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Aviation History
2002
2002 - 0023.PDF
companies choose to expand their existing businesses (vertical acquisition) or diversify into new areas (horizontal strategy) - fash ions may well change. A year ago, vertical mergers were popu lar. But the GE/Honeywell experience has reminded business of the impact of antitrust laws. Boeing's horizontal approach, by contrast, has been a good move. By expanding into defence, space and communications, it has built a broad base that will help it survive the several nasty blows it has received in recent months - losing the Joint Strike Fighter (JSF) contract, falling airliner orders and so on - by spreading risk. Tough time ahead Despite huge contracts like the JSF, the decision to go ahead with production of the Lockheed Martin/Boeing F-22 Raptor, and the prospects for the Airbus A380 and A400M, as well as Boeing's Sonic Cruiser, the major aerospace companies face a tough year. None of these big-ticket projects will start full-scale production for some time, meaning that integrators and suppliers will be left selling the same products to customers less willing and less able to buy. From confidence about a soft landing a year ago, aerospace manage ment is now far less hopeful about both civil and defence sales. Airlines, unable to see an end to the continued fall in traffic, have shed jobs and delayed making purchases. Airframers, followed by second-tier sup pliers, have followed suit: engine manufac turer GE has shed 4,000 jobs, Rolls-Royce, 4,800, and United Technologies 5,000. These will not be the last. The top 10 aerospace companies remain more or less unchanged. The main points of interest are the reductions in revenues, the absence of a merged GE-Honeywell, and the impressive rise of Bombardier. Falling passenger numbers may cause carriers to order smaller aircraft over the next few quarters in order to keep services going at high-load factors. Pilots' scope clauses, which limit the numbers of smaller aircraft relative to the numbers of large air craft in a fleet, may restrict this. Notwithstanding, Bombardier and Embraer could profit from such a move. Airlines Fuel-price fluctuations, the rise of the low-cost carrier and industry consolidation are set to become the issues of the year ALEXANDER CAMPBELL BUSINESS EDITOR R ecent moves by Russia and other non-OPEC (Organisation of Petroleum Exporting Countries) members suggest that the decades-old oil cartel could be weakened or even destroyed if outsiders who have hitherto co-operated with the organisation's production limits decide to flout them. While a truly free oil market might lead to lower prices, it could also make them more volatile. And fuel costs could also increase as a proportion of overall expenses as airlines cut other overheads in response to the downturn, since cost-cutting does not necessarily reduce fuel consumption. Aviation fuel prices closely track crude- oil prices. Airlines will therefore be more vulnerable than ever to the vagaries of the oil market, which is as sensitive as ever to the hyperactive politics of Central Asia and the Middle East. Larger carriers may respond to this by putting hedging deals in place to ensure a steady fuel supply, as Air France has done. But they will need to hurry if, as seems increasingly likely, the USA follows its war in Afghanistan with an attack on Iraq. Oil prices will soar again as they did a decade ago, and passenger numbers will also be affected. This would be more bad news for an industry that has already been hit hard in recent months. The same would occur, to a less extent, if the war spread elsewhere, with military action against or within Indonesia, the Philippines, Somalia, Sudan or Yemen - or if the situation in the Middle East were to worsen, for example, with Syrian military intervention against Israel or the collapse of the Palestinian Authority. In addition, various aircraft crashes since 11 September, though unrelated to each other or to Al Qaeda, have done nothing to tempt pas sengers back into the air. Any carrier tempted to cut safety spending by increas ing flying hours or cutting cabin-crew runs the risk of just making the situation worse. The most remarkable news, as the downturn has deepened over the last year, is the success of low-cost carriers, as opposed to the rather gloomier picture emerging from mainstream airlines. Whether the economy at large recovers or sinks into recession, it seems likely that the airline market has changed for good. The rise of the low-cost carriers may or may not have come solely as a conse quence of people - and companies - hav ing to cut back on travel expenses. What is not in doubt, however, is the fact that it has permanently transformed the face of the airline business. Another major change, increased secu rity, especially at US airports, is unlikely to affect low-cost airlines more than main stream carriers. The most significant cost for budget airlines is turnaround time, and this will remain unaffected, regardless of whether passengers board immediately or after a long security clearance. However, the structure of the airline net work could alter: it is probable that passen gers transferring at hub airports will have to go through security checks again, mak ing hub travel much less attractive than point-to-point. This would appear to be a vindication of Boeing's forecast of fast low- volume point-to-point traffic (using Sonic Cruisers), rather than Airbus's vision of large volumes of traffic moving between a few hub airports (ideally aboard A380 ultra-large aircraft). However, this holds only if intensive security checks are limited to passengers. If new measures also involve thorough checks on aircraft, there will be two conse quences. First, operational expenses will increase - and this will affect low-cost car riers more than mainstream airlines, as turnaround time is a key element in deter mining operating costs for the budget car riers. Second, it will limit the number of departures per day from an airport, encour aging airlines to offer fewer flights on www.flightinternational.com FLIGHT INTERNATIONAL 1-7 JANUARY 2002 21
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