August 2012

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Aviation and the advent of Globalization 2.0

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globalization-tails.jpgOn my very first assignment for Flight, I was sent to cover the Dubai Air Show. It was November 2007 in the midst of one of the most extraordinary expansion years commercial aviation had ever seen. The A380 successfully had entered service with Singapore Airlines a few weeks before and the 787 was accumulating orders after a spectacular rollout ceremony preparing for a first flight that was intended for March of 2008. The industry looked virtually unstoppable.

One particular memory still stands out in my mind from that show that had Emirates spending $38 billion for firm orders on 82 aircraft (70 A350s, 12 777-300ERs).

I was heading to a press conference on the upper level catwalk that surrounded the show floor when something completely out of place caught my eye. As I reached the top of the stairs, I noticed about a dozen workers, all men, who appeared to be of South Asian descent sleeping behind two skillfully crafted artificial walls.

From the upper level on the catwalk I could look down into the space they were using to sleep. They were piled on top of one another, using each other as pillows. Feet from where these men were sleeping, billion dollar deals were being done. A person could easily walk by and have no awareness of what was going on just behind the wall.

That, in essence, was the global economy in 2007: Growing at such an astonishing pace that no one stopped to realize that just behind the artificial walls was a world without real foundation.

And so, what we face today is the end of Globalization 1.0; a world built upon the principles that made the Field of Dreams: If you build it, they will come. The only problem was that the 'it' was always open for debate.

It was the reason for the housing bubble and the overleveraged credit markets that supported them, it was the reason for Dubai. It was unsustainable.

There was always trepidation in the voices of the Airbus and Boeing executives who constantly stressed that they weren't overleveraged in any one region of the world, always cognizant that a region, or regions, could collapse. In many ways the disclaimer they provided was more intended for self reassurance than for others. It felt too good to be true.

Airlines have already begun adjusting to the dynamics of the new economy with cuts in capacity, aircraft deferrals and cancellations. The only major airline, it appears, that is attempting to buck the trend is Emirates, with 14% capacity growth planned for the coming year. Emirates' proposition, which is based in some well founded airline dynamics, intended Dubai to be a hub to the world. But a hub is only as strong as the people traveling through it: if they aren't coming, you can't built it.

IATA General Director Giovanni Bisignani said that January figures for international travel will be even worse than the 5% plunge that came the month before.

We've seen this in the not so distant past. Just eight years ago, Web 1.0 was crumbling under not entirely dissimilar circumstances.  The justifications that inflated that bubble were the same then as they are now. Just because you have a business based online, success was far from guaranteed, even if the artificial IPOs told a different story. Businesses like and all saw the web as a tool, but the product they were selling wasn't fast delivery or pet supplies, it was the novelty of the internet itself. The fad then was the web, today it is buy now, pay later.

Though the fall of Web 1.0 gave way to an organic, and fundamentally more sustainable internet in Web 2.0: bottom up, not top down, driven by genuine growth that saw the web as a vehicle for product growth, not the product itself.

I don't suggest that Globalization 2.0 will be much different than 1.0. The free flow of ideas, people and capital will always be the underlying drivers for the global economy, but the foundations upon which the 2.0 economy is sustained must be different.

Aircraft have been the centerpiece of globalization before 'globalization' was a coined term. A search of the New York Times archive reveals its first reference to globalization found its way into the paper in February of 1981, more than a decade after aircraft like the 747 was flattening the world and connecting points on the globe 5,000 miles apart.

Perhaps ironically, the first reference came in an article titled OUTLOOK: Toughening attitudes on world trade.

Aviation finds itself in a particularly precarious situation, as the industry has always been both driven by, and a driver of, the global economy as both leading and trailing indicator of its health. Aviation will ultimately play a vital role in its recovery as the United States highest value export.

Though the challenge to both Airbus and Boeing is found in having charted different paths as the global economy ballooned in the last decade. Each thrived on the premise that twice as many people will be flying in 2020. Yet, slower growth of the once hot, but small, global markets may give large hub-to-hub travel the leg up or a global economy in recession means operating higher load factors on once high traffic routes with smaller long range aircraft. Each can find a way to thrive, but the interconnectedness that each manufacturer helped to create will also be our salvation in creating a 2.0 global economy.

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