Press Office

Aired: Monday, 9 June, 2008 19:30
Jeff Randall Live

Any quotes used should be credited to Sky News, Jeff Randall Live

JEFF RANDALL:
Good evening, I’m Jeff Randall. Fasten your seat belts, tonight we’re talking air transport. It’s sunny outside and summer’s here but could the soaring cost of fuel ruin the holidays of airline bosses? I’ll speak to one of them, Jim French from Flybe, what’s his view of the industry’s future? I’ll also be asking if there are simply too many airlines with the Sun’s business editor, Ian King. And we’ll try to work out which will be the next carrier to be grounded by bankruptcy.

Sir Freddie Laker famously said that the aviation business was for romantics and dreamers. Well for some airline bosses these days it must seem more like a nightmare. Oil prices are rocketing, with the cost of a barrel hitting a new record of nearly $140 last Friday. That doesn’t just raise the cost of fuelling a plane, it also hits the pockets of holidaymakers. Today I’m going to investigate just what the outlook is for the airline industry in the short and medium term. To help me do it I’m joined by the Chief Executive of an airline that one rival claimed could find it difficult to survive the current shake out, Flybe’s Jim French, thanks for joining us. Jim, IATA the trade body, the airline trade body, said recently that airlines are facing "a perfect storm" and the situation is desperate. Is it really that bad?

JIM FRENCH:
No, it isn’t, Jeff. It really depends on what your business model is and what your airline’s doing. Flybe is a regional airline, our USP is not price, it is actually convenience. We’ve invested over $2 US billion in the last five years, we’ve reduced our fuel consumption per available c/kilometre, the industry standard, by 37%. Fuel is only 25% of our total cost, it’s 45% of Ryanair’s cost. You can hedge your fuel, we have about a 70% nominal hedge in fuel, Ryanair is less than 3% but the other thing is the actual segment of the market you’re serving. You know, over 80% of our flights are on two a day or more, we’ve got a business orientation. Less than 20% are on single day leisure orientation. Now when this discretional spend, the recession some people call it, people’s spending ability is reducing, then it is the leisure, the purely leisure oriented airlines that are going to suffer. Airlines such as Flybe with the smallest proportion of its cost is fuel, with a business orientation, where 80% of our flights also cross water – our passengers use us as a necessity, not because it’s so cheap you have to travel. So I think to make that statement you have to look at the sector you are operating in.

JEFF RANDALL:
What about the cheap flight sector? We have become used to the idea that we can buy flights to Spain for £20, £30. Most people do not think that the oil price is about to fall quickly so is that the end of the cheap flights industry?

JIM FRENCH:
I don't think it’s the end. It is going to be selective, it’s certainly going to impact, there’s no question that people’s pockets are being squeezed so those who rely entirely on the deep discount traffic are certainly, with a combination of massive fuel prices and unhedged fuel prices, certainly have major problems hence why they are ranting about other airlines but there will always be cheap seats, not necessarily for £1, but they will be a lot cheaper than they were twenty years ago so I think what we are going to see is some rebalancing in the market where they will come up a bit but there will still be good discounts. We still offer seats at £30, that’s good value for a one hour flight.

JEFF RANDALL:
I know that chief executives in the airline business have to have a crystal ball at their side and try to work out what the oil price is likely to be, what’s in your budget for next year and the year after that, what do you think oil is likely to stabilise at?

JIM FRENCH:
Well none of us know. Last week I thought it was on the way down again, now as you say, it’s spiked back up again. Our break even is about $170 a barrel so we’ve got some way to go yet before we are in financial challenges so to speak but it is clearly a difficult time for the industry, those airlines operating older equipment particularly are going to have a very difficult time. Those of us who have made the investment in the past, we’re not immune to the circumstances but perhaps we’re better insulated than some others in the market.

JEFF RANDALL:
Some airlines are putting on fuel surcharges, will you be doing that?

JIM FRENCH:
Well the way we conduct it, we’ve increased our revenue by adjusting the fares to cover that. There is no question that if your fuel has gone up by £10 a passenger you have to recover that and that’s the way we’ve operated our revenues. One of the things we’ve done in the last few years is give the customers the choice and say look, you don’t have to pay for a cup of tea if you don’t want one but if you do there’s a price attached and we found that extremely successful, where the customer can make their choice as to what they want to pay for and what they want to buy and I think that has been a significant change in the industry.

JEFF RANDALL:
Willie Walsh, the Chief Executive of British Airways recently reported bumper profits but then told the City, whoops, it could be very much more difficult next year; Michael O’Leary of Ryanair, he said Ryanair may only break even. What about Flybe next year, how are you going to do?

