WAF 2010: Cost control puts airlines in position to exploit upturn

Cannes
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For an industry where even the good news seems more often than not to be couched with concerns, chief executive of aircraft lessor BOC Aviation, Robert Martin, had a bright message for the aviation sector. Speaking during a wide-ranging opening panel debate on the state of the industry during the World Air Forum in Cannes, he pointed to airlines’ tight grip on non-fuel costs as offering reasons to believe the coming decade could be a bright one for the sector.

Contrasting the cautionary noises coming from IATA – which in recently upwardly revising its profit forecast for 2010 to almost $9 billion suggested this year could be as good as it gets for the current cycle – Martin highlighted the stronger position airlines were in as they entered the economic crisis because of the cost control work already undertaken to counter the fuel price spike of 2008.

“We believe airlines more than ever before have controlled their non-fuel costs,” he says. “Compared to previous downturns, it has been very benign [in airline failures]. Airlines did a good job of getting their non-fuel costs under control before the crisis. For the first time we could be going into the cycle where we see profitability in the early part of the cycle [rather than only in the second half].”

waf 2010 panel debate
Straight talking: (from left to right) Airline Business editor Mark Pilling puts the questions to Vueling chief executive Alex Cruz, Changi Airport Group EVP corporate Tan Lye Teck and BOC Aviation chief executive Robert Martin.
During the wide-ranging debate Vueling chief executive Alex Cruz said he believes even traditional “fundamentalist” low-cost carriers, will need to evolve and develop product – while retaining a tight grip on costs. “The age of short-haul fundamentalism is over,” he suggests, pointing to two pillars to the Spanish carrier’s own operation – a focus on cost control which is “not an initiative but it is our DNA”, combined with evolving the product.

Cruz also believes network carriers in the maturer European and North American markets will in the long-term need to look at evolving their models in the face of strong competition from the Middle East. “Ultimately it is down to each of the airlines and alliances to do their homework. The real question is, the airlines that are threatened [by new competition], will they have to consider fundamental new models? They are going to have to come up with new ways, beyond investing in product and cutting costs.”

Looking into the long-term he says continuing to evolve is the key to survival. “Redefining yourself is the only way to survive,” he says.

The issue of competition from the Middle East has been the subject of much debate of late, with criticism from some quarters in Europe and North America over their expansion and the benefits from access to export credit financing. But Martin observes: “The reason some of those carriers are successful, is they have managed to tap into those new trade flows. This is part of what some of these Middle Eastern airlines have tapped into."

Oman Air chief executive Peter Hill – a former executive at Gulf giant Emirates, believes product will be a key battleground for European carriers in the battle against Middle East operators "The investment in product [by Gulf carriers] started a very long time ago and there was a lot of investment in the product and the vision." he says. "Price is not the only answer. [European airlines] have to be able to compete on that [product] level. They have to invest in the product."

BOC's Martin also points to the huge potential market from the developing markets in China, India and Latin America, and the travel potential from both the emerging middle classes and increased tourism. “I think there will be some fundamental changes going to come over the next decade about who the new consumer will be. The future [consumer] will also be much more Internet driven," he says. " This is going to drive aircraft demand for the next decade."

Follow the debate from WAF on Twitter at #WAF10