THE countries closest in size to Brunei, whose national carriers operate scheduled long-haul services are: Bahrain and Mauritius, with populations of 1.3 million; and Qatar, with a population of 1.7 million. Not only are the domestic populations significantly bigger than Brunei - but so are their fleets and networks.
For example, Gulf Air, based in Bahrain, is no longer technically a "tier one" carrier, having suspended most of its long-haul operations in 2007, but still deploys a fleet of 14 Airbus 319s and 320s, 14 Airbus 330s and 340s, and five Embraer 170s and 190s to fly to 40 destinations regionally and internationally.
In contrast, Air Mauritius is regarded as a "second tier carrier" with a much smaller fleet of only eight Airbus 330s and 340s and four Airbus 319s; they nevertheless, fly to 26 destinations in Europe, Africa, Asia, China and Australia. From Mauritius, pretty much everywhere is "long-haul", and as a result, they are the leading scheduled carrier in the Indian Ocean region.
Qatar Airways is now undoubtedly a "tier one carrier". Although a comparative "new entrant" in the Middle East airline market and competing directly against, Gulf Air, Emirates, Kuwait Airways, Etihad and Saudi Airlines; it has, in less than 20 years, built up a fleet of over 90 aircraft which now flies to a network of over 100 destinations, worldwide.
'Second-tier carriers' under stress
Whilst "second tier carrier" is a neat descriptor, unfortunately many airlines who fall into this category are struggling to survive. I am not an aviation economist but it seems to me that in simple terms "second tier" airlines such as RBA are "too big to be small and too small to be big!" Meaning that they have operations overheads that load their costs and prevent them competing directly with the budget or local market carriers; but they do not have the capacity or diverse portfolio of offerings to compete effectively with the major network carriers. They are caught in the middle and are "squeezed" by both sectors.
As a result, many airlines of a size comparable to RBA and even bigger have also struggled for profitability. Some national flag carriers such as Olympic (Greece), Swissair (Switzerland) and Sabena (Belgium) have gone under and no longer operate. Others such as Gulf Air, Aer Lingus and Alitalia, have had to curtail their operations severely to survive. Whilst several, such as Air Malta and Czech Airlines have received massive government bailouts in order to continue operations. However, another group of "second tier carriers" have teetered on the brink of collapse but fought back by reinventing themselves and are now successful.
For example Icelandair and TAP Portugal, have transformed themselves and created a profitable customer experience and operating model somewhere between full service and budget, that delights customers and is economically sustainable. An interesting illustration is that Icelandair was formerly known as a low cost, "backpacker" airline and is now the only transatlantic operator that offers an a-la-carte food menu and services.
Air transportation - an industry flying through turbulence
Managing a modern airline successfully has always been tough. The early years of RBA's growth saw peaks in oil prices as well as terrorist hijackings disrupting air travel. But the industry, nevertheless, remained pretty stable with the traditional national flag carriers such as Aeroflot, Air France, BA, Pan Am, Qantas, etc dominating the local, international and long-haul market segments. Each airline was essentially "government owned", or else their operations were extensively supported directly by government subsidies or indirectly by other forms of protectionism. However, the last 30 years have seen the aviation industry characterised by relentless market disruption, caused by, for example, increased de-regulation and "open skies" legislation. As a result, there has been a significant repositioning of all the former major players, with some such as Pan Am effectively vanishing, and the arrival of many new airlines.
In particular, the rise of the low-cost carriers, whose competitiveness was previously limited to the short-haul and regional sectors, is now having a major impact on the long-haul sector through airlines such as Air Asia X.
Growth of competition
Travellers have enjoyed an extended period of relative reductions in the cost of air travel, essentially a function of this growth of competition; but they are now seeing constant increases! The operating costs of any airline are increasing faster than their ability to adjust their business models; and as a result more of that cost is being passed on to the traveller via ticket price hikes and fuel surcharges.
All airlines, including low-cost carriers, are affected by the spiralling cost of fuel. In 2010, jet fuel rose to an average cost per barrel of US$91, this 11 per cent increase of fuel costs is equivalent to a 26 per cent rise in operating costs. In 2011, the continued rise in jet fuel is on track to reach an average cost per barrel of US$96 or an equivalent increase of 29 per cent in operating costs. Both Pehin Karim and the RBA spokesperson referred to this in their respective statements. But Pehin Karim dismissed it as irrelevant. His view was that the RBA fleet is relatively modern and therefore fuel efficient. He made the somewhat flawed assumption that the cost to fuel a Boeing 777 is the same, for whichever airline is operating it.
