Capacity control provides grounds for optimism


The airline industry will watch the global economy with some anxiety in 2001. After a year that has battered it with fuel price hikes, economic stagnation could deliver a body blow just as the sector is hauling itself back to its feet in anticipation of a fall in fuel costs. Yet whether the US economy has a soft landing, as still seems likely, or comes crashing to earth, the airline industry has cause for optimism, given its efforts to rein in capacity and restrict aircraft orders to sensible levels.

In 2000, US carriers enjoyed a free ride on the back of a continuing economic boom, and Asian airlines were buoyed by the transport market's recovery following financial stabilisation. In Europe the story was different, with tough operating conditions and limited hedging against fuel price rises leaving only Air France and Lufthansa unscathed. But although the red ink flowed, losses masked Europe's efforts to match capacity to demand - and its success in doing so bodes well for 2001.

Commerzbank analyst Chris Tarry says efforts to restrict seat availability are bearing fruit. "We've seen the benefit of reducing capacity, and yields going up," he says. "Airlines have to be hurt a bit before they behave sensibly, and they were hurt in 1999. There has been a rendezvous with reality. Even if the US economy slows to 2% growth, we are still looking at annual European traffic growth of 6%, and with European capacity growing at 3-4%, we still have a better relationship between demand and supply. Airlines like British Airways are getting the right cost base for the revenue streams targeted, and accept they can't cover all markets."

Tarry believes a US slowdown will focus minds on productivity and "structured - rather than illusory - cost reduction". A downturn might also soften wage demands. "Traffic fundamentals are good and airlines are focused on cost, but labour problems in the USA could spread, with demands for 'me too' settlements. BA is pessimistic, but that may not be bad if it makes them more conservative."

The pseudo-consolidation of the airline sector via global alliances will deepen in 2001, as Europe's three "homeless" heavyweights - KLM, Alitalia and Swissair - pursue strategies that may bring them into existing groupings, possibly via mergers. In the USA, carriers have already gone the extra mile, with United and US Airways pushing for a full merger. If successful, the deal will spark further consolidation among the US majors, although fierce opposition to the move may bog it down for months to come.

The collapse of KLM's axis with Alitalia and its subsequent merger talks with BA caused great strategic uncertainty in Europe in 2000, and that persists. A KLM-BA deal remains possible, if not probable, while Alitalia - which drew close to Swissair before wavering as Air France launched a charm offensive - has put an alliance decision on hold. For BA, committed to developing London Heathrow's high yield potential, any European deal offering an exploitable transfer hub (even one so outlandish as an alliance with Air France) would be attractive, though with control a stumbling block. SAirGroup, meanwhile, faces a crisis as losses mount and rebel directors push for rationalisation.

The transatlantic dimension will continue to complicate matters. The BA-American partnership, which wobbled in 2000 as the UK carrier approached first Delta and later, via KLM, Northwest, remains troubled. The pair are likely to reapply for anti-trust immunity for an alliance in the next six months, with this tied to the perennial saga of US-UK "open skies" talks, which will rumble on while promising little.

Tarry warns that if a UK-US deal is done, granting wider US access to Heathrow, Europe will surrender its last ace in securing a US-EU open skies deal conferring wider benefits. BA's desperate position at Heathrow may nevertheless force the UK's hand and finally consign the Bermuda 2 treaty to the bin. All of this means that while the Star Alliance is now truly mature, with representation in all key world markets, oneworld trails in its wake.

Asia's airlines performed well in 2000, with market recovery underpinned by post-slump boardroom realism. Yet Indonesia lags badly and Japan's economy is a concern. Malaysia Airlines could join a global alliance in 2001, but Thai's privatisation may be delayed if its share price remains low.

Source: Flight International