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Sunday, 20 May 2012

Is the future of aviation… the highspeed train?

About 35 years ago when I was young , I had a classmate whose father was pilot on passenger airplanes at KLM (Royal Dutch Airways). In my opinion this was the coolest job in the world and my classmate was a lucky b*stard to have a father like that.

It was a time when aviation was magical; very expensive and virtually out of reach for the normal middle class people to which my family belonged.

That feeling of magic surrounding aviation, being slightly out of reach, stayed throughout my youth until I became 21. Aviation in those days had become cheaper, due to the emergence of cheap charter flights that were sold in combination with travels to popular resorts in Spain and Greece. This was the reason that I could make my first air trip with a Boeing 757 from Amsterdam to Ibiza.

I was amazed during the take-off that such a mighty machine could accelerate to almost 180 miles per hour within 30 seconds and pleasantly surprised that that same mighty machine could bring you in a totally different environment within 2.5 hours of flying.  

Since that year 1987, I flew a number of times and developed a love-hate relation with the airplane. I loved how it brought me anywhere very quickly, but I hated feeling like a sardine in a can and the endless waiting and boredom within a flight.

Something that started to amaze me during those days was how aviation that had been so expensive in the sixties and seventies could in the nineties become so cheap under influence of Easyjet and Ryanair. I was wondering how their business model worked and to be frank, I still wonder today. What I do know now, however, is that ‘leg room’ is a treasure, hard to find at a Ryanair flight and that the ticket price is only a fraction of the amount you have to pay in reality, due to all kinds of ‘hidden features’ and surcharges.

During the nineties, airport security was still quite normal and when you arrived at the airport 1.5 hours before your flight left, you were perfectly on time. Then came the day that changed everything: 11 september 2001.

Since that doomed day, airport security eventually went totally berzerk after a number of stages of increasing security hysteria. Metal scanner-ports, 3 x-ray checks before boarding, explosive-sniffers, total body scanners disclosing all intimate parts of your body, removing your shoes one or even two times at an airport; we started to think it’s normal for a low budget trip to the Turkish sun and the Spanish costas. 

The absolute zero point of aviation came when an intended terrorist attack with fluid bombs had been obstructed at an English airport and the European authorities started to prohibit taking your own drinks and liquid food with you on the plane; a measure that lasts until today and of which I suspect that it is above all maintained after a strong lobby of the food and beverage selling points at the airport.

Today it is normal that you arrive at an airport 3 hours before your flight leaves, having 1.5 hours of humiliating security checks in prospect. My wife has turned into a desperate rage when prepackaged and unopened drinks and babyfood for our three very small children were tossed in the dustbin by an overzealous customs officer, where the official rules stated that you could take it with you.

These days aviation has lost its initial magic, as it has been replaced by boredome, bureaucracy, humiliation and a feeling of being handled like a dangerous suspect at every occasion.

That is the personal point.

Also from an economic point of view, aviation seems a doomed business. In spite of the duty free kerosene and the numerous taxbreaks that the industry receives in comparison to all other means of traveling, it seems impossible to turn aviation into a profitable business.

Last year I wrote in my article of June 6, 2011 on the IATA Profit Outlook for 2011:

My opinion is that there is something structurally wrong within the aviation industry. When an industry has had a net return of 0.1% over the last forty years and when sustainable profitability for the aviation industry is still a mirage, like it is today, then you could seriously question the earnings model for the whole industry.

Especially when you consider that aircraft fuel – the main driver for aviation costs – is still free of taxes, due to an international agreement, where ALL other kinds of fuel for cars, trucks and other means of transport are (heavily) taxed by governments all over the world: gasoline, diesel/gasoil, LPG (Liquified Petroleum Gas) or fuel oil for ships.

I had to think of these lines when I read the 2012Q1 results for AirFrance-KLM:

Marked improvement in passenger unit revenue

Passenger revenues rose by 8.8% after a favourable currency effect of 0.9%, to 4.43 billion euros. The operating result was -504 million euros (-367 million euros a year earlier) due notably to a 224 million euro increase in the fuel bill.

Cargo revenues amounted to 744 million euros (-3.3%) and the operating result was -68 million euros (-9 million euros at 31st March 2011). Third party maintenance revenues progressed by 10.7% to 258 million euros. The operating result stood at 16 million euros (+26 million euros at 31 st March 2011). The engines and components activities performed well during the quarter. Other activities generated revenues of 213 million euros of which 117 million euros for leisure. The operating result was -41 million euros (-53 million euros at 31 st March 2011).

Total revenues stood at 5.65 billion euros, up 6.0% after a positive currency effect of 1.1%. Unit revenue per equivalent available seat kilometer (EASK) rose 6.6% (+5.5% ex. currency) but this was insufficient to compensate for the rise in the fuel bill. Rise in operating costs, notably driven by fuel.

