Air Today Gone Tomorrow | BTalk Australia

So far this year 24 airlines around the world have gone out of business. What does this mean for the Asia Pacific region?

In today’s BTalk Australia Phil Dobbie talks to aviation expert Tom Ballantyne about the challenges facing airlines and how it will impact future business travel in and out of Australia. They also discuss the recent changes to the Qantas Frequent Flyer program, now promising any seat on any flight, for a price.

Click on “Play” above to hear the podcast.

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• Today’s Transcript

Dobbie: G’day, I’m Phil Dobbie.  Today on BTalk Australia, the future of air travels and the airline business. Qantas has just announced changes to its frequent flyer scheme. You can cash them in on any seat on any flight provided you’re happy paying extra frequent flyer points for the privilege. This is the time when fuel costs are at an all time high. Tom Ballantyne has been an aviation writer for many years now, perhaps more than he cares to remember. He joins us now. Tom, the cynic in me says that the changes by Qantas are just the way to eat up your frequent flyer points more quickly. What do you reckon?

Ballantyne:  Well, that’s absolutely right. I mean the fact is if you want to be guaranteed of getting a seat, it’s going to cost you a lot more points.  So you certainly are going to eat up your points a lot faster. If you can’t book far enough ahead and get a seat just using your normal frequent flyer points, then this is going to mean that your points are going to dwindle much more quickly. Although it has to be said that there’s some advantage in it for the traveller because you don’t have to use all your points. I mean this is a system under which you can use some points and some cash.

Dobbie: Right.

Ballantyne: So you can balance it out as it were.

Dobbie: Are we likely to see a response from the other airlines? I guess this is a bit of a competitive advantage. It’s the probably the first change that’s been made to any frequent flyer scheme for years.

Ballantyne: Well, yes. I mean there are one or two airlines around the world who do this sort of thing already; Air Canada is one. But certainly you know frequent flyer points and the airline really needs to try and get people to use them and at the same time it’s certainly difficult for people to use them because, the fact, is that the aircraft are pretty full these days and finding seats unless you book a long, long way ahead is very difficult.

Dobbie: And it’s potentially going to get worse, isn’t it? I mean, Qantas are saying they’re pulling back on some routes; they’re reducing the frequency of flights as their fuel prices go up. So is this part of that? You know they’re saying it’s going to be harder to get seats, so we recognise it’s going to be virtually impossible to use your frequent flyer points.

Ballantyne: That’s absolutely right. I mean, virtually every airline in the world is either grounding old aircraft or cutting back on the routes, rationalising their networks, looking at each route individually and if the yields aren’t there, if the profit isn’t there, then they’ll cut back. Airlines simply don’t have any choice. After all, they have seen their fuel bills quadruple over the past four years. An aircraft which may have been economical on a particular route 12 months ago, because of the fuel price is now losing money. And in today’s business environment, you simply can’t operate aircraft on a loss-making basis.

Dobbie: Now Qantas said about a third of their costs are airline fuel, I think I read somewhere. I mean what does this really mean over the next few years for the airline industry? Are we going to see more rationalisation?

Ballantyne: Well, rationalisation has been something which an airline industry has needed for many years. This may well force rationalisation, but the problem with the airline industry is consolidation and rationalisation is amongst the airlines is very difficult to come by because of ownership rules. You know cross border ownership rules for instance. In Europe there have been a couple of consolidations, KLM and Air France being one.  The United States which desperately needs consolidation, it hasn’t been possible for political reasons. Every time two airlines try and get together, they can’t do so because the competition bodies fear that someone’s going to end up with a monopoly. The only consolidation we’ve seen in Asia Pacific region has basically been two government owned carriers being joined together such as Qantas and Australian Airlines or in India, India and Air India. The only example I can really think of two separate airlines being consolidated still took place within the borders of one country and that was Japan Airlines and Japan Air Systems. So cross border consolidation which actually would be very important for the future of the industry is actually very difficult to come by.

Dobbie: So is it possible that this fuel crisis we’re now facing is going to force some of the governments in for example in our region to look at more of an open skies policy so that mergers can happen?

Ballantyne:  That is certainly the hope of the airline industry itself. Even the International Air Transport Association which represents all of the world’s airlines believes that there are too many airlines in the world. And too many aeroplanes, too much competition, that there does need to be some rationalisation. And there are means, there are discussions going on in terms of cross border ownership rules. For instance, Europe is talking to the United States about the possibility of changing the rules to allow European carriers to take bigger stakes in US carriers. In this part of the world, I mean there aren’t any real signs that it’s about to happen any time soon. Liberalisation is happening, but it’s happening at a very slow pace. Even in the case of low cost carriers who want to increase their ownership, if you look at Air Asia in Malaysia, it has created a Thai Air Asia and it’s created and Indonesia Air Asia by taking a major stake in a carrier in those countries. But it still can’t take a majority stake. It’s still less than 50 percent and that’s the same with Qantas in Vietnam taking 30 percent of the Pacific Airways. And Qantas in Singapore being a part owner of Jet Star Asia. It’s difficult to say when the rules will change to allow true consolidation to take place, true cross border consolidation.