JIM FRENCH:
Well we’re still facing, you know, we’re just about to report the best profits ever for last year, the same as Willie Walsh actually. We are still looking at a profit for next year, a substantial profit, an increase on this year. Obviously this is only two months into the year, let’s see how the year goes but at the moment Jeff, we’re still looking very optimistically to the future.

 

JEFF RANDALL:
Plenty of carriers are going bust though, who’s next in your view?

JIM FRENCH:
I have enough problems working with my team to run Flybe without predicting others but there is no question, there is going to be a lot more consolidation but you know, in the food chain of life, if there is consolidation between Air France and KLM and Alitalia, BMI, British Airways, Lufthansa – whatever happens, there’s always something further down the chain for us and that’s clearly what we’ll be looking at. We recently picked up Aberdeen-Gatwick, Newcastle-Gatwick, big routes for Flybe, routes that give us a boost. In time it may be that we have got to give up routes, if things get bad, and somebody beneath us will feed off us so there is a massive food chain out there and all our job as an independent carrier is to make sure that we’ve there and able to pick up the crumbs off the rich man’s table.

JEFF RANDALL:
And some people would say that you are about to become a rich man, Jim, but we’ll move on to that in a minute. What about airports because that’s been one of the big issues in the aviation industry in recent months, a lot of airlines are complaining about BAA, the airport operator famous for Heathrow and Gatwick of course, but you operate out of Southampton, you are Southampton’s biggest airline I think and Southampton is owned by BAA. Is BAA giving the customers a bad deal, is it ripping off the airlines and passengers?

JIM FRENCH:
I think the Competition Authority could not have been clearer in their guidance, they said you have to have competition and we support that. To have Heathrow, Gatwick, Luton and Southampton in the south east, to have Edinburgh and Glasgow and Aberdeen in Scotland is wrong, it has to be split up, we have to get competition. As an airline we duck and dive, we innovate, every day we are trying something to make sure we give our customers the best value service. Airports need to do the same and I’m looking forward to the day that the airport system is broken up and there is real competition out there.

JEFF RANDALL:
Do you expect that to happen? I know you’d like it to happen but do you think that’s what the government will eventually force through.

JIM FRENCH:
As I said earlier, I think that the clue that the Competition Authority gave us in their mid-term guidance, I think it’s fairly clear which way they’re going.

JEFF RANDALL:
I mentioned that you are about to become a rich man, Jim. Last year you were talking about floating Flybe on the stock market, conditions have changed, can you still do that?

JIM FRENCH:
What we’ve always said, as a business, we have independent shareholders, we are an independent company and we’ll float when the market is ready for us. Clearly at this precise moment it isn’t ready. Our job is to keep the business strong, to keep developing the business, our April figures were up 15%, our bookings for the summer are up 15% on last year and when the time is ready, we’ll go to the market.

JEFF RANDALL:
One of the things you did do recently was to buy from British Airways BA Connect, all its domestic routes, it was quite a big network. BA always struggled to make any money out of that, how is it that BA lost money and yet you can make money?

JIM FRENCH:
British Airways is one of the finest airlines in the world, it is a long haul airline competing in that environment. It is not a regional business. Our speciality in life is a regional business and in this first year of the integration between British Airways Connect and Flybe, we have taken 40 million out the cost base, we’ve replaced all of the 50 seat jets, we’ve done all of the things we did in Flybe four or five years ago, we’re doing it again and this year we’re making a substantial profit again in Flybe.

JEFF RANDALL:

Jim French, thanks for joining us, don’t go away, I’m going to bring in Ian King the business editor of the Sun. Ian, this oil price, in your view is it just a blip or has the game changed forever for airlines?

IAN KING:
Well put it this way, I certainly don’t think that we’re going to see oil prices back to where they were at the tail end of the 1990s which is to say around the ten bucks a barrel level. There’s no doubt that there has been a shift in demand, we’re seeing a huge thirst for oil from countries like China, India, parts of Latin America, the emerging markets, and that has changed the whole dynamics of the oil industry because quite simply, the producers are getting it out of the ground as fast as they can, refineries are working at full pelt and there really just isn’t the capacity to keep up with demand and so that’s a big issue and that’s with us for the long duration, for at least until the oil majors can start putting on more refining capacity.

JEFF RANDALL:
Now three business only airlines have failed recently, Max Jet, Silver Jet and Eos, is that to do with oil or were there other factors to blame?

IAN KING:
Well undoubtedly in the case of Max Jet and Eos it was certainly. I suspect with Silver Jet what happened was the problems that those two had made people look anew at Silver Jet, for example suppliers started demanding money up front and people stopped booking in some cases as well and that is probably what did for them ultimately. 

JEFF RANDALL:
Jim, down there in Exeter, what’s your view on why those business airlines failed? Three of them launched with great expectations two years ago and they’ve all gone, what’s gone wrong there?

