Air Traffic Management

This post somewhat follows and adds to one of my previous posts: “Air transport and environment, the challenge which will leave the industry dented”

It is an attempt of an answer to a series of questions asked by a colleague of mine:
” What are the changes that transport industries will have to face to use all the opportunities? Why are the transport industries the most touched by the crisis after banks? What did they miss? What are the similarities between Transport industries and banks? Can these common points alone explain the reason of bankruptcy? What needs to be done to reconciliate all the subsystems and make them work in harmony supporting each other rather than being an obstacle to each other? What are the level of innovation required to develop a sustainable transport system? What would be the new transport business? “

In disguise of an answer to some of the questions I’ll note down my observations and opinions mainly focussing on the aviation sub-sector of the transport system then we can see if the reasons describe could be permeated to other sub-sectors:

The main struggle for aviation is that it is operating through an old model:

In rather simple terms, aviation, and more specifically civil aviation commercially transporting passengers and cargo, have historically been created by public funding [with many airlines seeing their birth as state owned enterprises]. There was little consideration to the size of the market in which they had entered. They were also based on a public service and were not operating necessarily for profit. This lead to un-optimised operating costs and a culture which assumed that that is the way it should be done. So the market ended up with too many of them operating at relatively high costs.
Then the crisis started coming alone challenging their business model:

1st crisis: Deregulation: With the progressive deregulation of the market and competition for hubs and airports, airlines found themselves too numerous. This pushed prices down and their profit margins [ticket prices had to fuel their untrimmed operating costs], thinner. Most started to trim their operating costs, some others which could not adapt and which were not helped by public funding [some unjustly were] died.

2nd crisis: Low cost airlines: Then low costs came along. They tapped on a revolutionised business model. Most were start ups and their operational costs and performance were trimmed from the very beginning. They did not have and legacy cultural inertia to change to a trimmed way of making business that the traditional airlines had.  [in my opinion many of the low costs will be suffering the same issues as ‘traditional’ airlines very soon]
The result was even more airlines on the market, making the market very sensitive to tiny fluctuations in business. [E.g. the SARPs crisis in 2002-3] Profit margins continued to decline. Positive business cycles started not being enough to cover for the great losses during down turns.

Consolidation of the market started to happen at a slightly more accelerated pace. However mature consolidation is yet to happen. The need to travel is real. The market exist, but there is too much offer for the same thing and as a consequence the ticket prices are generally lower than whet they should be. [Whether the current market size in reality is sustainable is rather questionable] .
I believe that in the future further consolidation will continue to happen. Some through mergers others through pure bankruptcies.  Governments, especially in Europe, will be less able to intervene because of their bad financial situation. Some [how many?] companies will go. The market will be shared by less, hopefully making it a bit more stable for those remaining. This will probably push ticket prices up.

I have not mentioned the third crisis yet: the cost of fuel. Cost of fuel amounts to around 40% of an airline’s operating costs. So the sensitivity on the profit margin of fuel prices which are highly volatile [$30 in 02, $60 in 05, $80 in 06, $60 in 07, $100+ in 08, $50 in 09, $80 in 10... or a 300% change in 8 years with multiple fluctuations in between]. This trend will continue as, even though engines are becoming more efficient, the fuel part of operating costs will remain significant and fluctuations in oil prices and the upward trend which will continue. The effect will be that the market will have to adapt. Ticket prices will have to go up, probably leading to a lower demand leading to further consolidation.

Crisis 4: Environment. Apart from prices going up, humanity, at least in western societies is becoming more aware of the environmental impact that certain activities have. People are questioning the sustainability of air travel especially where more environmental friendly options exist and could be developed further. To tap into this trend [and as part excuse to this trend] governments may be inclined to further tax aviation, thus accelerating consolidation.

As a conclusion the commercial airline industry has no option but to consolidate.
Airlines need to get into a strong position in order to survive [while others go, thus making the survivors even stronger] This can be done by:

diversifying their investments, thinking mobility,  more than just air travel.

They can also look for niche markets within the industry as one of the problems is that there are too many offering the same.
They can also put pressure to reduce reliance on fossil fuels which inevitably are on upward trend. The industry is quite behind in this area with the first synthetic fuel based on natural gas tests being done by commercial airlines.

I do not necessarily see many similarities with banks. I am not an expert in the area, but I think consolidation is more mature in the banking industry. I think that banks have abused deregulation and under estimated the global effect of the risk they were taking to maximise profits in the shortest terms possible. And this is why they got [the rest of us] into crisis. I think that the airline industry is simply struggling in an environment because its generic business model and the size of the offer do no longer fit deregulation and the aviation’s dependence on what is now becoming a scarce resource.