 Operating costs rose 9.0% and by 6.0% ex-fuel. Unit cost per EASK, was up by 7.3%, but by just 1.9% on a constant currency and fuel price basis, for a slight rise in production measured in EASK (+1.3%). The group nevertheless maintains its objective of a slight decrease in unit cost on a constant currency and fuel price basis for Full Year 2012. The fuel bill rose by 255 million euros to 1.68 billion euros (+17.9%) under the combined effect of a 1% rise in volumes, a negative currency effect of 3% and a 13% rise in fuel costs after hedging.

The operating result was -597 million euros (-403 million euros at 31st March 2011).

The economic environment continues to be uncertain, while the fuel price in euros remains at record levels. The annual fuel bill is expected to increase by 1.1 billion euro’s. In this context, the group is highly focused on the negotiations underway, the successful outcome of which will enable it to significantly improve its economic efficiency between now and 2014.

The results of the First Quarter lead the group to maintain its expectations for Full Year 2012, of a reduction in unit cost at constant fuel price and currency and a maximum level of net debt of 6.5 billion at year end. The operating result for the First Half is expected below the level of last year (-548 million euros at 30 June 2011), while the Second Half will see the benefits of the first ‘Transform 2015’ measures feeding through.

After reading this statement of AirFrance-KLM, I think that the company tries to say to the public: “Fuel prices are the reason that aviation companies don’t make money anymore. Fuel is already so expensive that it is virtually impossible for us to make money. Even trying to hedge the fuel prices didn’t bring us the required results. 

Please help us by abolishing those ridiculous EU plans for reducing the CO2 exhaust through the distribution of paid emission rights before it is too late. Then, especially when the fuel prices will drop, we will be OK again”.

What I read is: this entire industry has made less than 0.1% profit during the last 40 years. The chance that the industry will make solid profits in the next 40 years is limited.

The budget companies make money by treating their passengers like cattle and charging them for everything: food, drinks, normal luggage, abnormal luggage, credit card payments, non-creditcard payments. On top of that the budget companies let their passengers take-off and land in the middle of nowhere at 4 am in the  morning.

European high-class aviation companies like AirFrance-KLM, Lufthansa and British Airways have struggled in their price-fight against the budget companies and never could make a solid choice between being expensive enough to offer good service and being cheap enough to fight the budget companies at their own turf. I’m convinced that the same is true for quality airlines all over the world. This led to a schizophrenic business model, trying to make an impossible choice between cheap tickets and high-service: companies became jack of all trades, but successful at none.

This, in combination with the ever increasing security hysteria, turning passengers into self-hating masochists,  makes that I’m quite pessimistic on the viability of aviation as a large industry.

The aviation industry can only be made healthy by charging the passengers a fair and transparent price, based on all-in ticket prices, without all kinds of hidden fees. Quality airliners should in my opinion stop the useless fight with the budget airliners for the lowest price, but should return to delivering service and a little bit more leg-room for a higher, but fair price. However, this will not take place before a big shakeout in the aviation industry has taken place.

Only a few European, (Latin-)American, African and Asian budget companies and a few high-quality companies will survive this shakeout. The battle will be brutal and bloody, but that is the only way to survive the current unhealthy situation in aviation where too many aviation companies make too little money by flying too many air-miles.

Let one thing be clear: there will always be an aviation industry, for cargo as well as passenger flights. There is still no long-distance alternative for flying. In the future this industry might even become healthy and well-financed again, but this will come at a price. Maybe flying will again become something for the elite that can afford it; just like in the seventies.

Therefore it is my opinion that the future of short-distance aviation might be… the highspeed train. Countries all over Europe are currently building a highspeed train network that makes international train traveling possible and even easy to do.

The modern trains can easily reach speeds of 220 miles per hour, making a trip from Amsterdam to f.i. Barcelona possible in 6-7 hours.Of course, an airplane can do the same distance in 2 hours, but if you add the time at the airport of departure (3 hours) and arrival (1 hour), then the train isn’t so slow anymore.

The biggest advantage of trains are the transparent prices (‘you buy a ticket and that’s it), the easy luggage handling and check-in procedure, the ample leg- and headroom and the mobility on board, where you can walk around as much as you can and nobody gets nervous when you stand up.

One of the oldest competitors in mass-transport for aviation, might have a very bright future ahead.

1 comment:

  1. I agree.
    Ours is the last generation that will be able to fly to the sun for close to nothing. The next generation be doing holidays on bicycle like our parents did back in the sixties.
    It’s a real shame the German maglev never took-off on our continent. It’ll be up to the Chinese again to show us the way.