(TVLW) – Dark clouds are once again gathering over the airline industry, with a confluence of events likely to spell the end of an almost accidental boom period.
The industry is emerging from a sweet spot largely due to a shortage of aircraft during about three years of strong growth in global passenger numbers, enabling airlines to boost profits for each passenger, Air New Zealand chief executive Rob Fyfe says.
“Some time in the next 12 to 24 months we will see a more challenging environment to operate in than what we have got today,” he says.
The shortage of seats was caused by the two-year delay in deliveries of the Airbus A380 superjumbo jet, and airlines not buying aircraft three or four years ago.
But that situation is about to reverse, with a massive wave of capacity coming into the industry at a time of growing concern about financial market volatility and record oil prices, raising the prospect of a slowing economy in key markets such as the United States.
If passenger demand softened, as expected, airlines would compete by offering the best quality seat and service to maintain market share, eroding profit margins.
The International Air Transport Association (IATA) has sharply downgraded its forecast for global industry profits for 2008 from US$7.8 billion (NZ$10.2 billion) to US$5 billion.
That is also down from US$5.6 billion this year.
Rising fuel prices are expected to add US$14 billion to industry costs, taking the fuel bill to US$149 billion.
Fallout from the banking credit crisis is expected to slow revenue growth to 4.7 per cent and growth in passenger numbers to 4 per cent.
Meanwhile, nearly 1300 new planes will be delivered by aircraft manufacturers.
IATA director-general Giovanni Bisignani expects 2008 will be tougher.
A combination of the favourable economic environment and efficiency improvements have helped to mitigate the impact of record fuel prices and underpinned profits.
“With the credit crunch, that is changing,” he says in a recent report. “The peak of the business cycle is over and we are still US$190 billion in debt. So we could be heading for a downturn with little cash in the bank to cushion the fall.”
Air New Zealand has spent the past three years positioning itself in preparation for the next downturn. Analysts say it is better prepared than most of its competitors.
Mr Fyfe says that is part of the reason “we have run so fast”.
The workforce has been restructured and more fuel-efficient long-range aircraft are in place with more on order, bought at deep discounts when no other airlines were buying.
The airline is also enjoying a capital spending holiday till late 2010, when the next batch of new planes is due to start arriving.
Cabins have been fitted with market-leading seats, and new international routes have been opened.
Mr Fyfe says competitors are unlikely to make another big change in seat design for the next two years, because seats being put in aircraft now were originally designed for the A380.
Air New Zealand engineers are already working on designs for a revolutionary new seat and cabin in time for the ultra-long-range aircraft, the Boeing 777-300ER and 787-9, due to arrive from late 2010. The airline is also planning new livery and uniforms.
Air New Zealand will then be able to launch non-stop services deeper into Asia, as far afield as India. Over the next few years the airline will increasingly focus on Asia to take advantage of the world’s strongest growing travel market.
Mr Fyfe says the airline’s present network reflects a past dependence on Europe, especially Britain, for traffic and freight.
Air New Zealand announced this month it will add Beijing as its second Chinese destination, after launching its service to Shanghai a year ago.
The twice-a-week Beijing service will start in July, ahead of the Olympics in the Chinese capital in August. The service will initially come at Shanghai’s expense, with the airline’s scheduled services reduced from five a week to three.
Air New Zealand’s focus on Beijing is because that is where the key opportunities are, Mr Fyfe says.
“We will keep seeing a shift of our balance of capacity toward Asia and relative to our traditional markets of the likes of Britain and the US.”
The challenge is to ensure that capacity growth remains in step or ahead of market growth to maintain market share.
China’s burgeoning middle class has money to burn and now has greater freedoms to travel the world.
Chinese visitor numbers to New Zealand are growing by 14 per cent to 15 per cent per annum.
Growth in American visitor numbers is flat and is not much better than Europe, Mr Fyfe says.
American and European routes will not be reduced, but will grow less rapidly.
The Chinese routes have been strongly skewed to New Zealand-bound tourism – comprising about 80 per cent of all passengers. But it is important to ensure the right sort of tourists are attracted – ones who add value to the economy, Mr Fyfe says.
Valuable tourists are those able to afford New Zealand-owned attractions and high-quality accommodation.
They are more likely to spread the word among their friends back home, a key form of marketing in China.
Mr Fyfe is not concerned that a three-year wait for new aircraft to arrive could lead to Air New Zealand missing out on some of the growth from China.
The airline’s existing fleet of eight Boeing 747-400s and new 777-200ERs has sufficient surplus to squeeze in another five to seven long-haul sectors a week.
More aircraft could be leased to boost capacity if necessary – but would come at a 60 per cent premium on the price Air New Zealand paid for its own fleet because demand is so strong.