Storm Clouds?

So how bad is the airline operating outlook? One thing for sure is that Qantas can be relied upon to respond robustly to changing market dynamics, and the Qantas move certainly points to some softness in the travel market – witness Jetstar’s withdrawal from some leisure routes. Then there is UBS’s outlook for Virgin Blue, which is now forecasting a loss of $40 million for the current financial year – this for an airline that only a year or two ago was riding the wave of finding a market sweet spot between pure low cost and legacy airlines as a ‘new world carrier’.

So right now, things are not too pretty. But it’s also important not to overstate matters and create a self-fulfilling disaster scenario.

Sure, forecasts of US$200 per barrel for crude oil are gruesome, but by the same token some market watchers point out that the behaviour of fuel prices is showing every sign of being a speculative bubble. Indeed, a Boeing forecast puts the longer term average fuel price at closer to a much more sustainable – although still high – US$70-80 a barrel.

And the timing of the Qantas announcement shouldn’t be overlooked – that same week Qantas was facing industrial action from its aircraft maintenance engineers who are seeking a five per cent pay increase.

Qantas says the aircraft retirements and route cutbacks represent a five per cent cut in available seat kilometres across the group. But later this year Qantas plans to take delivery of its first three A380s, two more A330-200s are on the way, and Qantas mainline and Jetstar still have large outstanding orders for 737-800s and A320 Family aircraft. This is more a slowing of capacity growth than a reversal.

Still, whether fuel prices deflate to US$70 or rise to US$200 a barrel, it seems high fuel prices are now here to stay, and this, combined with efforts to reduce the industry’s carbon footprint, suggests we are at the vanguard of significant structural change as aircraft manufacturers, engine builders and airlines cope with the new normal of high fuel prices.

Listening to the environment presentations at Airbus’s annual Technical Press Briefing in May it was clear – not that any confirmation was needed – that there is no silver bullet in dramatically reducing aircraft fuel consumption, let alone weaning the industry from jet fuel altogether. Instead, thus far the industry is responding with a range of incremental measures to reduce its reliance on the black gold. Some were old – taking a fresh look at active laminar flow techniques to reduce boundary layer drag (see Newsdesk) and geared and even unducted turbofans engines – others newer in concept such as using hydrogen powered fuel cells to replace jet fuel powered APUs. Then there is the fuel itself.

Airbus reckons algae based bio-fuels could provide 30 per cent of the world’s jet fuel requirements by 2030.

What will be fascinating to watch is to see what combinations of technologies Airbus and Boeing propose for their 150-seaters to replace the A320 and 737 series respectively, due mid next decade. Some airlines like easyJet are pushing the manufacturers to take a more radical approach in designing their new single-aisles. The stakes here are enormous given the size of the single-aisle market, so how much technical risk will Boeing and Airbus be prepared to shoulder, and how will their solutions differ from each other? In the shorter term we’ll likely see a continuation of trends to larger aircraft – typically more fuel efficient on a per seat basis – across the board.

Indeed Air France KLM CEO Jean-Cyril Spinetta told a French newspaper at the IATA AGM in Istanbul in early June as AA closed for press that he was pressing Airbus to build its A380-900 stretch sooner rather than later because of the operating economics this enormous aircraft offers.

That certainly illustrates the size of this pressing issue