JIM FRENCH:
Of course, when things are really booming there is enough room for everybody but the minute things start slowing down it gets tighter and if it is tight when you start up airlines, that’s when you run into trouble. I think also a lot of other airlines are responding to that market and the whole situation is changing. I guess quite honestly the market wasn’t big enough for them, there was a decreasing market and that’s what we’re seeing today.

JEFF RANDALL:
Would you agree with that, Ian, that the market simply wasn’t big enough because you have got so many big players, British Airways, Lufthansa, all those American airlines, chasing the big buck, the big hitting dollars?

IAN KING:
Up to a point but the business market has been reasonably buoyant over the last twelve months, I think as I said with Silver Jet, as soon as you saw the problems at Eos and Max Jet, I think people that might have been tempted to experiment with them just went straight back to the likes of BA and Virgin Atlantic as they did previously.

JEFF RANDALL:
Jim, isn’t the trouble with your industry that if you look through the record books, famously it’s a loss making industry, very few carriers make profits in the long run. If you added up all the efforts of all the airlines over the world since 1945 you get to a whopping loss so in the end it is a bit of a casino and not many people walk out with a profit. 

JIM FRENCH:
Jeff, as you know, I’ve been in the business 35 years and I often call regional aviation the graveyard of aviation. What we’ve learned the last five years since we’ve had to change Flybe and recreate our airline from a disaster into a very successful airline, is to be absolutely focused on what you are doing, understand exactly what you are trying to provide to the customers, make sure the customers understand your business model and just keep an absolute focus. That’s what we’ve found has worked for us and we’re staying as a regional airline, we are now the biggest regional airline in Europe and we are looking to continue that model.

JEFF RANDALL:
All right, Jim, many thanks for joining us from down there in Exeter, much appreciated. Is that right, Ian, this is a business that a few can survive in but in the end so many make losses and they are all propped up by governments?

IAN KING:
Well that’s right. I think people should be quite reassured by what Jim French said in the interview there, that $170 a barrel is their break even point.

JEFF RANDALL:
It’s quite impressive that, isn’t it?

IAN KING:
It is, it shows that their hedging policy has been successful and of course we shouldn’t forget that Ryanair’s boss, Michael O’Leary, was saying last week that if oil got to $150 a barrel and stayed there, he predicted only five airlines across the whole of Europe – Lufthansa I think he mentioned, Air France, Easyjet, Ryanair and BA – he said they would survive and everyone else would go under so Jim French has kind of given the lie to that.

JEFF RANDALL:
We’ll have more on that in the second half of the show, many thanks. This is Jeff Randall Live, coming up on Sky News, flying into the sunset, we’ll assess which carriers might follow Pan Am’s flight path and be permanently grounded.

END OF PART ONE

********

PART TWO

JEFF RANDALL:
That was Flybe’s Jim French but what about his rivals, which of them will still be flying in a year or two? After all, there are a long list of carriers which have folded. Take Laker Airways, Britain’s first cut price airline, which collapsed when the cost of flying its planes became too much. It was followed by the American airline Braniff, the Big Orange, which was squeezed by soaring fuel prices and fierce competition. Sound familiar? Then there was the grand daddy of them all, Pan Am, once the world’s most famous airline, formed in the 1930s but declared bust 17 years ago and even the flying bank, Swissair, was grounded in 2002 after struggling to pay for a heavy spending spree. More recently it has been the specialist business class airlines that have buckled under pressure. Max Jet hoped to appeal to transatlantic big hitters but on Christmas Eve last year it suspended all flights, though it hopes to start up again. ESL Airlines filed for bankruptcy in April blaming the rising cost in fuel and declining consumer spending in Britain and America and of course just ten days ago, Silver Jet ceased operations although its administrators have confirmed that there is an offer to relaunch it. Joining me now from our central London studio is the transport analyst, Douglas McNeill, from Blue Oar Securities, Douglas thanks for joining us, much appreciated. Will these high oil prices really cull many of the weaker airlines or are some of those airline bosses just trying to manage down expectations?

DOUGLAS O’NEILL:
Well the problem here, Jeff, is the airlines have long done their scenario planning, they wondered what they would do if oil ever went to $100 a barrel or more and they also wondered what would happen if there was an economic downturn and they had some contingency plans for both of those eventualities. What they didn’t foresee happening was both of those things occurring at the same time and that’s really at the heart of the problem here. To put it into some sort of context, the rise in the oil price is proving enough to wipe out profits of 10% or more at the operating margin level and not very many of the world’s airlines made profits that were that good in the first place. Last year, 2007, which was a good year for the industry overall, perhaps only a dozen and a half of the world’s airlines made operating profits at that sort of level, the others find themselves staring at a loss this year, possibly next year. That's not quite the same thing as running out of cash of course but the two are related.

