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| Airline margins are tightening. Capacity management is crucial
(Source: Airline World and Clay Bennett)
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Airlines around the world are feeling the squeeze. The fierce price-based competition, the GFC, rising fuel prices, and greater uncertainty in travel demands have increased pressure on airline bottom lines. When times are tight, airlines focus heavily on capacity management. In part, this is focused on 'getting bums on seats'. Increasingly, as a 2012 Economist article highlights, airline are also increasingly giving thought to how they should best source their aircraft fleet.
Essentially the question airlines confront on the matter of sourcing aircraft is should they buy or rent? Traditionally, airlines have owned their aircraft. This is fine in a steady or growing travel market. But ownership ties up resources and commits expenditure for long periods of time What happens if the market turns or demand fluctuates? What if demand in new routes is relatively untested? What if the airline is new, or otherwise lacks sufficient financial stability to responsibly commit to the long term financial demands of ownership? Such questions are particularly important in the relatively uncertain market conditions airlines now face.
The market response, according to The Economist article (which can be read here) has been the rise of "airlines with no passengers" - aircraft leasing companies. Given current market conditions, airlines are warming to this development - over a third of the world's airline fleet is now leased, according to the article. This brings added flexibility to the cost management of a key airline resource (their fleet of aircraft). Leases can be made for desired durations, brought in and removed as needed. Responsibility for the cost management of unused aircraft falls back to the lessor.
However, an airline's decision to own or lease, and by how much, is not always an easy decision. There are likely to be a host of positive and negative considerations to take into account (both financial and non-financial). Some are briefly outlined in the article. Can you think of others? Do you think it is likely to reach a point where most aircraft are leased? Do you have any other comments on this industry development? Let me know your thoughts.
Essentially the question airlines confront on the matter of sourcing aircraft is should they buy or rent? Traditionally, airlines have owned their aircraft. This is fine in a steady or growing travel market. But ownership ties up resources and commits expenditure for long periods of time What happens if the market turns or demand fluctuates? What if demand in new routes is relatively untested? What if the airline is new, or otherwise lacks sufficient financial stability to responsibly commit to the long term financial demands of ownership? Such questions are particularly important in the relatively uncertain market conditions airlines now face.
The market response, according to The Economist article (which can be read here) has been the rise of "airlines with no passengers" - aircraft leasing companies. Given current market conditions, airlines are warming to this development - over a third of the world's airline fleet is now leased, according to the article. This brings added flexibility to the cost management of a key airline resource (their fleet of aircraft). Leases can be made for desired durations, brought in and removed as needed. Responsibility for the cost management of unused aircraft falls back to the lessor.
However, an airline's decision to own or lease, and by how much, is not always an easy decision. There are likely to be a host of positive and negative considerations to take into account (both financial and non-financial). Some are briefly outlined in the article. Can you think of others? Do you think it is likely to reach a point where most aircraft are leased? Do you have any other comments on this industry development? Let me know your thoughts.
