A long-term view

What exactly is the future of aviation, questions veteran business travel journalist Stanley Slaughter...

Aviation seems to be caught in an inescapable trap. On the one side there is increasing pressure from governmental bodies like the EC and a clamorous and often effective environmental lobby to cut carbon emissions. On the other there is the relentless rise in costs, for the customer in the form of add ons and surcharges, and for the carrier in fuel.

The effect of both is to drive potential flyers away.

Airline economics have never been for the faint hearted, being based more on hope than reality. But the amount of bad or, rather, discouraging news seems to accumulate by the month. It leads to a genuine and serious worry as to the future of aviation and, more specifically, just what is the future for short haul flying.

It would be absurd to predict that aviation will in any way cease. It is a more likely outcome that it will continue to grow although perhaps not at the same dizzy rate as the past decade. This would certainly apply to long haul. These flights remain essential to the business traveller who needs to meet clients and potential customers face to face to secure the deals. Video-conferencing or other forms of virtual meetings may erode the numbers flying but there will always be a hard core. Airlines also make much of their profits from these long distance services.

The same argument cannot be made with much confidence for short haul flying. In March this year, the EC issued its Transport 2050 document which it described as a “roadmap for a competitive transport sector that increases mobility and cuts emissions”.  

In short the EC is aiming for a cut of 60% in airline emissions by 2050 – fewer than 40 years on. To achieve this Siim Kallas, the EC’s VP and commissioner responsible for transport, envisages cities without cars running on conventional fuel and half of people undertaking journeys of more than 300km opting for trains.

If this second target is achieved, short haul airline routes will have been dealt a considerable blow. What must be worrying for the airlines is that it is not beyond reach. The UK is likely to continue to have plenty of short haul services, because of the continued absence of a high speed train network and also the awkward shape of the country which makes plane trips from, say Exeter to Inverness, infinitely quicker than rail journeys. It is hard to see this changing.

But it is a different story on the continent. France, Spain, Germany and to a lesser extent Italy have a good and growing high speed network.  High speed services have long ended flights between Paris and Brussels. When the Barcelona-Madrid service opened just a year ago, it soon grabbed 50% of the business. What price the Paris-Amsterdam or Paris-Frankfurt flights? How long will they last? In the not too distance future, there will be direct train services from London to Cologne and Amsterdam. Again will this force carriers on these routes to cut flights? This would be detrimental to the business traveller who needs frequent services.

But this is not the only threat to short haul aviation. There is a second which some would argue is even greater. This is the cost of fuel.

Earlier this month, IATAThe International Air Transport Association: IATA represents and serves the airline industry, with a membership made up of around 230 airlines. The association seeks to raise awareness of how aviation benefits the economy, fight for airline's interests and ensure industry regulations are sensible. IATA helps its members directly by offering advice on reducing costs while improving efficiency and on improving safety standards. It also provides professional support in the form of publications, training and consulting. , the airline cartel, issued its Financial Forecast for the industry. This revealed that airline profits are likely to drop by half in 2011. Earlier this year, the association predicted that airline profits for the year would be $8.6bn. This has now been cut to $4bn. It contrasts sharply with a profit last year of $18bn.

IATA cites several reasons for this potential setback including the Japanese earthquake and tsunami and unrest caused by the “Arab Spring”. But the main reason is the hike in fuel costs.  Fuel, IATA said, has risen by $20 a barrel since March, which would “add significantly” to airline costs. It continues: “Continued strong global economic expansion will be critical to generate the revenue growth that could partially offset higher fuel costs.” It does not say where this growth will come from although the best bet would be India, Brazil and the Far East. It is not likely to be in Europe.

It estimates that the fuel bill for airlines will be $10bn higher than predicted in March. Then the estimated bill was $176bn or 30% of airline operating costs. “Recouping this cost increase would require an additional 2% in yield,” IATA said. But its own figures suggest that fuel prices have risen more quickly this year than fares and surcharges. For the past five years they had kept just about equal pace. If this trend continues, airlines are likely to be hit further. But could this gap also indicate a possible tipping point – that airlines cannot really get away with any further hikes in prices or surcharges. That may be a concern too.

IATA also indicates in its Forecast that extra capacity being put on by carriers is outstripping current levels of demand.  It comments: “But even with some trimming of capacity expansion plans we expect capacity cuts to lag the recent falls in demand. Load factors and aircraft utilization are likely to fall further.”

But there is one other point to emerge from the facts and figures of the Forecast. On long haul, IATA is reasonably upbeat. Short haul is barely mentioned.  It does not augur well.