Despite a cyclical recovery in traffic, the pressure for change is unlikely to let up over the coming year as the air transport industry continues to grapple with the new realities of consumer power and an end of the old certainties

It does not take much by way of a crystal ball to predict that the air transport industry faces another year of dramatic change. From the changes wrought by new distribution channels and low-cost competition, through to open skies on the transatlantic, virtually every sector of the industry remains in play.

Amid all the churn, it is worth remembering that all this change is being driven by two elemental forces. First, is the shift of power from producers to consumers. Not only are consumers increasingly aware of their worth and ever more prepared to demand real choice, but they are smarter too, thanks to the internet. Second, is the march of globalisation. Whether under the name of liberalisation or deregulation, national borders are being breached and with them many of the old certainties.

Having already reshaped much of the rest of the world, the full, pent-up force of these trends has now been unleashed on an aviation sector previously shielded by the legacy of national bilaterals and ownership limits.

So how will these forces drive the business in 2005? To start, it could prove something of a watershed year for airline distribution. IATA has outlined the ambitious year-end goal of 40% e-ticketing through its clearing house on the way to 100%by 2007. Online sales, too, are likely to come close to gaining the critical mass that they need to tip over in to the mainstream.

That has already provoked a response from the global distribution system (GDS) providers and with consolidation also afoot in the overcrowded market for online agencies, expect some key moves in the coming months.

Cendant, with Galileo under its wing, last year snapped up the USA's giant Orbitz and rounded off the year by buying e-bookers, a mid-sized but struggling online agency in Europe. The resulting online sales giant is one to watch as the grab for online market share continues. A leveraged buyout of Amadeus is now in progress, with four bidders lined up by the end of 2004, including the financial group that already holds Worldspan. The smart money is betting on further plays as the sector consolidates.

With Europe due to follow the US lead in GDS deregulation, next year could also provide a key test of whether the traditional GDS providers have done enough to persuade sceptical airlines of the future value of their services. Sabre has now followed Amadeus in unbundling its price structure, but the pressure is still on for further reform, with others waiting in the wings with alternatives, including Lufthansa Systems, which has now formally launched a GDS bypass project together with Unisys.

The year ahead could also bring a reckoning for many of the new wave of low-cost carriers that have poured onto the market in Europe and Asia. Ryanair's dire warnings about a bloodbath this winter may have been something of an exaggeration, but some of the shine has gone from a sector that was once the darling of investors. The collapse of Italy's Volare in December provided Europe with its biggest failure yet after the fall of Vbird and Air Polonia. The less-crowded US market too has seen ATA Airlines into bankruptcy. Others could yet follow as the sector begins to mature around a handful of larger players.

But there are no immediate signs of pressure letting up on the network majors to transform their cost base in the face of a continuing climate of low yields. Although a significant fall in the oil price could provide a much-needed windfall, the best guess is that this would do little more than take the industry back to breakeven in 2005.

The prospect of serious consolidation, either through mergers or market exits, seems remote, although a couple of the most stressed, such as US Airways, may not make it through the year. However, watch out for some further bold restructuring moves, accompanied by battles with labour. Those that have already learned the lessons from low-cost competitors on short-haul services could also begin to export the advantage onto longer-haul services as Qantas is doing through its low-cost launches and Aer Lingus has already done on its own mainline network.

Last but not least, there is a chance to get moving on liberalisation. The US/Europe bilaterals hit a stalemate in 2004, but with a new European Commission (EC) in place and US elections out of the way, the path is clearer in 2005. It remains to be seen whether the will be much real progress on the key sticking points, such as ownership limits and US access to London Heathrow. But meanwhile the EC is nevertheless quietly pressing ahead with European-wide agreements with other countries which continue to chip away at the old order.

Few of these issues are likely to result in hard conclusions in 2005, but the year will be key in setting the direction for an industry in the midst of change.

Source: Airline Business