5 Lessons Aviation Learned in 2014

2014 was a mixed year for the aviation industry. Three very public disasters left the industry in shock. At the same time Brent Crude and Jet A1 prices dropped dramatically, and technological advances continued to provide challenges. We take a look back at some of the major themes of the year and what lessons might be learned going into 2015…

1. The aviation industry must improve its ability to deliver new technology (particularly aircraft tracking)

Aircraft Contrail

Image Copyright tsuna72

It is unbelievable to think that as this article was in editing that the aviation industry would be hit with a second high profile missing aircraft story in 2014.

The tragic events of MH370 and now QZ8501 have taught aviation surely one of the biggest lessons of recent times: That technological advances in some areas simply aren’t making it into the industry quick enough.

Although technology moves along at incredible paces, aviation is often several steps behind as safety regulations put barriers to quick progression.

Whilst the effects of MH370 were still being felt, IATA announced in April a special task force called the which includes representatives from IATA and ICAO as well as a range of international air navigation organisations and airframe manufacturers.

The role of the ATTF is to identify options for global tracking of aircraft. They will assess various products and services to see how they will be used to implement global flight tracking and answer the questions of many. Why isn’t it easier to find black boxes? Or why is information from all airline black boxes not streamed in real time to engineers on the ground?

However there may be greater challenges ahead, as this may reinforce the need for all aircraft to be tracked. Jonathan Sinnatt, Director of Corporate Communications of Inmarsat, the UK-based satellite company which determined Flight MH370’s approximate path after disappearing from radar said that “Today, continual tracking of aircraft via satellite communications is only mandatory in certain regions of the world and we believe this should immediately be extended to all remote and oceanic routes.”

It is not just missing aircraft where technological questions remain. The Boeing 787’s use of lithium ion batteries shows an industry trying to play technological catch-up. These batteries are no stranger to mobile phones and laptop computers and have been understood in these industries for many years. However their introduction into aviation cost the industry millions of pounds in delays, cancelled flights and technical fixes, when fires broke out on board various 787 fleets around the world. This taught us that, whilst certain consumer technologies have long been proven, when applying these to aviation several years or decades later, they are less well understood than in their consumer applications.

2. Bigger is not always better

Airbus A380

Image Copyright Joao Carlos Medau

The future of the Airbus A380 superjumbo looks bleak after Airbus announced they may cut production of the airliner as early as 2018. The manufacturer did not make a single sale to an airline in 2014, its only buyer being a leasing company, and even they have failed to tempt any carriers into taking any of the 20 planes on order.

Though there are a number of high-volume markets where passenger demand is strong, the market demand for a double decker aircraft looks not to be. There is various speculation as to why this could be but several key themes come out:

  1. Passengers prefer to fly directly, point to point;
  2. Major airports are still not prepared. Most of the major airports in Asia, Europe and the US have made investments in infrastructure to support the A380, but no airport in Brazil for example can handle the aircraft, and Mumbai only has one parking stand for the aircraft;
  3. The A380 was launched in the midst of recession and airline leaders were cautious in planning aircraft orders, especially for larger aircraft. This doubtlessly also influenced the decision of airports around the world on whether or not to invest in infrastructure changes to accommodate the aircraft.

Therefore aviation (and mainly Airbus) may have learned a difficult lesson about passenger behaviour and demand for aircraft of such a size. This must surely influence future airport planning decisions as any airport, including hubs, look unlikely to rely with any great confidence on larger aircraft alone to address the issue of capacity management. Instead they must ensure that they have the ability to handle a minimum number of departures.

Our conclusion on the economics of the 380 is a combination of the above:

  • Without a NEO variant, the A380 doesn’t offer really meaningful economies of scale over smaller aircraft. When flying full, it offers airlines an opportunity to generate significant revenues, it needs to fly at high loads all the time to warrant the additional operating cost.
  • The cargo payload capacity is restricted by the amount of hold-space required for two-decks worth of passenger luggage, meaning the ability to generate incremental revenue from freight is low
  • Frequency is king – on high value routes, having more frequent flights leads to greater market capture than flying high capacity/low frequency
  • In the network model, higher frequency leads to better connectivity

3. Aviation’s younger sibling, drones, will bring fresh challenges

Drone and moon

Image Copyright Don McCullough

The rapid rise of Remotely Piloted Aircraft Systems (RPAS), or drones as they are more commonly known, is causing concern amongst industry regulators.

Fortune magazine reports that the drone market is growing 15% to 20% annually and is now estimated to be worth $2.5 billion. The vast increase in use of unmanned aerial vehicles (UAVs) in both commercial and private applications is beginning to highlight issues with airspace control and safety that urgently need addressing.

Only very recently an Airbus A320 was within 20ft of colliding with a drone as it approached London Heathrow airport. The U.K. Airprox Board (UKAB) launched an immediate investigation and gave the incident an A rating – meaning that there had been a “serious risk of collision”.

