The High Overheads of Low-Cost Flight

The airline industry is facing its most serious crisis since 9/11, according to a number of analysts. And as a result, airlines are exploiting new technology and changing operating procedures in an effort to combat the impact of the relentless rise in fuel costs.

Michael O’Leary, the chief executive of budget airline Ryanair, claims to ‘love recession’, explaining that it forces businesses to focus on efficiency. But few others in the aviation industry share his enthusiasm. Undoubtedly, more airlines will disappear over the next two years, hit by rising oil costs, ‘green’ taxes and falling demand as individuals and businesses cut back on flying.

SURVIVAL OF THE FITTEST

The International Air Transport Association (IATA) has forecast that airlines will lose around $3bn this year: director general Giovanni Bisignani has warned of an ‘extraordinary’ crisis. IATA says that the growth in cargo traffic has already fallen significantly.

However, many airlines, despite dropping flights and upping prices (at least publicly) appear calm. UK budget airline operator Ryanair has even gone as far as boasting that it is the fittest and is already well equipped to stand strong in the coming ‘Darwinian’ battle for survival.

In June, while warning that high fuel costs would hit profits harder than previously forecast, Ryanair said that it was in a stronger position than European rivals and should avoid a loss this year, even if oil stays near its recent record highs. Ryanair is known for its low-cost structure. But even still, the airline has announced a reduction in services, which it puts down to high oil prices and increased airport charges.

And of course, aerospace suppliers have also felt the effect. Companies such as Boeing and Airbus say that the slowdown provides both an opportunity as well as a threat to their businesses.

Boeing says the oil crisis will boost orders for fuel-efficient aircraft and that so far it has had no cancellations. EADS, the company that owns Airbus, also says that it expects to benefit from the high price of oil.

EADS chief executive Louis Gallois, told the BBC that the rising oil price is encouraging airlines to buy new, more efficient aeroplanes and that the A380 is ‘the most energy-efficient aeroplane in the world’.

However, Gallois did concede that airlines in financial difficulties might delay or even cancel orders.

CUTTING COSTS WITH TECHNOLOGY

The truth is, to date, Airlines have not been cancelling orders for new aircraft, but many have already implemented measures to cut costs. Ryanair, whose fuel needs remain mostly unhedged for the current year, plans to ground up to 20 aircraft (about 10% of its fleet) in the coming winter, in a bid to save money. It is also freezing pay across the company, cutting some jobs and renegotiating airport contracts.

Budget airline EasyJet, which has seen its fuel costs double from £10 a passenger last year to £20, is scouring its cost base and operating procedures to trim its annual expenditure. It is, for example, flying planes up to 2% slower on some routes to conserve fuel, saving hundreds of pounds a flight. With 30,000 flights a month, this move alone could save the company tens of millions of pounds each year. Like others, the airline is trying to stimulate revenues by introducing policies such as charging customers for putting bags in the hold and promoting more hotel and car packages.

British Airways (BA) has said that it is reviewing capacity and its network in the wake of oil’s relentless price rise, while a series of US rivals have been forced to slash this winter’s timetables. BA has informed aerospace-technology.com that it hasn’t had to make ‘a short-term, knee-jerk response to high fuel prices’. The airline says that it has used ‘flight-planning computer systems that intelligently select the most efficient speed for each flight for several years’.

Optimum speeds are selected throughout each flight and fuel is thus conserved. In addition, BA has ‘pioneered operational practices such as continuous-descent approaches to conserve fuel and reduce emissions’. The airline has even ‘cut the amount of water being carried on aircraft to reduce weight and therefore fuel consumption’.

BA also told aerospace-technology.com that it has a large number of fuel-efficient aircraft on order, including 24 Boeing 787s and 12 Airbus A380s.

FLYBE’S RETURN ON INVESTMENT

Flybe, Europe’s largest regional low-cost airline, in one example where technology is now driving sustainability in the current climate of high oil prices and dwindling demand. Chief commercial officer Mike Rutter says its strategic technology purchases has helped it to overcome ‘one of the most challenging times that the aviation industry has seen’.

“Around five years ago we decided to invest in turboprops in the expectation that fuel costs would rise and that the environment would become a major issue. At the time, everybody else was buying gas-guzzling jets. For the first couple of years, we were told to go and stand in the corner and wear a dunce’s hat,” Rutter says.

“We now have huge advantages in terms of fuel costs and everybody is scrambling to buy turboprops – fortunately we now have 60 of them and in the longer term we are looking to place orders for substantially more.”

Flybe is certainly now in an envious position. As Rutter points out, fuel prices (at current levels) account for around 26% to 27% of its cost base, whereas they make up around 50% of Ryanair’s.

Having acquired BA’s UK regional airline BA Connect in March 2007, Flybe has been able to reduce fuel burn fairly dramatically by phasing out the BA Connect fleet. Consequently, and even following the dramatic increase in oil prices, Flybe’s total cost base has increased by between just 5% and 6% while airlines like Ryanair have probably seen their cost base increase by between 12% and 14%. “That sort of difference,” says Rutter “allows us to remain competitive.”

Flybe also sought to contain fuel costs when it ordered its fleet of turboprops. Rutter says that when discussing specifications with the manufacturers the airline decided it wanted the lowest possible maximum take-off weight, and that since acquiring the aircraft it has made gradual changes that have resulted in weight and operational cost savings on both of the major aircraft in its fleet: the Embraer 195 and the Bombardier Q400.

The company has taken other steps to reduce fuel costs. It recently invested in new flight-planning systems to ensure it can produce the lowest-cost flight plan between two different places, according to Rutter. Like other airlines, it is striving to fly its aircraft in long-term cruise mode for as long as possible – a move that can have a big impact on fuel bills.

The company also has ‘a very strong hedging policy, with around 76% of its fuel needs for this year hedged’.

WILL IT ALL BE IN VAIN?

As to the future, many airlines clearly believe that the price of oil will come down from its recent record highs. Flybe contends that the current price of oil has been driven largely by speculation. “Speculators will keep pushing oil up until they finally create a bubble that will burst,” says Rutter, whose company is lobbying the government to tackle the issue. Ryanair has predicted that oil will become cheaper over the medium term, helping its earnings to rebound strongly, but it is not sure when this will happen.

Even if oil prices do fall, airlines will continue to bear down on fuel costs. Boeing, for example, has said that airlines are demanding a 15% cut in operating costs over and above the efficiency achieved by its 787 Dreamliner, which already promises to cut fuel use by 20%, thanks to new engines and the use of lightweight composite materials. It seems that the Darwinian battle for survival may have only just begun.