Passengers are returning. Cancelled services are being resumed. Optimism is back. That's precisely why airlines should be worried

In the days and weeks after 11 September, as airlines, manufacturers and analysts scrambled to work out the long-term implications of these unprecedented attacks on the heart of the USA, there were two nightmare scenarios: one was that the world economy would go into meltdown, prompted by a collapse in consumer spending, rising oil prices and plummeting stock markets; the other was that passengers, worried about airline safety, would refuse to fly again.

Seven months on, neither has happened. After dipping into recession, the US economy is beginning to recover. European economies, including the UK's, have largely weathered the storm. The success of the military action in Afghanistan, the rapid and very visible implementation of security measures on aircraft and at airports and - most of all – some irresistible fares have seen a resurgence in passenger numbers after the dark days of September and October. Frequencies and routes, including many axed after 11 September, are being added. Flying is popular again. Airlines ought to be worried.

The biggest problem is that the airline industry, in Europe and the USA at least, is in desperate need of consolidation. Long before the World Trade Center attacks, the sector was in crisis. The problems of inefficient airlines had been masked by the economic boom of the second Clinton presidency. When the rise in passenger numbers was halted by the beginning of the US downturn, in late 2000, airlines were suddenly exposed, with too many aircraft chasing too few customers. After 11 September, airlines took the opportunity to downsize by furloughing crew, grounding hundreds of aircraft, reducing services and postponing orders. But - with a few exceptions - basic business models did not change. Airlines simply expected to hunker down for the duration of the recession and resume normal service when the market recovered.

There are, of course, many barriers to structural reform in the airline sector - regulatory, cultural, political and business practice. These must be overcome before real change occurs and a healthier industry results.

Airlines must switch their focus from maintaining market share to building more profitable operations. It is easy to see why carriers are obsessed with size. Critical mass is essential to maintaining a hub and feeder network; large airlines also have giant support infrastructures to keep busy. Part of the success of low-cost airlines has been their willingness to employ third-party companies to handle everything from ground support to catering, leaving their own small head office staff to concentrate on the customer. Airlines need to look much more closely at what they do well themselves and what could best be left to an outside contractor.

The outdated regulatory framework also needs to be scrapped. In this field, the European Union is leading the way, and the USA badly needs to catch up. Ownership restrictions, which ban foreign nationals from owning majority stakes in domestic airlines, are a relic of an era when flag carriers' fleets were considered part of a state's strategic inventory. Today, there is no more reason for governments to have a say in the way airlines operate - other than in the area of safety - than there is for them to run, say, car manufacturers or telecommunications providers. Bilaterals between the USA and individual European countries restrict competition and promote inefficiency. As International Air Transport Association director-general Pierre Jeanniot insisted recently, the airline sector needs to become like a normal industry.

The third major area ripe for change is airlines' pricing strategy. It is not so much the spread of fares available - no-frills carriers have made an art of real-time demand management: the price of their single product can vary enormously depending on how many other people want that seat - it is the complexity and lack of transparency. Customers struggle to find the best deals; airlines struggle to maximise yields. The effort to fill aircraft after 11 September and the rise of the low-cost carriers have seen airlines respond by offering passengers very attractive fares. The challenge will be managing their fare structure and yields as demand returns. Neither must airlines be frightened, in this fragile environment, of concentrating on their brand. The danger for full-service airlines is that air travel becomes utterly commoditised. By offering customers a unique experience - much as hotels do - carriers can compete on value and profit rather than price and revenue.

Source: Flight International