“How long have you been in the industry?!” demanded Campbell Wilson, boss of Scoot, the Singaporean Low Cost Carrier, ridiculing the notion that airlines are in business to make money.
Wilson was outraged that he’d been asked if the low cost business model is busted.
Fair question I would have thought given recent big losses from a slew of big name budget brands such as Tiger Airways, Jetstar Asia and AirAsia X to name a few.
These are airlines supposedly operating on a revolutionary low cost base designed to make them profitable in today’s aviation market.
Yet in many cases they are doing no better than the legacy carriers they were going to replace.
Indeed, according to Stefan Pilcher, CEO of Fiji Airways, of the 27 airlines presenting at the CAPA Asia pacific Aviation Summit in Sydney last week, just four are profitable.
The fact is airlines of all stripes are losing money, but no-one bats an eyelid because that’s just the way it is.
So, according to Campbell Wilson, the question is not:
“Is the low cost model broken?”
“Is the the aviation industry broken?”
Perhaps but maybe it’s time airline CEOs stopped shifting the blame for aviation’s present predicament, characterised by:
- Carrier glut – LCC brands growing like mushrooms after rain
- Aircraft overload – way too many planes and more on the way
- Airfares at rock bottom and not going anywhere fast
- Fuel prices volatile to the point of inflammable
- Egos, personal and national, triumphing over common sense
Fair to say the industry is a complete mess.
Everyone knows it but nobody has intention of changing their race to become the biggest.
Some may say this is macho posturing at its basest level, while others – such as the highly paid business consultants these airlines employ -believe this to be a core business principal.
In their eyes, scale is necessary for budget airlines to make money.
However, from the outside looking in, gunning for scale is like an arms race, there are no winners.
Scale was a theme raised by Stuart Myerscough, Head of Commercial Australia & New Zealand of AirAsia X.
In his opinion, “the most important thing is to maintain a genuinely low cost base (while) trying to develop scale.”
AirAsia X, the medium/long haul division of AirAsia, is on track to do that.
But is losing money along the way despite reputedly having the world’s lowest airline costs at USD1.9 cents per available seat kilometres.
CAPA writes “AirAsia X grew its fleet in 2013 from 12 to 19 aircraft (16 A330-300s, one A330-200 and two A340s), giving it a 49% share of the total widebody LCC fleet in Asia-Pacific.”
Its closest rivals are Jetstar International – 12 aircraft (10 A330-200s and two 787-8s) at the end of 2013, and Scoot with six 777-200s.
This new-found scale has seen incredible growth in its transit pax, which “accounted for 43% of AirAsia X total passenger traffic in 2013, up from only 25% in 2011.
“AirAsia X expects this figure to approach 50% in 2014.”
In other words, AirAsia is morphing into becoming like a network carrier and, it could be argued, is suffering the same problems.
As Mr Myerscough said: “There’s a lot of capacity and it’s going to be a hell of a ride for all of us”.
That’s for sure with two big factors at play:
1) costs can only be controlled to a certain point because fuel prices are almost impossible to effectively hedge against
2) scaling up incurs very heavy costs, stretching finance, staff and resources to breaking point.
Then there’s the issue of natural attrition.
While commercial aviation sounds Darwinian, it’s actually not. There is no survival of the fittest.
It’s more like survival of the fattest.
For example in the United States failing airlines can go into Chapter 11, eliminate all debts, restructure and return leaner and stronger than they were before.
Even when disaster strikes, airlines live on.
Malaysia Airlines, demand for its services decimated by the recent shooting down of MH17 and disappearance of MH370, will remain flying no matter what impact on its bottom line these tragedies have.
The Malaysia Govt has effectively taken the carrier in-house, privatising the business by removing it from the national stock exchange .
It had no choice – airlines are seen as symbolic of the countries they represent.
Like Malaysia Airlines, there are countless other carriers that will not be allowed to die however dire their performance .
As a result, there can be no doubt the aviation industry is broken.
And what’s even more certain is that it will never be fixed.