Any Increases In Taxes, Fees Affect Airlines

Malaysia Airlines (MAS) director of commercial Hugh Noel Dunleavy recently spoke to SunBizabout the challenges facing airlines and why airlines are not happy with any aviation tax or fee increase even though the increases would be passed on to passengers.

Following are excerpts from the interview.

On the state of the global airline industry:

Dunleavy: The airline industry is hypercompetitive, where airlines would not hesitate to get back to full capacity or ramp up capacity in an economic upturn. As soon as the economy picks up, all airlines will think, 'Now is the time for us to put in some capacity into the market to absorb the growing demand and become more profitable'.
But the problem is when you place a plane order today, it could be four or five years down the road before the aircraft arrive. And when these aircraft start arriving, it's just when the world's business cycle start turning down again.
(Thus the constant problem of overcapacity to haunt the airline operators like MAS.)
This puts pressure on yields because every airline will be struggling to fill their aircraft and if the economy is weaker, then fares tend to tumble. That is okay if fuel prices and everything else tumble at the same time. But they don't.
So that's where you get the problem of the airline industry going in cycles, between profit and loss and it's every five to seven years you get this type of business cycle in the industry.
But despite it being a hypercompetitive (industry), because every country or entrepreneur likes to have an airline, you end up with lots of airlines in the world. However, in the entire airline space, from technology companies, distribution companies, aircraft manufacturers, ground handling companies, maintenance and engineering companies, airport operators to catering companies, there is only a few big companies worldwide. Thus, you have got thousands of airlines competing for this number of passengers and in every other component of the (aviation) supply chain, there is limited numbers of competitors.
So, when it comes to where the profit margins get made in the aviation space, it does not historically get made by the airlines themselves. But every other part of the supply chain actually has reasonable margins. In fact, some have very good margins, but they don't have the same level of hyper-competitiveness as the airlines. That's a feature of the airline business/industry. It's not a Malaysian issue, but a worldwide phenomenon.

On how the commercial aviation industry is being perceived:

Dunleavy: Last year, the profit margin that the global aviation industry made from travellers was US$4 per guest. Yet you still see regulatory authorities, government entities and airport authorities raising their fees. For example, a security fee of US$14 was introduced (by the US Department of Homeland Security) for passengers entering the US.
Then, you have the European Union (EU) telling the airlines to participate in Europe's emissions trading scheme (even though) we are the most energy-conscious, fuel-efficient, least carbon polluting industry on the planet. No one would put those fees on the shipping, railway, bus, taxi or trucking industry because people perceive the aviation industry as one where only the rich can travel. But this is no longer true. Today air travel has become much cheaper and can be afforded by a large number of people.
So, it comes back to the challenge of how people and the government perceive the aviation space. They perceive it as a cash cow and I think we are starting to get to a level where we are going to seriously degrade the ability of people to travel because the industry won't be able to support all those costs.

On how such increases in taxes and fees such as the passenger service charge, the EU's carbon emissions tax and air security fees affect airlines:

Dunleavy: When regulatory authorities, government entities and airport authorities raise their fees, people say, "Why do you care? Passengers pay for it." But do you know how much airlines spend on a fleet? People don't realise that air travel is discretionary and is price sensitive. For example, every time we raise ticket prices by US$4-5, demand drops off.
Consumers are very price-conscious. Because I got so many airlines that I compete with, if some of them don't all add the (increase in) fees in, then we can't either. Frequently, I would say, nine times out of 10, we can't add the (extra) fees on to the fares because the market won't accept it. It just takes one or two airlines to refuse to implement the fee, and suddenly, I have to absorb it out of my existing fares.

On how low-cost airlines can absorb the extra costs and why full-service (legacy) airlines like MAS have less room for manoeuvre:

Dunleavy: Some airlines (including low-cost airlines) can (offer low fares as well as absorb increases in aviation taxes or fees) because some may have a lower cost structure than another. We are not all on the same level playing field. When you are 40 years of age and you have built up your brand, image and infrastructure, and people have been with you for years, as you company ages, your costs go up. All those things are just the consequences of growing up.
In comparison, when a brand new airline comes in, they can absorb the extra costs for a while, probably long enough for me to withdraw my services from that market. And by then, they can start increasing their fares because they no longer have any competition (in that particular market).
Whereas if I increase my fares immediately, that would be a challenge. So that's why people tend to think about what happens now. They frequently overlook on who's done the right things when deciding which airlines to fly.
Consumers are also not good economists. Why? That's because a full service carrier like MAS provides hot in-flight meals, entertainment and other complementary services such as internet and communication system all in one price, but consumers see the low fares offered by low-cost carriers only to be charged for add-ons later and they may end up paying the same amount, if not more.

On travellers becoming savvy when purchasing airline tickets:

Dunleavy: Over time, you would expect the consumers to recognize that. And they do. But as each year goes by, particularly in Southeast Asia, India and Asia-Pacific, the size of the middle-class grows and those who can afford to travel is growing very quickly. So while there are people maturing and saying, "Hold on. That wasn't such a good deal afterall. Maybe I am going to give the full service carriers a chance", there is also a big groundswell of new people entering that middle-class who have never done this before.
Because that is growing so quickly as well, that's what is funding and structuring the growth of the low-cost airlines.
You still can react to that as a full-service carrier and we (MAS) are. But we still have a lot of work to do as an airline in terms of making ourselves more efficient and driving cost out of the operations where they don't add value.
For MAS, we will also focus on winning brand loyalty from the rising middle-class in emerging markets.