What’s the future of the aviation industry? Think about it. Is it sustainable to have major airlines operating hubs that are 30-60 minutes flying time from one another?
How many companies are going to be allowed to operate huge markets such as that of the US, China, and India?
Given the fact that 30-40 per cent of fuel is burnt during take-off (don’t take the figure for granted though), one may conclude that an airline company would pump up its yield per mile flown by focusing on long-haul flights, and at the same time using more fuel efficient planes.
The question here is: how many airline companies can be out there and how close can they be from one another?
Let’s look at it first from an international point of view and then from a domestic point of view. And given that the region is very well-positioned geographically, the emergence of major carriers is not only to connect people from one part of the globe to the other, but to also bring people to those hubs, even if that is a mere two-day transit.
Are they all going to survive in the long-term? No. I believe that the general direction in the aviation sector would be that you will have one, or perhaps two, big regional carriers. That happening means that the focus will shift from a mix between short- and long-haul flights to being long-haul, leaving the short-haul flights for low-cost carriers.
That will possibly be the first shift in the aviation industry. The second shift will be another reduction in the number of overall global carriers. This is basically saying that countries losing money because of its insistence on maintaining a national carrier will have to cut its losses eventually and move on, providing more efficient airlines better access, including fifth freedom rights, and better economies of scale.
The third shift, which could happen in parallel with the second one, is that the countries with the highest populations would do much better serving their own domestic markets. India is a case in point.
With more than one billion people, India’s airline industry has been the target of acquisitions, as well as investments in established or brand new airlines. So Etihad bought a share in Jet Airways to have better access into the market at the time, and it also fit into its strategy of acquiring and maintaining stakes in different carriers.
However, and given the current increased openness in India towards foreign direct investments, Qatar Airways is planning to establish a 100 per cent-owned airline company in India to serve the domestic needs there.
It also had plans to establish one in Saudi Arabia. Despite the fact that the latter’s population is smaller compared to markets such as that of India, it still boasts a high number of religious travellers, making the Jeddah route one of the most lucrative for airlines (so says the A380).
What should countries do, and what should companies do? For the former, “learn to let go”.
The issue that many cannot properly grasp is that, just like in any other industry, only the most efficient in the production and delivery of the service will be the one that will endure long-term.
Another option for countries would be to move away from running a national carrier, and tolerating debts because of that, to running an investment fund that buys stakes in other successful airline companies — an aviation sovereign wealth fund basically.
As for companies, my personal view is that we will see a rise in mergers and acquisitions once countries change their views of their own national carriers. In other words, when those companies are seen from a purely commercial perspective, and on the basis of earnings and profitability.
The last question that I want to leave you with: what will be the most significant, most eye-catching merger or acquisition in the aviation sector?
— The writer is a UAE based economist.