Faced with rising oil prices, Brexit and air traffic control strikes, the good times may soon be over for airlines, says Gary Noakes
The world’s major airlines have enjoyed robust profits in the past five years or so. Low fuel prices and soaring demand for air travel have kept their bottom lines very healthy. There are fewer carriers than a decade ago – particularly in the US – which has prompted higher fares on some routes and helped boost profitability in the industry.
That, in turn, has led to more investment; something now being enjoyed by passengers in the shape of new aircraft and more luxurious cabins and lounges. Throw in advances in technology, both in the air and on the ground, and travelling has become much easier and more pleasant.
So far, so good, but as usual in the airline industry, there is no room for complacency. The expansion and investment came on the back of low oil prices, but the price of the black stuff seems to be creeping up.
On a more local level, the industry in the UK is also having to deal with Brexit. What that will mean, nobody seems to know, but airlines have had a taste of what it’s like to be unable to overfly countries – a potential post-Brexit situation – with recent strikes by air traffic controllers in France and other European countries.
Willie Walsh, chief executive of the International Airlines Group (IAG), has called these strikes “the biggest challenge this year and next” to the industry.
Oil on the up
The future price of oil is a perpetual unknown, but a look back over the past 12 months does not provide comforting reading. In August 2017, oil was around US$45 a barrel, while a year later it had reached US$75.
Based on renewed sanctions on Iran introduced by Donald Trump, which will see contracts with the country halted by November, Morgan Stanley forecasts a price of US$85 for the second half of 2018 – nearly double last year’s price – and for rates to reach US$90 in 2020. The bank cites rising demand for jet fuel as another reason the price will rise. What seems certain is that surcharges will be reintroduced on air tickets and prices will go up. When, and by how much, only adds to buyers’ uncertainties.
As Flybe chief commercial officer Roy Kinnear puts it aptly: “The world is not the same as it was a year ago, and won’t be in 12 or 24 months.” He adds that oil price rises are not yet making alarm bells ring or prompting thoughts of fuel surcharges. “I don’t think we have reached that point yet,” he says.
Consolidation is another issue for buyers, simply because fewer airlines means less choice and higher prices. Quietly and behind the scenes, legacy airlines are circling the budget brand Norwegian, which has been a major disrupter in the long-haul market. International Airlines Group - the parent company of British Airways and Spain's Iberia which was created by the merger of the two carriers in 2010, one of its suitors, saw the future if Norwegian was allowed to spread its wings further and bought a 4.61 per cent stake in it in April, a precursor to several spurned hostile takeover bids.
Tellingly, in June, IAG’s British Airways quietly pulled its Gatwick-Oakland service. Oakland serves as a secondary airport for the San Francisco Bay area and was pioneered by Norwegian. BA decided to compete in March 2017, but has now thrown in the towel.
Should Norwegian be taken over by one of the legacy airline groups, expect a ripple effect on fares – upward.
Out of control
Air traffic control strikes used to be something mainly experienced by summer holidaymakers, but they now seem to be a year-round irritation.
The situation is so serious that in July, International Airlines Group - the parent company of British Airways and Spain's Iberia which was created by the merger of the two carriers in 2010 and Ryanair spearheaded a joint complaint to the European Commission. Easyjet also put in a complaint. The airlines argue EU law is being infringed because of the European Commission’s failure to ensure freedom of movement by clamping down on industrial action.
Every time strategically located air traffic controllers go on strike, major airways across Europe are knocked out for hours, creating chaos. IAG’s Willie Walsh singled out just 20 controllers in Marseille for crippling “most of the Mediterranean”; while Ryanair cancelled 1,100 flights in June because, it says, of ATC strikes and shortages of air traffic controllers.
In the first half of 2018, Brussels-based trade body Airlines for Europe (A4E) estimated there had been 29 days of ATC strike action – 22 of them in France – causing 5,000 cancellations. A4E-member airlines – some of which are backing the legal challenge – also reported a four-fold increase in delays of more than 15 minutes in May to 56,000 instances in “one of the worst years for ATC strikes in Europe”.
A4E is in talks with the French government over possible changes to the law. Spokesperson Jennifer Janzen says it was calling for 72 hours’ notice of how many staff would be striking: “We’re not campaigning against the right to strike, but airlines need better predictability of strikes. We never know how many staff will turn up, so airlines can’t predict how many flights will be able to pass through that airspace and have to cancel them all.”
