By: Robert Milton |
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© Billypix |
Look back 25 years? I'm not old enough oh wait, I am. Let's see, I'll go back to when I knew this was the industry for me, my first sighting of a 747. I was nine. Whoops, that was 1969, way too long ago. Twenty-five years? Let me get the time-frame right. OK, we're talking the early days of the 747-300. Well, unfortunately, one of the key features of our beloved airline industry (I have trouble referring to it as a business, as it has never demonstrated anything approaching an ability to consistently make decent returns) is that no matter how far back you go, it is generally a pretty discouraging picture. We can conjure up historic flights and routes, beautiful airplanes, and paint schemes, but the business reality is closer to some of the sound bites we've heard ad nauseum: "Since its inception, more money has been lost than made"; "If a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down"; and so on.
For all the trauma, being an airline CEO is probably close to the inverse of one of the many clichés about an airline pilot's career, "Years of boredom, interspersed with moments of sheer terror" becoming "years of terror, interspersed with moments of boredom"; few of us in this industry would trade our time in it, including the past 25 years, for anything.
Looking back, when I first dreamt of one day running an airline, I realise now that my dreams were conjured up in a world of deep regulation. Capacity was controlled, pricing was controlled, even starting an airline was controlled, and so one could easily aspire to come up with the best schedules, and offer the fanciest food, and run the best operation - hmm, I guess I was just dreaming of Swissair. Deregulation was the right place to go, but, wow, things sure have changed. Today's obsessions include hub mass and connectivity, legacy costs, government levies, slot controls and on and on goes the endless list of challenges faced by the modern day legacy airline CEO. Name another industry that can be brought to its knees by liquids and hand gels. The past 25 years has seen sporadic industry profitability, with us feeling wonderful for those brief spells, while wiping our minds clear of the preceding periods of heavy losses and efforts to simply generate enough liquidity to "survive, and live to fight another day" (this really is a key airline industry mantra), all while not really having adequate time to prepare for the inevitable, but unpredictable, hard times ahead.
HERE LIES THE RUB
Compounding the misery is the fact that all around our airlines, in fact, throughout the entire food chain, OEMS, airports, IT providers, CRS's, everybody, makes good, consistent, profits, at attractive margins. Invariably, to the extent they are publicly traded, they also trade at far higher multiples than airlines do. Herein, lies part of the airline "rub", and a key aspect of a big airline's existence that is missed. While airlines struggle, they have always spawned great businesses that have often become worth far more the airline that created them ever could. People still cite Pan Am: "They should have sold the airline, and kept the hotels and building." So long as an asset sale's proceeds benefit the shareholder, and are not used in a vain attempt to fund a losing airline's insatiable appetite for cash, I say bravo, go for it. Think AMR with Sabre. The fact is that airlines trade at airline multiples, and though, cyclically, they may bring a smile to our faces when times are good and the tide is high, the fact is the industry's market cap is an irrelevance on the global capital market scene, and airline shareholders aren't owners, they're renters. This must change.
Over the past 25 years, if asked to name consistently profitable companies operating commercial airliners, I would have said FedEx, or UPS. However, nowadays, without looking to spark a debate, there are a new breed of airlines that are creating a lot of value, but these airlines are not about planting one's flag all over the globe, they are only a means to an end: profitability.
Take Ryanair, it flies airplanes, but this is an internet portal juggernaut that needs the airline. Emirates, they've built a terrific airline, but it is part of a bigger picture that would be of little value without what the airline makes possible. Fundamentally, they have a vertically integrated food chain at their Dubai hub, reasonable airport fees, duty-free profits, ground handling, route rights, government support everybody is aligned, and so good things can happen. A holistic approach, what a concept. We've seen it before in Singapore; it works; but it isn't the playing field that the global legacies are playing on.
Is it right that the future will become one dominated by government-backed carriers in the Middle East? No. The bottom line is that legacy airlines have not only the legacy cost challenges of pensions, work rules, and IT systems, but also the obstacles that so many, especially governments, seek to impose by wanting a piece of the action. The net result is that airlines are too often up against the wall, figuring out how to get more, and more cost out.
Airlines have painfully carved billions of dollars of cost out in recent years, but for what? To transfer the fruits of their work up the food chain? How often do you hear about airports struggling to get cost out? The answer is never; you are far more likely to hear about them spending millions of dollars getting ready to serve A380s that will never be seen at their airport.
So, how do I feel about the future? Well, I am comforted that 40 years after I saw my first 747, the latest variant, the "8" is about to take to the skies hmm, what does that say about how this industry has changed? Seriously though, if we are going to move from today's industry of haves and have-nots and inconsistent, or non-existent, profitability, I feel the paradigm has to be turned on its head. Airlines as a rule, not an exception, must get out from under the thumb of a food chain that crushes them, and managements must act for the owners, the shareholder. How can this happen? I suspect, only with full, and open skies. Anyone flying anywhere, anytime, but with no government ownership.
This will unquestionably result in a period of upheaval, and change, but at the end of it, we're likely have a few, strong, global brands, able to stand up for themselves against the food chain, and make some real returns, while also putting an end to legacy guys like myself, trying to defend the indefensible: legacy costs and methods in a changed world. I can dream, can't I?
COVER STORY: SEPTEMBER 2006
| FROM THE ARCHIVES "We've seen a significant increase in international market share since acquiring Canadian. We benefit from their strength on the Pacific with our strength elsewhere. With a combined Air Canada-Canadian international market share of around 50% and a rationalisation of routes," Milton says. "Profitability has raced up in all these international markets." |
Source: Airline Business
