View from the Brink: Perspective on the State of Canada's Aviation Industry

Canadian Journal of Administrative Sciences, Dec 2003 by Miller, Bernie

Thank you, Dean Miciak.

Good afternoon, ladies and gentlemen.

To those of you who flew into Halifax from across the country, I hope you enjoyed your trip through our airport. We're very proud of our airport. As you may have noticed, like most airports these days, it is a work in progress. When you travel back, I encourage you to take a look around the facility and take in some of the improvements. And please buy something, we need the revenue.

In the last two years, the global airline industry has lost approximately $25 billion US. According to Giovanni Bisingani, the Director General of the International Air Transport Association (IATA), world airlines today have a combined debt of over $100 billion US and a market capitalization of only $4 billion. These are staggering numbers with more zeros than most can comprehend. In fact, according to the International Air Transport Association, the industry lost more in 2001 and 2002 than it made in profits over the combined previous 45 years. The western world's largest airline, United Airlines, now in Chapter 11, does not have enough cash to pay for even one Boeing 747. In that same period, approximately 400,000 aviation workers have lost their jobs. That's a lot of people, a lot of skilled and talented people. In fact, it's more than the entire population of Greater Halifax.

In a report released in March 2003, the Air Transport Association called the situation facing the industry today, "The Perfect Economic Storm."

Interestingly, this analogy is borrowed from a phenomenon that occurred off the coast of Nova Scotia in October 1991. Three weather systems collided off our shores creating waves over 100 feet high and a raging storm unprecedented in recorded history. Its unique and terrible fury prompted meteorologists to dub it "The Perfect Storm." Most of you are probably familiar with Sebastian lunger's book and the subsequent movie by the same title.

I think the analogy is a good one. By early 2001, the technology sector had imploded and the economy was showing clear signs of weakening. As the economy began to slow down, people did what they always dothey cut back on their business and holiday travel.

That in itself was enough to send airline revenues sharply downward, stall growth, and seriously erode their already paper-thin margins. For the second quarter of 2001, airlines recorded the steepest drop in unit revenues in two decades. This was the first front of the storm.

The second front descended with deadly precision on September 11, 2001. The world watched in horror as a network of international terrorists used commercial aircraft as weapons of mass destruction. The immediate impacts ... were beyond anything we had seen in aviation history.

Beyond the devastating human toll and economic impact of those events, what is still not fully understood, I think, is the psychological impact, particularly on Americans. The psychology of fear and insecurity. Not only did this dramatically reduce passenger traffic, its impact brought with it profound changes in aviation security policy and in U.S. foreign policy. It brought enormous hikes in insurance and security costs. And, it brought the storm's third front.

By early 2003, the mounting international tensions and uncertainty around international policy toward Iraq played further havoc with airline costs. Fuel prices escalated dramatically, markets fell and, again, people just stopped flying, particularly on trans-border and international routes.

It was then, when the industry was most vulnerable, that the fourth front descended with particular ferocity in Asia and in Canada. The name of this storm was Severe Acute Respiratory Syndrome-SARS.

This global epidemic struck Toronto particularly hard-right at the heart of Canada's economy and its principal aviation hub. Air Canada estimates that during the month of April it lost approximately $125 million due to the SARS epidemic. And even as it seemed that SARS was behind us and the city was beginning to rally, a new wave of infection spread indicating that the full impacts of this front have not yet been realized. In May, Air Canada's passenger traffic fell by 26.4%, causing a further loss during May of over $200 million. Air Canada President Robert Milton is now stating that operating revenues this year will be more than $1 billion lower than they were in 2002, mostly due to the impact of SARS. The airlines most negatively affected in the world were Cathay Pacific Airlines headquartered in Hong Kong, Singapore Airlines, and Air Canada.

This final blow was enough to tip the precarious balance for Air Canada and, in April, it filed for bankruptcy protection under the Companies Creditors' Arrangement Act.

What made this Perfect Storm particularly devastating was its timing. It arrived at a time when consumers were turning their backs on the traditional network carriers and flocking to low-fare alternatives. And in Canada, it came at a time when government air transportation policy was in serious disrepair.