Adapting to Survive: An Industry Overview

28 February 2006 (Last Updated February 28th, 2006 18:30)

The air transport industry is responding to intense pressure with innovations and improvements to the way it operates. Pierre Jeanniot, Director General Emeritus, IATA, and Chairman, Thales Canada, Inc reports.

Adapting to Survive: An Industry Overview

About 150 years ago, the 19th century English social scientist Herbert Spencer, paraphrasing Charles Darwin, spoke of the need for species to adapt to survive in the struggle for life. Adapting to survive is a principle that the aviation industry has come to accept all too painfully, particularly in the last decade.

All sectors have been forced to reshape their products, costs and strategies to stay in business. Unable to change, some 'species' have perished. Flag carriers are not the first to go, nor will they be the last. So what can be done to ensure that the air transport industry keeps on top of the pressures it faces?

"Although much has been achieved in improving the competitiveness of the air transport industry, much still remains to be done."

SEEKING BETTER REGULATION

Sound government policy that is sensitive and adaptable to aviation's rapidly changing circumstances is essential to the survival of the air transport industry. However, governments today sometimes appear supremely indifferent to the difficulties faced by the industry. Heavy-handed solutions are imposed where a little intelligent intervention would suffice.

Recently, my successor at IATA, Giovanni Bisignani, revealed that the EU was inflicting an annual cost burden of almost €6bn on the airline industry.

SECURITY INITIATIVES

The year 2004 was the safest year ever for air transport. More than 1.8 billion passengers were carried by all airlines, and not one life was lost due to a security incident. Cockpit doors are now reinforced and locked, passengers are screened from head to toe, and biometric devices are being tested and implemented.

At the same time, machine-readable passports and their biometrically enabled versions (e-passports) should be available worldwide within the next five years, passenger data transmission has been agreed upon, at least in part, and explosive detection devices have been deployed. Thousands of air marshals are in the air, and combat aircraft stand ready to intercept rogue aircraft.

The USA is understandably cautious about security. But many of its new and proposed regulations are unnecessary, very expensive to implement and sometimes redundant.

US policy now requires the checking of passenger manifests against a 30,000-name 'no fly' list for all foreign flights into and over the USA, no later than 15 minutes after a plane has departed.

Unfortunately, there have been several cases of mistaken identity where flights were unnecessarily forced to turn back, at considerable inconvenience to passengers and cost to airlines.

Another US plan is to fingerprint and photograph international travellers both when they arrive at US airports and when they leave. However, these unreasonable measures are alienating passengers.

ADDITIONAL COSTS

And haste makes waste. According to The New York Times, the US Government is now moving to replace or alter much of the $4.5bn-worth of security equipment rushed into service after 9/11 because it is ineffective, unreliable or expensive to operate.

"The aviation industry must adapt if it is to survive."

The cost of additional security measures to the industry and flying public is over $5bn a year.

But should passengers have to pay for air security? Citizens are not charged for other forms of civil security.

In truth, air travel is being taxed like the 'sins' of alcohol and tobacco consumption, the feeling of governments being that the air transport industry and air travellers are guilty of the sin of environmental pollution – all this despite the fact that, in the last 40 years, the industry has reduced noise at source by 75% and emissions per passenger kilometre by 70%.

Governments should understand that additional taxes limit the funds available to invest in new technologies and will hinder rather than help the industry's ability to further reduce its impact on the environment.

Such taxes will hinder, for example, the industry's ability to develop next-generation airplanes, such as the B787, A350 and A380, with their 20%-lower fuel consumption and emissions – a major achievement.

Although aviation was excluded from the Kyoto Protocol because of the legal complications of dealing with international flights over oceans and outside any national jurisdiction, IATA and ICAO are trying to get emissions trading for airlines on the agenda for the next annual UN Conference on Climate Change.

Emissions trading is the way to go. Allowing airlines to buy and sell the right to emit CO2 would be a more efficient way to tackle climate change. The European Commission (EC) has now recommended that airlines be included in the scheme.

DEREGULATION MOVES

I remember when the USA championed deregulation, so it is somewhat ironic that the USA rejected the EC proposal for a Transatlantic Common Aviation Area (TACAA). The EU transport ministers were not in agreement either.

