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Competing to control the sky

The aviation sector is hugely competitive, with airlines, cities and manufacturers desperate for a piece of the profitable, if somewhat risky, market

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An industry reliant upon a large amount of volatile external factors, aviation has suffered a turbulent time during the past decade. While the manufacturing of planes is predominantly shared between two major players in Airbus and Boeing, there are hundreds of competing airlines across the globe. The destinations these airlines fly to frantically compete to welcome business and leisure travellers alike, to help boost their economies.

The airline industry has seen varying rates of success in recent years, with difficult economic circumstances affecting how much people are willing to spend on travel, while many see boosting global trade links as a means of getting out of the mess some countries are in.

Towards the end of 2012, the International Air Transport Association (IATA) estimated that the global industry would see combined profits of $4.1bn, with a sharp rise in the
coming year. The company’s Director General and CEO, Tony Tyler, said in October: “Even six years ago, generating a profit with oil at $110 per barrel would have been unthinkable. The industry has reshaped itself to cope by investing in new fleets, adopting more efficient processes, carefully managing capacity and consolidating.”

The news will be particularly welcome in North America, which saw a large proportion of the increases and was expected to report profits of around $1.9bn in 2012. In Europe, however, forecasts were significantly less positive, with losses expected of nearly $1.2bn for the industry, with the IATA remarking that: “The region is plagued by high taxes, inefficient air traffic management infrastructure and an onerous regulatory environment.”

Emerging markets were expected to see profits by 2012, with Middle Eastern carriers leading the way with around $700m combined profits and Latin American firms gaining $400m. It is in the Asia-Pacific region that there has been most growth, though, with aggregate profits of $2.3bn.

The organisation predicts that 2013 will see net profits of around $7.5bn, although this optimism is dependent upon better global economic growth and a reduction in oil prices.

The IATA added: “Regional divergences will persist in 2013. North American airlines are expected to continue to improve profitability based on tight capacity management. Asia-Pacific carriers will see a profitability boost from improved cargo volumes (if not yields). European airlines are expected to be the only region in the red for 2013, although losses will be trimmed as a result of slower capacity growth and improved global trading conditions on long-haul markets.”

Manufacturing delays
The manufacturing of commercial airlines, dominated by Europe’s Airbus and the US’s Boeing, has had some difficulties going into the new year. While airlines have refreshed their fleets with new jets that sport supposedly modern, more environmentally friendly engines and bigger capacities, delays in delivery and faults have led to both companies suffering poor PR. Airbus reported strong sales for 2012, but delivered fewer than expected A380 superjumbo jets, with only nine of the group’s 800 new orders being for their biggest plane.

Boeing fared slightly better, saying in December that it had booked 1,203 orders in 2012 and delivered 601. However, the US firm suffered embarrassment in January when two Japanese airlines, Nippon Airways and Japan Airlines, grounded all their Boeing 787 Dreamliner planes as a result of battery problems. This was yet another setback for the plane, which has recently faced issues with fuel leaks, faulty brakes and fires. Analyst Richard Aboulafia from the Teal Group told the BBC: “You’re nearing the tipping point where they need to regard this as a serious crisis. This is going to change people’s perception of the aircraft if they don’t act quickly.”

Capacity issues
Competing for the highly lucrative status as a gateway to booming emerging markets in Latin America and Asia has become something of an arms race in Europe. While German, French and Dutch cities have pushed ahead with expanding the number of flights to industrial cities in China and Brazil, the UK has lagged behind because of political squabbling and highly motivated local campaign groups.

France, for example, offers twice as many flights to key emerging economies, with Charles de Gaulle airport in Paris, the country’s main hub, handling just under 61 million passengers in 2011. Industry analyst Innovata revealed in 2012 that Paris sees approximately 3,500 flights to China a year, while Amsterdam’s Schiphol offers 2,300. Frankfurt can offer around 2,800, providing a key advantage for the German financial capital over London, where Heathrow is only able to offer around 1,700 to just three mainland Chinese destinations.

UK business leaders joined together to publish a report in December that called for action on the capacity issues in the south east of England. The Institute of Directors polled 1,000 members, with the consensus showing a preference for expanding Heathrow to four runways, followed by a new hub airport. The report said: “Only a new hub airport or a four-runway Heathrow are sufficient to meet the shortfall. A combination of a third runway at Heathrow and a second runway at Gatwick or Stansted would be sufficient to meet the overall capacity shortfall, but may not provide enough additional hub capacity.”

The report added that more modern airports in neighbouring countries were taking travellers away from the UK’s creaking airports, saying: “In effect we have outsourced our hub to Amsterdam’s Schiphol airport.”

Strategic alliances
Airlines have been desperately seeking slots within this constrained airport capacity. Some have formed strategic alliances to help expand their operations, while others have sought to take stakes in rival firms. Most notably, the world’s emerging markets have seen growth in the operations of airlines.

The major airline alliances, such as Star Alliance, Oneworld and SkyTeam, have been in operation for nearly 15 years, giving members extended networks of operations and connectivity. Many of the more established airlines are members of these groups, but some of the newer operators – including the likes of Emirates and Etihad – have instead remained independent, opting to pursue a system of codeshare agreements and equity stakes.

In early January, Indian airline Jet Airways, one of the more luxurious in the South Asian market, was seeking investment from cash-rich Etihad Airways, Abu Dhabi’s state airline.

Discussions over Etihad taking a 24 percent stake for around $330m led to many questioning why they would want to invest so much into an airline that has posted five consecutive quarterly losses in the last year. However, after the Indian government relaxed regulations that prevented foreign ownership of domestic airlines, many in the industry are eager to get a strong foothold in a market with significant potential for growth.

Etihad has been rapidly growing its presence since launching ten years ago, with many investments in other airlines around the world, as well as codeshare arrangements, promoting the brand in far-flung places. Stakes in other carriers, such as airberlin, Virgin Australia and Air Seychelles, have strengthened Etihad’s reach across the globe, and it is clear that the company intends to add to its portfolio in the coming year.

Similarly, Qatar Airways also has plans for an aggressive expansion of its operations. In October 2012 the airline outlined details of its targets over the next three years, with an increase in its destinations from 119 to 170. The airline’s CEO, Akbar al Baker, told the UK Aviation Club that its “aggressive expansion will continue unabated” despite tough industry conditions, and that his airline was “no longer the follower, but the pace-setter”. He added: “We will take on the challenge and operate in new markets where other people dare not venture. Until now we have been very successful in finding and fuelling new markets.”

Strategic alliances will allow airlines to move into fresh markets and benefit from the reach that existing operators have. As capacity in airports around the world grows, and trade links are formed, both airlines and manufacturers should see a rise in demand, but the competition will continue to be fraught.

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