"There is no escaping the fact that air travel is inextricably linked with economic activity"
In the aviation industry the only constant is change and over the last 25 years there have been some dramatic changes with significant effect on the business. External disturbances have also played their part, including the Gulf Wars in 1991 and 2002, pandemics like bird and swine flu, severe economic downturns and terrorist attacks. But there is no escaping the fact that air travel is inextricably linked with economic activity and therefore the industry will continue to be cyclical.
The first edition of Airline Business was published over a year before the privatisation of British Airways in February 1987. Since then we have seen government ownership of airlines diminish and today many governments refuse to bail out their national carriers. Most now distance themselves from the old-fashioned flag carrier ideal.
The availability of capital for aircraft and airline financing has been a key enabler and the enormous growth in operating leasing over the last 25 years has helped airlines secure equipment. Some 40% of aircraft are now leased, compared with 2% back in 1983.
But money will not get you far without entrepreneurship, as exemplified by Southwest Airlines whose growth really took off in the mid-1980s, hitting some 101 million passengers by 2009. While it started off as a point-to-point carrier, some 25% of its passengers now connect. Ryanair is another example of a budget carrier which has generated a greater return than its cost of capital. But the so-called low-cost sector has attracted a lot of me-too behaviour and not all have been as successful. The boom in low-cost travel on the supply side also changed demand, creating rapid growth in VFR air travel and the substitution of other modes.
THE X FACTOR
A key success factor for low frills airlines has been the changing regulatory landscape, leading to liberalisation and greater market access. This has also been important for so-called legacy carriers. But we are still some way away from full open skies, in terms of both access and cross border ownership.
While the first record of an airline alliance was in the 1930s, involving Pan Am, the modern alliance age began in 1989 with the KLM and Northwest tie-up. Almost a decade later the age of multilateral alliances started with Star in 1997, oneworld in 1999 and SkyTeam in 2000. The next stage is real cross border mergers to enable airlines to get more market access for less cost and capacity.
Technology has also had a fundamental impact on the business. New efficient long-haul aircraft have changed traffic flows, giving rise to major Gulf hubs, while the internet and e-commerce have increased fare transparency and provided many airlines with transaction-related cost saving opportunities.
And the next 25 years? Aviation clearly has growth potential. By 2035 China's domestic market will total some 1 billion passenger journeys annually, compared with 215 million in 2009. That gives an average annual growth rate of just over 6% a year, representing an additional 800 million passengers. By comparison the US domestic market is forecast to grow by 500 million passengers over the same period. At the moment 1% growth in the US produces some 6.3 million additional passengers, whereas 1% in China produces about a third of that. But by 2035 1% growth will generate the same number of additional passengers in both countries. Asia is likely to be the most important region in terms of traffic. Indeed, Boeing suggests that Europe and North America will decline from 58% of total traffic in 2009 to 45% in 2029.
With growth undoubtedly on its way, the more pertinent question is what might stop it or slow it down? Environmental concerns, which are likely to be tackled by a combination of technology and taxation, would certainly be on the list. Infrastructure limitations are another factor, threatening to constrain growth through airport and ATC capacity. After all, Europe's single sky still appears to be some years away. While slightly larger aircraft may give some relief, most of the aircraft for the next 25 years are already known. Labour and the balance of power with management will be a continuing challenge.
Over the last 25 years the cumulative operating margin of the airline industry has been less than 2%, so perhaps the key need over the next 25 years is for the airline industry to be able to earn an adequate and attractive return. Here lies the greatest challenge and, perhaps, the greatest opportunity.
VIDEO DEBATE: DECEMBER 2009
At the turn of the year, when things were bleak, Chris Tarry took part in our outlook debate. Take a look at the full video