After Hitting The Bottom in 2009, The Global Aviation Industry finally retuned to black in 2010 across all Continents. But with fuel Prices Posing a threat, can The Industry Sustain it’s Profitability in 2011?
“Crisis is part of the airline industry’s genetic profile. And still it survives, more or less intact,” stated Peter Harbison, Executive Chairman, Centre for Asia Pacific Aviation (CAPA) when the industry body released its outlook for the global aviation industry for 2009 titled, “A Year of Great Opportunities. Don’t waste it!”. But little did Harbison or CAPA know that the series of events thereafter would ensure that the industry dips down to a historic low, in terms of demand. While the man made disaster (read global financial melt down) started it all, nature wasn’t too kind to the aviators either. Volcanic ash to heavy snow-fall, every event took its toll on the industry. As per calculations put forward by International Air Transport Association (IATA), the global industry lost a mind-boggling $81 billion in terms of revenue in 2009. However, with green shoots of recovery (from recession) germinating across the world, the aviators have managed to turn the demand for mobility into unexpected profits. Though the growth is based on a lower base of 2009, it’s certainly a welcome trend reversal for the industry.
Estimates suggest that in 2010, Asia Pacific carriers recorded a 9% year-on-year increase in passenger demand, while European carriers grew by 5.1%, North American carriers by 7.4%, Middle Eastern airlines by 17.8% (on back of a 13.2% capacity increase), Latin American airlines 8.2% (despite a 1.1% decrease in December) and African Airlines by 12.9%. What makes this growth more worthwhile is that it has not only brought the financial statements of most of the carriers back in black, but has also helped them outperform the market benchmarks with a 28% rise (IATA data). And most importantly, they have achieved this despite sharp rise in fuel prices. But the salient question remains, can the sector manage to sustain the positive bottom-line that it has witnessed after a lot of struggle and hardship?
Before getting into the possibilities of bottom-line sustainability, one first needs to recognise what could be the challenges for the industry in 2011. The airline business is highly exposed to unanticipated shocks and air travel demand fluctuates with economic cycles and environmental factors. At the same time, travellers’ expectations are changing faster than ever, calling for improvements in business models. As such, aviation is an industry, which yields one of the lowest returns on equity even in the best of times.
Apart from economic conditions, government regulations, unionisation & infrastructural problems, the other biggest near term risk looming large is on the oil price front. On the back of recovering global demand and thus economy, fuel prices have again started heading north in leaps and bounds. Considering aviation fuel price, the IATA index shows a 33.1% rise in the same over the past 12 months, and it is expected to escalate further. Airlines are planning to levy additional charges to make up for the loss from high fuel prices, but there is no doubt that this phenomenon is going to hurt the operations of air carriers; for free fares, if not for anything else.
Estimates suggest that in 2010, Asia Pacific carriers recorded a 9% year-on-year increase in passenger demand, while European carriers grew by 5.1%, North American carriers by 7.4%, Middle Eastern airlines by 17.8% (on back of a 13.2% capacity increase), Latin American airlines 8.2% (despite a 1.1% decrease in December) and African Airlines by 12.9%. What makes this growth more worthwhile is that it has not only brought the financial statements of most of the carriers back in black, but has also helped them outperform the market benchmarks with a 28% rise (IATA data). And most importantly, they have achieved this despite sharp rise in fuel prices. But the salient question remains, can the sector manage to sustain the positive bottom-line that it has witnessed after a lot of struggle and hardship?
Before getting into the possibilities of bottom-line sustainability, one first needs to recognise what could be the challenges for the industry in 2011. The airline business is highly exposed to unanticipated shocks and air travel demand fluctuates with economic cycles and environmental factors. At the same time, travellers’ expectations are changing faster than ever, calling for improvements in business models. As such, aviation is an industry, which yields one of the lowest returns on equity even in the best of times.
Apart from economic conditions, government regulations, unionisation & infrastructural problems, the other biggest near term risk looming large is on the oil price front. On the back of recovering global demand and thus economy, fuel prices have again started heading north in leaps and bounds. Considering aviation fuel price, the IATA index shows a 33.1% rise in the same over the past 12 months, and it is expected to escalate further. Airlines are planning to levy additional charges to make up for the loss from high fuel prices, but there is no doubt that this phenomenon is going to hurt the operations of air carriers; for free fares, if not for anything else.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
