Economic Realities

This warning label raises a very salient point for the industry: the ability to fly is not the same as the capability to fly.


This warning label raises a very salient point for the industry: the ability to fly is not the same as the capability to fly. That, in turn, leads to another important point. There is something missing from that costume: the price tag. It's a different world. When I began my aviation career almost 40 years ago, Lyndon Johnson was President; the Beatles had invaded the U.S.; and Cassius Clay ruled the boxing world. Things have changed. But even change has changed; the process seems much faster now than it ever did.

Consider if you will, just the language of aviation. Ten years ago there were no such phrases as Internet check-in, biometrics, no fly lists, Opt-out Programs and TSA. And today, those "cutting-edge" phrases have almost become hackneyed. The change, of course, is by no means limited to language. From terrorist threats to fuel prices in the $50-per-barrel range to the next generation of new large aircraft, this is a very unusual time.

Given the breadth and depth of the aviation industry, it's impossible to know exactly what airlines, airport managers, and customers are talking about on any given day. Having said that, though, one would be hard-pressed to find someone in the aviation industry that is not talking about money and, in turn, technology that saves money. Why? Just look at the headlines. "Big Airlines May Become Extinct" is but one example.

The International Air Transport Association (IATA) projects that airlines could lose $5.5 billion this year. In addition, it is estimated that each dollar-a-barrel increase in fuel costs the airlines millions in lost profits a year. Delta estimates that for every one cent per gallon increase in the price of jet fuel, it costs the carrier roughly $25 million more per year.

In aviation, like many industries, economics are cyclical. Even taking into account the events of 9/11, this is supposed to be a boom time. With passengers having returned to the skies, we expected a cyclical upswing in aviation profits. Yet airlines are losing money hand over fist. That's even more bizarre given that tourism is on the upswing.

According to the World Tourism and Travel Council, travel and tourism in the U.S. is expected to generate $1.5 billion of economic activity. That figure is expected to grow 5.6 percent in 2005 and by 4 percent each year, in real terms, between 2006 and 2015. That kind of money should buy quite a few airline tickets. It does. Unfortunately, current airline operating costs diminish virtually any advantage that growth brings.

With considerable debt, lost revenue from the immediate post-9/11 period, rising health care costs, a retiring workforce/pension burden, and fuel costs that are more than twice what was forecasted, airlines must operate much more efficiently. The cost-cutting solution that holds the most promise is technology. But technology has its price.

IATA says that airlines could save upwards of $10 billion a year - returning them to profitability - by implementing new technologies. Again, technology costs money. But if an airline doesn't invest now, it can't reap future savings and will cease to exist in its present state.

RFID, New Airliners, and Other Potential Solutions

One example of a technology that should be implemented is radio frequency identification devices (RFID) for baggage. At present, 80 percent of airline baggage goes where it's supposed to go - slightly less than 5 bags from every 1,000 passengers are lost, stolen, or damaged. Airlines estimate that each affected bag costs them some $100. RFID technology can raise baggage-handling efficiency from 80-99 percent. That's a considerable savings, especially over time.

Airlines are also looking at aircraft. Boeing's new 787 Dreamliner could save as much as 30 percent in fuel while reducing operating and maintenance costs. Airbus claims that its new A380 will provide "15-20 percent lower seat-mile costs and 10 per cent more range than today's largest aircraft," and a "fuel burn comparable with the best of small modern turbo-diesel cars."

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