The collapse of United Airlines, the biggest bankruptcy in airline history, follows the failure of Sabena, Swissair and US Airways since September 11 last year.
The simplistic explanation is that these failures, and the problems at Air New Zealand, are primarily due to the terrorist attacks.
September 11 has contributed, but
the main reason many airlines are in trouble is that they have failed to adapt to a rapidly changing industrial environment.
These changes are relevant to the proposed Air New Zealand-Qantas deal.
The main feature of the airline industry in the past five to 10 years has been the phenomenal growth of the low-cost, no-frills carriers. As the table shows, Southwest Airlines, the original discount company, is the most valuable airline company on Wall St and has been one of the best share-price performers since December 1997. JetBlue, which was listed this year, is the second most valuable company.
Ryanair is now the largest airline in Europe, in sharemarket value terms, and has substantially outperformed its competitors as far as share price growth is concerned. EasyJet, run by former Air New Zealand executive Ray Webster, is also one of Europe's fastest-growing airlines.
These discount carriers have a similar model to The Warehouse. They are low-cost, efficient operators that advertise extensively and offer customers an attractive alternative.
The key to their success is their low cost structure, particularly labour costs. Employee costs in North America are more than fuel, aircraft, interest, maintenance, landing fees, commissions, communication, advertising and food costs combined.
US research indicates that Southwest Airlines has a break-even fare of US$52 on a 1200km trip, whereas United Airlines has to charge US$106. Southwest's labour costs, reflecting overall pay and productivity, are approximately 35 per cent lower than United's.
United's Chapter 11 bankruptcy will allow it to deal with high labour costs and inefficient work practices. While under Chapter 11, the company can ask a bankruptcy judge to cancel its labour contracts.
Discount airlines have been extremely effective at creating shareholder wealth. Low-cost airlines in the US have a 25 per cent market share in terms of passenger numbers and 15 per cent of revenue, yet just four of them - AirTran, Frontier, JetBlue and Southwest - have 66 per cent of the industry's total sharemarket capitalisation.
Low-cost airlines have substantially outperformed the full service operators since December 1997.
The good news for the discounters is that a survey by Merrill Lynch and the National Business Travel Association - the 2003 Business Travel Outlook Survey - found that 66 per cent of respondents planned to use discount airlines more regularly.
No-frills operations in Europe, where they began later than in the United States, are estimated to have had 7 per cent of the passenger numbers last year, compared with 2 per cent in 1998 and a forecast 14 per cent in 2007.
As in the United States, low-cost airlines have reduced fares, stimulated travel and created considerable shareholder wealth.
European passenger numbers rose from 365 million in 1998 to 435 million last year and are projected to be 600 million in 2007. Low fares will attract a high percentage of the additional 150 million passengers over the next five years.
Ryanair has an operating margin of 26 per cent and its sharemarket value is twice that of British Airways, even though the British company's revenue is 20 times greater.
The huge increase in passenger numbers and big drop in fares in the Northern Hemisphere has coincided with the deregulation of the industry and greater competition.
While New Zealand was at the forefront of industry deregulation in the 1980s, Ralph Norris of Air New Zealand and Geoff Dixon of Qantas are trying to drag us back to the bad old days of monopoly carriers and an uncompetitive market.
An avalanche of media spin, unprecedented in New Zealand corporate history, has accompanied the proposed deal.
Norris is promising something for everyone:
* He says the deal will create 200 new jobs in Air New Zealand's engineering unit, yet there is no mention of job rationalisations in its core operations, a move every full service carrier has to make.
* According to Network Economics Consulting Group's Public Benefits Report, Qantas Holidays "has instructed" the research group that its "network can be leveraged" and an additional 50,000 passengers to New Zealand "could be achieved" as a result of the Air New Zealand-Qantas deal. Adopting vague figures from Qantas Holidays, a related rather than an independent party, and not subjecting them to rigorous scrutiny, is not the best way to analyse this important topic.
* NECG says that average airfares will rise by 3.1 per cent on domestic services and 1.7 per cent across the Tasman in the next three years. Is this the best we can expect when airfares have already dropped sharply in the Northern Hemisphere and this trend is expected to continue for the next few years because of the growth in no-frills airlines?
A key feature of Air New Zealand's argument is that a discount airline will start up in New Zealand within three years if the deal with Qantas goes ahead. In other words the company is saying that the establishment of an Air New Zealand-Qantas domestic monopoly, which the Government is being asked to endorse, will encourage rather than discourage competition.
This is totally inconsistent with our economic policies of the 80s and 90s. It is also inconsistent with the Northern Hemisphere experience, where deregulation and pro-competition policies have encouraged the growth of discount airlines.
Based on sharemarket capitalisation, Qantas and Air New Zealand are in a relatively strong position and it is difficult to justify them joining.
There are two alternatives to the Qantas deal: Air New Zealand could find another cornerstone shareholder or reinvent itself as a no frills operator, particularly in its domestic operations and across the Tasman. It could also rationalise its international routes.
The first alternative would be difficult to achieve because most of the major full service operators are struggling in the face of intense competition from discount operators.
But the second is viable and could bring substantial benefits to shareholders, the public and tourism.
The problem is that Norris has come from the relatively stable banking sector and has limited experience in change management. It is easier for him to go cap in hand to the Government seeking to establish a near monopoly rather than undertake the difficult task of turning Air New Zealand into a low-cost, efficient operator.
If the Crown and Commerce Commission succumb to his arguments, he can sit back and enjoy the short-term comforts and rewards of a cosy duopoly with Qantas. Air New Zealand is unlikely to have any competition on the domestic market, and costs and inefficiencies can be allowed to grow. Fares can be easily increased when cost increases adversely affect profitability, and the company's domestic operations can be used to subsidise unprofitable international routes.
The unfortunate consequence is that New Zealand, which was once at the forefront of airline deregulation, will take a big step backwards. The dramatic developments in low-cost air travel will pass us by and we will continue to look in envy at cheap fares in the Northern Hemisphere.
The New Zealand public deserves better than this - at the very least there should be a rational debate on the merits of and alternatives to the Qantas deal. This debate should not be totally dominated by Air New Zealand's relentless public relations spin.
* Disclosure of interest: none
* Email Brian Gaynor
The collapse of United Airlines, the biggest bankruptcy in airline history, follows the failure of Sabena, Swissair and US Airways since September 11 last year.
The simplistic explanation is that these failures, and the problems at Air New Zealand, are primarily due to the terrorist attacks.
September 11 has contributed, but
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