The rich get richer, the poor get poorer… up in the sky

Monday 21 July 2008 - Filed under Life Outside Work

It’s been announced Qantas is slashing 1,500 jobs and bringing down the planned capacity growth from 8 percent to zero. Both Qantas and Virgin Blue, Australia’s No. 1 and 2 carriers, are cutting back services, cancelling routes, retiring old aircraft, and finding ways to raise fares. But that’s not because Qantas has been running into losses; on the contrary, the company is expecting pre-tax profits of more than A$1.4 billion for 2008 and comparable figures for at least a couple more years. This contrasts starkly with Delta, one of the major carriers in the U.S., which announced a US$1 billion loss during the last QUARTER.

Qantas, in my opinion, has been running an extremely profitable business for its size and is also dextrously conscious of the projected longer-term reduction in profits. That seems quite fair given that aviation has been such a volatile industry, one that appears to bear the brunt of all the negative news about the economy. Whether the upcoming downsizing effort will help Qantas maintain a forward-looking competitive edge or result in the degradation of services and safety standards, remains to be seen. I personally hope to see the same (if not better) Qantas in-flight meals, refreshments, and entertainment for the years to come. That is after experiencing some of the low-cost carriers, although I do think they have their own merits.

So, is it all doom-and-gloom for airlines? An inevitable Yes for many, I’d imagine, but a definite No for the chosen few. Ones based in the Middle East and some of the low-cost carriers in the Asian market seem to be flying high. China, India, and the surrounding countries are where four billion people live and fly around after all. As for the Middle Eastern airlines such as Qatar Airways and Emirates, I have no knowledge of the inner workings but one would reasonably argue that they don’t suffer from the same baggage of soaring prices of kerosene as others do. That coupled with the sky-rocketing wealth of some oil-producing nations gives those airlines immense buying power – to buy planes, that is. One day I hear an airline in Oceania cut jobs and pull routes, and the next day a 5-year-old Abu Dhabi-based carrier signs up for a US$43 billion purchase of 200 aircraft. I gather these are not 20-seaters but “jumbo” jets like the A320, the A380, the B777, and the B787. I wonder how many major airlines in the world today actually have more than 100 of such large commercial aircraft in their fleet, and how many of them have the capacity to aggressively purchase 200 more to be delivered in the next couple of decades. Probably not many from outside the Middle East anyway.

As with any other industries, some players in aviation will lose out and others will eat into their shares over time. The world may in fact end up with far fewer airlines over the next couple of decades, who knows. But I’m certain of one thing: More and more people will choose to fly and will have no choice but to fly. Airports will keep expanding, the airspace will keep getting congested, and there will be more and more of new planes that can travel farther, cheaper, and hopefully greener as the manufacturers claim. Based on my momentary experience, I find aviation fascinating and dynamic for an industry to work in despite the apparent difficulties and challenges. Aviation is the blood vessel of the world we are in. It’s a melting pot of logistics, engineering, hospitality, tourism, and entertainment. And the players who survive will have truly mastered the art (or science) of efficiency, strategy, risk management, and long-term vision.

A couple of questions lingering deep in my mind:

• Is it better to pour efforts into R&D to come up with lighter materials and other weight-saving measures to reduce a flight’s load by a couple of hundred kilograms (and thereby save fuel); or to find three more paying customers who together weigh a couple of hundred kilograms?
• Is it better to reduce services and capacity to save costs now; or to invest hundreds of millions of dollars in securing brand-new fuel-efficient planes that will start delivering substantial savings after a decade? Or are they not mutually exclusive?

Update (22 July 2008): Today the chief executive of Qantas, Geoff Dixon, commented on the climate for the global aviation industry. Quoting Mr Dixon:

Over the next 12 years many more airlines will vanish, many. [They will be] unable to cope with the rising fuel prices and they will be swallowed up by takeovers or by mergers which is unusual for this industry. The work that Qantas has done to date means that we will avoid this dark destiny.

2008-07-21  »  JK