February 2011 Archives

Willie Walsh, head of the newly-launched British Airways-Iberia merger IAG, wants to replace Iberia's 36 fuel-thirsty, four-engined Airbus A340s. With oil threatening $120 a barrel as he spoke, he presumably regards this move as a very high priority indeed.

Walsh reckons he can get more efficient aircraft that are already available to see IAG through until less-thirsty Boeing 787s or Airbus A350s are on stream. Since every airline would like to replace less-efficient with more-efficient aircraft, Walsh is either engaging in wishful thinking or he sees carriers in such distress that they would welcome his call as an opportunity to turn prized assets into desperately-needed cash.

Don't be surprised if he finds some takers. IAG's prospects hardly look healthy - its shares have been on a steep descent since its January initial public offering - but IAG isn't alone. While stock markets have been enjoying a long rally, airline shares have been going south and it is not hard to see why. Fuel represented more than a quarter of operating costs last year, when oil averaged just $79/barrel. At $100-plus, the industry is into heavy losses, and since most airlines started frantically slashing non-fuel costs back in 2008 when oil soared to its pre-crisis peak of $140, there is not that much more they can do now do counter the latest rise.

What worries airlines is the prospect of a long haul at $100 or higher. Oil's been rising for months, but some of the impact on jet fuel is down to refineries having to choose between it and heating oil, so airlines have paid for a cold winter in North America and Europe.

Just as that effect should be easing off, Middle East turmoil looks increasingly like an oil supply shock. Some disruption to Libyan output can be coped with, but the market isn't prepared to bet against revolution fever spreading to Saudi Arabia.

Two background trends are also alarming: emerging-country demand for fuel means soaring global demand, and 150 years of heavy oil production has depleted reserves to the point where we are, metaphorically speaking, scraping the bottom of the barrel.

A sustained price of $100 may be high enough to dampen economic recovery. If so, oil prices may ease off, but the supply-demand situation doesn't leave much room on the downside and for airlines a weak economy is as poisonous as costly fuel.

For many airlines, selling aircraft to IAG and shrinking or even getting out may be the alternative to going bust. Good luck, Willie.

Commercial air transport operators provide a unique kind of service. They should not be treated, in law, like companies that sell tickets for, say, theatre seats.

At no stage before, during or after a theatre performance do the audience find their seats collectively careering at nearly 300km/h along a short tarmac path in a three-wheeled vehicle that was not designed to operate on the ground, before being launched into the sky. Neither do theatre-goers contract to spend several hours in an artificially pressurised container traversing the troposphere at 750km/h before being aimed another small tarmac strip to impact with it at some 250km/h.

The inherent risks in using commercial air transport have never been better described than by Capt A G Lamplugh, an aviation insurer and former aviator. He argued: "Aviation is not in itself inherently dangerous, but to an even greater degree than the sea, it is terribly unforgiving of any carelessness, incapacity or neglect."

For this reason commercial air transport is the most heavily regulated business activity in the world outside nuclear power. But regulation does not produce safety; it just sets the boundaries for legally acceptable operating practices. It is an acknowledgement of the need for care, but it is not the care provider. The airline is.

That is why a carrier that can genuinely be defined as a "virtual airline" should be illegal in any region professing to care about high safety standards in public services. A virtual airline is not the same thing as a franchise carrier, which wears the livery and brand name of what is usually a large, highly visible airline - whose reputation is on the line if standards are not maintained. Due diligence across all aspects of the franchisee's operation is carried out, and all bucks stop with the chief executive of the franchiser.

To pursue the theatrical analogy, a virtual carrier may be nothing more than a ticket agency. This is more or less what Manx2 claims to be. It sells tickets for seats on aircraft for which it appears to consider it has no responsibility. Most of its passengers will assume Manx2 is an airline, even though information about the actual operator is available in the online booking process.

What really provides safety in an airline is unbroken lines of responsibility and control, a corporate ethos, and a set of company standard operating procedures. A ticket agency that contracts out its customers to three or four different operators all with different aircraft types cannot offer the standards that passengers expect when they purchase an airline ticket. n