In the meantime, like-minded countries in other regions of the world are opening their markets, and a number of significant initiatives are on the drawing board.

India has been moving towards complete market freedom. Its new, much more open aviation policy has resulted in considerably more liberalised agreements with the UK, the USA and China.

"Measures such as improved efficiency, deregulation and technological innovation are helping the industry to remain profitable."

I have been advising my own government, in Canada, about moving faster towards a wider opening of Canada's air transport market. The next stage should be to seek the total integration of aviation markets in North America as part of the North American Free Trade Agreement (NAFTA) and develop an open skies agreement with the EU.

If the deregulation of air travel markets is proceeding too slowly for some, it is proceeding too quickly for others, or at least with insufficient safeguards, leading to abuses. For example, fees in Canada are among the highest in the world – Toronto Airport is without doubt the most serious offender.

Because airports are essentially monopolies in their respective cities or regions, their control by large private consortiums makes it vital that governments ensure their profits are adequate to finance the high cost of new infrastructure but are not excessive.

THE ARRIVAL OF THE A380

Adapting to the A380 may not be as big a challenge for airports as was first predicted, since the aircraft has been designed to fit into an 80m x 80m box of available apron space and gate separation. And because of its 20-wheel main landing gear, weight distribution does not exceed that of aircraft already in service.

It is thought that about 20 major hubs around Europe, North America and the Pacific Rim will be ready to handle the A380 by late 2006 or early 2007. And another 40 airports are expected to follow by the end of the decade.

LEVEL PLAYING FIELD

Major airports were initially content to let the low-cost airlines operate at under-utilised, less expensive secondary airports, such as London Stansted. But as recession reduced the business activity of the major hubs, they decided to go after the low-cost trade by modifying sections of existing terminals for their exclusive use, keeping down costs and fees and tailoring services to their no-frills strategy.

Such discrimination does not sit well with the full-service airlines, however, and in a recent decision relating to Berlin's Schoenefeld Airport, a court ruled that all airlines have to be treated equally.

One solution to this situation is to develop low-cost terminals open to all carriers. Singapore's non-discriminatory low-cost terminal is a relatively cheap, $24m, single-storey building without jet-ways, lounges, escalators, elevators or seats at gate areas. Fees will be 20%–25% cheaper.

ATC INITIATIVES

IATA thinks that optimal ATC could reduce the global fuel bill
for airlines by 18%. Meanwhile, the Single European Sky (SES) concept has been accepted in principle, and streamlined ATC rules are being pushed through. But the European continent's 34 separate ATC centres won't disappear anytime soon.

"The air transport industry is responding as never before to the survival imperative."

Abolishing borders in the sky is a political minefield.

In an attitude that goes back to the Second World War, many EU countries still enshrine ATC as a matter of strategic national importance.

Continent-wide application of the gate-to-gate concept – that is not allowing an aircraft to leave a departure gate until the arrival gate is available – would be a good start.

Saving a minute of fuel burn on every flight would save $3.6bn in operating costs, as well as 4.2 million tons of CO2 emissions.

The recent reduction in minimum vertical separation over Europe, the Atlantic and North America was accomplished smoothly and safely. It required all operators to equip their aircraft with more precise and costly instrumentation, but the benefits are enormous. Airway capacity has almost doubled.

Over the USA alone, airlines are expected to save $400m in fuel and operating efficiency during the first year and more than $5bn over the next decade. There are several other promising ATC developments:

  • GPS satellite navigation, which has helped create new routes, will be tested on a small number of transatlantic flights
  • Galileo, the proposed European satellite navigation system, should be operational by 2008
  • Testing is under way on a 'free flight' operating concept that will allow pilots with specially equipped aircraft to choose their own flight paths
  • Synthetic vision and other new avionic tools will assist terminal operations
  • Wake turbulence avoidance will reduce final approach spacing by half
  • Some airport authorities are considering 'paving down the middle' to add a third or even a fourth runway between two existing, parallel runways

These developments are some way off. But taken together, they could more than triple current ATC capacity. That is a considerable improvement in airway productivity.

IMPROVING PRODUCTIVITY

Cost pressures on the air transport industry as a whole continue unabated. Recently, oil prices hit a frightening all-time high of $70 a barrel. At an annual average of $43 a barrel, airline industry losses alone are predicted to be $5.5bn in 2005. As a result, improving productivity will continue to be a necessity for all industry players.

