AVIATION FACING STRONG HEADWINDS, RESHAPES INDUSTRY

By GRACE SEGRAN

From INSEAD Knowledge (http://knowledge.insead.edu)

Falling demand, collapsing yields, low consumer confidence and fears of a pandemic have thrust the aviation industry into survival mode. Airlines are expected to post losses of $9 billion this year, with an unprecedented drop in revenue of 15 percent, which will see industry revenues shrink by $80 billion to $448 billion.

"Governments, partners and airlines must use this crisis as an opportunity to build a stronger industry," says Giovanni Bisignani, the director general and CEO of the International Air Transport Association. "That means resizing and reshaping, and the burden of change must be shared across the industry value chain."

ADAPTING BUSINESSES

The IATA chief calls on industry leaders to adapt their businesses and exercise flexibility. "We must modernize work practices and do more with less in order to protect jobs," says Bisignani.

To survive the global online market, he says travel agents need to reshape services and business models to provide greater value that travelers are willing to pay for.

While the western Global Distribution System charges $4 per transaction, China TravelSky does the same job for 50 cents. This, Bisignani says, must change.

The relationship between airlines and governments also needs to change, he says, to switch "from punitive micro-regulation to joint problem solving."

ON THE GROUND

Bernard Gustin, the Managing Director of Brussels Airlines, says that his airline had 20 percent fewer passengers the first quarter of this year. This was mainly in the corporate sector due to companies imposing a travel freeze, he says, "although it is slightly offset by leisure sales and promotions that we had undertaken to stimulate the market."

Since April, the number of passengers has increased but yields have decreased. This is largely due to business travelers switching to the back cabins and a bigger mix of leisure travelers who look for bargains and book in advance.

According to Gustin, Brussels Airlines has reduced its capacity by 15 percent, cut overheads by 20 percent, and is negotiating a salary freeze.

"We are holding our yields as dropping prices would mean that the current clientele pays less," says Gustin. "At the same time, we are creating attractive, innovative promotions such as festive and summer bargains to stimulate new demand."

The airline had been looking for a partner since 2005 when its shareholders (mainly Belgian institutions) said they were no longer interested in keeping their stakes. Negotiations started in 2007 with Lufthansa and were approaching completion at the end of June, under a deal in which the German carrier would take a 45 percent stake in Brussels Airlines with an option on the remaining 55 percent.

"The partnership is going to have a positive impact on Brussels Airlines given Lufthansa's multi-hub multi-brand strategy," says Gustin. "It will give us the potential to invest in new routes and our future fleet while keeping our identity."

THE IMPACT ON AIRPORTS

Along with airlines, airports are also affected by the downturn; sharing the same customers and having common interests such as customer service, security and facilitation, efficiency and cost-controls, and environmental responsibilities.

The slump came just as the industry had shifted into high gear in terms of airport capital expenditure in response to tremendous passenger growth.

However, airports do not have the same ability as airlines to contract and expand quickly, according to James Cherry, president and CEO Aeroports de Montreal and chairman of Airports Council International.

"The very nature of airports (capital intensive, long-life infrastructure) makes it very difficult to make dramatic cuts in their costs when a crisis hits -- especially one that came on as quickly as the one we're in now," says Cherry.

While this crisis is significant and cannot be ignored, the aviation industry -- and airports in particular -- has to maintain a long-term focus, Cherry says.

"We have to constantly be looking 10, 20 and even 30 years out to make certain that we keep up with the long-term trend. As bad as this crisis is, in a few years the current crisis will just be a blip dampening the industry's growth trajectory by a few years."

STRUGGLING TO SURVIVE

Bisignani says some strategies for airlines to survive the crisis are already clear.

Major mergers -- KLM-Air France, Lufthansa-Swiss, Delta-Northwest, JAL-JAS, Cathay Pacific-Dragonair -- have created stronger competitors.

U.S. airlines had cut capacity quickly. As a result they are stronger now, he notes. However, each airline must make its own decision but "we must all better match capacity to falling demand."

Some 4,000 aircraft, or 17 percent of the current fleet, are scheduled for delivery over the next three years. Aircraft ordered in good times are now being delivered in recession and finding customers to fill them profitably will be a challenge.

Whether this downturn is long or short, the way of doing business is changing and it will not be business as usual post-crisis, says Bisignani. "Today's situation is unprecedented, the most difficult ever. We are struggling to survive with a new and harsh reality. We are, however, resilient and capable of great change."