Hope you find this useful to fuel the debate…

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According to The guardian [http://www.guardian.co.uk/travel/2006/jan/29/theairlineindustry.ecotourism.observerescapesection] and Eurostar as quoted by the site seat61.com, flying from London to Paris one way [including the drive to the airport I guess] produces 122kg of CO2 per passenger [occupancy rate of aircraft unavailable]. A similar journey by train [and where the car journey is shorter, I guess] produces 11kg of CO2 per passenger [again occupancy rate is unknown].

Now, we may argue that the numbers are broad approximations and that the sources are biased. This may well be true, but I think since the differences are so great that we can agree that flying pollutes much [much, much] more than taking the train.

In this blog entry I am trying to think what could be happening in the next decade to aviation, especially in Europe.

So, given that oil will become more expensive and that current aircraft consume and pollute a lot, what should the aviation industry’s strategy be? A strategy which on the one hand guarantees a more environmental friendly approach [something which is not only ethically correct vis-à-vis nature and ourselves but is also quickly becoming a market demand] and on the other maintains a viable industry on its feet?  What should the right strategies be?

Here are three thoughts:

1. Innovate and become more efficient
2. Have a more integral approach to transport
3. Accept reality and bank on the unique non-substitute areas – make positive lobby

1 Innovate and become more efficient [or become extinct]:

In terms of innovation I can see two work areas on which the industry should [is] work[ing]

A. Longer term [but crucial to survival]: Engines and aircraft framework

In terms of engines, aircraft produced today, with a shelf life that easily exceeds 30 years are fossil fuel gulping monsters. These planes will stay with us until 2040. It seems to me that in terms of R&D, when it comes to alternative ways of propulsion, we are significantly behind the changes which lie on the horizon. The first hybrid or non fossil fuel reliant engines will not be produced for a long time still. So we can say that as by today’s situation, we will have to stick with a certain amount of fossil fuel propelled aircraft until 2060.

In terms of the aircraft framework, we are already seeing lighter planes which use less fuel. This is a first step. Research should continue to make aircraft lighter and more aerodynamic…

B. Short to medium term: Efficient routing

Probably in terms of short to medium term improvements, this is where it needs to happen. Flights need to become more direct, with less en route and approach delays. Flights need to be able to climb, descend and cruise at fuel consumption optimised profiles.

Investment here is under way because with the prices of kerosene on the up, the flying community puts substantial pressure on the Air Traffic Management side to reduce its flying costs.

Conclusion on innovation: ATM efficiencies will only come part of the way needed to achieve future sustainability and even the most direct routes with the most consumption efficient profiles will still consume tonnes of litres of fuel. Unless [serious] pressure is put on aviation to innovate on the engines and on the aircraft framework engineering, we will continue to produce fuel gulping aircraft for years to come.

2 Have a more integral approach to transport.

Air transportation is transportation

In reality, rail, air and even road transportation is all about getting people and goods from A to B.

Airline companies should maybe change their strategy and see their business scope enlarged to transportation in general and not solely limited it to air transport. I have not made any research on whether this is already the case, but I would say that in terms of transport, companies should / would start merging strategies. I would say that airlines should start buying shares of rail companies [and vice versa...]

Transport should be seen as one integrated industrial sector and for me the future winners are those which will be able to earn money on a transport offer which adapts to the market’s needs not withstanding the distance to be travelled, the location of the two places A and B and the nature of the persons / goods to be transported.

I think that after the airline industry consolidation we should start seeing a transportation industry consolidation…

3 Accept reality…[whilst making the best out of it]

A successful company would be one which accepts reality and which would bank on its strengths and manages its weaknesses. Talking about Europe, reality is that with a maturing fast train network connecting not only major but also medium sized cities over one given continent and or large countries, inter city flights may likely decline in market demand over the coming years. With oil prices growing and with environmental awareness raising [and with it governmental taxations on carbon emissions] European Inter city flying [at least with destinations under 1200 kms of distance i.e. 4 hours of train city to city] may be out of business some, not too far, a day. [And this includes low cost carriers]

So what would be a good strategy? It surely should not be that of tobacco companies in the past, i.e. denial and counter propaganda [even if some of this will anyway happen]. In my opinion [apart from what has been mentioned above in terms of integrating other means of transport within the company's portfolio] this would be to start lobbying on the strong holds of aviation travel [I call it positive lobbying], where the alternative is not modernly viable with alternative means. This includes all water crossing – e.g. accessing islands and flights between connecting destinations which are further than 2000kms apart.  There companies could lobby that there is a public mission [and an economical one too] of theirs to transport people between these places and that these flights should not be extra penalised by new eco friendly malus taxations, which will continue to come into place in the coming years.  In return airlines would agree to heavier tax shorter flights, implicitly acknowledging that alternatives exist.

