The aviation industry is an ever-competitive one. With new players entering the scene amidst long-term aviators facing cost rationalisation, financial problems and issues with human resources, the sector maintains its competitive edge with budget airlines – such as AirAsia Bhd and the upcoming Malindo Airways – currently basking in the limelight. BizHive Weekly takes a look at the sector and talks to AirAsia as well as Malindo Airways on their future plans.
Gearing up for low cost competition
It comes as no surprise – in an economy like today’s – that the key word to sustaining an airline is ‘budget.’
In layman’s terms, budget brings about the definition of ‘estimating the inflow and outflow of cash to achieve one’s financial goal.’
Tony Tyler, IATA director general and chief executive officer
Aviation jargon expands this definition to define low-cost flying, offering customers the option of lower fares in contrast with traditional full service carriers providing premium airline services.
Indeed, when it comes to the topic of aviation, budget airlines or low-cost carriers seem to be the thriving business concept currently – assisting players by unbundling the once-conventional service packages for transporting people across the skies.
A low-cost carrier can be defined as an airline that offers lower fares with fewer comforts as its trade-off. To make up for revenue lost in decreased ticketing prices, airlines may charge for extra services such as food, baggage, priority boarding, seat allocating and so on.
As such, low cost carriers often stand to gain more from these extra services called ancillary income.
Lately, frequent fliers seem less likely to opt for full service packages. Instead, they prefer to ‘pick and pack’ their own services based on their own needs and comfort levels.
This practice is ever more evident in light of today’s global economic crisis, consequently impacting aviation players – but in a positive way.
Global outlook boosting aviator performance
The ongoing global crisis in the eurozone as well as slowdown in China, US and Japan has left an unsavoury impact in many sectors except aviation.
In fact, the International Air Transport Association (IATA) recently announced an upward revision to its 2012 global aviation outlook in early October.
In an interview with BizHive Weekly, IATA director general and chief executive officer Tony Tyler explained the reason behind this revision.
“The eurozone crisis is continuing despite the best efforts of politicians. The recent quantitative easing in the US and Japan has not yet translated into more robust economic growth,” he said to BizHive Weekly. “Also, the ripple effects of the slowdown in China are still being calculated. Business confidence is low, and that is having a direct impact on airline fortunes.”
Tyler noted that there has been very little relief in one of aviation’s largest cost items—fuel. Oil prices, he said, have been volatile but in line with the expectations that IATA had in June.
“In general, this is all bad news. And you are probably wondering how airlines have squeezed out some extra profit in these conditions,” he enthused.
“However, airlines are delivering profits in these difficult times as a result of their own strong operational performance. This is, in part, evidence that the consolidation that has taken place in recent years is strengthening the business.”
On the passenger side of the business, Tyler said statistics portrayed a more robust performance in traffic volumes during the first half of the year than expected.
“People are flying in greater numbers despite the economic uncertainty, so much so that we have increased our passenger projections by a half a percentage point to 5.3 per cent growth for the year. This is, however, below the six per cent historical trend,” he added.
“In addition, airlines have restructured their businesses, cut costs, improved processes, invested in more fuel efficient aircraft and much more. This combination of actions is keeping the industry’s head above water—but with a profit margin of just 0.6 per cent. It is far from an acceptable return, but almost amazing given the circumstances.”
“And, if we look into which market segments are growing we can see that the premium side of the business is suffering. In July, for example, the number of economy passengers was up three per cent, but the number of premium travellers was down 0.5 per cent.”
These statistics serve to prove a point – that the aviation sector played an important role in helping the global economy climb its way out of its slump.
Growth was the only way forward and a healthy aviation industry can stimulate that, believed Tyler, linking stagnating developed economies to robust emerging markets.
“Aviation connectivity spurs growth at both ends. That is why it is important for governments to ensure aviation’s ability to be a catalyst for growth is not constrained,” he opined.