Slowdown in the BRICs and low GDP growth elsewhere again means performance improvement must come from structural change, writes CTAIRA analyst Chris Tarry
IATA's headline for its latest forecast - "performance improving despite conditions" - is most descriptive and reinforces the view that the key to prosperity for most airlines is structural improvement.
As ever, forecasts reflect the outcome of a number of "moving parts". This latest view from the Association, while reflecting a slightly higher rate of growth in passenger numbers, also shows a small improvement in yield and a widening gap between the forecast load factor achieved and break-even.
The outcome of these changes was an increase of some $1.6 billion in operating profit to $23.9 billion and an increase in net profit of $2.1 billion to $12.7 billion.
Although GDP in 2013 is in the order of 3% at a global level and will be closer to 4% in 2014, for the developed world growth is expected to be little more than 1% in 2013 and 2% in 2014.
Elsewhere there are increasing concerns, not only about growth rates within the BRIC countries (Brazil, Russia, India and China) generally, but also about interdependencies between these countries.
While differences in forecast and actual growth are nothing new, and with economic output in 2017-18 for some likely to be no greater than in 2007-08, the issue is that we are seeing the "new economic norm". For many airlines there has neither been, nor is there likely to be, a "cyclical pull" or upswing in the near term to boost traffic, revenue and, most importantly, cash generation.
Getting an appropriate cost base which is the lowest possible for the markets you want to compete in and where there is the greatest gap between cost and revenue - is important. However it is the revenue itself and changes in that revenue that are the real keys to achieve prosperity.
Here the need, given the general absence of widespread positive economic forces, is to drive as much revenue as possible - from better mix and increased volumes - across the best possible cost base. In this respect the consequences of a better balance between supply and demand in a number of key markets has also been seen, providing evidence that the rules of economics apply to airlines just as much as to any other business.
On one hand, there is increasingly widespread evidence of airline management recognising there will be no real boost from GDP, while on the other hand there is more to be done to improve the operating economics of the business, where fundamental and structural change in internal and external relationships may be needed.
It may be an issue of evaluating and, most importantly, implementing best practice not only from across the industry, but also from other industries. Despite benefits from structural improvement showing in improving forecasts against a still challenging background, the need is not only to deliver more but also to ensure these benefits are permanent and, at the simplest level, that they are not given away when economic conditions become more favourable; which also will reflect the balance of negotiating power.
In previous columns we have highlighted the need for longer-established airlines to move production systems closer to those of more recent airlines. The necessary conditions for success are likely to include a strong brand, competitive network and market reach in terms of effective access to the most profitable customer base, which in part is related to the network.
An effective revenue management system and efficient asset management model delivering the best cost of ownership are also required. Other than in the asset management model, most other factors are best described as intangible, but these will determine the real success of the business subject to being able to having a "cost-effective production system".
Outsourcing is nothing new in the airline industry and is widely used by both newer entrants and legacy airlines. At the simplest level the need is to ensure an internal monopoly supplier is not replaced by an external one.
There are a number of other issues that emerge, in particular what more could be achieved if the traditional "you sell"/"we buy" relationship was replaced by a series of real risk-sharing partnerships between airlines and those providing what might best be described as "internal services" - most of which involve labour as well as non-airline specific processes. The issue is not the extent of the potential that exists as it appears significant, but one of implementation and here the partners will inevitably have to play their role too.
Returning to IATA, partnership and collaboration was one of the key themes of this year's AGM, although the focus was more on the traditional suppliers: manufacturers, lessors, air navigation service providers, airports and GDS providers.
However it is also clear that this group of suppliers and those who are able to provide internal services, offer the opportunity and key to airlines achieving meaningful and permanent structural change in their production systems. This would effectively be the airline equivalent of Toyota's lean manufacturing system and would likely bring commensurate benefits.