Volume is good but fundamentals are essential

when perusing commentary on the airline industry there is a lot of talk about passenger figures (see the previous post, for example). However, less common is the talk about yields. And even less common than that is to see discussion about the right yield and use of assets. Too many people give off the impression that airline executives are wearing blindfolds and recklessly handing out seats at ridiculously low prices to anyone and everyone. Low prices are part of the game and a worthwhile tool to stimulate demand, but the real art is the ability to maximize those ticket prices and ensure that your assets are being used effectively. If a route is flying with a high load factor and high yields should it be cut? Well, an argument could be that it should be cut if those high yield passengers will stay in the system by taking another departure on your airline or are willing to go to another airport to fly with your airline. That way the asset can be used more effectively on another route. The point is that observers of the industry need to look beyond the passengers numbers but to consider the yield and asset utilization. Nobody said this was going to be easy.

European airlines carry 7% more passengers in 2011

The AEA has announced their preliminary figures for 2011 traffic and they are indicating a good year, at least compared to 2010. Of course, 2010 was a year fraught with events that challenged European aviation, but now the positive message of the day is passenger growth! See the announcement here.

There is only one problem here: at what price? Too many people are blindly focused on passenger figures. "How many seats are filled?" "How many people did you carry?" "What was your load factor?" In essence, who cares! Passenger figures are only side to the calculation. It's price that we should really care about. It's the easiest thing in the world to fill airplane seats; it's another thing to fill airplane seats AND make a profit! This goes for any business. Who cares how many iPods Apple sells! I want to know how many iPods were sold at what price. The announcement says nothing about the yield that the airlines were getting. If European airlines were filling their seats at a loss then that's bad business.

Nordic aviation is alive but sluggish

This week I had the opportunity to attend two very interesting seminars related to aviation in the Nordic region. The first was related to the aviation commission that was appointed by the Danish Ministry of Transport, and the commission's progress. The commission is investigating the entire environment surrounding aviation in the country and how it can be improved to foster growth and innovation in the industry. It was an interesting seminar that involved several stakeholders, such as airports, airlines, tourism organizations, government, charter operators, etc. The second seminar was an evening with the Chairman of the Board of SAS, Fritz Schur. This was a relaxed evening discussing the transformation of an airline from a monopoly to a competitive fighter.

The aviation commission seminar saw an economist and an SAS representative agreeing that Copenhagen has more routes than its size and location justify. There about a dozen routes too many at the airport, which are only justified due to the network strategy of various airlines, particularly SAS. Therefore, it is imperative that the airport collaborate with its airlines to stem the dwindling transfer passenger figures. An airline's or airport's route structure is similar to a ball of twine. If you pull at a single string it slowly comes out, but reveals another string to be pulled on and eventually all you are left with are hundreds of independent strings jumbled on the table with no cohesion. If the airport levies fees or charges or implements processes or restrictions on airlines that stymy growth in transfer passenger it may spell the end for numerous routes. Of course, point to point routes can be justified, however there just are not too many that can be supported out of the catchment area of Copenhagen/Southern Sweden. In addition, point to point routes are often flown by low cost carriers, and they are lean business machines. If a route is contributing a deficit to the bottom line it will soon be axed. Finally, one important regulation was named that is a thorn in airlines' sides: denied boarding regulation. Unfortunately, politicians, who travel extensively, have been incompetent when formulating this piece of regulation. This was no more evident than during the ash cloud crisis in 2010. The fact that airlines are responsible for compensating passengers during events out of their control is unbelievable. In addition, the regulation does not different between purpose of travel. Thomas Cook was present and told that if their largest aircraft, with a cabin factor in the high 90s, is significantly delayed it costs them upwards of 600,000 USD. However, a 4 delay to your 2 week Greek holiday is not as big a deal as a 4 hour delay to your M&A meeting in London. Yes these two are treated equally by regulations. Other interesting topics discussed were:
- the establishment of bypass routes from airports that traditionally have played a feeder role to Copenhagen
- the fund that provides marketing finance to airlines to establish new routes
- the lack of public financial support for pilot training, unlike nearly all other educations in the country. In addition, to the difficulties in recruiting mechanics to general aviation

The seminar with the SAS Chairman of the Board was a great insight into how organizations that were previous monopolies have to transform themselves into competitive entities. The discussion touched upon how inefficiencies and incompetence are allowed to fester in organizations that have no real competition. How the lack of understanding of the seriousness of the situation among airline employees challenges real progress (e.g. the strike of Sabena pilots for more pay hours before bankruptcy was declared). How the militant attitude and dialogue among unions and management don't allow them to find a common ground. Naturally, it is important to realize that the Chairman represents one side of the coin, however I think much of what he said is valid. Some interesting facts include:
- Average annual hours flown at SAS is 604
- Total average cost for an SAS pilot is 300,000 USD
- SAS continues to fly personnel from Norway and Sweden to crew inter-continental flights out of Copenhagen; the transit time is part of the duty time. This in and of itself is not a problem, but the fact that the airline is required to staff its flights in such a manner is the problem. That crews are not simply assigned to a base and how they get to work is their hassle
- The Chairman is supportive of an eventual sale or merger with another carrier, and although Lufthansa is an obvious choice, a carrier outside the EU may be a reality
- He foresees that within half a decade there may be non-EU flight and cabin crew working; this is a reality in some parts of the world today
- The "flags of convenience" used for crew hiring in the industry means that an airline such as SAS can never be competitive against its low cost competitors

All of these issues are relevant and deserve the attention of employee groups, management and stakeholders to make the airline more competitive and prepared for the future.