This would protect aviation until innovative and sustainable propulsion becomes feasible.

In the mean time pressure should start being put on manufacturers [probably the market will regulate itself through cost of demand versus offer, etc. anyway but being proactive won't hurt] to innovate before fuel will become too expensive anyway to scare more revenue away from airlines [and from the rest of the supply chain].

Finally, [after all this is an ATM blog] what could the repercussions on ATM be?

Well, in terms of Europe, air traffic may plateau earlier than expected. The 2009 crisis showed a severe correction to traffic growth. Traffic will recover from this one and will continue to grow to unprecedented figures, but will this trend resist the next blow? Will it resist, even with all ATM and trajectory improvements, oil prices in excess of $150 a barrel?  Will it resist the growing environmentalist awareness and the market and lobby this is putting over governments who will potentially start heavily taxing all sorts of CO2 consumption [and we know current aircraft consume a lot]?

And when will this plateau potentially happen?

I have a gut feeling that in Europe, given oil prices, environmental awareness, the infrastructure and maturity of alternative means of transportation, mainly fast trains, this could happen in the next ten years.  Which then means that the current mass investments in air traffic management to be able to accommodate tomorrows demands may in fact be the last one before a new flying technology is introduced. One which does not use fossil fuels.

Maybe I may sound too pessimistic, but frankly that is what my glass ball is showing me. [and maybe my blog, if it will still exist then, it will talk about transportation in general ]

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I have recently read a very interesting report on the challenges that leading aviation experts identify for the future of ATM, especially in Europe. The conclusion of this study is that even though these experts have identified significant challenges for the future, they still anticipate long term growth for the industry. [since these experts mainly come from the aviation community one can say that at least the experts still believe in their sector, but one can also say that the report may be biased because it is too close to the experts' home. Anyways, I am also too close to be objective...]

Some of the challenging areas they have identified range from the need for more innovation, to defragmentation of airspace, to management of resources to marketing, security environment and ticket pricing. So as you can see it is very broad. Here are some of the broad lines in some of these areas.

Innovation: The challenge is that the rate of innovation in ATM is slower than that of the flight deck for example. Technology ages, regulation and certification cycles are too long…

Safety: Ensuring safety while increasing complexity of the system is another challenge. To this challenge one needs to add another one: of how to conciliate the safety paradigm with the market led economic regulation one [which many times are at perpendicular angles to each other] Yet another challenge in this area will be to maintain the perception of safety [of course this perception needs to be backed up by the real McCoy] in an ever decreasing risk tolerant society.

Environment: A hygienic factor. Society seems to perceive aviation as a major contributor to environmental issues. This may reduce travel demand in the future because of extra taxes and emissions quotas. Here my comment is that better selling of aviation should be done. Where as it is true that toxic emissions and noise are environment issues caused by aviation, it should not be compared to road transport for example. Whereas train travel is seen as an alternative cleaner way of transport to the car – mass transportation,[ noise and emissions] air travel does not. Yet trains pollute as well.

I would say that the emphasis of this challenge should be more on how to selling the industry to society rather than on the reality of the problem itself [I am thinking of the bonus malus schemes in some countries to incite people to buy cleaner cars- but these cleaner cars are still for individualistic use and pollute.]

Defragmentation: A challenge is to defragment airspace and service provision to achieve efficiencies and economies of scales. A barrier to this is country sovereignty but also a lack of clarity of who is in charge of regulation, specification, system construction, certification etc. on a broader scale.

Human in the system: How to bring the human in the system to meet future roles in an intensely automated system? A second issue is that in the transition between current systems and paradigms and the future concepts there is a severe lack of resources which in turn slow down change, innovation and improvement. In a way this is a paradox. We need more people now to define and implement a system which will be more and more automated then….

Scarcity management: The aviation industry is saturated. Resources [fuel, space, etc] are becoming scarce. The industry needs to learn how to efficiently manage scarcity.

Marketing: The industry tries to identify trends in air travel for the future but seems to lack the understanding of the influencing factors t these trends.

Security – The aviation industry needs to deal with this challenge both at the societal side of things but also in the technologies that ensure the running of the system. These systems may become targets of security threats and of sabotage acts which will have implications on safety and efficiency in the future.

Lastly in my list, ticket prices seem to be at their lowest, meaning that the future trend is upwards.

All these challenges will need to be considered both when running day to day business and while conceiving and implementing changes and improvements. The experts thinks there is still hope…

As I wrote before this is an interesting report. Worth a read and a thought.

Click here for the report

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