Industry Poised for More Stability Says Unisys

Revenue maximization, cost management, improved customer service, airline consolidation, and improved air traffic control management will be the catalysts for further stabilization in 2008 and beyond if certain trends continue to develop, according to Unisys Global Transportation.
“The airline industry is going to continue to see incremental improvements in efficiencies and cost control, but certain developments like consolidation and air traffic control technology updates are imperative for these improvements, as well as a continuous investment in aircraft and infrastructure,” said Olivier Houri, president and general manager of Unisys Global Transportation. “Overall, the global air transportation industry will continue to recover from the dire period of a few years ago. Profitability will still be small compared to the total industry’s revenue, as fuel costs will continue to place a heavy burden on the financials of the industry.”
Continuous restructuring efforts have enabled major U.S. airlines to exit bankruptcy protection, and benefit from new, more competitive cost structures, he said, resulting in the 2007 return to profitability. “However, as the entire industry generates annual revenues of $470 billion, this represents only one percent operating profit which is totally inadequate for long-term sustainability,” he said. “The industry must sharply improve operating margins if it is to cover the cost of capital and begin to generate returns on the massive investments already made – as well as the investments still required in terms of fleet, technology and other supporting services and infrastructure.”
Houri indicated that airlines discovered they still had pricing power, which, coupled with a more disciplined approach to managing capacity and the use of modern revenue optimization systems and tools, resulted in cutting unprofitable routes, more careful balancing of capacity and demand resulting in increased load factors, and consequently, higher yields.
He noted that passenger and cargo growth forecasts see five percent and six percent annual growth rates for the next decade and said the aviation needs to add capacity to at least match expected demand growth. Maintaining this delicate balance will test the industry’s new-found resolve, said Houri, especially when considering such factors as the introduction of capacity to deter new entrants; a capacity surge will diminish profitable markets first, driving down fares; and an uneven distribution in capacity increases driven by massive aircraft orders from Middle Eastern and Asian carriers which will create strategic imbalances in many established markets.
“We expect the airline industry as a whole to continue on the path of financial stabilization in 2008 and to generate profits in excess of $10 billion,” Houri said. “The key to improving profitability lies as much in continuously managing costs as well as maximizing revenues.”
Houri favors cost management to cost cutting for long-term stability. He noted that fuel has surpassed labor as the largest cost factor at 28-30 percent of total operating expenses, adding that airlines have been successful in managing fuel costs by investing in new aircraft/engine technology and in exploiting improve airspace use. They have also increased labor productivity by 56 percent since 2002, which will be tested by the growing shortage in skilled personnel and demands for increased salaries.
“Managing staff resources, and particularly the relationship with staff and unions, will continue to be a major strategic challenge for the industry in 2008 and beyond,” he said, noting that air navigation is another important cost factor. “The International Air Transport Association estimates that $42 billion is paid annually to airports and air navigation system providers, equivalent to 11 percent of total operating expenses.” This, at a time when regulators are considering a rise in airport fees through congestion pricing, for example, which is compounded by the massive requirement for infrastructure investments needed for air traffic modernization.
Houri is optimistic that at least one or two changes will be made to the U.S. air traffic control system in 2008 or 2009 so that some of these benefits can be realized since increased air traffic control capacity is so critical to cost management.
Finally, Houri expects the airlines in 2008 to continue tight management of the unit costs remaining under their own control through:
• Continuous management of unit costs per route, per market, and eliminating anything that does not create value for clients
• Continuous modernization and the increased use of technologies that have already resulted in significant cost savings (distribution costs are down 13 percent over the last five years, non-fuel costs down 15 percent)
Houri anticipates an increased focus by the US carriers on improving their customer service. However, airlines will not be able to reintroduce any costs to improve customer service, despite having to deliver more “five-star” customer service at the lowest cost. He predicted this will accelerate the “unbundling of services” in which passengers are offered a range of products and services and asked to pay for what they value. The lines between low-fare and legacy carriers will blue in the future as the former increasingly add features and services to their offerings and legacies offer more competitive prices.
“Improving customer experience and redefining the products and services while maintaining reasonable pricing will require significant investments in new technologies by the airlines because their existing old systems are not flexible enough to support the new ways airlines will market, sell, distribute and deliver their products in the future,” Houri said.