Relax - For the world's airlines, the only easy day was yesterday

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Operating a business is tough. No matter the size of the organisation or the sector it operates in, every company faces its own regular challenges.

Many small businesses struggle with cash flow, medium-sized businesses often find it tough to scale, while big businesses struggle to overcome complexity and escalating capital costs.

Running any kind of organisation comes with its own obstacles, but the challenge of operating an airline is, broadly speaking, in a league of its own.

Airlines run assets worth billions of dollars, manage workforces that often involve thousands of employees across the globe, and face the challenge that comes from serving millions of customers every year. While these factors make running an airline a challenging proposition, the biggest test is their exposure to volatile external forces in which they operate.

Over the past year alone, volcanic eruptions in Iceland and Chile; political turmoil in Africa, the Middle East, and Thailand; as well as raging blizzards in London have all caused major flight disruptions, costing airlines millions, and severely impacting the travel plans of passengers the world over.

While natural disasters have a major impact, there is an even greater external factor currently confronting the airline industry - the volatile cost of fuel.

In the last 12 months, the price of aviation fuel has risen by more than 50 per cent.

This dramatic rise has had a pronounced impact on airlines, eroding margins and contributing to the widespread profit downgrades that have been reported by the region's airlines in recent weeks.

Singapore Airlines, one of the world's leading carriers, announced that fuel now accounts for more than half of its total operating costs - an eye opening figure that highlights the magnitude of the issue.

No airline is immune to escalating fuel prices, which may force them to pass on part of the increased cost to passengers to maintain commercial viability.

The addition of fuel surcharges to most base fares has now become common place, causing some dissatisfaction among members of the travelling public who have not been shy to share their frustration.

While these surcharges vary from one airline to the next, it's clear that in the last year, the cost of flying has risen across the board, hitting the wallet of business and leisure travellers alike.

With fuel prices unlikely to drop significantly in the short to medium term, the question remains, what can airlines do to help offset these variable costs?

For many carriers, the answer lies in ancillary services - the process of breaking down the cost of a flight into its component parts.

This could involve selling only the base fare and charging for everything from meals to in-flight entertainment and luggage.

Fare unbundling enables consumers to spend less on airfares by cutting out optional extras, while in parallel, airlines benefit from the additional revenue stream.

Low-cost carriers such as Tiger Airways and AirAsia have been using this mode for some time and with great success, but increasingly, full service carriers are being prompted to examine a similar approach.

Of course, many of the leading airlines in Asia and the Middle East, including Cathay Airways and Emirates to name a few, have built a justifiable reputation on service excellence, making flight unbundling a somewhat problematic proposition.

After all, it is small luxuries like the hot towel provided on Thai Airways flights that help differentiate them from the competition. For these airlines, it's the effective use of technology that's playing an important role in helping to offset higher fuel costs.

For example, carriers like Finnair are taking advantage of the Amadeus Altea Departure Control Flight Management, which ensures planes are loaded with the optimum amount of fuel to complete their journey.

High fuel prices are going to be a challenge for some time, impacting airlines and the entire travel chain as a result.

In this environment, it's the airlines that proactively look for solutions, like the effective use of technology, that will fare best in the new economic reality.

There is no easy fix to solving the challenge of the fuel price hikes. But then again, when it comes to operating an airline, easy isn't really what it's all about.

The writer is president, Amadeus Asia-Pacific.

This article was first published in The Business Times.

For the world's airlines, the only easy day was yesterday

By David Brett, The Business Times | Tue, Sep 13 2011

Creativity and technology are needed to confront challenges.

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