He missed the point that aircraft are not like our cars - they don't just pull up to a Shell service station, fill the tank and go, paying whatever price is on the pump. Airlines buy their fuel many months, even years in advance using a whole range of sophisticated financial instruments such as forward contracts and hedging to optimise the price they pay. Whilst this can help "flatten out" the short-term price fluctuations, it can only slow the inevitable rise in overall fuel costs. Moreover, airlines with big fleets, requiring lots of fuel, negotiate significant discounts associated with their future orders. Smaller airlines with smaller fleets, such as RBA, do not enjoy these benefits of scale.
All airlines have also had to adjust to the increased costs associated with airport security and landing fees. But airlines operating to the US, Australia and Europe, in particular have also to deal with the often punitive "carbon footprint" or "green" taxes of various types, these countries are now levying.
Not only are the traditional travel markets of the US and Europe decreasing in size because of "double digit" levels of unemployment. Those potential passengers that still have a job and can afford to travel are faced with increases in the personal cost of travel by way of rises in for example, travel insurance premiums, as well as the imposition of direct "airport taxes" and "surcharges".
String of 'disasters'
Add to this the improvement in reliability and reduction in cost of telecommunications technologies, such as IP-based video conferencing, and even the formerly highly lucrative "business travel" sector has taken a dip. Executives now fly less and Skype more!
Asian-based airlines, in particular, have had to deal with a string of "disasters" that have impacted air travel one after another. First it was the regional financial collapse of the late 1990s, then SARS, followed by "9/11" and then "Bird Flu". The financial collapse of 2007/2008, whilst centred primarily on the US and UK, has resulted in a global economic slowdown, with implications for air travel, which were then exacerbated by the world-wide scheduling hiatus caused the Icelandic volcano eruption.
Domestic pressures in the developed and developing economies are resulting in a further general slowdown in air travel. To such an extent that even Singapore Airlines are struggling to fill all of their Airbus A380s! The otherwise burgeoning Chinese travel market is, as yet, unable to balance the loss from other markets, and is itself in danger of slowing. The current US and European debt crises have resulted in recessionary pressures there, but if the US debt crisis is not resolved, then China will be the biggest loser. They will be left holding US$1,000 billion of worthless paper and in comparison Brunei's current GDP is US$20 billion. Not even an economy as dynamic as China can afford a loss of that magnitude, so it is not surprising that Chinese travellers are reverting to the financial prudence and caution for which they are famous.
Where next for RBA?
I would argue that considering the plethora of market factors RBA's leadership have been obliged to consider, and that few of them have been "favourable", the decisions to suspend a handful of routes and to cease subsidising the 90 per cent of RBA passengers who merely hitch a cheap ride from Australia to Europe, can be seen as almost modest!
That said, the RBA spokesperson did state that these decisions were merely "the first step" in some yet to be defined "improvement process" focused on "securing the survival of the airline". If one was to use a medical emergency comparison, the mid-June announcements, therefore, "have stopped the financial bleeding and saved the patient from death". However, it must be inferred, that more "treatment" is needed to make the patient fit again; and, this may even include "further radical surgery"! The real issue is "where next for RBA?" - Literally, in terms of viable destination route network; and metaphorically, in terms of what type of carrier will RBA become? Pehin Karim expressed his view on what should be done, very forcefully. The RBA spokesperson was less forthcoming.
The spokesperson used jargon phrases such as "a stable platform"; "back to its roots"; "realign goals"; "become a regional hub, with strategic connectivity"; "establishing a robust network with a high level of integrity and convenience" etc. Whilst these may mean something to the management consultants who are advising RBA - to the general public they are meaningless, verbal padding.
Sadly, these non-explanations do not conform to the "imperative that RBA responds openly", the same spokesperson mentioned earlier in the same statement; nor to the standards of openness and clarity RBA's stakeholders really deserve. They merely serve to confuse further, whilst given the pretence of a clear explanation.
Source: http://business.asiaone.com
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