KEY POINTS:
Huge increases in the cost of fuel have caused some airline chiefs and aviation analysts to renew predictions that airlines will need to consolidate to survive.
Last month, Qantas CEO Geoff Dixon saw his airline as among "a few very large and efficient global airlines with a
portfolio of interests and brands" that would emerge in a "new world aviation order".
But as an airline-restructuring expert and former Airbus executive, Henri Courpon, told the Wall Street Journal a week earlier: "Before we get to a new world order, we're going to have a period of new world disorder."
Disorder has struck hard in the United States. So far this year, five smaller carriers have filed for bankruptcy protection or ceased operations, and route cancellations have left more than 100 small and medium-sized cities without air services. Some analysts predict the US industry could post a combined loss of US$10 billion ($13.8 billion) this year, just short of the record loss in 2002 in the wake of 9/11.
British Airways reported this week that its net profit for the quarter ended June was down 91 per cent, and the CEO of leading low-cost carrier Ryanair said he doubted it would make money this year.
The cost of fuel and a weakening world economy have led to airlines cutting services, laying off staff and grounding older, less fuel-efficient aircraft. Airlines have also looked to government intervention to help them survive.
In just one week last month there were reports that airlines as disparate as Aerolineas Argentinas, Air India, South African Airways, Alitalia and Air Tahiti Nui have sought state assistance.
In the US, there remains the option of Chapter 11 bankruptcy protection, which has enabled the survival of airlines that would otherwise go under or be taken over. Five of the top six US carriers - United, Delta, Continental, Northwest and USAir have benefited in the past from Chapter 11.
All are recording losses again, as is the largest US carrier, American Airlines, and they have mostly elderly, fuel-inefficient fleets that they cannot afford to replace.
Closer to home, Qantas has announced 1500 job cuts, and both it and Virgin Blue have reduced capacity, temporarily withdrawn from unprofitable routes, and parked aircraft.
So, what of consolidation? Despite predictions, there have been few successful airline mergers. Most notable have been the acquisition of KLM Royal Dutch Airlines by Air France (2004) and of Swissair by Lufthansa (2005), while British Airways and the Spanish carrier Iberia are now planning to merge.
Notably, these airlines are based in Europe, where a single aviation market allows its carriers to operate between, within and beyond each others' countries. Even so, governments in Italy and Austria are resisting loss of their national carriers to foreign ownership.
Other merger activity has occurred in the US. The attempt by United and US Airways failed, but in 2005 US Airways merged with America West, while Delta and Northwest Airlines are planning to merge. But in a report based on his testimony to Congress, a Standard & Poor's aviation analyst warned that mergers have a "chequered record" because of the difficulty of merging unionised labour groups and disparate aircraft fleets, computer systems and other operations.
He noted US Airways and America West "are still trying to finish putting together their operations". Last week union officials representing Northwest Airlines workers brought to Congress concerns about the proposed merger with Delta.
Cross-border mergers face significantly greater hurdles.
Some inter-governmental air service agreements have relaxed the traditional requirement that airlines be "substantially owned and effectively controlled" by the signatory governments or their nationals, adopting such alternatives as requiring the airlines to have their principal place of business in the countries concerned.
The US has accepted such a formula for foreign airlines but retained the restriction for its own carriers. It limits foreign investment in its airlines to 25 per cent of voting stock.
When the EU agreed with the US last year to free up air services between them, it reserved the right to revoke the agreement unless progress was made on lifting US foreign investment restrictions at a second round of negotiations to be completed by 2010.
There is little sign the US will relent, especially with Congress controlled by the Democrat Party which has traditionally supported union objections to foreign ownership.
The US chief air rights negotiator raised the issue in a recent speech, suggesting that a more relaxed approach be extended not just to arrangements with the EU, but with the 60 countries with which the US has "open skies" agreements. The EU, however, seems not to be diverted and, in any case, there is little chance that such a proposal from an outgoing administration will be taken any further.
David Stone is an independent aviation consultant and commentator