Whilst the use of drones for private and commercial use is allowed in the U.K. as well as many other countries such as Japan, Australia and France, the U.S. Federal Aviation Administration (FAA) has a blanket ban on all commercial endeavours. It is arguably here where there is the greatest pent up demand for the commercial application of unmanned vehicles, as big tech and parcel companies like Google, Facebook and UPS are already experimenting with drones as delivery vehicles. And with global superpowers like Amazon announcing recently that they will move testing abroad if the FAA does not grant permission to do so in the US, it seems this will only become a bigger and more important topic in 2015 and beyond.

4. The jury is out on the benefits of fuel hedging

Aircraft engine in the sky

Image Copyright Alberto P. Veiga

The price of oil has dropped dramatically in 2014, reducing by more than 40% in the last four months alone. This has led airlines to conduct serious reviews of their hedging strategy.

Ryanair is a case in point. The airline’s hedged fuel price for 2014 is $960 per tonne, however the current price of Brent Crude is $580 per tonne. RDC estimates that across one year of flying at the current price Ryanair will have a cost base that is around $1 billion higher as a result of its’ hedging policy.

Of course, we don’t expect fuel prices to stay this low forever. But then neither can we accurately predict the short to mid-term direction of fuel prices. Whilst the planning benefits are clear, many airlines may be looking at their fuel hedging strategies now wondering whether there is ever a real bottom line benefit to the practice, or if going with the inevitable fluctuations is more profitable and sound in the longer-term.

Manufacturers and aircraft lessors will also be keeping a close eye on hedging strategies. Airlines consider long-term fuel prices when considering fleet expansion options. Aircraft Commerce magazine recently interviewed Nico Buchholz, group fleet management of Deutsche Lufthansa AG, who said that “It is important to consider capital costs alongside the cash operating costs. The lower capital costs of depreciated older aircraft could outweigh the lower cash cost associated with the more efficient new types. Much will depend on long-term fuel prices. The higher the price of fuel, the larger the comparative cost savings of new aircraft.”

In short, if fuel prices stay relatively low over the next few years and decades, then the cost savings of newer aircraft through fuel efficiencies might not then outweigh their purchase price.

This unexpected gift may cut both ways for the industry players. Although good for the short-term P&L, low oil prices mean old airframes become attractive for new start-ups, leading to unwelcome competition for the incumbents. It also throws light on cost items that become a higher proportion of operating cost – labour rates and airport user fees being two that come to mind.

5. Regional airports have struggled, but it’s not all doom and gloom

Runway lights at Glasgow Airport

Image Copyright paddy patterson

In its recent review on state funding of regional airports, the EU concluded that “EU-funded investments in airports produced poor value for money” with only half of the audited airports increasing passenger numbers.

The UK has seen further airport closures in 2014, with Blackpool and Manston airports following on from the closures of Bristol Filton and Plymouth in recent years. These airport closures have been presented with a sense of ‘doom and gloom’, but there are positive signs from elsewhere in Britain and lessons that can be learned for other similar airports within Europe and beyond.

First of all, the reasons for the closures - two are often cited:

  1. The regions where closures have occurred have seen overcapacity.

    Proximity of the closed airports to other local often larger airports has meant that demand simply wasn’t meeting supply of airline flights in the regions. Blackpool for example is only just over an hour’s drive time from Liverpool Airport and Manchester Airport, and Plymouth is an hour’s drive time between Exeter and Newquay airports.

  2. Where there has been demand, under-capacity elsewhere in Britain has stifled the ability and desire for airlines to “feed” these smaller airports.

    For regional services to work there normally has to be an availability of new or minimally served destinations for the region, which could include domestic or intra-continental destinations. Whilst there may be some intra-continental routes available, the major ones will normally be served by the larger competing airports, which leaves a smaller market of regional airports in other countries.

    In the case of the UK, London is the major hub where airlines would want to serve demand from the regional airports. However the lack of capacity in the London region has meant airlines have been cutting regional routes, in favour of higher yielding and denser international destinations.

Elsewhere the picture is a much more positive one. Newquay Cornwall Airport is a prime example of an airport that is finding its feet again after a difficult couple of years. The outlook for the first five months of 2015 is that the airport will be back to the performance of 2012, with more than 7% growth on 2014 seats.

Additionally, the successful sale of Aberdeen, Glasgow and Southampton airports by Heathrow Airport Limited shows there is a continued appetite for regional airports amongst the investor community – although there is little doubt that operating below the one million passenger threshold makes it highly challenging to develop a profitable airport business.

Southend Airport has taken advantage of the overcapacity in London and good ground transport links to become an overflow for the main London airports. Capacity has risen more than 7% in 2014 alone, with faster growth in prior years.

All of these airports have, or are soon, benefitting from a healthy diversity of airlines operating into them, reducing their vulnerability when/if a carrier pulls its services. We are cautiously optimistic for the future of regional airports, though see the lack of supply in the regional airline segment as a key challenge that shows no sign of changing in the short term.

This story originally appeared on the RDC website.

By Adam Kendall / Connect on LinkedIn

Adam Kendall