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Creating a stronger airline industry

By CHRIS GRAEME [email protected]

Continental Airlines completed its merger with United Airlines in October 2010. The industry in crisis needs strengthening. Charles Duncan explained how at the American Club in Lisbon recently.

Airlines continue to face difficult times. Pan Am, Eastern, Varig and TWA all had serious financial problems and disappeared. Companies face intense price competition, fuel increases, and are vulnerable to strikes, restrictions on where they can fly, security problems, monopolistic airport taxes not to mention volcanoes and other natural phenomena.

Charles Duncan came up through the ranks of the Continental part of the now merged airline, working mainly in the Asia-Pacific region, both in sales and marketing and as the president of Continental Micronesia.

In October 2010, he assumed the Transatlantic, Middle East and India Region of the merged airline where he will face the daunting task of maximising United’s revenue for the region while maintaining those competitive prices for air fares to the United States.

Despite the challenges, Duncan said it was a “great industry to work in” and a “lot of fun” adding that the company was “really proud of its 15 years service to Portugal” and has “no intention of “pulling back our service to Lisbon”.

He explained that merging had been an industry trend for many years, with one of the first mergers in the Far East in the past decade being Japan Airlines and JAS, followed by Air France and KLM, with a lot of media speculation about further mergers.

“Continental, from 2001 to 2010, was profitable for just three of those 10 years, while United was profitable for just two of that decade,” he said, adding that most airline companies had lost money, wasting a tremendous amount of capital as an industry.

“The idea from mergers is to create a larger and more profitable company that can make a profit year-in, year-out,” he added, saying that there had been multiple mergers going back to the 1930s and even 1920s in the United States.

As a founding member of the Star Alliance, which has 27 carriers including TAP, United is proud to be part of the Alliance group allowing agreements over lounge access, bag follow on and a greater level of cooperation and coordination which is important for passengers.

Star Alliance has about 27% of the total ‘seat miles’ used by the industry, while One World has 16%, meaning that half the world’s capacity is within alliances and the rest is outside.

“We really think that the biggest alliance is the best alliance because we’re able to offer more destinations and services to our customers. An even further level of integration is joint ventures, with Continental and United being venture partners across the Atlantic with Lufthansa and Air Canada.

“Effectively, we pool our revenue and sell jointly, which doesn’t work so well from Lisbon, but from other destinations works well with coordinated pricing with venture partners,” he added.

In Porto, this has relevance since Lufthansa flies from there, so the Alliance can offer a service into Frankfurt and on to Newark and beyond. Air France, Al Italia and Delta have a competing JV as do the IAG Group with American Airlines.

The company started code sharing earlier this year with TAP for domestic points locally and longer destinations which means miles points can be redeemed on flights to the United States and Latin America.

IATA, the international airline industry trade organisation, estimates that for 2011 there will be a US$6.9 billion profit for the industry globally, or 1.2% profit margin. When compared with EDP (over 6% profit margin) or Siemens (5.4%), “we really are a terrible industry from an investment point of view and we’re trying to get back to having reliable, stable earnings,” he explained.

The one big frustration, however, was the price of oil which the industry had no control over, with a single one dollar rise in price capable of wiping out the entire industry’s profits for a year.