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Digging up weeds

While no one wants a return to $150-a-barrel oil, the strong are relishing what a combination of high fuel prices and falling demand will do to market competition, the ability for further labour restructuring and the chance to pick up a bargain along the way

In late August a remarkable thing happened: the price of oil ducked under $100 a barrel. After five months of living with oil that broke this ceiling at the end of March, this was the cue for some mild celebrations in airline boardrooms.

But let's face it, for many the damage of high fuel prices is already done. As Ryanair's deputy chief executive and chief financial officer Howard Millar says: "If you are paying $100 or $130 a barrel it doesn't matter. You've got to remember most carriers were paying $50 or $60 last year." His point: a falling price of fuel means things will get a bit better, but on the "scale of badness" this is still at the very top.

Digging up weeds 
 © Richard Gardener/Rex Features
And current opinion among oil price pundits shows black gold remaining at the $110 level for 2009. This could track back some if the global recession bites harder than they expect. In early September IATA reforecast the industry's result this year downwards to a global loss of $5 billion (with oil averaging $113 a barrel this year). The industry needs oil at $95 to break even, it says.

However, as IATA chief economist Brian Pearce observes, as economies the world over slow: "What we save in fuel costs we lose on revenues." Even as carriers enjoyed robust summer revenue growth, they were nervously tracking bookings for the autumn and winter for signs of weakness. The worries about demand are justified. Traffic growth is falling, even though it should not at the global level turn negative. IATA predicts passenger growth of 3% in 2009 with cargo growing at 2.5%.

This so-called perfect storm of lower demand and high fuel prices is billed as a bad thing, as it is for the businesses teetering on the brink of survival. Some, however, relish the prospect. "There are some stronger players, with a strong fuel hedging position, which see very high fuel prices as a way of weeding out weaker competitors," says one airline leader.

One of the strongest, Qantas Airways, is feeling bullish. At the delivery ceremony of its first Airbus A380, chief executive designate Alan Joyce commented that the Australian flag carrier is not only a very well-capitalised airline but one of only two investment-grade airlines in the world. "Obviously, like everyone else, we want the fuel price to come down," he says. "However, we also see consolidation happening. That will happen in one of two ways. Airlines will go broke: we're already seeing that, and more will. We also see airlines merging...And we see high fuel prices speeding that." Either way Qantas ends up a winner.

The same goes for other carriers with strong cash reserves, such as Air France-KLM, British Airways, Lufthansa, Ryanair and Southwest. Even Ryanair, a regular profitability ­table-topper, had warned of a ­possible loss in its financial year to March 2009. It will trade through these turbulent waters, refusing to deviate from its rock-bottom fare ethos: "This downturn will provide enormous opportunities for strong, well-financed airlines, such as Ryanair, to grow," it says.

Lufthansa is in this category. Its chairman Wolfgang Mayrhuber joked after winning this magazine's 2008 Executive Leadership honour at the Airline Strategy Awards that the German carrier's cheque book can always be pulled from his pocket if the right opportunity presents itself. That happened with Brussels Airlines in Belgium and other opportunities may crop up in Austria and Scandinavia.

Particularly for strong players like Ryanair and Lufthansa today's market conditions provide an unprecedented chance for industry restructuring that no amount of lobbying or political manoeuvring could achieve. The fundamentals of how seats are delivered, with the emphasis on labour, will come under scrutiny again. The artificial life-support of the state is being withdrawn. The crisis in financial markets will make it tougher for the under-capitalised to source aircraft. Regulators will look more kindly on consolidation efforts.

Those with cash in the bank have the luxury of playing the long game and riding out the storm. For others the storm will prove too strong whether oil costs $50 or $150 a barrel.

To see the video interview with Wolfgang Mayrhuber from the Airline Strategy Awards visit.
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