JEFF RANDALL:
Isn’t a good thing though, Douglas, that over many years the airline industry has suffered from massive over capacity, far too many carriers, all shored up by bloated governments pumping money in, isn’t this the big opportunity for the industry to get it right, get rid of some of the rubbish and just let the quality remain?

DOUGLAS O’NEILL:
I would agree with that. As you say, the industry has got a long record of delivering disappointing returns on capital, it has long been ripe for consolidation but that hasn’t happened, partly due to government interference as you say, partly also due to intransigence on the part of unions, particularly in America. Interestingly, we are now beginning to see some of that union intransigence in the States give way to a more co-operative attitude so that's paved the way for some M&A activity there and I think that even the power of governments to stave off the effect of the current oil price is limited so you see Alitalia for example soldiering on with the help of the government. The Italian government can prop it up but it can’t make it healthy. It can provide the funds to cover day to day operating losses but it can’t provide the capital to invest in the fleet and keep the airline in a competitive position for the longer term.

JEFF RANDALL:
Douglas, we heard Jim French earlier from Flybe saying that his break even price per barrel of oil is $170, I was astonished by that, I would have thought it would be much lower. What’s the general tipping point for airlines, at what point do they start to make losses?

DOUGLAS O’NEILL:
Well $120 a barrel is probably the limit for the majority of airlines, $170 is unusually high I would say, for British Airways it would be about $120, that is one of the most efficient operators in the industry, it does enjoy economies of scale of course. There will be quite a number of airlines who can’t handle a price even below that level.

JEFF RANDALL:
Wow, so you are talking about a huge swing here, Douglas, because last year BA made whatever it was, £800 million, if the oil price stays where it is you’re saying that BA is going to make a loss this year, is that right?

DOUGLAS O’NEILL:
Yes, possibly. Much depends on what happens on the demand side and the pricing side, this is the great unanswered question in the industry at the moment. It is clear I think that prices are going to have to rise, possibly by quite a bit, possibly by 10-20% and the question is how buoyant demand will prove to be in the face of price rises of that magnitude. My guess is that for the purposes of business travel demand will prove to be more resilient than a lot of people think, on the leisure side I suspect it will be less resilient. I am reasonably optimistic about BA’s chances of making a profit this year, I think their pricing power is good, certainly their Q4 results suggested that, but we will have to wait and see.

JEFF RANDALL:
Douglas McNeill from our Westminster studio, many thanks for joining us, much appreciated. The Sun’s business editor, Ian King, is still with me. There are not many quoted airlines left on the stock market are there, is that because the City has finally had it with airlines, it’s given up?

IAN KING:
Up to a point, they have certainly not given investors a particularly good ride over the last twelve months. BA, Easyjet, Ryanair, their share prices have all fallen by 30-40% over the last twelve months and as Douglas O’Neill mentioned the re, you’ve seen some go to the wall as well. On a pan-European basis investors looking further afield can still invest in the likes of Lufthansa and Air France.

JEFF RANDALL:
Do you think that BA will be a winner in the sense that it will survive, do you share Michael O’Leary’s analysis that we’ll get down to six jumbo carriers and that BA will be one of them?

IAN KING:
It is, as Douglas McNeill mentioned there, it is one of the most efficient operators in the business, they have a very, very loyal customer base particularly in business class, despite some of the recent mishaps, for example T5 which incidentally they have migrated all of their business to over the weekend I think, so that seems to have gone more smoothly this time around. They are a pretty efficient operator and they are doing what some of the others … they are grounding their flights. We’ve seen Ryanair announce last week they are going to ground something like 10% of their fleet, BA will probably do the same. This is all going to be about managing demand and ultimately that is going to result in higher ticket prices for the public. 

JEFF RANDALL:
That quote I read out earlier from Freddie Laker, the business is for romantics and dreamers, why is it that this industry sucks in so much capital? What is it about airlines that people like putting their money in blindly?

IAN KING:
It’s a glamorous industry. In some ways it is not unlike the newspaper business that we’re in, they are great calling cards. If you are very, very rich and there is no shortage of mega rich individuals out there, it is a great thing to be able to present yourself as, the owner of an airline and indeed it is no coincide that a lot of the new wealth that is coming out of the Middle East for example, a lot of it is finding its way into the airline industry and some of the more successful operators in recent years, the likes of Etihad, Emirates, come from that part of the world.

JEFF RANDALL:
It is all a bit of a trophy industry really isn’t it?

IAN KING:
Indeed it is, yes.

JEFF RANDALL:
I think we should all avoid those. Ian King, many thanks for joining us, much appreciated. You've been watching Jeff Randall Live, I’ll be back at the same time next week with more news and views from big business and beyond.