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[ April 18, 2000 ] Successful airlines are the ones who can manage the business cycle, says BACK Aviation Solutions New York City – Airlines must be able to manage the business cycle if they are to keep profitable, Michael Allen, Chief Operating Officer of BACK Aviation Solutions told delegates attending the IATA Airline Financial Summit earlier this month. He pointed out that US domestic traffic in 1999 during the second and third quarters – the traditional peak travel periods - showed capacity growth which exceeded traffic growth. Taking this worrying situation into account, airlines must have the flexibility to manage both capacity and costs, Allen said. With world economic growth over the next 20 years projected to range from 2.6% in Europe to a high of 4.9% in the Asia Pacific region, airlines need to plan accordingly and demonstrate to the investment community that the cycle can be managed with an emphasis on profitability. Yields are expected to continue to decline worldwide, he noted, as aviation regulations are liberalized, opening up even more competition on routes within world regions. But declining yields stimulate air traffic demand, thus bringing forth the demand for more aircraft capacity. In North America mainline carriers are increasingly bringing their regional partners in house. And they are buying up sizeable regional jet fleets for their smaller partners, with regional jet growth now exceeding that of mainline growth. Delta acquired Comair and ASA and ordered 94 CRJs, plus 406 options spread over 10 years, while USAirways recently declared its goal to grow its fleet to 400 RJs. With the absence of the scope clause, growth would escalate even more rapidly. Other niche carriers continue to thrive, although TowerAir and AccessAir are in Chapter 11. In Europe, the pursuit of the global alliance is the number one goal as KLM and Alitalia combine and the Star Alliance emerging as the market leader. The low fare carriers continue to gain a greater market share as they combine low fares with high frequency service. The Asia Pacific region is showing signs of recovery as Japan deregulates domestic aviation, and there is ownership restructuring at Indian, Garuda, PAL and China Airlines, while in Australia the situation gets more complicated with heightened competition between Qantas and Singapore for a stake in Air New Zealand. Virgin Atlantic is the new kid on the block with its plan for a low fare entrant in domestic Australia. The Middle East and Africa continue to struggle with internal conflicts as does Eastern Europe, especially Russia, he noted. Latin America is also expected to strengthen as the region develops more trade within the region. Right now, however, there has been a marked increase in parked aircraft worldwide, especially older-generation wide and narrow body jets. "This is the direct result of a sharp increase in fuel prices, the need to reduce capacity to meet the slowing of traffic growth and Stage 3 noise regulations." "In order to manage capacity, airlines need to optimize alliances with shared facilities and training and even fleet purchasing power. They need to maximize their code-share networks, leverage fortress hubs, and streamline route structures. Maintaining flexibility of aircraft deliveries, downsizing aircraft, and removing seats as product differentiation can all help in controlling capacity," Allen stated. "The use of E-commerce also offers a real opportunity for airlines to decrease costs, enabling them to generate revenue and new value when it comes to lowering distribution costs and filling excess capacity. E-ventures can also enhance equity valuation," he added. For
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