Dobbie: Now if that doesn’t happen and the fuel price continues to rise, I mean the first to feel the pain is surely going to be the low cost airlines.  It’s a pretty bleak future for Virgin Blue isn’t it and presumably for Jet Star.

Ballantyne: One of the issues for low cost carriers is that the fuel bill is actually a larger percentage of the cost than for a legacy carrier. Because they have lower overall costs, for many low cost carriers fuel is actually up to 50 percent of their bottom line costs. Whereas for a major full service carrier, it’s now up to somewhere between 30 and 40 percent, depending on the airline. Virgin Blue is somewhere in between. It’s not a low cost carrier any more. It’s doing many of the things that a full service carrier is doing and you know it describes itself as a new world airline. But certainly for Virgin Blue being competitive and making money becomes more difficult by the day as the fuel costs rise.

Dobbie: And we’re starting to see examples overseas of these low-cost airlines just hitting the wall.

Ballantyne: Yes, that’s absolutely right. But what you will generally find is since the beginning of this year, 24 airlines have actually gone bankrupt or gone out of business.  Most of these carriers, a lot of these carriers are low cost carriers. But what you will find is their low cost carriers which were operating older aircraft. A typical example would be Oasis Hong Kong which flew Boeing 747 300s, a rather veteran aircraft and in basic terms, a gas guzzler. Most of the low-cost carriers in the Asia region are actually operating very new airplanes.  People like Air Asia, people like Tiger, people like Jet Star here in Australia, they’re all operating pretty much brand new or very new 8320s, Boeing 737s, so they’re much more economical.  They’re far better able to absorb the increased fuel prices. But having said that, there is a limit. If they keep going up, then it becomes more and more difficult and they’re going to have to take further action to cut back on their capacity.

Dobbie: Yeah, and even then don’t we risk the danger, now you can cut back flights and push up prices, but there’re still those other overheads, the other 50 percent of the cost that you have to cover and isn’t it possible the price that they have to charge is simply going to be too much? And you know the price elasticity is going to determine that there’s not a bright future.

Ballantyne: It’s a good fear of the airline industry of course and it’s always suffered from the fact that it’s never really charged what would be a fair going rate for the product it produces because of the high levels of competition; airfares have actually been a bargain for years. And the global airline industry’s profit margin is only something like 1.5 percent. Now that will be totally unacceptable in any other industry in the world.

Dobbie: It certainly would.

Ballantyne: Airlines have got to bite the bullet and realise that they simply have to charge more for their tickets. But on the other hand, they’re afraid that if they push it up too high, then people will simply stop flying.

Dobbie: The other fear for travellers as well, particularly in times like this, you know, are the airlines going to cut back in their investment? Are we going to have aging fleets? I hear a lot of even though you’re saying a lot of it is new aircraft in this country, I still hear a lot of nightmare stories particularly from people who travel regularly to and from Perth.  Are these stories just circumstantial or is flight performance on the decline?

Ballantyne: I think in the case of, say, people flying to Perth, certainly over the past few years an airline like Qantas has been using what would be termed older aircraft, Boeing 767s for instance, even Boeing 747s. Now these are heavy on the gas, but now we see Qantas, you know, getting rid of its 767s. I don’t think that we are going to see an aging of the fleet because it has become absolutely vital for airlines that they get new modern aircraft to benefit from their fuel efficiencies. It’s just unfortunate that the two newest aircraft coming into the fleets, the Airbus 8380 and the Boeing 787 which will bring huge savings in fuel use have been delayed for various reasons. Qantas has got a lot of 787s on order and it is absolutely desperate to get them, but they simply can’t get them until they’re coming out of the factory. But there are a lot of new aircraft. Something like 400 new airplanes will be arriving in Asia Pacific this year alone. That’s a lot of new airplanes, a lot of capacity, but these will be more efficient fuel-wise and cost-wise than the aircraft they’re operating right now.

Dobbie: OK, so getting your crystal ball out, how do you see business travel particularly in the next couple of years? Obviously higher fares is a start.

Ballantyne: Yes, absolutely. But it is very difficult to assess. I mean airlines have been surprised by the resilience of the marketplace after 9/11, after the SARS outbreak, after terrorism. They have been quite surprised at how quickly traffic has returned, far more quickly than they expected.  What airlines are hoping is that business people will continue to fly in their present numbers. I think that there will probably be a bit of a dropping off because of all the economic uncertainty, stock market jitters, all that sort of thing happening around the world. But so far, business traffic is holding up relatively well. And airlines are betting on the fact that well people need to travel, particularly in this region. You know, if you want to get from A to B and go to another country, you have to fly. You don’t have any other choice. And, and that’s what airlines are banking on. But it remains to be seen. There may be a bit of a flattening out even a bit of a downturn, but the general feeling within the industry is that business traffic will continue to hold up relatively well.

Dobbie:  OK, thanks so much for your time today, Tom.

Ballantyne: That’s a pleasure.

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