Richard Branson said overnight that he couldn’t guarantee the survival of Virgin Atlantic, which is 51% owned by his family company, if a revenue sharing and price fixing alliance was allowed between American Airlines and British Airways.
Branson has made similar warnings for the many years, even before the oneworld alliance came along in 1998 and supposedly linked founding partners British Airways, American Airlines and Qantas in a marketing alliance to counter the Star Alliance.
But this time around Branson’s comment are being taken especially seriously, because the global financial crisis is pushing many carriers into such deep losses that they may collapse. This shadow is deepened by the inability of airlines, even very good airlines, to bank on being able to refinance loans that expire in the short to medium term.
This makes Branson stand out for being forthright about the stark reality that some airlines are most likely going to go broke. He is particularly concerned that if the US approves cartel immunity for an arrangement where American Airlines and British Airways can fix fares jointly and share revenue it will create a juggernaut that could control enough market share, and airport slots, to extinguish trans Atlantic competition.
His views are shared by most of the other competitors to American and BA, although the Air France/KLM entity and Lufthansa, which has controlling or highly influential stakes in a wide range of other carriers are both more than capable of taking on AA+BA.
The logic of Branson’s stance is that failure through market forces is acceptable, but failure caused by anti-competitive stich-ups supported by government interventions to create legal exemptions that favour selected carriers is much more to the disadvantage of consumers, and more broadly to trade and commerce.
Branson’s comments point to the real crisis in aviation rather than the persistently wilful lies being circulated about the survival of Virgin Blue, and even in some instances Qantas, in what on the global stage are irrelevant events in Australia.
This week Crikey was tipped off, maliciously, that Virgin Blue flights were running late out of the Gold Coast because the armoured car carrying the cash to pay for fuel was held up in traffic. Which is complete nonsense.
The Australian carriers look like clear survivors, but by and large the same cannot be so readily assumed for the much more severely exposed airline industry throughout Asia, Europe and North America.
At this stage Qantas expects to make a loss in the half year to 30 June. Virgin Blue expects to make a loss in the full year to 30 June. Neither appear to be headed into ruinous loss, with Virgin Blue appearing to do rather well in the domestic market to offset to some extent the baptismal blood being spilt over its ill time launch of V Australia.
The main offshore players in Australia, Singapore Airlines, Cathay Pacific and Emirates have reported sharp reversals of fortune, but they aren’t, so far, showing any figures that would put them at risk of failure. However Air New Zealand is in something of a vice as Jetstar and Pacific Blue run amok in its domestic market.
Overseas, the debate about how the airlines will, or should, respond to the financial crisis has moved beyond the dim-witted platitudes about how consolidation is the inevitable answer to the more brutal inevitable prospect of market exits.
Consolidations require money, and usually fail. There is no money for such purposes, nor leveraged equity deals, at least not on anything like the scale of the failed private equity bid for Qantas. And there will be market exits, and as every such fleet is rendered useless junk in some desert graveyard for jets, the true book value of active fleets will approach zero.
Until passenger volumes and yields return, how can realistic calculations be made of the investment value of airlines?
Another real thorn in the side for American Airlines and British Airways this week in addition to Branson is Robert Crandall, who was CEO of AA when it aggressively pursued its founding role in the oneworld alliance.
Crandall disowned consolidation and marketing alliances at a major air cargo conference.
“These days, the solution de jour seems to be consolidation, via either mergers or international alliances.
“Many voices clamour that it is both inevitable and imperative,” he said.
“But …though alliances have not been a major factor in the cargo business, they have had the effect of limiting competition in international passenger markets.
“Alliances add overhead to operational costs and offer no functionality outside the interline system of years ago.”
Coming from an architect of oneworld, that is pretty devastating.
However Crandall was voicing something that other airline executives involved in alliances have been saying in club for some time. That given their time over, they wouldhave refused participation in a global alliance and all the cost and waste of time involved.
The alternative, of raw competition, looks much better in hindsight, while mergers that would struggle to deal with the complexities of dual listed structures and the policy interventions by governments with differing expectations of their flag carriers face too many barriers.
As did the short lived QF+BA plan late last year, which was politically impossible and in terms of practicable benefits, nothing but daft.
What Branson, and arch foe Crandall, and others seem to anticipate is a process of rationalisation rather than consolidation, in which very weak airlines disappear, and less weakened airlines take over their space, and conserve their cash until better times return.
