Airlines hang by a thread

Photo / Thinkstock
Photo / Thinkstock

As global aviation industry leaders chased their fish lip soup down with a glass of Chateau Changyuafip the crisis affecting their industry seemed a million kilometres away.

In Beijing's Great Hall of the People - on the edge of Tiananmen Square - the most immediate concern was finishing one of nine courses before waves of waitresses whisked their plates away.

The "constant shock syndrome" faced by airline bosses was not on the menu at the gala dinner of the International Air Transport Association.

And as efficiently as hundreds of delegates and others were bussed motorcade-style through China's capital during rush hour, staff let them know it was time to go just two hours later.

Beyond the thick walls of the Great Hall and the collegial atmosphere of the small global community of aviation bosses, there is an industry with big problems.

IATA's director-general Tony Tyler was unable to rule out having fewer members by the time of next year's annual general meeting in Cape Town.

"Yes, it's possible. Even big airlines can go off the rails if things get very bad," Tyler said.

"We'll get a good turnout [but] if the world enters a global recession all bets are off."

Although it has fallen in price over the past month, fuel hit the profits of all airlines during the past 12 months and the impact of the eurocrisis is starting to bite, especially for carriers based there.

The industry says it is also under siege from rapacious revenue collects and Europe's emissions trading scheme which threatens to provoke a trade war.

But at dinner youthful executives from struggling Aerolineas Argentina were not downcast. The airline was renationalised in 2008 and in its main regional market, Brazil, the currency has been devalued by 20 per cent, hitting demand.

But in the swings and roundabouts business, it is flying its planes to their limit on the 15-hour Buenos Aires-Sydney route given up by another airline described by one magazine as "being on life support" - Qantas.

That means the Argentine airline is giving up on its route to New Zealand from early next month after about 30 years.

The rugby-loving Aerolineas bosses say it will be reinstated "as soon as possible".

And just as Qantas' fortunes have plunged this year and takeover talk is swirling, Japan Airlines' journey back from bankruptcy court was cited as an example of how quickly airlines can recover.

The carrier was on its knees two years ago, in the past year it made a US$2.3 billion ($2.9 billion) profit.

Legend has it that billionaire investor Warren Buffett has instructed aides to phone 911 to get help if he ever makes moves to buy airline shares.

Air New Zealand chief executive Rob Fyfe also has doubts about the wisdom of investing in airlines right now. "It's an industry that over its lifecycle performs very poorly in giving investors a return."

The Government is planning to sell down the Crown's stakes in four state-owned energy companies and NZX-listed Air New Zealand.

Fyfe said he doubted the Government would be in a hurry to sell down its 75 per cent stake in the airline.

"It looks like a good time for buyers and a poor time for sellers. The Government is a relatively astute seller so I'd be surprised if they'd be wanting to sell at these prices."

Fyfe is optimistic about Air New Zealand's prospects next year, partly because of continued growth in the Asia-Pacific region.

China has recently been the standout performer, with sustained domestic demand, traffic growth in double digits and its airlines aggressively expanding internationally.

Mainland China's five main airlines have a 1748-strong fleet and over the next year are forecast to contribute over half of global profits.

But they are not immune from fuel costs and profits slid during the first part of this year.

China Southern Airlines is Asia's biggest airline by passenger numbers and its president, Si Xianmin, said he was cautious about the future.

Although there are big plans to increase the number of flights to Australia and this month it launched connecting flights to London from Auckland through its Guangzhou hub, Si Xianmin said further growth would depend on demand.

"We need to be very cautious when looking at long-haul routes."

China has been a victim of its own success though.

Although there has been a US$39 billion investment in airports during the past 10 years the country's civil air space is crowded.

Jane Pan, a Chinese air transport specialist writing in IATA's meeting magazine, reported 80 per cent of the country's airspace is controlled by the military, creating a bottleneck and putting pressure on airports and airlines.

There are signs of rules being relaxed in the Pearl River Delta region of southern China.

Airport slots have also filled quickly.

Air New Zealand's Fyfe said the unavailability of reasonably timed vacancies at Beijing Airport, expanded for the Olympics but now filled, was one reason why the airline would quit flying there next month and consolidate around Shanghai.

Government action in Europe is also a threat to airlines.

They say the European Union's emissions trading scheme is punitive and a group of 30, "the coalition of the unwilling", led by China, India and Russia are making a stand against the scheme.

The industry says it is already taking steps to cut emissions, mainly through more efficient aircraft, although biofuels is held out as a hope for the future.

IATA's aviation environment director, Tony Steele, said there was a dangerous standoff brewing, not about money but about sovereignty.

"When an airline in China, India or the United States turns it engines on to fly to Europe it is accountable to Europe for those emissions for the whole distance of the flight even though a small percentage takes place in European airspace," he said.

Although the EU wants to talk over the next 18 months, countries felt as if they had a pistol held to their heads while negotiating.

"The last thing we want as an industry is a trade war and retaliatory action being taken against carriers around the world."

A tit-for-tat scrap could mean some airlines slowing down the purchases of new aircraft from European manufacturers or limiting the number of overflights from European carriers.

"It's an extremely charged situation," Steele said.

Air New Zealand is staying on the sidelines. Fyfe said the ETS had a minimal effect, measured in tens of thousands of dollars, because the airline had switched to more efficient aircraft than flown during the reference years.

There was enough momentum among "the unwilling" whether or not Air New Zealand was a party to it.

He is worried that stealth taxes meant airlines - which have big cash flows but, over time, low margins - were being milked by revenue collectors.

"The sector's become like a drug they can't extract themselves from."

Under-pressure Qantas boss Alan Joyce, now the association's chairman, said it was not only legacy carriers such as his own main brand which faced uncertainty.

"It's what a previous chief executive of Qantas called a 'constant shock syndrome' and that's what we deal with all the time," Joyce said.

And for airlines this year, dealing with it will take the agility and gravity-defying skills the young Chinese acrobats showed during their fine, albeit brief, show at the Great Hall of the People.

Circling the globe
* 2.8 billion people travelled on scheduled flights last year.
* 5.2 trillion km flown, 34,000 times the distance to the sun.
* 57 million jobs supported by aviation.
* US$2.2 trillion in economic activity.
* 48 million tonnes of cargo is air freighted.
* US$5.3 trillion value of cargo air freighted.
* Air freight is equivalent to a third of world trade by value.
[Source: International Air Transport Association]

On the radar
* Passenger traffic is forecast to increase by 4.8 per cent this year but profits are expected to more than halve to US$3 billion.
* Oil prices have fallen in the past two months but long-haul carriers are badly hurt by historically high prices given fuel can make up to 50 per cent the cost of a flight.
* The eurozone crisis threatens to cut demand from the area and affect global flying if problems worsen.

Grant Bradley flew to Beijing courtesy of IATA and China Southern Airlines

- NZ Herald

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