25 October 2016
Fuel cost fluctuations, prohibitive airport fees and aircraft prices, the threat of terrorism -- why would anyone want to run an airline today? Photo: internet
Fuel cost fluctuations, prohibitive airport fees and aircraft prices, the threat of terrorism -- why would anyone want to run an airline today? Photo: internet

Who wants to run an airline?

While Air France and Lufthansa flights may be grounded by massive industrial action if employees’ demands regarding remuneration and pensions are not met, we hear a rumor that our home carrier, Cathay Pacific, may encounter renewed turbulence in the Lunar New Year festive season as its attendants threaten to call another strike should the management fail to agree on a higher pay raise.

The situation on the ground is that the world’s civil aviation industry — a lucrative business with a subliminal high-tier image in the eyes of many — always finds itself in too impecunious a state to satisfy even petty demands from employees.

Why the whole sector cannot fly high is because the fate of carriers is somehow predestined.

Airlines worldwide are perhaps among the very few commercial entities that find it difficult to thrive in a free market.

The industry is never short of misfortunes, be it terrorism or four decades of fuel price surges since the 1970s.

Despite the dramatic nosedive in oil costs in recent quarters, some carriers booked staggering losses on fuel hedging contracts. Cathay is one of them.

A member of Cathay’s labor union bashed the management’s rhetoric blaming high fuel costs for tiny pay raises, saying the firm lost billions of dollars in hedging contracts.

Cathay employees’ grievances are not hard to understand when they are forced to foot the bill for the losses.

Airlines also cannot escape from a twofold conundrum: airport operators, likely local authorities or sizable conglomerates, charge exorbitant fees with their semi-monopoly status, while the aircraft manufacturing industry is a duopoly of Boeing and Airbus, and planes are thus sold with a fat markup.

Virgin Atlantic founder Richard Branson once shared his secret about how to become a millionaire: start with a billion dollars and launch a new airline.

He wasn’t joking, as that is the truth of his own experience.

Until 1978, the world’s civil aviation industry was still categorized as a public utility and put under heavy scrutiny.

Governments decided pricing, route management, inflight service and even the design of uniforms for flight attendants.

But the absence of competition was a vital guarantee of stable profit.

Carriers were set free after western policymakers became votaries of free economy theories, especially when US president Jimmy Carter scrapped almost all government interference with his Airline Deregulation Act.

The tourism industry thrived as a result, yet US airlines were all weighed down by persisting losses in the following decades.

In the 2000s alone, six US carriers went bankrupt.

The scenario is basically a dogfight between freely competing airlines and the impregnable monopoly of airport operators and aircraft makers.

A single plane may come with a price tag of between US$100 million and US$320 million.

A baseline-model Boeing 777-200ER costs US$262 million, equivalent to almost a tenth of Delta Air Lines’ 2014 net profit, a study shows.

The US carrier may need a grand total of 25 years to recoup the money for a single such plane.

Also, don’t forget that applying for a civil aviation license is no easier than securing all the regulatory approval for a nuclear power plant.

A workable business model for the sector is still up in the air.

However, for the first time in years, the profitability of the airline industry showed marked improvement from last year.

The International Air Transport Association forecast in June that the combined pretax profit of global airlines for this year could rise to US$29.3 billion, with carriers in North America securing almost half of the pie.

Still, had it not been for the plunge in fuel prices, an aggregate 66 percent dive since mid-2014, carriers could still be stuck in the red.

Austerity measures airlines have implemented may have also come at the cost of safety.

Vanity Fair ran a feature story in its November issue about the negligence and many shenanigans at major low-cost aircraft maintenance bases – in particular, El Salvador, Mexico, Beijing and Xiamen in Fujian province — where carriers outsource maintenance jobs to third parties to shed costs.

A new spike in terrorist activity has cast a shadow on the prospects for airlines.

The US government advised its nationals against travel to Paris after the attacks last month, which led to a 23 percent drop in passengers arriving in the city.

This article appeared in the Hong Kong Economic Journal on Nov. 25.

Translation by Frank Chen

[Chinese version 中文版]

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A famous Hong Kong writer; founder of the Hong Kong Economic Journal

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