To many executives, making reasonable assumptions about the future based on sound understanding of the past as well as up-to-the-minute knowledge of the present is a daily task. These are the corporate planners, and their task in the airline industry right now is to divine ways of avoiding repetition of recent history. They don't talk of the coming boom in airline leverage buyouts or massive fleet renewals. They do talk of international alliance strategies and capacity growth that is slow and carefully matched to demand.
In 2005, the world's airline industry may not be staggeringly different from today - think of all the similarities in the markets of 1995 and a decade ago. But the combination of economic and political change and technological advances has pushed the industry to the edge of a new era.
China and former Soviet bloc countries are moving towards market driven economies and alliance building between carriers is swiftly bringing about the long-expected globalisation of the industry. As Europe, Australasia and other regions loosen the regulatory grips on airlines, the question is not whether the world will deregulate, but whether it will follow US-style deregulation. Though the future is far from certain, forward planning for airlines is more important in this era of rapid change than at any time before.
It is already self-evident that the (apparent) deregulation of telecommunications in the US is bringing to the fore technologies that are still considered by some in the airline industry as akin to a Jules Verne fantasy. In the 1980s, the computer industry brought personal computing to the consumer. The second half of the 1990s and beyond 2000 will see the hard-wiring of global industry. Corporations, separated by geography, time and task, will become integrated via electronic transmission. This will allow video conferencing on levels previously unknown, leading (some say) to diminished growth in business travel and hence the dilution of yields, which has already been a long, steady trend for most carriers.
Airlines will need to adapt accordingly. As consumer acceptance of the new technologies grows, the diminished level of business travel could be compensated by increased levels of discretionary travel on systems maintaining a lower-cost base.
Even with lower costs, however, carriers will need to boost revenues as yields decline. Here airlines, too, will benefit from advances in technology by employing focused service products that will make it much easier for airlines to segment their passenger base and stimulate higher-yield travel by providing individual fare offerings and by tailoring marketing efforts to specific audiences - Unisys, for example, already markets a Customer Management System.
But technological advances are, frankly, relatively safe predictions: a new generation of supersonic transport is on the drawing board, and it seems logical to assume that levels of international airline competition will, a decade from now, demand such an aircraft. Whether the SST gets built depends wholely on the outcome of balancing perceived demand 10-15 years down the road against the high capital outlay which must be borne much earlier.
Less tangible are such uncontrolled experiments as deregulation, the airlines' labour-management relationship, alliances and aeropolitics. No laboratory is working on the answers to the questions these issues raise.
Which leaves room for informed speculation. Take deregulation. By 2005, most regions will have liberalised internally. But few agree just what deregulation means in the industry today. At the outset of the US experience, many thought a plethora of new entrants would signal the arrival of deregulation, but the true test came when established carriers were allowed to fail.
In Europe, the existence of state aid is a block to the 'true US test', but over the next decade market forces will dictate a change in government spending priorities and the European Union will host only three to five large, international carriers and a small bevy of regionals. But differing interpretations of deregulation will still exist as Europe pursues its philosophy of a regulated free market in the face of US calls for unfettered competition.
Other regions of the world will evolve similarly, if not as quickly. The embryonic consolidation in Latin America will have moved from within single countries to a cross-border merging of airlines. Elsewhere, in Asia-Pacific, the Middle East and Africa political disparities and developmental concerns will continue to make deregulation less of a priority, though exceptions within these regions are already emerging. This issue will not, however, impede globalisation through the building of international alliances.
Although many of the partnerships that exist today will have fallen apart, alliances are here to stay. The cost efficiencies and revenue potential of joint operations will still make sense as carriers continue to chase higher market share and lower unit costs.
But what will happen after the alliances are formed? Projections beyond 2005 suggest they will have evolved into single entities. A single brand image will be the marketing tool of choice, and airlines that are now studying - and in some cases implementing - franchise operations are readying themselves for a world where global presence, from the small markets of Latin America to the giant potential of China, could be essential for survival. Equity stakes between carriers, now a concept in full retreat, will return as market and regulatory barriers come down. The larger carrier in any alliance is likely to seek majority stakes in its smaller partners to ensure complete control of strategy.
Whether labour fully commits to supporting alliance strategies - it generally didn't in 1995 - depends on how union coordination between partners progresses. Already pilots from KLM and Northwest are holding discussions with each other to strengthen their respective bargaining positions. For unions, this trend of coordination across alliance partners will be essential as they work to prevent negotiations with management fracturing along national lines.
Still, labour-management issues will be as difficult as they are now. Employee representation on the board will have become a global phenomenon in 10 years time. Open markets and deregulated industries may have driven down costs, but achieving those lower costs, especially in Europe in the face of low-unit cost US competitors, will mean more and more emphasis on cooperation from labour. A growing involvement by unions in airline management seems inevitable.
And in the US worker representation is likely to increase. The trend in the early 1990s was to seek short term cost savings through staff concessions in exchange for equity and representation on the board. Continued competitive pressures and the subsequent loss in value of the employee concessions will cause labour to pressure management for a recovery of those concessions seemingly frittered away. Patrick Flanagan, a labour expert with consultants American Capital Strategies, believes management will not be able to meet the wage requests, and instead may compensate with more equity.
The result in 10 years could be employees with substantially more control of the US airline industry. And this could mean more job protection, resulting in 'overcapacity because of pressure from employees not to make cuts, [which in turn] could mean more pricing pressure,' says Flanagan.
The pessimist could easily view the current state of aeropolitical concerns - eg US-Japan, Hong Kong-Australia - as relations so mired in dispute that even a further 10 years of negotiations will produce little change. But this goes against the rise of regionalism in the global economy, and the sheer market forces which are propelling the formation of trading blocs.
Many aeropolitical experts envisage a time 10 years down the road when blocs like the European Union, the North American Free Trade Area, Mercosur, Asean, China (a trade region unto itself) and Caricom will be negotiating bilaterally. This, however, does not mean all will favour complete liberalisation. In Asia, countries are allying against the common threat of powerful US players in what could well evolve into a bloc opposed to too much free trade. Market liberalisation, a process taken for granted by many, could just as easily remain as entrenched and immovable as many bilateral relationships are today: the US-UK bilateral, for instance, has changed little for close to 20 years.
Within airlines, the tiered structures evolving today - from low-fare regional to global megacarrier - should be fully formed by 2005. On the way, however, a major shakeout will inevitably take place. By 2005, some European and Latin American flag carriers will be consigned to history. And those airlines with flexible management structures and a broad understanding of new, on-line technologies will dominate the industry.
Source: Airline Business
