Airlines are a mug’s game
“We face a fight for survival.”
British Airways chief executive Willie Walsh last week.
“(Qantas) faces many obstacles in surviving.”
Qantas chief executive Geoff Dixon in July 2003.
For an industry that depends on its ability to instill confidence in travelers, airlines sure spend a lot of time scaring their workers and shareholders witless.
BA’s Willie Walsh is the latest to play the we’ll-all-be-rooned game mastered by Geoff Dixon in his latter years at the head of Qantas. And he has really lifted the bar. Last week, Walsh took the extraordinary step of imploring employees to work for free for somewhere between one and four weeks to help save the poor airline from collapse.
“I am looking for every single part of the company to take part in some way. It really counts. We face a fight for survival. These are the toughest trading conditions we have ever seen and there simply are no green shoots,” he said in the inhouse newsletter.
To kick things off, Walsh generously said he wouldn’t take a salary during July. (Wags pointed out that it’s not exactly tough for a man earning to more than $1.5m a year to take a small haircut.) Just how popular the push is among the rank-and-file won’t be known until next week, when management tallies up the volunteers among its 40,000-strong workforce. The approach is a significant escalation from other companies’ efforts to force staff to cut their hours, or take holidays, long-service and even unpaid leave.
Dixon never went so far. But before handing over to Alan Joyce, he ran an excellent line in pointing out the boundless challenges faced by the airline to survive and prosper, even as it remained one of the most profitable in the world. Critics noted that such doomsaying often came ahead of negotiations with unions on salaries, job cuts or shifting maintenence work on its fleet offshore. Coincidentally, Walsh is currently negotiating pay deals and job cuts - as many as 4000 - with big chunks of the workforce.
That’s not to say that BA, Qantas and just about every airline around the world are not feeling severe - perhaps unprecedented - pain at the moment. In particular, the financial crisis has crushed business and first-class travel - the area where most airlines, particularly the international carriers, make most of their profits. It’s the handful of passengers in the pointy end of the plane that subsidise the cheap tickets for us cattle in the back. BA lost about $820m in the year to March - most of it in the last three months.
Qantas will make about $100m-$200m this current financial year but has been running at a loss in the opening months of this year for only the second time since the government sold out to shareholders in the mid-1990s. Like BA, it is axing jobs and grounding planes. And like BA its reputation has slipped - not helped by a string of mid-flight incidents mostly, but not entirely, beyond its control. All told, the global aviation industry is forecast to lose more than $11bn this year, with no end to the dark clouds in sight.
The trouble with the airline Cassandras is that airlines are almost always losing money. They cost a lot to run (Boeings and Airbuses don’t come cheap) and are especially susceptible to economic hiccups, pandemics, terror attacks, pilots strikes, bird strikes, you name it. There is nothing more discretionary to households than a flight to visit Auntie Betty in Hobart.
Warren Buffett famously quipped that the best thing a “far-sighted capitalist” could have done at Kitty Hawk in 1903 was to shoot down Orville Wright to spare investors more than century of heartache. Until at least 1992, more money had been lost in airlines than had been invested since the dawn of flight.
There was a proliferation of cheap discount carriers during the 1990s, and many made reasonable money even as they flew us around the country and world for free. But since September 11, 2001 (Ansett collapsed all by itself on September 12), the airline industry has lost more than $60bn and made money in only one year - 2007. You can pretty much forget about any meaningful profits for a couple of years. And don’t doubt that big airlines can fail. More than 30 airlines have been declared bankrupt in the past year or so, continuing a long trend perfected by most big US carriers.
Which begs the question: why be in the airline game at all? Because, done right, there are tremendous profits to be made, particularly when business is good and executives think nothing of a $15,000-plus fare to London. BA has gone from a $2bn profit to deathwatch in just two years. It’s just that there are too many airlines fighting for customers.
What the industry needs is a little consolidation, a few mergers like the BA-Qantas tie-up floated then sunk in a matter of weeks last year. And what’s the best way for airline executives to convince regulators and governments to wave through anti-competitive mergers they’d otherwise block? Well, a little scaremongering doesn’t hurt.
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