This year began as a year of hope. In what seemed to be the initial stages of recovery from a series of setbacks, including the September 11, 2001 attacks, the SARS outbreak and the war in Iraq, 2004 was to bring relief and encouragement, albeit slow, for getting back on track. Unfortunately, jet fuel and oil prices gushed out of control and remain one of the greatest threats today to the airlines profitability.
FOREVER CHANGED
Analysts were predicting in 2002 that the current slump could get worse and that the industry emerging at the end of it will be significantly different. They were right; they just didn't know how right. In the two years hence, the hits taken by the industry have not let up, leading virtually everyone to rethink the aviation industry and scramble to implement alternative models that focus on downsizing, overhauling cost structures and using aircraft more efficiently. "The airlines are obviously not healing from 9/11," as Dewey Kulzer, project director of Alaska Airlines for Elite Line Services (ELS) bluntly puts it. "They started to, but they have fallen deeper into the pit, fuel prices being the big culprit now."
Even though the oil prices recently fell to just below $46, they haven't fallen far enough. The hope is that if the war in Iraq settles down and we don't have an unusually cold winter, those prices will drop back down to within the $35?$42 range offering relief to everyone. Tim Wix, general manager GSE for Delta Air Lines explains, "It helps that it's come down to $46, but our viability plan was built around $45 for fuel, so it is getting close to what we can survive but not there yet."
According to Kulzer and his counterparts, the base problem has been the cost structure of the traditional airline, making it nearly impossible for the airlines to compete with the stream-lined, well-financed, growth-oriented carriers like JetBlue Airways Corp. and Southwest Airlines Co. There is no doubt among most leaders in the industry that within the next year, at least one of the legacy carriers will disappear. Discount airlines are not immune either, as we have witnessed with ATA Holdings Corp. According to Gordon Bethune, CEO of Continental Airlines, consolidation will eventually come to some of the low-fare carriers as well, especially now, given the pressure of rising fuel costs and the impact of reduced fares.
FOLLOW THE OPPORTUNITIES
Staying ahead of change and keeping on top of new opportunities have become the great challenges. In addition, the probability of airline consolidation has forced others to consolidate. Ground handling companies, wanting to provide optimum service and ensure their airline customers can obtain the ground services they need from one supplier, are making acquisitions so as to offer single-source access to the full range of airport ground handling services. ASIG's acquisition of Airport Group International and Swissport acquiring the key ground services functions from SR Technics are two recent examples of this trend.
Another trend on which the floodgates have opened is outsourcing. Recently Alaska Airlines set a precedent by discharging an entire GSE department and outsourcing it overnight - in this case to ELS. According to Kulzer, "The fixing like Alaska is doing is only going to accelerate. Alaska and Northwest are trying as hard as they can to shed the high costs. Carriers like United are trying to do that now, but it may be too late. American is going to be forced to, and Delta is desperately trying to, but they have kept everything in house for so long and are so far behind the power curve in these cost structures."
"There are wonderful opportunities out there, but there are very scary risks," says Brian Wood, VP Operations Airport Terminal Services. "As the airlines struggle financially, they look for more ways to save money which makes opportunities for outsourcing companies. But with that comes greater risk because they (the airlines) are in financial difficulty. It goes hand in hand."
BOTTOM LINE
It's the best of times and the worst of times; however, an optimistic outlook prevails. All of us depend on this industry and as Wood aptly declares, it doesn't do anybody any good when you are negative. "We are going to get through this and we are going to come out stronger on the other side," declared Tim Wix. The economy is improving, airlines are adding service, passenger and cargo traffic levels are up and predicted to return to pre-9/11 totals by next year, there has been phenomenal regional jet growth (1,400 delivered since 1993) a report by Forecast International projects a total of 5,835 large commercial transport jets will be produced between now and 2013. Also looming on the horizon is China's continuously growing aviation market which provides enormous opportunities for the aviation industry worldwide. According to estimates from Airbus and Boeing, China will need about 1,500 new aircraft by 2015.
In the final analysis, according to Rhonda Hamm-Neibrugge, American Airlines, "The industry will be watching very closely as the bankrupt carriers emerge and present restructuring plans. I [also] think you will continue to see creative ideas being introduced, such as selling food on board, as the industry unfolds into a new era."
In 2005 and beyond, it may just be that GSE suppliers, manufacturers and ground handlers have only one thing to worry about; how to keep up with the demand.
