My watch-word for this year is relevance.
Relevance in the sense that aircraft in the sub 150-seat segment have never been more important in global aviation. You need only look at some rather astonishing numbers to understand why.
Today, our planet is more connected than ever – airlines served 20,000 city pairs around the globe last year, a record number, and double that of 20 years ago. Nearly half of the 1,350 new city pairs added in 2017 were served by aircraft with fewer than 150 seats. Those new routes alone accounted for 25 million passengers, the equivalent of the population of Australia.
While year-end statistics are not yet final, the airline industry is expected to have carried four billion passengers. Over a quarter of them flew on the worldwide fleet of 9,000 aircraft in the sub-150 seat category operated by some 700 airlines. That means that more than 1 billion passengers flew on small-capacity airplanes last year. One in four passengers. It’s an impressive figure.
Check out my latest blog post where I share my perspective on what will be shaping our industry in the months ahead.What’s going to influence that ratio? Well, I’m not one to make new year resolutions, but I try to identify things that will shape our industry in the months ahead. I believe three issues will determine if 2018 is going to be a good year, or a not-so-good year.
IATA economists expect the airline industry to report its fourth consecutive year of profits in 2018 with a 9.4% return on invested capital exceeding its 7.4% average cost of capital. That spread could be reduced as the price of fuel rises and airfares fall.
Yields continue to weaken amid intense competition which has been sharper as fuel prices declined. A glut of seats has forced carriers to offer deep fare discounts which leads to profit-destroying price wars that further depress yields. I believe this will be particularly difficult in Asia and Europe. Even the highly profitable US carriers will struggle to see a turn in their yields in 2018.
The collapse of Air Berlin, Alitalia, Monarch and Darwin show how cut-throat competition has become in the European short-haul market. FlyViking, a Norwegian regional carrier, is the first airline to suspend operations in 2018. Expect more to follow.
Overall, I see 2018 as another great year for the industry, but the peak of this particular cycle is behind us. Airline earnings will depend on how adept carriers will be in controlling non-fuel costs.
I like to say that, politically, we live in a world not knowing what we don’t know. Yet we can already identify issues that will impact our industry in 2018. This year will be pivotal in understanding what the UK’s departure from the EU will mean for airlines. We may not know its true impact for a number of years but Brexit, most surely, will discourage any bold moves into and out of the UK market in the short term.
There are still many big, unanswered geopolitical questions. Will we see more or less protectionism? Will the U.S. administration re-certify the Iran nuclear deal? How will political discord in Catalonia affect airlines?
Creative Competitive Positioning
Adapt or die has never been more relevant. Resilient strategies and a more nuanced competitive positioning will be increasingly important.
Airlines already leave no stone unturned in their quest for new sources of revenue and cost savings. Nearly every major carrier has implemented reforms to adapt to the new competitive landscape. Business models are converging. Multiple brands and business models are attempting to serve all passenger profiles. It used to be unthinkable for full-service carriers to charge for meals, checked baggage, seat selection, and so on.
The basic economy fare offered by FSCs, without amenities like checked baggage and advance seat assignment, is now a tool to compete with LCCs who remain true to their no-frills mantra. Yet they themselves, are taking non-traditional approaches with multi-type fleets, loyalty programs, and sales to premium customers via global distribution systems.
FSCs have introduced their own LCCs and even supranational LCCs. Long-haul LCCs are now less experimental and more mainstream. One of the last great taboos between FSCs and LCCs may disappear in the near future: co-operation in the form of code-sharing, feeding each other’s networks and improving connections.
So, what does the future hold? How can airlines best position themselves? We know past performance is no guarantee of future results. Inevitably, the airline industry will face a more challenging environment in the years ahead. Airlines that do not address the prevailing trends and issues head-on will face an uphill battle for viability.
Whether the airline industry has something to brag about in the coming months and years will depend on how seriously we all take today’s challenges and respond to the threats.