By Rob Morris
The head of IATA tells Arabian Business why the sector is braced for a turbulent new year.
With several carriers folding in 2008, the airline industry's future appears bleak — and Giovanni Bisignani doesn't disagree. The director-general of aviation body IATA tells Arabian Business why the sector is braced for a turbulent new year.
The tense faces at an aviation summit in Brussels earlier this year revealed much about the industry's dramatic downturn. In 2008, various carriers went bust after struggling to meet hefty oil prices, while plummeting passenger numbers and the global economic downturn look set to cripple several others.
It's a miserable outlook, and Giovanni Bisignani isn't providing any respite. During his speech at the summit, held by air transport communications developer SITA, the director-general and CEO of aviation trade body IATA predicted more turbulent times for the industry.
We are in a perfect storm, something we haven't experienced in the past.
"We are in a perfect storm, something we haven't experienced in the past," he warns, before pointing to other recent troubles following 9/11. "After September 11, the industry experienced many years of losses amounting to some $42bn. So 2007 was the first where we recorded a small profit of $5.6bn, but that's only a 1.1 percent margin which isn't very healthy."
Hours later, Bisiginani locks horns with journalists demanding further soundbites from the outspoken Italian. He is a small, middle-aged man dressed in a fashionable suit and carrying little physical presence. But despite his meek appearance, Bisignani is one of aviation's leading figures and shouldn't be underestimated.
When grilled by the media about the industry's bleak outlook, Bisignani remains cool. He talks candidly about the ongoing troubles, insisting a turnaround isn't on the cards - despite oil prices significantly dropping from $147 a barrel last July to just under $39 at the time of writing.
It's a topic that Bisignani is keen to revisit months later when speaking with Arabian Business. He gesticulates and becomes increasingly animated while reeling off numerous statistics to illustrate the sector's downturn.
To emphasise his point, Bisignani refers to the numerous airlines that went bust in last year's opening half, forecasting that others will succumb amid the credit crunch.
"It's always unpleasant to make forecasts on members disappearing," Bisignani says. "But as I mentioned at [IATA's] annual general meeting in Istanbul, if the situation continues we will have many empty seats at the next one in Kuala Lumpur. The situation has led to several airline terminations in different parts of the world."
This September, IATA posted a $5.2bn loss for the global airline industry when announcing its revised 2008 financial forecast. The report also said the Middle East sector's profits were expected to plummet to $200m from $300m in 2007.
To compound the industry's misery, IATA revealed that global demand for air travel dropped 2.9 percent and 1.3 percent in September and October respectively.
In typical Bisignani fashion, the IATA chief talks openly about the industry's ongoing problems. "While we expect the bottom line to improve by about $1bn this year, the industry will still be in the red," he says.
"This crisis is reshaping the industry in more severe ways than the demand shocks of SARS or 9/11."
"When fuel goes from 13% of your costs to 40% in seven years with an increased cost implication of $183bn, you simply can't continue to do business in the same way. Fundamental change is needed."
For some carriers, waiting for "fundamental change" is already a lost cause. Last May, business-class operator Silverjet went bust after management failed to secure outside investment for the ailing airline.
By August 28, Canada's low-cost airline Zoom had also crashed amid the aviation industry downturn. It was closely followed by XL Leisure Group, a UK-based charter airline and holiday group, which suspended operations in September 2008.
Bisignani says the industry crisis may worsen. He also believes the fate that befell Silverjet and Zoom could strike other carriers in the coming months.
"You have to be careful when you're doing your homework on an airline's business case. For example, we have seen in Europe that the low-cost model has been effective for carriers operating in that region. But that can't be said for budget carriers travelling long-haul.
"In Europe and America 30 percent of the domestic market is low-cost," Bisignani adds.
"Of those 30 low-cost airlines in Europe, around only five make double-digit money. Many of them will go out of business quickly because the fuel impact is higher for them. You will see a shrinkage in airlines operating in Europe."
While some European and US airlines are struggling to survive, Middle East carriers appear more comfortable amid the market downturn. State-ownership ensures some airlines can secure additional funds from their respective governments when operating over budget.The upshot is that some chief executives in this region are less concerned about the industry downturn. But state-backing remains a controversial issue for Bisiginani.
"We are against state subsidies," he says emphatically. "Europe made a good decision many years ago that no subsidies would be allowed. The result is we have a European system that was profitable in 2007, although Alitalia is an exception. This message that state-owned isn't allowed has been good for the industry."
To clarify his point, Bisignani adds: "When I say state-aid I mean funding airlines to cover gaps in the budget. You can run an airline that is owned by government if handled like a commercial entity."
Airlines fly from Dubai to London, for example, so the C02 output isn’t just a European issue. We need a global scheme but Europe doesn’t understand this.
Bisignani acknowledges the development of the Middle Eastern aviation industry in recent years. He points to the region's geographical location between the East and West as a distinct advantage for local carriers. Rapid growth, involving fleet expansion among established airlines and airport refurbishments, is also contributing to the industry's development.
Elsewhere, Bisignani is happy to report that Middle East airlines met IATA's May 31 deadline for converting to e-tickets from the paper equivalent.
Red tape meant other regions such as the Commonwealth of Independent States took longer to make the switch. But Bisignani insists the changeover problems have been addressed.
Now, Bisignani is focusing on other issues within the aviation industry. His biggest gripe is with governments that refuse to accept responsibility for airport security. Indeed, Bisignani believes governments - and not airlines or airport operators - should meet security costs for hubs across the globe.
"Governments that take care of people when they get on trains or go to soccer stadiums should also look after passengers that board planes," he says.
"For airports in Europe, we had to convince the EU that it wasn't up to the passengers to pay for security. The government didn't agree, leading to an unfair relationship between the passengers that board trains or planes. This situation is unacceptable."
It's a serious issue that Bisignani is determined to address. Whether he can remains to be seen, but IATA's director-general will continue lobbying governments across the globe for more support.
Aside from red tape and security, Bisignani's biggest concern is the environment.
"We have a clear strategy that was approved by the International Civil Aviation Organisation," he says. "In 2007, 135 routes opened and 10.2 million tonnes of C02 savings were made by airlines. The only area we don't have an agreement with is Europe.
"We have a four-pillar strategy on technology, new planes, operations and economic measures, so tax relief is available if an airline buys a newer plane because it's more fuel efficient. But instead of using those positive measures, some governments like European ones are looking at punitive ones, such as emission trading schemes."
Chances are, Bisignani's feud with Europe concerning C02 emissions will not be solved anytime soon. But there's little doubt the dogged Italian will carry on the fight.
To reiterate the point, Bisignani's final comment on the environment is unsurprisingly frank.
"This isn't an industry with a power generation station that you can put in a specific area," he says. "This is different because airlines fly from Dubai to London, for example, so the C02 output isn't just a European issue.
"We need a global scheme but Europe doesn't understand this."