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Charles Schlumberger, Principal Air Transport Specialist - The World Bank Group

Charles Schlumberger, Principal Air Transport Specialist - The World Bank Group

I am not at all saying we are running out of oil. We, the World Bank, are not in a position to assess the oil markets, but eventually conventional oil production will become more and more difficult.

» Interview | Tuesday, November 9, 2010 • Air News Times

GQ: What are the biggest challenges facing the airline industry in the next few years?

CS: My personal view is that the biggest challenge we face is rising oil prices. Experts agree that there wasn’t enough investment in upstream production and if the world economy really bounces back strongly, demand will be strong again in China and India.  I have researched and published on the issue of the spike of 2008.  

It was not because of speculation. It was a combination of factors such as production, distribution, storage and low reserves.  It all came together at the price of $147 (per barrel) in July, 2008.  It came down again, but it came down because the economy went into a downturn, and that will repeat again.  

I am not at all saying we are running out of oil.  We, the World Bank, are not in a position to assess the oil markets, but eventually conventional oil production will become more and more difficult.  The easily accessible oil will become difficult over time and that will result in higher and higher oil costs and that will not be smooth.  It will bring volatility, recession, higher costs, etc.  I think the biggest challenge in the medium term is energy.

The environment is also a big issue.  We need a global solution.  If ICAO doesn’t get it right we will see more and more taxes levied in Europe and other parts of the world, and that is also unhealthy for the industry.


GQ: Do you see a global carbon tax superseding the carbon taxes already in place in some countries today – in effect a single solution?

CS: That is a good question.   Do we believe that if there is a global solution, the U.K. and the Germans will give up their taxes?  Germans always have a problem giving up taxes; inventing new ones is easier.  With sufficient pressure they might, yes, but I can’t assess that.


GQ:: I’d like to return to the price of oil.  You said the price of oil is going to go much higher.

CS: It will become volatile.


GQ:: But is it also trending upward?

CS: Yes.


GQ:: What will the airline industry look like five or ten years from now?  How will higher oil prices impact the airline industry?  Can we do anything about that between now and then and what happens if the industry cannot adapt to a world of higher oil prices?

CS: I cannot predict if in the next two, five, ten or 44 years, like IATA says, we will reach a situation where increasing oil production becomes difficult.  I have my own view, but that is not an official view.

I’ll give you some scenarios.  If the oil price stays where it is – if we go easily to 100 million barrels per day for the next 40 years – then the industry will grow.  It will double itself in 20 years.  There will be thousands of people traveling and more airports.  Life will be good.

The other extreme: if in two to five years, the oil price shoots up to $350 and then comes down to $100 and then goes up again, but the trend is higher and higher and higher, we will see a decrease in economic activity for long periods.  With that, we will see a decrease for air travel.  

Now, what will happen, I don’t know, but it is absolutely clear, if we are in a situation where oil is above a certain level where production doesn’t meet demand for a sustained duration – only killing demand at a high price – the industry will not grow.  It will shrink.  But these are scenarios which nobody knows.


GQ:: If you are right, if we go into a very volatile period but trending upward, how can airlines prepare themselves?  How should they deal with that?  What is the best strategy?

CS: I think, first of all, energy efficiency is number one.  Airlines need to have fuel efficient airplanes, need to have fuel efficient procedures, need to have high load factors, etc.  Number two, if you really get in high oil price territory and less people travel, they need to adapt.  What did they do last time?  They parked airplanes in the desert.  They killed capacity.  They need to be very flexible, to quickly adapt.  

If one day in the next 44 years, we have a problem with oil (IATA says in 44 years), others say within the next ten years, but we all agree sometime in the future we cannot rely only on fossil fuels.  We eventually have to find another energy source or airplane design.  We probably need to start working on that 20 years before it happens.  If it happens in 20 years, we have to start now.  If it happens within the next ten years, it is already too late.


GQ: In a presentation you mentioned that bio-fuels are one solution, but we may need to have more solutions?  Where should we be investing?

CS: I published an article on alternative fuels and alternatives and you can find it on under documents and data.  There are various different alternatives.  You have algae based bio-fuels.  Then you have synthetic fuels, which is out of coal, coal to liquid, etc.  I think there will be a variety of different products that will meet the specifications for jet fuel, that will replace fossil fuel, over the coming two decades.  So it is not one, but there are several alternatives.


GQ: With all these possible changes, what is the ideal business model for airlines?  Is there one good business model or multiple optimal business models?

CS: Well, we had government-owned and regulated airlines in the past.  It was a little bit like a national infrastructure.  Most railway systems in the world are not really profitable – not even the good ones.  So the idea that airlines were part of the infrastructure, that they were a cost center like Aeroflot was operated for years, is not new. 

Will it come back?  To answer that question: one day we might not have pilots at all in the airplane.  They may be totally automated.  People would sit in that machine; it would transport you by air somewhere and land.  Will that be a private business or a state owned infrastructure?  I don’t know.  But what I am trying to say with this discussion is, right now we are focusing on the last 30 years – liberalization, privatization, low cost, some legacy carriers go under, some adapt. 

There is one rule in aviation: the best model today is wrong tomorrow.  In the United States, we need to have total coverage.  An airline in America can only make money if it has flights to every state with one or two or three hubs. That was the rule in 1990.  It turns out wrong; the only one making money is Southwest with point to point on markets where they have little competition.  It is a moving target.  There is no ideal business model.  

