Airlines with the highest levels of liquidity tend to fare best during times of crisis. Can you see airline business models evolving in the coming years to prioritise liquidity and profitability ahead of scaling up growth?
Various full-service network carriers were profitable in pre-COVID-19 times. The cash reserves therefore are decent, however, the current operating model of various full-service network carriers could eat up the cash reserves quickly. Despite the cost advantages and the flexibility, life will be also hard for low-cost carriers after the crisis. Yes, their lower cost base means they can drop fares quickly to stimulate demand and they can fly on new routes wherever they see a gap. But they are not getting the government money being doled out to national champions.
The key characteristics of low-cost carriers are also negatively affected by the crisis. For instance in Italy, a large low-cost market in Europe, the civil aviation authority prohibited the use of overhead lockers for baggage. Fast turnaround times at airports can’t be achieved either. The more health-conscious customer will also negatively affect the ancillary revenues of low-cost airlines with a decline in on-board sales of drinks and foods on short-haul flights.
The hybrid business model will evolve in the coming years since now it is the right time to bring about structural reforms in the aviation sector. Hybrid carriers like Alaska Airlines or JetBlue have strong balance sheets. They are much more leisure and domestic focused in an environment where domestic and leisure travel will come back much faster than business travel. Especially for business travellers, it is all about safety first.
Alaska Airlines and JetBlue are hybrid carriers and are also targeting the so-called growing ‘bleisure’ segment, partly driven by the younger generations. During the pandemic, revenues were constrained and demand tight, but the lower costs will help them to grow in the recovery phase. Another advantage for them is the partnerships with international airlines. Rather than building their own long-haul network to Asia or Europe and buying the wide-body jets associated with exponential financial risks, they rely more on domestic and regional feeder services for the partners.
The Middle East market is set up slightly differently to that of other regions. How well placed do you feel airlines and airports in the Gulf and surrounding region are for a full and relatively speedy recovery?
For the Gulf carriers with a strong focus on their international hub model, long-haul travel will be more complex and limited than the domestic market where standardisation of processing is possible. Because every country across the globe has set up its own restart systems during and due to the large complexity, a slow and painful economic recovery will be expected in the air transport sector of the Gulf.
The travel sector of countries in the Gulf that lack large domestic markets like in the US or Australia will recover more slowly and may open up first to travellers from nearby countries in the Middle East and Indian Subcontinent. Having a large and diverse domestic market can be considered as one of the competitive advantages for carriers. In the post-COVID-19 era, an increase in demand for domestic feeder services for long-haul flights can be expected, driven by the fast-changing customer behaviour of health-conscious passengers and the economic advantages associated with flying efficient, twin- engine long-range aircraft with lower cabin density. These factors could open up new market opportunities to Gulf carriers’ main competitors with a large domestic market.
Gulf carriers’ reliance on international connectivity makes it difficult for super-connectors to keep such a scaled network system with the prospect of significantly lower seat load factors on routes between key markets. Large markets for the Gulf carriers like Australia, China, the US and India do not expect a large amount of international flights in the foreseeable future. Therefore, the Gulf carriers have to find the complex balance of global demand passing through their hubs because the weakness in each market ripples across the other markets. For instance, having fewer Perth passengers might negatively impact the profitability of a connecting flight to Manchester, which at the same time impacts Delhi. In turn, it could reduce the viability of a Toronto flight. At the end of the day, the kick-off of regular long-haul services largely depends on travel bans and the restrictions and entry regulations imposed by countries the Gulf carriers serve.
Under these circumstances, Gulf carriers like Emirates and Etihad Airways need to reshuffle their business models and rethink their strategies for the post-COVID-19 era. The focus has to be shifted more towards bringing passengers into the UAE rather than relying heavily on the international connecting traffic via their hubs. It has to be done in close collaboration with the airports, stakeholders and the tourism sector. After about 15 years, the golden era of the successful Gulf-hub operating model is coming to an end. It worked very well in the past, but it is not going to work in the post-COVID-19 era. Deploying smaller aircraft is one of the essential steps to sustain long-term operating. In these challenging times, the main Gulf carriers have to reevaluate their existing network strategy by considering potential alliances, partnerships and joint ventures in the near future in order to strengthen and maintain the position in different foreign markets including the key markets.