IATA is leading a programme called 'Simplifying the Business' that leverages technology to reduce the cost of complex industry processes, including passenger ticketing, cargo invoicing, check-in and baggage handling.

"IATA is leading a programme called 'Simplifying the Business' that leverages technology to reduce the cost of complex industry processes."

Electronic ticketing levels are now approaching 40% worldwide. If the goal of 100% electronic ticketing is achieved by 2007, as planned, this could save the industry $3bn a year.

The motivation for moving towards electronic ticketing is strong, as non-compliant airlines will eventually have to issue their own paper at more than ten times the cost of e-ticketing.

Doing away with paper tickets also means the check-in process can be completely overhauled, while barcoded boarding passes will eventually allow travellers to print out their own tickets at home. Several airlines already allow online check-in over the web. The next step is to extend online check-in to mobile phones.

SELF-SERVICE KIOSKS AND RFID TAGGING

In the meantime, another component of IATA's plan offers more immediate benefits. Self-service kiosks, which are already popping up in airports around the world, save the industry as much as $3.50 per check-in, while improving customer service.

Switching from airline-specific kiosks to Common-Use Self-Service (CUSS) ones, which can handle passengers from several airlines, will be even more efficient.

Complementing passenger e-ticketing is a programme to eliminate all the paper involved in handling cargo by the end of 2010. Some shipments entail as many as six different forms, each of which costs approximately $6.

Although less than 1% of the 1.5 billion bags carried on commercial flights each year go astray, that still represents about 10 million bags and a corresponding number of angry owners. Mishandled baggage costs the industry as much as $1.6bn a year.

Radio-Frequency Identification (RFID) technology, thanks to the greatly reduced cost of RFID tags, will substantially reduce the number of lost, delayed and mishandled bags in future, and the industry savings will be substantial.

All of these technologies – electronic ticketing, remote check-in, self-service kiosks and RFID tags – have already been adopted, to varying degrees, by forward-thinking airlines and airports around the world. The air transport industry is responding as never before to the survival imperative.

MIXED PICTURE

The financial health of the industry differs by region and by type of airline. But for US carriers, there is little good news.

United Airlines (UAL Corp) recently posted a second quarter loss of $1.43bn, while Northwest lost $225m in the second quarter and Delta $382m. In South America the prognosis is better, with first-half traffic growth of almost 14% by the 22 member carriers of the Latin American Airline Association (AITAL).

A number of European airlines have shown that it is possible to turn things around. Air France-KLM Group, Lufthansa, SN Brussels Airlines, British Airways, Air Berlin, Ryanair and Easyjet have all enjoyed recent financial success.

After placing last year's largest civil aircraft order – for 110 Airbus A320s – Ryanair increased its pre-tax profits in its first quarter to June by 32%, despite doubling its fuel costs. Easyjet also swallowed soaring fuel prices by cutting costs, and raised its full-year profit forecast to match last year's $111m.

ASIAN GROWTH

For Asia Pacific carriers, the challenge is to adapt to internal markets, which grew at a phenomenal 20% last year, and are projected to continue at a double-digit pace in future.

"The airline industry as a whole continues to lose between $5bn and $10bn a year."

China is expected to lead the world in air travel growth over the next decade. By 2010, the country will have 200 airports. Although India remains far behind China's fully liberalised air policy, an equally booming economy and a rapidly growing middle class have transformed a stagnant two-carrier government monopoly, notorious for poor service, into a vibrant, highly competitive air industry growing at 20% a year.

UNFINISHED JOB

As we have seen, all the components of the air transport industry are, at varying speeds, adapting to survive. But the struggle to survive is far from complete. The price of oil still threatens, the pressure on yields is relentlessly downward and cost cutting is not complete.

Fleets are in need of renewal and the cost of new airplanes will further lower operating costs. Market liberalisation is only piecemeal. Government regulation remains excessive in some areas and insufficient in others, while congested terminals and airways are potentially choking growth and more than a few carriers are in urgent need of consolidation.

The industry has made a great deal of progress in its effort to safeguard its profitability, but a great deal more needs to be done. We must not forget that, despite substantial and sustained demand and growth, the airline industry as a whole continues to lose $5bn–$10bn a year.