Emirates, Etihad and Qatar - airlines of the future

FROM that sweet spot 12 months ago, to crisis today. The global airline industry is in turmoil, but not everyone is seeing it the same way.

Many airlines are staring at disaster, while some see the coming bad news as an opportunity.

That's why what is happening now to the world's airlines is more than just another steep downturn.

When the rollercoaster heads back up again in perhaps a year or two, the global business will have taken on a very different appearance.

In the US, ballooning fuel prices have sent already-distressed airlines into a tailspin.

They genuinely find themselves in the perfect storm: most operate old, fuel-thirsty aircraft; they operate in a cut-throat market and many are still inefficient, despite having been through prolonged bankruptcy processes.

But, worst of all, demand for travel is dropping as the effects of fuel prices filter through to consumers.

If it were not for the US summer season peak period right now, where seats were already sold, the scale of fleet cutbacks and aircraft groundings would be even more aggressive than already announced.

A month ago, the two deadly forces intersected, as crude oil prices shot above $US135 ($A140.75) and consumers switched off spending.

On 21 May several US airlines announced that they were planning to ground some aircraft as soon as the northern summer peak passed. Major airline share prices immediately slumped.

The worst hit company, US Airways, already had a severely depressed share price, which has halved again in just a month. With valuations slumping like that, something is going to have to give in the US industry.

Creditors become uneasy, cash flow starts to be hit, as suppliers start to demand tighter credit terms - or even cash on delivery - and the cycle tightens.

Outside the US, though, the situation is more complicated. Certainly, high fuel prices are pretty much a global phenomenon, even if US motorists believe their current $US1 ($A1.04) a litre is outrageously expensive - a price Australians would drive across the country for.

But there is not yet consistency of economic conditions.

The wider economic malaise is spreading quickly across the world. The airlines are beginning to absorb higher costs, but as consumer sentiment and demand deteriorate, the bottom line effects spread.

So, where airlines were previously able to cover the higher costs by adding "fuel surcharges", softer demand means that if they continue to do so, travellers simply stay on the ground.

At home we can see the bad news coming, although Australia's economy is still riding on minerals sales to China, while housing and retail in the eastern states languish. As long as consumer spending holds up, airlines can muddle through.

But, across the world the lead indicator of forward bookings already clearly shows there is slowing. And when that combines with high costs, the equation completes.

Europe, and Asia too, are starting to show signs of something more than the average slowdown. India's airlines, which had been experiencing rapid, but profitless growth will lose around $2.08 billion this year, even if things don't deteriorate further. And European airlines, hurting at home, are announcing that the Chinese long-haul market has slowed significantly in the past quarter. Japan, another key market in this region, is cooling fast as well.

Remarkably, China's domestic market also shrank in May, the first time it has declined since SARS, where normally it has shown double digit growth year on year for the past decade. That reduction was influenced by the Sichuan earthquake, but then, when bad news comes, it usually has company.

That's why, across the world, airlines are bunkering down and preparing for the worst.

So who in this market is crazy enough to be pumping more big aircraft into the market? Emirates Airline, for one, along with other Middle East airlines. This week, Vice Chairman, Maurice Flanagan, confirmed the Dubai-based carrier's aggressive expansion plans.

"From July, we will be taking on two big aircraft a month. And that will go on for 58 months. And it won't stop there," he said this week.

Emirates will be increasing its seat capacity by more than 20 per cent annually for the foreseeable future.

The usual myths aside, about subsidy and cheap fuel, Emirates - along with its neighbouring airlines, Etihad and Qatar - is an airline of the future.

And this downturn will accelerate its future, as the carrier capitalises on its great advantages: it is based in the middle of the world, now able, with new generation aircraft, to fly non-stop to any point on the globe and sporting an established brand with high quality product.

The magic ingredient that now allows Emirates to prosper where they couldn't before is that governments are increasingly willing to open up their markets to so-called sixth freedom airlines (which carry end-to-end passengers in transit via their home base).

WITHOUT government protection it is tougher for the airlines at each end to compete, as they can't combine lots of different routes to converge on to particular flights - so, for example, a traveller can fly from Melbourne with one-stop (Dubai) to unlikely small points like Venice. Or bigger ones like Sao Paolo.

Emirates will soon have the youngest large aircraft fleet around, when its 93 large aircraft orders (and another 50 options) arrive. Half of those are massive A380s.

So, adding the advantage of their better fuel consumption to the natural advantages that the Middle East airlines have in this environment, they should be in a position - profitably - to establish long-term dominance over the next two years, while others are forced to cut back.

This coming downturn is going to be very tough on many airlines, as Qantas and Virgin Blue shareholders already fear.

Their abiding strength is a domestic market that has delivered strong returns for them in recent years. If that evaporates, we can expect big changes at home too.