Four ways the airline industry doesn’t add up
Singapore Airlines’ decision to re-route away from the A380 underscores the contradictions in the aviation industry
What is it about the airline industry and their aircraft that appears to defy business logic?
How often, for example, have you just disembarked from a packed plane only to pick up a newspaper telling you how hard times are in the airline industry?
And why are popular airliners headed for the scrap heap? A case in point being the much loved A380 super jumbo, Singapore Airlines recently announced that it will not be renewing its first lease for A380s, despite being its second biggest user (Emirates is the biggest). Moreover it seems likely that Singapore will also drop its other A380s.
This two-decker plane has been in service for almost a decade but only made money in a single year, 2015. Other airlines are now joining Singapore Airlines in reassessing whether they want this super jumbo despite having placed orders.
And yet passengers really love this plane, it’s a big beast that delivers a pretty wonderful flying experience. But then again passengers really loved Concorde, the super sleek, ultra fast supersonic Anglo-French aircraft that has gone down in history as one of the biggest commercial jetliner money losers. The cost of developing Concorde was so high that there was no way of recovering the investment, only the national airlines of Britain and France ever used it but then again their purchases of the planes had to be heavily subsidised by taxpayers.
Mind you Concorde was nothing like the more comprehensive disaster of the Russian version of this plane, called the TU144, which managed to crash spectacularly when its prototype was presented at the 1973 Paris Air Show. It went on to make a grand total of just 50 commercial flights before the former Soviet Union conceded defeat.
The pattern for the clash between the romance of the airline industry and the harsh reality of making it pay was set by De Havilland which produced the world’s fist commercial jetliner, the much loved Comet. It looked like a dream but was riddled with production flaws, especially in the design of its windows that led to its sad demise and commercial failure.
Most flying experiences are pretty mundane and conducted in soulless mid-sized aircraft where the majority of seats, not so lovingly known as “cattle class”, are jammed with squashed passengers living in fear of the seat in front being reclined.
However this remains an industry like no other where romance, intrigue (that’s a polite word for bribery) and fantasy combine with a hellishly complex set of economics.
Although last year was a good year for airline profitability and the prospects for this year look good, it is highly unlikely that global average net profit margins will be in the double-digit zone. The International Air Transport Association reported that in 2014 the average net profit margin was an unspectacular 4 per cent, which translates as US$8.27 per passenger.
In that year the most profitable airline in terms of profit to cost ratio, was the Irish-based budget carrier Ryanair, which has the dubious distinction of being widely hated by its passengers, who continue to use it mainly because it is cheap.
Few major full service carriers are as profitable as smaller companies offering budget prices and strenuously budget service. It should be noted that a number of mainland Chinese airlines, such as Air China, are allegedly highly profitable but there is widespread scepticism in the industry over the authenticity of their figures due to the lack of transparency over financing and costs.
Profitability is constrained because competition is tough in places like Europe, plus there is vulnerability to forces beyond airline company control, such as fluctuating oil prices and terrorist threats. Then there is the problem of an uneven playing field created by state-subsidised airlines, particularly in the Gulf, who are making a considerable impact on long haul services. No wonder airline executives often assume a martyred demeanour.
All of this turns the traditional logic of doing business on its head. In the airline industry a much hated company can make a far better return on capital than its rivals. Customer experience of using airline companies can be pretty dismal yet we still talk about the romance of flying. And, to top off all these seemingly contradictory aspects of the airline business, some of the most loved aircraft have to be taken out of service because they don’t make a cent.
And let’s not forget that here in Hong Kong the suckers, aka the passengers, were told that despite a massive fall in oil prices they would still have to pay a fuel surcharge because the clever chaps at airline HQ made terrible bets on hedging fuel costs. But then again airline competition is severely restricted in the “world’s freest economy”. Go figure.
Stephen Vines runs companies in the food sector and moonlights as a journalist and broadcaster