal race to the bottom.  Legroom has been clipped in order to cram more bodies into the same aircraft; routine services and formerly free perqs have been stripped away to further pare down costs; fares have been lowered to fire-sale prices regardless of the actual cost of the flight.  And all while operating costs have marched steadily upward.  The airlines have fooled the public into believing low fares are a birthright, and now that we believe it too, they can’t quite bring themselves to seek salvation by dispelling the illusion.

Historically the airline industry has never been wildly profitable; most of its best-known exemplars (Imperial Airways/BOAC, Air France, KLM, Lufthansa) were heavily dependent on government subsidies for their survival.  KLM, for example, was founded in 1919; it remains the world’s oldest airline still operating under its original name.  By 1926, a mere seven years after its founding, government subsidies accounted for 41% of KLM’s revenue.  A 1927 subsidy agreement stipulated that the subsidies must gradually decrease to zero by 1934; you will not be surprised to learn that KLM did not reach this milestone until late in 1946.

About 16 or 17 years ago I flew from Toronto to London aboard a British Airways/Canadian Airlines code-share; an Executive Club (i.e. First Class) ticket was about $7,000.  Simply by keeping pace with inflation and purchasing power (as measured by the consumer price index) that fare should have risen by about 36%, or up to $9,535.63 in today’s dollars.  Its actual cost today is around $6,700, or $300 cheaper than it used to be.  Good for me?  Certainly.  Good for the airline?  I imagine not.

Something else to keep in mind is that the First Class folks themselves are rarely paying customers these days; very often they have earned a pile of reward miles, and are quite sensibly using those to travel.  The brunt of the cost is thus borne by the business-class passengers and the folks back in coach/economy.  I mention this not as any lament for the working man, but as a simple recognition that the airlines aren’t drawing in as many tens of thousands of extra bucks from the good seats at the front of the plane.

The only way out of the death spiral is to make travelling less of a pain in the ass.  To restore some speed and efficiency to the process; to add some much-needed service and cachet; most importantly to raise fare prices to a realistic, sustainable level.  Operating aircraft is an expensive proposition at the best of times, and ticket prices need to reflect that more than they currently do.  This will mean a further fall-off in coach passengers, but first it requires the tacit admission that air travel will, for the time being, revert to the domain of the patricians, not the plebes.  That is anathema in these democratic times, but if we want airlines to continue to function as profit-making enterprises at all, they will have to learn to be honest with themselves—and us.

Category: Aeronautics  Tags: ,
You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
2 Responses
  1. Polprav says:

    Hello from Russia!
    Can I quote a post in your blog with the link to you?