June 19, 2008

Low cost, high expectations

The low cost airlines claim they are not being affected by the oil crisis. Do they have their heads, like their aircraft, in the clouds? Ian Jarrett looks beyond the rhetoric.

Pick up any newspaper, turn on any news bulletin, and the sad state of the airline industry is sure to show up somewhere.

Across the world - apart the United Arab Emirates perhaps - the talk is of cuts in services and staff, route rationalisation, aircraft retirements and fuel costs going through the cockpit.

Qantas, British Airways, Finnair, United, Air Canada, Northwest, Continental are just some of the carriers attempting to slash their costs and increase charges to help reduce the impact of the fuel bill on profits.

United, for example, is not only charging for the first piece of checked luggage, but is also collecting A$2 for bottled water on their flights in the US.

There are not many other ways to squeeze passengers until they choke, unless, of course, airlines start charging for use of the toilet or the overhead lockers - although Ryanair is probably on to this as I write.

Oddly, though, two prominent low-cost carriers, AirAsia and Tiger Airways, have bucked the bad news trend by proclaiming that, come what may, they will prosper.

AirAsia's ebullient chief Datuk Tony Fernandes said the airline group could still make a sustainable profit even if the price of crude hits US$200.

Speaking on the sidelines of the World Economic Forum on East Asia in Kuala Lumpur this week, he said, "We've taken a very different approach, in that we will market ourselves out of this problem. I think to put your head in the sand and cry about oil and cut routes is not the solution."

Tiger leader Tony Davis has also taken an aggressive line, promising to pounce on routes in Australia being shed by Qantas and Virgin Blue.

While the confidence of AirAsia and Tiger is to be admired, it is difficult to believe that they can continue to keep their heads above the rising price of oil and the falling value of some currencies in South East Asia.

Other airlines are better hedged than AirAsia on fuel. Some airlines have just-as-smart marketing strategies. Many have the latest, fuel-efficient planes, too.

The crunch could be coming for the low cost carriers despite the bravura of their leaders.

There are strong rumours that airlines have huge outstanding airport, fuel and landing fee charges at Thailand's Suvarnabhumi airport.

Airlines are reported to be struggling with cash flow and a crisis is only weeks away.

Fernandes said this week that during the Great Depression of the 1930s, the movie industry in Hollywood prospered. The same theory applies now to the travel sector, he insisted.

The next few weeks will tell if Fernandes is right.