Comment: Revolving doors

By:  
-
Source:
This story is sourced from Airline Business
Subscribe today »

The metaphorical lobby of the airline industry may look glossy and inviting, but the reality is stark. You enter easily, armed with heady ambitions; you come out poor. But could the new economic reality be the doorman that this industry so badly needs?

We have all heard people moan about how easy it is to enter this industry, and how much harder it is to exit. There is nothing more galling than building up a market and then seeing a new entrant waltz in and take advantage of all your good work.

For much of the past decade, the temptation of deregulated markets and access to cheap money has set the entry barriers tantalisingly low. Many have clambered over this barrier with ease, seduced by the prospect of entering what they perceive as a sexy industry. That in itself is an odd notion; surely the sexy bit is found at the end of the journey once you get out of the metal tube - the destination - not the journey itself? Try telling them that.

(c) Rex Features 445
 © Rex Features

"The airline business is so bad, I would never do it again if I was starting afresh," says Lim Kim Hai, executive chairman at Australian regional Rex. "All the odds are against you and it's not worth it. When we started out, we were stupid and naïve. We didn't know the airline industry was so treacherous." And would-be entrants take note: these comments come from an airline with an exceptional 10% profit margin.

"There are too many cowboys going into the market. Eventually they go bust, but before that they'll give you a lot of grief," says Lim. "Even if you outlast them, they cause a lot of damage."

Although the attraction of this business is magnetic as ever, this could be the economic cycle that punctures new entrant aspirations for a while. Quite simply, they will not be able to afford it. Not because they can't achieve an economic return or create shareholder value, but because they literally will not be able to secure the start-up cash.

Investors, banks and financial institutions - which were all too ready to lend to airlines of all shapes and sizes in the past - are now risk adverse in a big way. How long this will last depends on the speed of the economic recovery and how quickly the financial community repairs itself. But for a couple of years. at least, in most markets the established market players could have some breathing space. Not before time, some might say.

So, for a while, the revolving door of airline entrants and exits looks like it could only work one way: out. Such a scenario favours the well-established and, of course, the well-financed. They won't get spat out of the door.

But what about the smaller, independent and marginal players in the three sectors we focus on in this issue: cargo, regional and leisure players? How can they take advantage of people not coming in, while making sure that the door doesn't shove them out too?

Praying that the general economic recovery will make things work out is a false hope. There are also random factors at play like the Icelandic ash cloud, which pushed some small European regionals to the brink. Then there is the ever-lingering debilitating effect of high fuel prices.

All of the smaller players Airline Business has talked to in the past few weeks with any chance of surviving long term either have special local factors in their favour, a benevolent benefactor, extreme flexibility or the will to consolidate. Talk to the larger players and they say: "I wouldn't want to be them." That isn't too helpful for "them", so what is? Having some form of relationship with a stronger partner, at least for a portion of the business, could offer comfort and stability. It is not so much about taking advantage, but staying in the game.

Worries about independence and control have to be weighed up, but entrepreneurs know they can give something up today and come back into the revolving door later on when times are better. The alternative is to let the spin cycle of the revolving door take its natural course.