The lethal cocktail of a global recession, higher oil prices, and a drop in demand for expensive seats has hit the airline industry hard. Budget carriers aside, airline companies traditionally make most of their money from business and first-class passengers and commercial cargo. Air freight volumes have declined and the industry has been rocked by corporate cutbacks and a decline in consumer spending. This has prompted many to question how certain airlines will survive.
Premium travel (first- and business-class) has borne the brunt of the recessionary impact. Premium passenger numbers have plummeted during the last year by about 20%, which led to a drop in revenue of 35-40% since the beginning of 2009. This fall is a crucial contributor to the record industry-wide losses of $11bn (¤7.4bn) announced recently by the International Air Transport Association.
On some routes, first-class cabins are virtually empty. It is not hard to understand the reasons. If you were sitting in a British Airways (BA) lounge at Heathrow two years ago, probably eight out of every 20 premium-class passengers flying to New York would have worked in the financial sector. With each of them paying around £4,000 return, these customers constituted the lifeblood of airlines and ensured that transatlantic routes such as London to New York were the cash cows of global airlines like BA. The recent decimation of the financial markets and industry titans in Dublin, the City of London, Wall Street and other financial centres around the world has clearly had a huge impact on the revenues and profit margins of many airlines, including Aer Lingus.
The other reality that this recession has highlighted is the need for many long established companies to get their cost bases in order and ultimately transform into more efficient and adaptable organisations. In this respect, there are many parallels between the automotive and the air transport industries. Former 'national champions' such as General Motors and BA face an uphill struggle in the face of strong and fractious unions, large legacy and structural costs and generous pay and conditions
that are often far above the industry norms.
The rising economic 'tide' lifted all the 'boats' but now that the tide has gone out, the heavier, more bloated vessels remain stuck in the silt. In the air transport sector, these companies tend to be former or current state-owned airlines, often burdened by accumulated cost obligations and long-standing societal commitments. Unlike their leaner and more agile budget airline competitors, these companies have largely failed to gain control of their costs. The world we now live in means that for those who can no longer rely on state support – and even for many of those who still can – cost management and the strategic allocation of resources is a must. As legendary airline boss and Southwest Airlines founder, Herb Kelleher, commented: "If the Wright brothers were alive today, Wilbur would have to fire Orville to reduce costs".
The unstoppable growth and expansion of budget airlines across the globe leads many observers to ponder the future of legacy carriers. BA's chief executive, Willie Walsh, has already made his decision. He sees a structural shift in the industry, away from high fixed costs and the reliance of legacy carriers on price-neutral premium traffic. He faced these same challenges when as boss of Aer Lingus he oversaw its transition from a state-owned, high service loss-maker to a publicly- listed, lower-cost and occasionally profitable company.
His challenge this time around is much greater given BA's size and status and its often militant ground staff and cabin crew trade unions. Similarly, Aer Lingus CEO, Christoph Mueller, is undertaking yet more cutbacks at the Irish carrier, acknowledging that the airline's cost base remains structurally uncompetitive.
Flag carriers everywhere have to wake up to the new reality. Many still refuse to do so or are hampered by political and societal demands that are divorced from commercial reality or by high structural and legacy costs such as employee benefits and pension obligations. Aer Lingus and BA are grappling with these challenges, seeking to be amongst the few mature airlines that remain competitive and forge their own strategic pathways in this era of budget airline dominance.
Thomas Lawton is professor of strategic management at Cranfield University School of Management, UK.