Low cost carriers have always existed.  Every single airline in the world I can think of started as a low cost carrier.  After the (First World) War in the 1920’s, they started operating airlines with pilots from the military.  They weren’t very well paid, but it was still an expensive operation.  As they age, with pension issues and other increasing expenses, are no longer low cost.  So the invention of low cost is nothing new in the world. That alone is not the perfect business model.


GQ: In that kind of scenario, where everyone started as a low cost airline, do you think airlines can reinvent themselves to become a low cost again?  Despite the difficulties of operating a profitable business in this industry we still see many new players entering the market.  Do you think this will continue?

CS: You see, what does low cost mean?  It means you pay less for the transportation, but you also get less service.  It is at the end the question of what does the customer want?  We have educated the customer that flying is practically free.  Remember when we were young?  Nobody thought it should be cheap.  Flying, in fact, is expensive.  It is dangerous.  People get killed.  It is an adventure.  It is something we don’t do often.  Traveling from the United States to Europe 20 or 30 years ago, that was an exception, you flew.  

Today we don’t even think.  Oh, I have a wedding in New York.  I’ll take a flight.  But the customer’s focus on safety and the special experience flying in an airplane has completely shifted to “flying has to be free”.  I accept paying $100 for a taxi to go the airport.  I accept everything, but I don’t want to pay for transportation – that has to be cheap.  That is something that came up with low cost carriers: value for money. 

Also, the power of the Internet will always be a question. And yes, the markets will explode if traveling by airline is free.  But somewhere the airline needs to make money.  My big concern is one day the financial markets will say “hey, enough is enough”.  One day, they won’t be able, because they live from shareholders; they live through equity.  It is sexy.  It is interesting to invest in an airline even though everybody knows you don’t make money in it. That is risky.


GQ: Do you think airlines will ever earn the cost of capital?

CS: All big transport infrastructure components – ship lines, railways, even the Euro Tunnel and the Suez Canal all went bankrupt– they all had problems.  I think in modern history – the last 100 years – has proven that the transportation infrastructure hardly makes money.  You always prove the rule with the exception.  The industry can be profitable because the exception is profitable, and that is the wrong approach.

As long as shareholders are undisciplined and put their money in airlines that only lose money, we will continue to have this strange situation where the industry doesn’t make money.  So I am not too optimistic.  But what will it lead to?  There are three possibilities.  One is the status quo.  That means we continue to have cheap money and finance the airlines.  Number two is that they actually become profitable.  They increase their revenue, etc. Number three is that the system doesn’t work anymore and it falls back to nationalization, state owned infrastructure. Those are the three possibilities, which one will happen, nobody knows.


GQ:  There has been a lot of consolidation lately. Do you think consolidation will continue?  Some people predict there will only be 20 major airlines worldwide.  What do you see?

CS: I said, every rule is wrong tomorrow in aviation.  You will have constant consolidation and constant new startups. The DOT (U.S. Department of Transportation) told me last year they had applications for 15 new airlines in the United States.  You will always have new airlines and you always have consolidation.  It is like nature.  I think we will see worldwide consolidation of legacy carriers, and at the same time, you have new ones popping up.  That will continue.


GQ: What about open skies?  Will liberalization really happen and will it be the United States version of open skies?

CS: This is a good question.  I wrote a book about liberalization of Africa.  Liberalization is an issue of political will.  It is absolutely flabbergasting in the United States, how the misinformed Congress is against liberalization of the ownership clause.  It is trendy.  Oh, the foreigners will own our airline.  Foreigners can own parts of our defense industry or nuclear power resources,

I believe if we get into big problems with energy and the government is asked to bail out our airlines, support them and fund them, it will be difficult to liberalize more.  The industry wants liberalization and the most important is ownership liberalization.  I hope it happens.  We have made some progress, but with certain challenges facing the industry, we may experience some push back.


GQ: What role does the World Bank play?  What role should the World Bank play going forward in the aviation industry?

CS: The World Bank finances projects for the economic development of developing countries.  Basically, we have about a $1.4 billion portfolio.  Approximately 1% of the World Bank’s portfolio is aviation.  It is very small.  We are a completely independent, neutral source of quality information.  We want to be on the edge of technology and policy.  We want to advise our countries how to do the right thing.  For instance, take bio-fuels.  We are very careful right now on bio-fuels because there are a lot of implications in water, food, etc, so we are not rushing in.  We really want to look at sustainability.

It is not financing.  We give our client countries technical advice and guidance. We believe that air transport is a catalyst for economic development and therefore we support transport projects.


GQ: Do you have any special message for the airline industry?

CS: In a discussion earlier today, I was struck by the sentence: “The ash cloud (volcano eruption in Iceland) impact was a missed opportunity for the industry.”  We need to tell the public how dependent the economic development of the world is on aviation.  We need to take care of this fragile industry, but we need to communicate.  I think we are spoiled by shareholders who provide all this funding and we are not even profitable and then they slap us with taxes and restrictions and bad reputations – specifically in Europe – that is not deserved.

I think it is communication and, as much as people sometimes think that IATA and specifically the Director General is a bit too direct, we need more people like him.  We need people to stand up and say: “enough is enough”.  We need to lobby strongly for this industry because we all depend on it.  We all agree among ourselves, but if you go into the street it is a completely different picture.  I think there the industry is asleep at the wheel.

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Astra Smith write

12/20/2011 1:10:17 PM

The mindset that air travel is a luxury continues in all the third world nations, rather than a modern bus service that it is. Governments find the industry easy to tax and earn revenues. This must change.

Astra Smith write

12/20/2011 1:08:44 PM

very bold and direct summary of European activism that has made air travela n expensive proposition
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