Brands not flags
“The situation is grim.” No simpler, nor truer words could be used to sum up the brutal impact of current oil prices is having on the air industry. Spoken by International Air Transport Association (IATA) director general and CEO Giovanni Bisignani, the bluntness underscores the absolute seriousness of the situation. IATA is now revising its […]
July 1, 2008
By Donald Urquhart
“The situation is grim.” No simpler, nor truer words could be used to sum up the brutal impact of current oil prices is having on the air industry. Spoken by International Air Transport Association (IATA) director general and CEO Giovanni Bisignani, the bluntness underscores the absolute seriousness of the situation. IATA is now revising its earlier forecast of overall airline losses of US$2.3 billion sharply upwards to as high as US$6.1 billion. Even this is somewhat conservative considering the revised number is based on oil prices at US$130 a barrel, compared to the original figure which supposed a price of only US$106 a barrel. Another illuminating statistic from Bisignani was the fact that for every US$1 hike in the price of fuel, industry costs rise by US$1.6 billion. Ouch.And yet some more startling facts – although likely no surprise to carriers – fuel surcharges, the bane of passengers and shippers alike, don’t even come close to recovering actual costs in most cases, according to recent studies. The aircraft manufacturers are also likely to be hit hard if oil prices do not come down, with a recent study suggesting that as much as 25-30 per cent of the backlog of commercial aircraft orders from both Boeing and Airbus could be deferred or canceled. Key for IATA is getting governments to understand the magnitude of the problem means it”s not just about the airlines, its about the air industry’s pivotal role in global economy and the consequences for everyone if the air industry fails. But what Bisignani was perhaps inferring, has been said by others including Northwest Airlines president and CEO Doug Steenland testifying before a US House of Representatives subcommittee – supply and demand fundamentals alone do not explain the extreme price hikes and volatility in the energy markets.Many, including Steenland have been calling for government intervention to curtail speculative investments in the futures markets. Whether this is even possible remains to be seen, but there are plenty of things that can be done. The current environment has given Bisignani even more fuel to heap on his already blazing liberalisation fire. And on that fire he would like to see, first and foremost, the nearly 3,500 bilateral agreements go up in unholy smoke. Now is clearly the time; now there is a true turning point in the industry and an opportunity to fix things once and for all – or at least start the industry on the much needed course of medicine. The alternative is the status quo which will at best leave a sickly cripple of an industry, and at worst see it convulse and perhaps die an ugly death. The rules of game must be changed, says Bisignani. “The Chicago Convention is not the problem. It’s the bilateral system that was designed for another age. The Freedoms of the Air are only restrictions on our business. Airlines cannot look beyond national borders to manage risk, access global capital or consolidate. To fight crisises effectively, brands not flags must defi ne our business,” the IATA chief said poignantly. The liberalisation agenda is complex, multi-faceted and unfortunately, highly political. But if this industry is ever to stand a chance to operate unhindered as virtually all other major industries do in the free market, the moment must be seized quickly.Dum loquimur, fugerit invida aetas – carpe diem, quam minimum credula postero, wrote the Roman philosopher Horace, which in English is: “While we’re talking, envious time is fleeing – seize the day, put no trust in the future.” I’m sure Bisignani and the industry would agree.