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Developments in the global aviation industry during 2008 undoubtedly will impact how many companies think about international travel. While the challenges of fuel costs, climate change and congested infrastructure force airlines to adapt their operations, healthy demand for long-haul trips will keep suppliers focused on serving business customers. New services, partnerships and liberalized regulatory frameworks should help them do so.
One of the more significant developments for global business travel will occur in March, when a new aviation agreement between the United States and Europe officially comes into force. Since the "Open Skies" deal was signed last year, airlines on both sides have been readying new services and snatching up slots at London Heathrow Airport.
Currently, only American Airlines, British Airways, United Airlines and Virgin Atlantic Airways operate nonstop service to the U.S. from Heathrow. Starting in March, that list--including new entrants and their codeshare partners--will grow to include Air France, Continental Airlines, KLM Royal Dutch Airlines, Northwest Airlines, US Airways and others.
Indicating just how sought after Heathrow slots are, Alitalia in December said it would sell three pairs for €92 million (US$135 million).
"Open Skies is good news for most airlines and travelers," according to a statement by HRG CEO David Radcliffe. "It should increase travel options for our corporate travel customers, and greater competition is likely to generate lower fares--particularly welcome in the current price-sensitive climate."
Radcliffe also noted several side effects from Open Skies, including more congestion at Heathrow (which could persuade carriers to add more international services at regional U.K. airports) and "a wave of consolidation as airlines scramble to secure prime slots."
Additional consolidation in Europe appears likely anyway, as Air France--parent of Dutch KLM--once again is poised to take a stake in a national carrier. The Italian government in December named Air France as the party with which Alitalia will have "exclusive talks" regarding a merger.
In a smaller-scale move, Air France-KLM agreed to purchase VLM Airlines, a European regional airline operating 19 aircraft on routes primarily to and from London City Airport. VLM would complement CityJet, an Air France subsidiary also based at London City Airport.
Meanwhile, Germany's Lufthansa raised eyebrows in December when it agreed to buy 19 percent of U.S. carrier JetBlue Airways for about $300 million. The companies said they "look forward to exploring potential opportunities for further cooperation for the benefit of their customers." JP Morgan Securities analyst Jamie Baker described the announced transaction "simply as a liquidity event," but did not rule out a codeshare deal or antitrust immunity request.
Despite the new U.S.-Europe Open Skies deal, significant transatlantic aviation mergers are not likely in the near term. But within the United States, airlines continue to explore possible consolidation, especially given the crippling price of oil. Should any pair of major U.S. carriers announce a tie-up, it likely would trigger more such deals and significantly shake up global competition.
Meanwhile, the three major airline alliances in 2008 will seek regulatory approval to further integrate the activities of existing members and will add new members from emerging markets. Star Alliance, for example, in December officially welcomed Air China and Shanghai Airlines, and invited Air India and EgyptAir to join its network. Both SkyTeam (led by Air France and Delta)and Oneworld (anchored by American Airlines and British Airways) have antitrust immunity applications pending at the U.S. Department of Transportation.
U.S. airlines, in particular, during 2008 will embark on numerous international service launches, generally in conjunction with their alliance partners. While they retrench in the domestic market, carriers will expand elsewhere as a means to tap into strong overall demand, attract higher-yielding business passengers and improve their financial stability.
"The world economy, led by China, India and other developing economies, is growing at twice the rate of the U.S. economy," according to a recent forecast issued by Air Transport Association chief economist John Heimlich. "In 2008, U.S. carriers will seek to capitalize on projected growth in these regions, taking advantage of the easing of restrictions of air service between the United States and China, India and the European Union."
Heimlich said strong international revenues this year would help counter rising fuel costs and propel the U.S. industry to a net profit of between $3.5 billion and $4.5 billion.
Still, fuel will continue to be a primary topic this year, both in the context of airline financial viability and the debate over greenhouse gas emissions. To make their operations less detrimental to the environment, airlines will focus on using newer planes where possible, making passenger terminals and ground operations more efficient, scrutinizing aircraft weights and testing alternative and hybrid fuels. They also increasingly will partner with nonprofit groups on green initiatives and provide emissions calculations to corporate clients keen on understanding their own and their suppliers' carbon footprints.
Yet, the airline industry generally will oppose new green taxes levied on carriers or their passengers and will find itself in the middle of global debates over emission cap-and-trade programs.
In December, E.U. environmental ministers approved the inclusion of aviation in Europe's Emissions Trading Scheme. Details of the controversial proposals still need to be worked out with national governments and European Parliament, and the airline industry likely will continue to press for self-regulation.
"Since aviation worldwide contributes just 2 percent of global carbon dioxide, aviation emissions trading has the potential to influence no more than a tiny fraction of the total," said Ulrich Schulte-Strathaus, secretary general of the Association of European Airlines. "Further investments into even more efficient engines, aircraft and biofuels are crucial for further reductions of emissions, and that requires funds. An emissions trading scheme should not deplete this competitive low-margin industry of those funds ... And it remains unclear how the European Union can ensure that all carriers globally will be covered by emissions trading without discriminating against European airlines."
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