Monday, February 27, 2012

EU ETS At a Crossroads

The rhetoric has subsided and the EU have softened their stance and agreed to a discussion of the Carbon Tax within an ICAO framework. However, the EU still insisted that airlines that do not participate and pay up may face a ban into operating into Europe. At least we are all moving in the right direction.

The EU's position is based on the fact that climate change and the environment have been the subject of a lot of discussions with no actions taken. So the EU decided to take this unilateral action to force a change. Well it kind of worked.

The whole idea behind the ETS it is to force airlines to get rid of their older aircraft and purchase newer technology aircraft which are more efficient and more ecofriendly. MENA and the GCC airlines operate on the whole some of the newest and most advanced aircraft, but under the ETS they still have to pay the tax as the rules tighten with time; after all technology does not evolve in terms of months but rather years and sometimes decades. Airlines have started adding surcharges to the tickets to provision for the payments under ETS. At this time, Etihad added $3 to their tickets to Europe and others will follow soon. A $3 increase to a ticket to Europe is not going to stop people from travelling. However, the tax will dampen the expansion of airlines as they balance fares against additional payments under ETS, which looks somewhat protectionist.

What is really annoying as well as disturbing, that after all this rhetoric about carbon emissions and the airlines having to pay their fair share to offset the effect on the environment. None of that money has to go
towards improving aviation infrastructure or research to improve technology or even projects that improve the environment. Europe will still face the same flow control problems and the same shortage of runways facing the same delays that will keep aircraft unnecessarily burning fuel in the air and on the ground, producing more carbon emissions. The collected monies will go to the general budgets and probably be used to offset deficits or support popular programs that otherwise may  have to be curtailed.






Tuesday, February 14, 2012

Government Policy and the Airlines

Mr. Tony Tyler, IATA's DG and CEO, in an address in Singapore urged governments to use airlines as strategic assets (read full story here). He cited two examples of how government policy towards their airlines affects their contribution to the country's overall economy, Singapore and India. Singapore support of aviation as a strategic industry contributed 119,000 jobs and a 5.4% contribution to GDP. While India's policy of high taxes, blind support for Air India is driving the airline industry towards a potential meltdown and a contribution to GDP of no more than 0.5%. Another example is Emirates in Dubai where the airline contributes 22% to GDP and 19% of the total employment (around 250,000 jobs) and is profitable.

Airlines have always been an instrument of government economic policy and national security especially in smaller countries. Government owned airlines were allowed operational losses because their contribution to the GDP in terms of employment, investment and tourism related businesses far outweighed any losses they may have incurred. The other issue is the ability to stay connected when so called bad times hit and most international airlines stopped operating; something countries like Egypt, Tunis and Jordan experienced and are still experiencing during the Arab Spring, regardless of how good or bad the security situation was.

Of course, aviation policy is not about state owned airlines only. It is about a policy framework for aviation that includes an open sky regime that promotes and facilitates bilateral and multilateral traffic rights similar to what Singapore, UAE and Jordan have and does not institute protectionist policies. It also includes a tax regime that does not view aviation as a luxury product and tax it accordingly, but as a vital component of the economy. There are several countries that have imposed taxes and fees that are rendering their industry uncompetitive like Germany, India and Canada.




Saturday, February 11, 2012

RJ Clips Its Wings

This is the gist of a news item in Zawya.com; a tad harsh. MENA is a tough neighborhood but Royal Jordanian is a tough airline. This is not the first time or the last time RJ will have to retrench. The airline has survived worse crisis in its 49 years history; the Arab Israeli war in 1967, the 1982 Israeli invasion of Lebanon, the 1987 financial meltdown in Jordan which saw the currency devalued by 50%, the first Gulf War in 1990 and the list goes on and on.

RJ was transformed from a losing government owned airline to become the first Arab airline to join a global alliance, Oneworld in 2007 and the first Arab privatized airline later in the same year. It also embarked on a fleet renewal program replacing its older A310 and A320s with new A319, A320, A321 and A330s. The A340 fleet was refurbished and new seats and AVOD system installed. The airline has 12 B787s on order.

