Is Declining Yield a Problem for the Airlines

The situation for 1985 is projected as being a further improvement over 1984. Unfortunately, fare wars, a disproportionate increase in capacity and rising equipment costs has generally meant that declining yield is only offering a small number of carriers the overall profitability that they require to prosper in the long term.

Dr Eser pointed out that in 1984 IATA members achieved an after-interest profit of about half a billion US dollars on their international scheduled services. Though this was very Encouraging after five straight years of losses it still had to be appreciated that the accumulated losses in the period stood at $US6. 2 billion. Hardly a debt that can be wiped clean overnight. Furthermore, the profitability in the ‘good year’ of 1984 was a mere 1. 5%, a frugal amount in veiw of the billions required Nowadays just to guarantee state-of-the-art fleet replacement capability in the decades ahead.

What is perhaps more relevant though is that most of the profit is being generated by a small minority of carriers. Broadly speaking, one group of IATA members earned $US1. 7 billion while another group, roughly of equal size numerically, lost a combined $US1. 2 billion. The majority of members reported results from their international scheduled services which were just slightly above or below breakeven.

The reason for this is simply that yield is declining. Despite an IATA strategic yield improvement programme commenced during 1984, yield dropped 5. 5% and 1985 looks set for a further decline. This decline was largely due to passenger growth being Strongest at the cheapest fare levels while freight yield dropped despite high demand reflected by a 14% traffic growth. IATA thus estimates that 1985 will be worse than 1984 while 1986, though Seeing growth in the region of 6%, will barely see adequate growth . in yield.

In the long term this does not portend well for the airlines who live in what at best would be termed a fragile economic environment. Only in the years where traffic growth is much higher than forecast is there any real chance of increasing average load factors. During the upsurge of 1984 there followed an increase in capacity that u , unfortunately, eroded much of the increase in uplift point is following an upturn if a carrier does not Th move with the market and increase seat availability to meet demand then that carrier may well lose passengers to a rival airline that has seat availability.

The other point is that in real terms an airline cannot effectively operate for long above 75% load factor without developing a severe under-capacity situation. Hence a carrier must be able to operate at least several percentage points consistently above breakeven in order to survive – too many though are simply not making this nowadays due to insufficient yield.

So where does this leave the air transport industry in the future?

Airlines will still need to replace present aircraft fleets, in fact the number of jet transport aircraft required alone in the next ten years runs into several thousand units. However, airlines will have to lease rather than purchase in the traditional sense. On the surface, this looks good for new operations such as our own Corsair and Ansett World Wide Aviation Services though if yield is not improved then these buying agencies could well end up holding aircraft longer than expected as potential lessors stay longer with older equipment. Additionally, AWWA and Corsair will have to face extremely vigorous competition from a revitalised Guinness Peat Aviation (GPA) which presently has more than 50 Boeings on orders for release, and the new Irish Aerospace which is a partnership between GPA and McDonnell Douglas.

Yield in Australia is characteristically strong by international standards though this is not helped by the very high inbuilt costs that all Australian carriers must pay due to local regulatory and government surcharges. Jet fuel in Australia for instance costs more than double the going rate in the USA while the present fiscal arrangement of ANC’s is amongst the highest in the world. The DofA suggest that this will now be more equitable under the new scheme set to commence on July 1 this year. If it is, then it would be a welcome change and one that may in time be reflected in an overall lessening of regulations experienced under the umbrella of the present two airline policy.

Other IATA goals revolved around improving security at airports in addition to improving air safety in a singularly tragic year. Using the entire world IATA airline community of some one million employees, IATA also suggested a new attitude towards drug smuggling by aircraft. An Australian, Mr Dick Shaw, Assistant Director General of IATA, will head the new task force which will work closely with regional law enforcement agencies to combat the growing drug menace.

The IATA Annual General Meeting of more than 139 member and associate airlines brought to the surface many problems of modern-day operation though, without doubt, the key issue was- yield – and how to improve it.

For the sake of the industry, yield is the single most important word that will divide the “have’s” and the “have not’s” in the decade ahead in the international pecking order of airline hierarchy.