It's not about fuel

The world and especially the media like to believe that airlines go belly up when fuel prices go up. Most reports show that fuel prices are responsible for the poor state of the Indian carriers.

In 2001, with the average fuel price at $30 a barrel, the airline losses mounted to $13 billion. In 2010, with the oil price at almost three times the price in 2011, world airlines reported a profit of $15.8 billion.

MARGINS

Of course, the fuel price is one of the most important component of the airlines' costs. But equally notable is the fact that airlines have absolutely no control over this component. So an airline's margins may be affected if fuel costs increase, but an airline being pushed belly up with fuel costs as the single reason just means that the airline is badly managed. All industries go through input costs fluctuating and affecting margins. The car industry depends on steel prices, the construction industry depends on cement prices. But none of these industries go belly up because of higher input costs. So what is it with airlines and fuel prices? Airlines are taking the smarter route in a bid to defray the rising fuel costs. They use their aircraft more wisely and run them for longer hours. Aircraft have become more fuel efficient and labour efficiency has also shot up over the years. The real cost of air travel has fallen by over 60 per cent in the last 40 years. But what the airlines can't control are external events.

EXTERNAL EVENTS

Airlines are more impacted by external events rather than rising input costs. And unlike any other industry, these external events can be as wide ranging as the 9/11 terrorist attacks (2001), the deadly Severe Acute Respiratory Syndrome disease (2003) and greedy bankers (2008 and 2009). External events that influence demand for airlines are more damaging to airlines than fuel prices.

Funnily, tracking airlines can almost help one predict a recession. If there are record aircraft orders by world airlines, it means a recession is just around the corner, or at least airlines are going to go into a slump. There were over 1,000 aircraft ordered in the year 2000 before the airlines went into a tailspin. Similarly, between 2005 and 2007, airlines went on a shopping spree just to see red ink flow in 2008 and 2009.

Again, what is it with airlines helping doomsayers help predict a recession, or at least airline losses? Airlines have a big problem going aircraft shopping. It's not like they can walk into a showroom and walk out with a couple of aircraft. Aircraft are typically delivered a couple of years after they are ordered. So when the world or the airline industry goes into the red, it is impossible to predict when the world will come out of it. So airlines typically go slow on new aircraft orders. Typically, the recovery happens much quicker than anyone anticipated, but there is a time lag between this and when the airlines realise it and order aircraft. This leads to huge aircraft orders followed by the recessions. Last year, Malaysia's Air Asia, American Airlines and India's Indigo placed record orders at the airshows. This year, a recession looms.

Secondly, more aircraft would mean more capacity in the market, which means prices would fall in an irrational manner. To see an example of this you need to look no further than India, with each airline trying to outdo the other not in terms of profitability but in terms of aircraft orders. So the next time you want to predict a recession, just look into the aircraft orders for that year.

(The author is a Bangalore-based freelance aviation consultant and writer.)

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