Terrain, terrain! … pull up, pull up!
A requiem for the airline industry
26 June 2012
I was wandering across a blackened, smoking, urban landscape, strewn with mangled remains of jet engines, wings, seats, luggage. There were men in high-vis gear picking through the ruins, which stretched as far as I could see. The whole airline industry had augered in – crashed and burned.
And then I stumbled across the crash investigators and they’d found the black box jammed under the remains of a car and they start playing the tapes.
And I could hear the cockpit mechanical voice screaming: wind shear, wind shear… sink rate, sink rate… too low, too low… terrain, terrain… pull up, pull up… two hundred, one fifty… pull up, pull up. And the industry heads were screaming at each other and applying more cheap money, more cheap money, low fares, low fares, competition, competition. Suddenly, somebody just said ‘Aw shit’ and the recording stopped.
And then I woke up, freezing cold, with my snout on the desk and a cramp in my tail. Outside the window, weak winter sun was starting to creep down Werrong Lane. Jesus wept, I thought, this airline corruption case is starting to get to me.
So I went down to the brushtail Café for breakfast and a caffeine hit and the place seemed strangely deserted. Joadja was polishing glasses, which is always a bad sign.
“Where’s the masses?” I asked.
“All gone overseas, I’m afraid.”
“What about old Granny Papadopoulos?”
“Her too. Flown home to see the relos in Greece.”
“Gee, she’ll have a fun time there. Is she still up for a riot? And Colonel Stan?”
“The UK, Ireland, France, Italy, Spain.”
“Bruce and Tarkis?”
“LA. And then across to New York via Vegas. Did you know that last year about a quarter of the Australian population went overseas?”
“Yeah, but Oz is about the last happy spot for the airline industry and it can’t go on. Peak oil is killing the thing”, I said.
In Australia we’ve been blinded by special factors - the mining boom and the growth of an East Asian middle class – but a chill wind is howling through the world economy and nothing is more threatened than the international airline industry. Steadily increasing oil prices and the eurozone crisis are slashing airline profits to the bone.
The International Air Transport Association reckons that revenues will continue to plummet, generating profits of only $3.5 billion, max, this year – a drop from the $7.9 billion in 2011 which represented a 1.3 per cent net profit margin. This year’s projected profit margin looks like being just 0.5 per cent or lower. To put that in perspective, average retail profit in Australia is 3.9 per cent, and it has the lowest rate of any sector. The average profit rate for all sectors is about 11 per cent.
This year, Asia-Pacific carriers are expected to make the biggest contribution to airline profits – $2.0 billion – even with a $0.3 billion downgrade from the previous estimates, due to a weak showing in the first quarter. That’s less than half the $4.9 billion profit that the region delivered in 2011 and a quarter of the $8.0 billion achieved in 2010. The trend is relentlessly down.
So, $3.5 billion profit this year? For the whole goddamn airline industry? Yes, you heard that right. That’s a third of BHP’s profit for the second half of 2010; an eighth of what Gina Rinehart is worth; an eighth of Australia’s small defence budget; a third of what NSW spends on education; less than half the annual budget of Ethiopia; a fifth of what the US Army spends annually just on air conditioning for its troops in Afghanistan. Forget Anthony Albanese’s gibberish about a second airport for Sydney – this is an industry on the edge of disaster. Aviation gasoline supplies are now so tight and prices are climbing so relentlessly that cutting wages and staff and pouring billions into upgrading to more fuel-efficient aircraft is inevitably a losing game.
Truth to tell, airline margins have always been pathetic. Warren Buffett once observed that despite the countless thousands of billions that have been invested in airlines over the years, net profit is still, in the long historical view, less than zero. The industry has always depended either on being subsidised by governments for reasons of prestige or nation-building, or in the last few decades, kept afloat by continual injections of cheap money. A couple of whole generations of Australians have come to believe that cheap flights to wherever are their birthright. They’re in for a rude shock.