Friday, January 23, 2009
Another year...another crisis
2009 promises to be an exciting year for aviation, unfortunately this is based on a weakening of the fundamentals that have aided past growth in the industry. On the one hand, we are seeing restrictions to financing that many airlines so desperately need, along with cyclical hiring cycles that puts a strain on HR departments and employee motivation. However, we are also witnessing an increasing decline in oil prices, which is benefiting some carriers and punishing others that are strongly hedged, as well as, capacity reductions that will hopefully help to keep prices up at healthy levels. In other words, some negative undertones and others that are positive. We will witness some airlines struggle to survive, but survive they will, while others that are better positioned will be able to capitalize on the demise of others. This is certainly not the first crisis for the industry, and most definitely not the last. Darwin's biological observations are still applicable to the business world.
Some things we may see in the coming 12 months:
- Route closures that lack strong fundamental economics; those point-to-point routes that don't capitalize on transfer traffic will be axed, and many routes that rely on price-stimulated traffic will drop off schedules
- Strengthening of business traveler-focused LCCs; cost-conscious business travelers will migrate to LCCs if possible, which will off-set the loss of those leisure passengers
- High-cost, low-fare airlines will wither away; just because those ticket prices are low doesn't mean that it's a low-cost carrier (maybe to the passengers but not to the company), and acquisitions, mergers, or 1-for-1 expansion is not likely as overcapacity plagues the market
- Increased lay-offs which will hamper industry growth during the next up-cycle; those laid off workers will find work elsewhere and will be hard pressed to justify returning to such a cyclical industry; those that are experienced won't be around to train the next generation
- Consolidation talks will most likely quiet down, which will be grounded in lack of financing and the need for carriers to get their own house in order; a new administration in the US will see the topic of cross-border mergers take a back seat
Remember, airlines have trimmed a great deal, if not all, of their fat away and they are going to have to become creative and innovative when it comes to further reductions. Many airlines have slashed pay and benefits, and increased productivity to the maximum, so future cost savings will have to be found in other line-items than payroll expenses.