Saturday, September 20, 2008

Airline industry faces enormous challenges

The massive hike in jetfuel prices, although moderated in recent weeks, has taken its toll in the airline industry worldwide. The most recent casualty, XL airlines (a UK low cost airline/ charter/tour operator) fell over because it hadn't hedged against price increases adequately, and had sold its tickets many months in advance. Being an operator at the bottom of the market left little room for fat, so it has gone. Others to fold have been Trans-Atlantic low cost carrier Zoom (again the bottom of the market has little profitability in it), US carriers Aloha, Skybus, ATA, Futura of Spain, Hong Kong's low cost carrier Oasis and the three all business class Trans Atlantic airlines, Maxjet, EOS and Silverjet. The last three folded because they couldn't offer the frequencies, network connections or airport access at London that was needed to be competitive.

So what does this hold for airlines down under? Well both Qantas and Air NZ have been hit hard, primarily because of a major collapse in international tourism from Europe, the USA and Japan. Long haul flights burn a lot of fuel, but the fare per passenger km is lower than short haul (and the staff/amenities required are much more elaborate than on short flights), so routes to and from Europe have been badly hit.

Air NZ in particular is vulnerable. Although it remains profitable, it is small, it retains the same risks it had before it bought into Ansett many years ago of not having much access to its nearest large market, and it extends itself far beyond New Zealand to an extent almost unparalleled by airlines of similar sized countries.

Air NZ's share price closing Friday was NZ$1.05, that is less than it was after it was largely renationalised in 2002, at NZ$1.75. More of your money Dr Cullen has spirited away. However, none of this should be a surprise:

- The domestic market remains largely stable, as Air NZ completely dominates the high yield flexible ticket business market and most provincial routes. It is shoring up that business by having converted the front half of its 737s to a new "Space +" configuration for Koru Club members, Gold and Gold Elite Airpoints members and full fare customers. That 3-4 inches more legroom will earn loyalty.

- The Trans Tasman market is growing, as Aussies and Kiwis travel closer to home, but it remains a bloodbath on prices. Pacific Blue is increasing frequencies as is (the apparently immune to oil prices) Emirates which will fly a daily Airbus A380 across the Tasman from February. Air NZ is also putting a "Space +" section at the front of economy class on its 767s and Airbus A320s on this route, also to shore up business traffic (as it will have the most legroom in economy class on the Tasman), as well as installing personal TVs for every seat in every class on 767s and A320s. Again it is hoping that aiming for the top of the market will increase yields, but it faces one huge disadvantage - no access to the Australia domestic market. Business traffic feeding to the Tasman domestically almost entirely goes on Qantas, because it can offer that.

- The Pacific Island market is low yield mostly, comprising ex.pat Pacific Islanders "going home" from NZ, and NZers going on holidays. They are all seekers of low fares. Air NZ has chosen to almost abandon the US/Europe to Pacific Island tourist markets through LA, although these have also plummeted significantly.

- The Asian market is also low yield. Tourism originating from Japan has collapsed significantly in the last few years. Air NZ has dropped routes to Nagoya, Fukuoka in recent years and the Osaka route is down to twice weekly (and about to be operated by 767s, a drop in 79 seats from 777s as well as a major drop in Business Class seating). The routes to China (Shanghai and Peking) are also disappointing, as there is very little business and premium economy demand, and the economy passengers are again at the cheap end of the market. Hong Kong has more balanced demand, though that is in part a feed to Lufthansa and Swiss flights to Europe (as well as the route to London).

- Routes to US and Canada tend to have plenty of business and premium economy traffic, but the economy class end of the market has declined significantly due to the recession in the US.

- Lastly the London routes are currently unprofitable, which is why the route via LA is being downsized to a 777 (also reflecting the increased competition between London and LA since the Trans Atlantic Open Skies agreement came into effect). UK origin tourism has dropped significantly, and Emirates has hurt Air NZ's business on routes to Europe.

So it's tough, it is a major exposure for the government as well, and like Delta/Northwest, BA/AA, Lufthansa and Brussels Airlines, Air NZ must be looking to hook up with a major foreign airline to survive and grow. To do this the government must water down its shareholding. At the very least the incoming government should look to dilute its over 80% shareholding to 50.1% to give the airline an injection of capital and the strategic linkages it needs to grow. Not doing so will see it struggle to sustain long haul routes at times like these, which is, after all, one of the key reasons for the government wanting the airline to remain in any case.

1 comment:

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