Eurocontrol, which oversees Europe’s skies, says that disruptive events, including strikes, accounted for 28 per cent of delays in the first five months of 2018, a figure that just outstrips weather delays. It predicts total delay minutes this year will increase 53 per cent due to strikes and capacity shortages.
Even without the disputes (and worries about air traffic rights after Brexit), there will still be a capacity problem in future, as European Organisation for the Safety of Air Navigation: EUROCONTROL's mission is to harmonise and integrate air navigation services in Europe, aiming at the creation of a uniform air traffic managemen... says the system is already badly overstretched. Eamonn Brennan, European Organisation for the Safety of Air Navigation: EUROCONTROL's mission is to harmonise and integrate air navigation services in Europe, aiming at the creation of a uniform air traffic managemen... director general, recently warned that Europe was already “struggling to cope with the levels of traffic”.
Eurocontrol’s “most likely scenario” is for traffic growth of 1.9 per cent a year – a leap of 53 per cent by 2040 to an annual total of 16.2 million flights; with four countries, the UK, Turkey, France and Germany, seeing an extra 3,000 flights per day.
“In our most likely scenario, there won’t be enough capacity for approximately an extra 1.5 million flights or 160 million passengers in 2040,” Brennan warns. “We need to address the issue as a matter of urgency.”
In its report Challenges of Growth, European Organisation for the Safety of Air Navigation: EUROCONTROL's mission is to harmonise and integrate air navigation services in Europe, aiming at the creation of a uniform air traffic managemen... states that even without these 1.5 million unaccommodated flights, the number of “Heathrow-like” airports operating near capacity for much of the day rises from six in 2016 to 16 by 2040. It adds: “In particular, the number of flights delayed by one to two hours increases by a factor of seven, which means around 470,000 passengers each day delayed by one to two hours in 2040, compared to around 50,000 today.”
The report concludes: “It will be a challenge to provide an adequate quality of service, day in, day out, in these circumstances.” Unless a solution is found, it may be that business travellers of the future will need to seek alternatives to face-to-face meetings.
Meanwhile, A4E is backing an ambitious plan that might solve some of the capacity and industrial action issues once and for all – a project known as the European Upper Information Region Study – effectively a permanent “highway in the sky” without air traffic control borders that will allow aircraft to fly above affected airspace.
A4E’s Janzen says this will “hopefully become a reality in future”, but there are considerable difficulties to overcome. Countries tend to be protective of their own airspace, especially for military reasons, so the idea of skies without borders – particularly with the Brexiting UK as part of it – might be a step too far for some countries.
It is not just competition between airlines and market forces beyond its control challenging the industry – technology is acting as a major disrupter. Some airlines have decided that it is better to take these tech upstarts under their wing, nurture and sometimes own them, rather than face them as a threat in future.
International Airlines Group - the parent company of British Airways and Spain's Iberia which was created by the merger of the two carriers in 2010 and others are investing in companies that may develop disruptive technology they probably would not be capable of creating in-house. In February, International Airlines Group - the parent company of British Airways and Spain's Iberia which was created by the merger of the two carriers in 2010 invested in start-up US firm Volantio via its Hangar 51 programme, which seeds digital companies. International Airlines Group - the parent company of British Airways and Spain's Iberia which was created by the merger of the two carriers in 2010 says Volantio’s platform Yana will allow airlines to identify passengers on full flights who are most amenable to taking alternative departures. Yana notifies these passengers well ahead of their flight and offers them incentives to switch time or date, thereby alleviating overbooking and “bumping”.
Hangar 51 is not a new concept. Since 2016 New York-based budget carrier Jetblue, for example, has invested in 18 start-ups via a Silicon Valley subsidiary Jetblue Technology Ventures.
One start-up that has chosen a different funding route is Seatfrog, which has created an app that enables customers to upgrade their class of train travel up to 15 minutes before departure. The London-based company is in talks with airlines aiming to do the same with airline seats.
It can sometimes feel like technology only serves as a disrupter and, in some cases, an irritation in everyday life; but as much as your smartphone can be annoying and your internet connection a source of frustration, let’s not forget the useful and sometimes fun side of technology.
Checking to see what an airline’s cabins look like used to mean flying on it, but virtual reality is about to change that. Emirates claims to be the first carrier to introduce web-based virtual reality (VR) on its digital platform, with 3-D 360-degree seat and cabin models of its Airbus A380 and Boeing 777 aircraft.
If VR headsets are not your thing, anyone with a mobile can examine a seat before making a choice with the 3-D seat map using the carrier’s website or app.