2011 was a particularly tough year; oil prices hovered around $110 a barrel, a deepening Eurozone debt crisis which is still unfolding and political upheaval in the region, the Arab Spring which affected some of the most profitable destinations in the network and caused a drop in incoming tourists.

According to Mr. Hussein Dabbas, RJ's CEO "Despite all the difficulties, the company was able to achieve positive operational results during 2011, as it increased the number of passengers by 6.5 per cent, the operational revenues by 6 per cent, the flying hours and departures by 3 per cent, the seat factor reached 70 per cent." however, fuel prices increased to JOD 293 millions in 2011 from JOD 203 millions in 2010. My estimate is a net loss of $100 millions on a turnover of $1 billion.

The airline is axing 5 destinations and reducing flights during the year as traffic develops. The airline is looking at the fleet requirements. Probably a reduction in the short and medium range fleet by terminating a couple of leases.
There is nothing new in the recovery plan it has been used several times in earlier situations and seems to work. RJ will still be looking at new destinations and opportunities and leveraging its Oneworld membership to its advantage.

MENA is not for the faint hearted but Royal Jordanian is a resilient airline and has been through worse situations before and emerged a stronger organization, I see no reason that they will not this time.

Friday, February 10, 2012

Airlines and the Law of Diminishing Returns

Etihad Airways announced a modest net profit of 14 million USD over a turnover of 4.1 billioon USD. No mean achievement in a global recession and a region experiencing massive political upheaval ranging from quiet and peaceful political reform to the other end of the spectrum, civil war and everything in between. What is interesting it was a profit made through expansion; efficient, steady and productive. The type of expansion that adds value and jobs which is typical to the region (MENA/GCC).

This is so unlike the USA market that can only achieve profit by a tight control of capacity coupled with a reduction in staff and network. The type that is great for shareholder equity but bad for communities. It does not create value or jobs, on the contrary it reduces service and increases unemployment. For some reason airlines in the USA have very seldom achieved profitability through expansion. They tend to expand through mergers and acquisitions which are always at the expense of the staff and the community.

Airlines in the USA followed by legacy airlines in Europe and elsewhere have unbundled services, kept the original ticket price and convinced us all that we are only paying for what we need or use. Of course, we are paying twice.

So, when the DOT issued a ruling that passengers should know the fare inclusive of all services and taxes, the airlines went up in arms claiming this will only increase the cost and now a few Republicans in Congress are trying to overturn the DOT ruling.

Airlines have not been very good neighbors, of course there are a few exceptions, they like austerity but then the answer to today's problems is job creation. After all cost cutting is subject to the laws of diminishing returns while for revenue the sky is the limit.

Wednesday, February 1, 2012

Failure To Communicate

The weather has not been very good in Abu Dhabi in the last few days and it wreaked havoc with Etihad Airway's schedule with delays and cancellations.Happens, mother nature can be capricious if not outright bitchy sometimes.

Airlines do their best to cope. These days the use everything they can get their hands on to ease the impact of the disruption on their passengers. Not Etihad, it seems they never heard of the word "COMMUNICATE".

They can figure out ways to expand their network or provide additional services on board or on the ground. What they have failed to grasp is the need to advise their passengers of how their flights have been affected.

A quick look at their Facebook page shows several comments by passengers complaining about extensive delays but not a single entry by Etihad explaining or apologizing. These comments were later deleted. Their website is business as usual. I tried to check in on the website for my Jeddah flight back to Abu Dhabi and all I got was a message "your flight is not open for check in". 

I never got a message from them informing me there is a delay and the website did not have any message regarding these disruptions. Basically a massive failure to communicate coupled with an inadequate Emergency Response Plan (ERP). ERP is not about crashes and accidents it is also about massive disruptions and how to recover.

In all fairness the airport staff in Jeddah, were at hand and interlined some connecting passengers with other airlines to their final destinations and offered the remaining passengers food and refreshments. 

However, Etihad as an organization did not rise to the occasion and failed dismally. If you want to be credible you have to perform. All these awards don't mean a thing to passengers stranded for 9 or 10 or 11 hours. They only prove that when you have good PR you can get any award you want. 

Etihad should look at their Response Planning and how to embrace the available means to minimize disruptions and keep passengers engaged and happy.

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