The mile-high party is over but only the airlines have failed to notice. As BA disappears under a mountain of lost luggage in its new terminal, rivals are preparing to launch new transatlantic services from Heathrow and across Europe squadrons of new aircraft are taking to the skies.
Airlines don't behave like normal businesses. Faced with a challenge, they have a single response – expansion.
When the chill wind of recession blows and the fuel price escalates, they prepare for take-off. Instead of sitting tight, they buy more aircraft, increase services and cut fares.
The rampant growth in air traffic is not sustainable and the business model must change. It's not only the incumbent flag-carriers that are threatened but the new low-cost carriers that thrive because of two market miracles – the availability of very cheap fuel and galloping growth in passenger numbers.
But these buttresses are crumbling, playing havoc with a business model that has changed the face of aviation over the past decade.
Airports are a mess, airline staff are in rebellion and the cost of jet fuel is soaring. What is less apparent is weakening demand for air travel. IATA, the airline establishment's lobby organisation, signalled the downturn this week, pointing to weakening load factors and a marked slowing in growth in revenue passenger kilometres – key industry volume statistics.
The load factor, the percentage of seats holding bottoms, fell in every region in February, with the biggest fall in Europe. Passenger kilometres worldwide grew at a rate of 4 to 5 per cent, which sounds good, except that this industry has become accustomed to 7 to 8 per cent annual volume increases.
For airlines, Europe has become a rotting carcass upon which a swarm of flies is feasting. In January, passenger kilometres increased by only 2.8 per cent in Europe, which included weak growth of 1.7 per cent on North Atlantic routes and almost no growth on Asian routes.
Still the aircraft roll off the assembly lines, adding more seats to a bloated market. Capacity in Europe increased by 4.4 per cent in January – and it is the low-cost carriers that are leading the expansion, with easyJet promising 15 per cent more capacity this year.
Low-cost airlines can cope with overcapacity if the market is growing rapidly. The low-cost model assumes that passenger numbers rise at twice the pace of growth in GDP – it enables easyJet and Ryanair to pile 'em high in the cabin with the stimulus of low fares. High load factors spread the impact of rising costs, such as fuel and maintenance, more thinly between paying passengers.
For example, last year easyJet reduced its average fare by 3.3 per cent and revenue per seat fell about £1 to £40. However, non-fuel costs fell more than 6 per cent to £26 per seat. The cost of fuel was £10 per seat, leaving Easyjet with a profit of £4 per seat.
Cheap energy is the first buttress to go because easyJet's overall fuel bill will rise 30 per cent this year, which will bring the coast per seat to about £12.50. It's a huge bite of the airline's margin and the company issued a profit warning in February. Air Berlin admitted this week that it was suffering the cosh of dear kerosene.
Economies of scale and general parsimony won't bridge the gap. If the low-cost carriers are to regain balance, they need massive growth in revenues. Where will it come from?
A market growing at 2-3 per cent cannot generate enough momentum to fill seats if overall capacity is growing at twice that rate. If the low-cost carriers are to fill their new aircraft, they must steal passengers by cutting fares ever more aggressively.
They must salami-slice their profit margins until they look less like the New Model Airlines of the future and more like yesterday's tired old model airline flying on an expensive wing and a financial prayer. The alternative is to accept more empty seats on each plane. That means increasing fares and the budget carriers are doing this with ancillary revenues and late bookings: charging for food, extra baggage and business travellers who pay double because they must fly today.
Instead of no-frills flying, low-cost carriers are offering lounges and priority boarding, just like BA. Soon, the pressure will mount to offer more. How long before easyJet divides the aircraft cabin into haves and have-nots? Of course, it needs original marketing – perhaps “Quiet and easy”, a guaranteed toddler-free experience for an extra £20 per ticket?
The New Model Airline is getting a bit frilly, but the emerging strategy of “make the punter pay” will work only if capacity is drained from Europe's overcrowded skies. That requires more airline bankruptcies. The only alternative is a return to very cheap fuel and the odds must be better on the former than on the latter.
Head East, where greed is still good
When will investment banks learn to follow the money and relocate to the East? The continuing assumption that these businesses must be Western-based, borne out by the squabbling supporters of Wall Street and the City, is on shaky ground.
Investment banks are market traders and for markets to function they must have liquidity.
Oops, where is the liquidity? It is heading eastwards – a magic carpet of petrodollars has been ripped from under the feet of tassel-shoed bankers and is jetting to the Gulf of Arabia and beyond.
In the first three months of the year, close to $100 billion (£50.4 billion) was ripped out of equities, most of it from Europe, Japan and the United States, according to Emerging Portfolio Fund Research. This is being hoarded in money market funds or reinvested in Russia, East Asia and the Middle East, who need capital for infrastructure and, arguably, banks to package deals. Besides, bankers wounded by a tide of opprobrium might be happier over there. Where in the world is greed still good? Russia, the Gulf and China, of course.
