Much has changed for airlines since the last time IR magazine took a good look at the industry. At the time, the September 11, 2001 terrorist attacks and their aftershocks were still rattling carriers around the globe. The situation is different today but what remains the same is the complexity and challenges that IROs who call the industry home continue to face.
‘It’s very challenging to run IR in this industry – there’s very little predictability,’ notes Amy Carpi, director of IR for New York-based JetBlue Airways. ‘You’re exposed to fuel cost fluctuations, event risks and a brutally competitive market. It’s a business for investors with strong stomachs.’
In the US and Europe, low-cost regional carriers such as JetBlue, Ryanair, easyJet and Southwest Airlines continue to outperform and reshape the industry. Their success is being duplicated around the globe. ‘Low-fare carriers are now taking Asia by storm, mostly in Southeast Asia, as they’re not a factor in Japan or Korea yet,’ says Jacques Kavafian, a research analyst at Research Capital Corporation in Toronto. ‘That’s probably just a matter of time.’
The success of low-cost carriers has basically split airlines into two categories: long haul and short haul. But while a few years ago the more established players might have been caught off guard by the upstarts, today they’re more comfortable discussing the changed playing field and how they fit in. ‘When it comes to the low-cost carriers, it’s important that people understand the differences between our business and theirs, and where our businesses overlap,’ explains George Stinnes, head of investor relations at British Airways. ‘The no-frills airlines don’t do long haul or premium services, and they don’t have a large network, so it’s important to differentiate yourself.’
The fuel factor
The high cost of fuel is perhaps the most obvious issue facing airlines today, with many imposing fuel surcharges on customers. The high costs are a factor for most industries, but fuel is an especially critical component for carriers. Some analysts estimate that a $1 per barrel price increase in fuel costs the airline industry $425 mn. With the price per barrel hovering in the high $40-plus range (the price moved above $50 at the end of February 2005), airlines are feeling the effect on their bottom line.
‘We’re watching crude prices and estimates on where crude will settle,’ says Kam Bansal, a securities analyst with Walter Capital Management, a London-based hedge fund. ‘The connection is obvious: every time crude prices rise, airline stocks drop. There’s a knee-jerk reaction from investors. So if you’re an investor who is bullish on crude and you think the $40-plus barrel is here to stay, you will be worried about the airline industry.’
For Singapore Airlines, the cost of fuel is the number one challenge. The airline is government-controlled and doesn’t face some of the same challenges from upstart regional low-cost airlines, at least not on its long-haul routes.
‘Most of the analysts and investors we meet are very concerned about the high cost of fuel and how that cost will impact the business and bottom line,’ explains Samantha Ng, treasury accountant at Singapore Airlines. ‘To help ease their fears, we try to share as much information as we can and give them as much insight as possible into what we’re doing to address this issue.’
For non-government-owned airlines such as British Airways and JetBlue, fuel is only one of many challenges. ‘Fuel is certainly at an all-time high price,’ concedes Stinnes. ‘At the end of the day, however, it’s simply something you have to get to grips with. You don’t have much choice in the matter, so it becomes another variable that you just have to deal with.’
Open skies
Stinnes points out that a push to increase efficiency and improve its cost base has been at the forefront of what has been happening at British Airways over the last couple of years. In the US, a number of airline bankruptcies have helped drive that efficiency push. In Europe, it has been more organic.
‘Most of the European airlines remain solvent, but none of us have disregarded our cost structure and balance sheets, and we have worked hard to improve them,’ points out Stinnes. ‘Another important factor here is the EU’s efforts to level the playing field by trying to get state subsidies out of the game. That’s a huge change in the post-9/11 era. For carriers like us that don’t get government help, we’d like to see more happen.’
Deregulation is also a hot topic. Most in the industry hope the barriers that restrict access to markets will come crashing down. Singapore Airlines has been in negotiations for access to Australia, for example, while the UK and India recently struck a bilateral agreement doubling the frequency of flights between the two countries.
‘The idea of open skies, where you can essentially fly anywhere, is something we’ve been talking about for a long time,’ observes Stinnes. ‘But there are bilateral agreements between nearly every couple of countries in the world, so that’s hard to dismantle. The stumbling blocks are the big ones, such as North America. Our agreement with India translates into more revenue and, of course, more investment interest.’
As markets open up and barriers come down, Stinnes says there will be more of the consolidation that has been prevalent in the US. ‘We’ve seen the first major step in consolidation in Europe with the combination of Air France and KLM,’ he notes. ‘As the bilateral pieces get sorted out, that trend will continue. Ultimately it’s good for both consumers and investors.’
Going for broke
One key reason consolidation is good for the industry is overcapacity. In the US, where major airlines such as TWA have gone out of business, excess capacity is perhaps the greatest problem facing the industry. Indeed, many in the industry, both inside and outside the US, believe the major airlines – the long haulers – have not got to grips with changes in the industry.
‘US carriers seem to be in denial or very slow to respond to the changing environment of low-cost carriers,’ says Kavafian. ‘Here in Canada, we recently had a bankruptcy restructuring of Air Canada that, just like in the US, isn’t for the better as it doesn’t reduce capacity. However, it’s made Air Canada more competitive against low-cost carriers such as WestJet. Air Canada was able to reduce its costs by $2 bn; over the long term, that’s good for the industry.’
Carpi labels overcapacity ‘the biggest industry issue overall.’ The result of overcapacity has been extremely low fares, something that pleases consumers but not the airlines. ‘These fares translate into a revenue problem, which is coupled with high fuel costs,’ explains Carpi. ‘Today, 25 percent of US capacity is operating in or close to bankruptcy.’
For Stinnes, keeping the airlines alive through bankruptcy protection is precisely the problem. ‘Most people believe that if the US would let the market clear out by allowing some of the airlines to go out of business, the US market would take care of itself,’ he states. ‘The intervention is keeping in business people who are running their operations for cash rather than long-term profit.’
The situation remains so critical in the US that some are questioning whether deregulation was the right decision. It’s not exactly in step with the direction elsewhere, and certainly not what successful airlines like JetBlue are hoping for. But Carpi disagrees. ‘Deregulation works, it’s the future of this industry,’ she says. ‘Carriers will have to become more competitive and focus on differentiating their product, which is something we’ve been successful at doing. Ultimately there has to be a rationalization of the capacity in the US.’
JetBlue has gone so far as to change the way it approaches IR. Carpi is not just telling investors an airline story, for example. ‘We’re in the customer service business, and we just happen to fly planes,’ she says. ‘Our investors know we have a competitive advantage that comes from our commitment to our constituents, from employees to customers. That brand promise is a key message for investors. So we talk about our values with investors, and we find investors who connect with that message.’
