EXPERT VIEW: Pricing is not the key to rebuilding passenger confidence

Linus Benjamin Bauer, founder and managing director of Bauer Aviation Advisory, argues why a collective approach must be considered as the key to regenerating air traveller confidence
Air Fares, Bauer aviation advisory, Aviation consultancy

In recent times, airlines have shown a collective intent to quickly rebuild network connectivity at any cost. To this effect, after what has felt like epochs for some, we are about to hear the roars of the turbofan more frequently again in the coming weeks. In turn, airlines will be focused on slowly re-solidifying their positions in their core markets, thereby looking to signal to the world that they have indeed navigated beyond the bottom of the crisis.

In saying this, a big question mark still lingers over the notion of genuine demand recovery, whereby the factors of when, where, who and how much still remains uncertain. Throughout the crisis period, we have been exposed to countless scenarios and forecast models, but as such, by virtue of lacking a crystal ball, the majority have proven to be well off the mark. 2023 has been considered as a popular projection for demand recovery, but in this case, we shall look to 2025 and beyond, of which can be based upon the ‘Nike swoosh-shaped recovery’.

In turn, the practicalities of such a conservative estimate challenges airline to rebuild their networks in a far more optimised and disciplined manner, of which is better reflective and responsive to actual demand levels. On the flip side, you perhaps now have a case of overoptimistic airlines, of who are rapidly looking to scale up their operations again, in the midst of an unprecedented ebb in passenger confidence and sitting on the precipice of an all but guaranteed global recession.

In any case, it has been unanimously accepted that the demand for air travel will take some years to recover fully from the simultaneous health and economic crisis derived from COVID-19. Important to recognise however, looking into both the medium and long-term, a portion of business and leisure travel may never return again at all. In this case, initial estimates have suggested that we might see a 3-6% decrease in demand from those particular demographics. This can be largely traced to the rise of technology, such that a portion of demand for air travel will be lost due to its adoption in the contexts of workplaces and social gatherings.

For example, online alternatives such as videoconferencing have been touted to capture up to 6% of business travel, however, the true monetized scale of the loss may be difficult to measure as ultimately, business travel spending will likely re-emerge and grow as the global economy begins to stabilise beyond COVID-19. Although business customers makes up just a small portion of total air travel, the foundation of the business travel sector is an essential ingredient for the world’s full-service network carriers (FSNCs), reflected by the fact that in 2020 alone, the real value of the segment will shed over USD$750- USD$850bn (IATA, 2020).

The key issue right now is the following: How do we get business travellers on-board again? To date, there is some pent-up demand, as highlighted by airlines that have already returned to the air. However, there is a need for a more sustainable approach since competitive forces are in play and that capacity will sooner rather than later, return to resemble something closer to that of pre-pandemic rates. For LCCs, the major unique selling point (USP) are low fares. For the short-term in our ‘new normal’, this unique selling point does not have the same stimulus-effect like in pre COVID-19 times, since now passengers and airlines alike must deal with waves of uncertainty that in turn impedes typical consumer behaviour.

Resultantly, if airlines do decide to relaunch a particular service or route, they must prioritise generating load factors of at least 50% or 60%, of which would provide them with a breakeven cash flow. With low fares, the chance to breakeven would decrease even further, thereby pushing the breakeven load factors well beyond the 70% threshold. To this effect, it seems apparent that price leadership cannot be employed as the predominant tactic by airlines to regenerate demand throughout this period. Rather, it must be considered as just one of several additional contributing factors, of which will ultimately decide the nature of the industry’s demand recovery cycle.

Then there is the notion of restoring air traveller confidence throughout the pandemic, of which invariably leads to a complex process for all airlines, but perhaps none more so than that of FSNCs with a high reliance on international connectivity. These carriers must deal with an intricate combination of about 40 uncontrollable variables, of which will all extend beyond their control.

To combat this, a wider collaboration and coordination between airlines, airports and linked stakeholders must be considered as essential since this complex mix of factors affects the entire customer journey, thereby involving an array of different players throughout the value-chain of aviation. Perhaps most crucially, air traveller confidence must be prioritised through a coordinated government and airline industry approach, of which is intent on transparently upholding safety standards and removing inconsistencies of which can be easily recognised around the world at this point in time.

Making the right decisions during the recovery will ultimately define the industry’s path to recuperation. After 9/11, it took many years to recover, of which has been partly attributed to governments, both local and foreign, not following a coordinated approach. Instead, separate entities implemented their own safety standards and resultantly, this led to levels of uncertainty and fear among passengers, of whom were unsure on whose system to trust.

Resultantly, it is clear that multilateralism will play a vital role in the post COVID-19 recovery and that the standardisation of global processes is one of the keys to a quick rebuilding of air traveller confidence. Unfortunately, there is still very limited coordination between countries, since many still follow their own procedures and run their own crisis management systems. If, for example, countries continue to implement 14-day quarantines, it would add further delays to the recovery of both corporate and leisure travel. Corporate travel would be increasingly and perhaps more permanently replaced by videoconferencing, with an increasing amount of new technology solutions becoming a further enabler of this outcome.

A country’s concern over a second wave of infections is not only understandable, but a necessity; it is important to recognise its potential and implications thereafter. However, countries are also beginning to open ‘travel bubbles ’and ‘air bridges’, of which do away with quarantine requirements for specific travellers from countries where COVID-19 has been successfully contained. This is an invariably positive sign and could perhaps become the catalyst for a new, coordinated and standardised approach to re-opening international markets for countries who have yet to do so. By looking at the example of the potential ‘Trans-Tasman Air Travel Bubble’, the touted development of bilateral safety protocols, in coordination with various industry associations, is a suitable approach to safe air travel in the post COVID-19 era and would certainly help to rebuild air traveller confidence in the region.

Despite a looming economic recession, governments should invest in long-term infrastructure projects relevant to aviation and tourism, thereby not only regenerating jobs and growth opportunities in the short-term, but to also positively recognise travel and tourism’s importance to the global economy. In many parts of the world, these two vital sectors contribute up to 45% of a country’s GDP. In this case, there is also an urgent call for governments to show their understanding of the socio-economic importance of aviation and tourism, in recognising that beyond a pure financial standpoint, these industries uphold the livelihoods of millions of people every day, around the world.

Over the next weeks, we will witness a phased reintroduction of routes and networks of airlines worldwide, and indeed, this can be seen as a positive sign. In saying this, a collective approach, of which adopts a more concentrated stakeholder management plan and message, must be considered as the key to regenerating air traveller confidence in these times of volatility.

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