Another Emirates’ innovation has neatly overcome the problem of the lack of windows in first class suites that are situated in the middle of its A380s. Instead of the real thing, three window-shaped screens show real-time images from cameras filming the aircraft’s progress.
The airline believes these are so realistic that in future, there may be no need for windows in aircraft at all. Emirates president Sir Tim Clark argues that removing windows can make aircraft lighter and more fuel-efficient, because having them means fuselages have to be reinforced. While safety experts debate whether this would impede an evacuation, it is worth remembering that the first London Underground trains were windowless, but passenger reaction soon changed that.
Etihad is also moving into the VR world and carried out a trial in its premium lounges in Abu Dhabi last spring. VR noise-cancelling headsets were used to bring HD-quality personal cinema in 2-D and 3-D, meaning that a long layover in the lounge may seem a lot shorter in future.
For airlines, apps are the latest must-haves, with two of the most recent being British Airways’ Reward App and Etihad’s WhatsApp Business app. The latter enables premium passengers to connect with the airline’s agents at Abu Dhabi airport and to receive messages, including flight reminders.
Useful as these apps may be for the traveller, it does not take much imagination as a buyer or TMC to appreciate the data-harvesting possibilities for the airlines and the direct marketing opportunities that these innovations will bring.
A big leap
Depending on who you speak to, the next 12 months will be the biggest leap in the dark that the UK airline industry has faced for many years or it will merely be a time of a little turbulence to be navigated.
It was either boundless confidence or baffling complacency that led the Department for Transport (DfT) to wait until June this year – almost two years to the day after the referendum – before advertising two key aviation roles to lead the airline industry through Brexit negotiations. With only nine months to go – which probably means, in practical terms, six months to do the job – the Department for Transport: The UK government department responsible for the English transport network, as well as transport matters in Scotland, Wales and Northern Ireland that are not devolved. began recruiting for two positions – a head of aviation EU exit negotiations and a head of airspace strategy – with no aviation experience necessary for either post.
There are already teams beavering away behind the scenes at the Department for Transport: The UK government department responsible for the English transport network, as well as transport matters in Scotland, Wales and Northern Ireland that are not devolved., but the experience of the leisure travel sector with a recent update to the EU Package Travel Regulations (PTR) does not inspire confidence about our right to fly unimpeded come next March. The EU updated the PTR in January but gave the unprepared UK until 1 July to implement it. The Department for Transport: The UK government department responsible for the English transport network, as well as transport matters in Scotland, Wales and Northern Ireland that are not devolved. issued the first set of guidance notes to the industry less than ten weeks before the July deadline and a definitive view only days before the new rules came into force, so expect negotiations on air traffic rights to go to the wire, too.
In July, Irish prime minister Leo Varadkar warned that a no-deal Brexit effectively involving a border down the Irish Sea would have serious consequences for UK airlines: “If they want their planes to fly over Irish skies, they would need to take that into account,” he says, adding: “You can’t have your cake and eat it. You can’t take back your waters and then expect to take back other people’s sky.”
If it ever comes to this, not being able to overfly Ireland would have a devastating effect on transatlantic flights, but it would also mean Irish carriers being unable to overfly the UK, so hopefully Varadkar’s comments can be taken with a pinch of salt.
Rob Griggs, policy and public affairs director at trade body Airlines UK, remains optimistic: “We are still confident that we can get a good agreement in terms of both access to the EU and around the agreements we have with the US and Canada,” he says. He adds that the EU has talked of a “bare bones agreement” to keep aircraft flying in the event that a full deal is not sealed after 31 March next year.
The Heathrow saga
In a saga even longer than the Brexit negotiations, MPs have finally approved plans to expand Heathrow, something that will be of most relief to its frequent users, who spend a disproportionate period of time queuing – both on the ground and in the sky – for its runway space.
But if any regular flier thinks Parliament’s approval is the end of it, think again, because the MPs’ vote triggered a flurry of legal challenges that will run and run before any soil is dug. And then there is the question of who will pay for the third runway, with airlines expected to put up a fight if they are told to foot the bill, something that will further delay the process.
It’s all, as they say, up in the air. And while there are probably quite enough disruptions and challenges, perhaps there will be more to come in March if, whatever Brexit deal is negotiated, the pound again starts to slide, pushing up UK airlines’ costs and hitting their profitability while handing the advantage to euro and dollar-based carriers.
There’s certainly turbulence ahead, but it’s not the first time airlines have had to divert course to weather oncoming storms. How rough the journey will be remains to be seen, and those agile enough to adapt their innovation strategies stand to emerge stronger.