“Airline service is getting worse because more people are flying at a time when carriers have slashed their work forces,” according to Dean Headley, a co-author of a study on the airline industry and associate professor at Wichita State University.
According to Headley, the U.S. airline system is being taxed because more planes and more people are flying than at any time since the 9/11 terrorist attacks. However, the aviation infrastructure runways, airport slots, and air traffic control systems is essentially the same as it was in the delay-plagued era just before the terrorist attacks, while employment at the seven largest carriers was down 12% in January 2004 compared to a year earlier. Ontime performance worsened in 2004, with 78.3% of flights arriving on time, down from 82% in 2003. (That 78% of flights arrived on time in 2004 surprised me, since on a recent trip to the United States not a single flight I boarded was on time.)
In 2004, complaints about airline services increased by 27%, a far higher increase than the 3.3% growth in passengers. Moreover, according to Homeland Security’s acting inspector general, Richard Skinner, the ability of the Transportation Security Administration (TSA) screeners “to stop prohibited items from being carried through the sterile areas of the airports fared no better than the performance of screeners prior to September 11, 2001”, despite the government having taken over the task at about 450 airports in early 2002 and hired 45,000 workers.
In the meantime, U.S. airlines have piled up huge losses and the market capitalization of AMR Corp. has declined to $1.6 billion, Delta to $509 million, UAL to $116 million, and Northwest to $486 million. By comparison, Southwest Airlines has a market capitalization of $11.5 billion and Jet Blue of $2 billion, while FedEx alone has, at $26 billion, a larger market value than all of the U.S. passenger carriers combined!
Across the Pacific Ocean, in India, an airline started in 1993 by a former travel agent, Mr. Naresh Goyal, recently went public, commanding a 45% share of the Indian airline market and having, following its IPO, a market value of $2.8 billion. Jet Airways is known for its impeccable service standards and punctual arrivals and departures, but it will face increasing competition from a dozen or so new low-cost airlines that have either already begun servicing or will soon start to service the Indian passenger airline market, which is growing by approximately 25% per annum.
In 2004 it had “only” 15 million passengers; however, it is expected to grow to 50 million passengers in five years’ time. What is remarkable is that India’s Jet Airways, with a market capitalization of $2.8 billion, has only 42 aircrafts, compared to 71 for America’s Jet Blue and more than 1,000 for AMR Corp., the world’s largest carrier, with revenues in 2004 of US$18.6 billion.
Now, I am not suggesting to invest in Jet Airways at its current price, it is probably overvalued but it is nevertheless interesting that, in Asia, airlines seem to manage not only to make money, but also to provide excellent services, while in the United States, the airline industry has not only lost billions of dollars in the last few years, but also offers poor services.
Not that conditions are far better in Europe: Air France is by far the world’s worst airline, while the once proud Swissair, which in the 1960s and 1970s was frequently voted as the world’s best airline, has been taken over (fortunately) by Germany’s Lufthansa following massive losses caused by its management’s complete incompetence. Still, of the ten airports that were voted the best in the world, Europe managed to have three, with Munich fourth, Amsterdam eighth, and Copenhagen ninth. All the other ranks among the best ten airports were won by Asian airports. Not surprisingly, our great service economy the United States had none!
I recently travelled to Wuhan, a large city in China and an important transportation and distribution hub. It is located about halfway between Hong Kong and Beijing on the Yangtze River and is worth a visit for its museum, which houses the tomb of Marquis Yi of Zeng, discovered in 1977, which contained not only 21 female consorts, but also an assortment of weapons, armors, and an L-shaped three-tiered bell rack made from massive lacquered wooden beams, capped and reinforced by bronze sheaths and supported by bronze figures on domed bases. Sixty-four bronze bells on the rack were in graduated sizes, and most still hung on bronze suspension armatures attached to the rack. The remarkable state of preservation of the bells, and the wealth of information supplied by the inscriptions on them, have surprised musicologists from around the world.
So, if you find yourself in Wuhan, which is not a particularly nice city, go and visit its museum and the 64 well-displayed bells of Marquis Yi, which are not only impressive for their age (over 2,400 years old), but are also highly interesting from a musicology point of view.
From Wuhan, I flew to Shenzhen, which lies adjacent to Hong Kong’s New Territories. I hadn’t been to Shenzhen’s airport for 20 years, when it had only a landing strip and a shed as a terminal. Today, it is an impressive airport with heavy traffic to numerous Chinese cities. It has around 15 flights daily to Beijing and more than 20 flights daily to Shanghai not bad, given that 20 years ago it had just a few flights a week, and considering that Hong Kong Airport has around the same number of daily flights to Beijing and just a few more to Shanghai.
In Asia, air traffic is exploding everywhere, with the number of passengers growing at 2025% annual rates in countries such as China and India, and with numerous new airports taking the bulk of the traffic increase. Last year, Guangzhou opened a state-of-the-art international airport (Baiyun Airport), which is designed to become the air transport hub for the Pearl River Delta (certainly for cargo) and southern China, and connecting with Southeast Asia. Baiyun Airport’s terminal can currently accommodate 25 million passengers a year with its two runways and can handle the world’s third-highest cargo capacity. Once the second phase of Baiyun Airport is completed by 2010, the airport will be able to handle 80 million passengers! There is little doubt that both the Shenzhen and Baiyun airports will be mighty competitors for Hong Kong Airport especially as far as cargo is concerned.
Currently, Hong Kong is the world’s largest handler of international cargo, with 80% of that freight coming from the Pearl River Delta, which produces about a third of China’s exports. (In 2004, China surpassed Japan as the world’s third-largest exporter.) However, with a rapidly improving infrastructure in China, I would expect the share of Hong Kong’s international cargo originating from southern China to decline meaningfully as both Shenzhen and Baiyun gain market share. This doesn’t necessarily mean that traffic at Hong Kong Airport will decline, because while the overall Asian passenger and cargo market is expanding rapidly, it is unlikely to grow significantly. This is already the case for the Hong Kong port, which has lost market share to ports located in southern China.
Still, the point I really wish to make is that in Asia, markets for goods and services are expanding rapidly because they are not saturated and they are becoming more and more affordable to the masses, as a result of personal income gains and price declines arising from huge capital investments. (In 2004, China added steel-producing capacities of 51.4 million tons, which is almost equal to the combined output of Brazil and India.) The problem in the United States and in Western Europe is that markets are largely saturated and real incomes are hardly growing, which has several consequences in terms of economic growth and the profitability of the corporate sector.
June 6, 2005
Dr. Marc Faber [send him mail] is the author of Tomorrow’s Gold. This first appeared on Bill Bonner’s Daily Reckoning.