Airlines across the market are faced with the difficult but necessary decision of reducing workforces. Is the criticism carriers are receiving in the mainstream media for cutting jobs fair?
In general, it is unfair to attack an airline during its fight to survive. Even the ME3 carriers (Emirates, Etihad and Qatar Airways) are not able to survive this crisis without the financial and non-financial support from governments and the stakeholders. Apart from the essential close collaboration between airline and stakeholders, the downsizing of the company’s business is one of the keys to survive a crisis and such tough measures need to be handled sensitively and in a transparent way. If an airline does the opposite of that, then it would be highly likely to face backlash.
In some countries, it could become very challenging for airlines to kick-start travel within a region or outside the region because of a few local governments’ mishandling of the crisis. First, by delaying the initial COVID-19 response, and secondly, by imposing a 14 day-quarantine on passengers. Governments’ lack of cooperation and commitment to the aviation sector during the crisis to date has led to airlines across the globe having to pull every single cost-cutting measure out from the drawers, at the cost of the employees.
Criticising airlines has become a national pastime for people and media across the globe. Of course, airlines need to respond to certain issues and take them seriously, for example sustainability. However, blasting the airlines for trying to prevent their own collapse is unfair and irresponsible. Various full-service network carriers are burning about $300-$600 million of cash every month and from a sustainable and economical point of view, countermeasures have to be taken immediately in order to save that airline from the collapse.
The media’s and audience’s “lack of economic understanding” and management’s lack of transparency also led to the ongoing toxic conflict between the airline’s management and other parties like the union, lawmakers, and public. Even if bailouts and wage subsidies buy an airline time, they do not change the economics at the end of the day. Therefore, regrettably, job cuts are inevitable in every single crisis.
The constant and sustainable safeguarding for airlines should be top priority for the employees, union, government and public. It should be in the interest of all stakeholders to sacrifice these measures in order to safeguard jobs in the long-term since the demand for travelling by plane will ultimately return to the long-term growth trajectory. A closer cooperation between the airline, the government and employees is essential in this case. It could even contribute to a reduction of the amount of upcoming redundancies because the longer these battles go on, the more jobs (direct and indirect) will be put at risk.
There is a tendency for aviation firms to ditch ‘green projects’ in a time of crisis as they focus on survival. But what is the importance of incorporating sustainability into your business strategy?
Every single crisis leads to new opportunities to improve things. What were viewed as the errors of the past can now be rectified. After receiving a wake-up call from this crisis, much more attention will be paid to issues like sustainability and the environment, leading to higher operational efficiency for the future.
It is correct that there is a tendency for airlines to ditch ‘green projects’ for the short-term in order to focus on survival. But the idea of ‘sustainability’ won‘t fade away and never return, no matter how long this crisis lasts. And the public’s attention towards such issues won’t disappear either. Few airlines across the globe have shown their continuing commitment to such issues during these challenging times.
For the medium- and long-term, we take a strong advocative position for sustainable business solutions. As such, our company logo itself is one that stands for green aviation, with an eye for providing clients with the wings to generate a simultaneously sustainable and profitable future. Moreover, in light of the unfolding situation with COVID-19, it must be recognised that there is an urgent and existential call for action across the entire value chain of the aviation sector, of which must be founded on strategic creativity, the prioritisation of human factors, empathy, pragmatism and optimism; all of which remain at the core of BAA’s virtues and values.
Airlines have generally gone from pursuing individual goals to driving for one common destination – survival. Can you see carriers reverting back to pursuing their own goals once the pandemic subsides?
The current industry structure is not a given, it can be shaped by airlines. For the survival during the pandemic and the post COVID-19 recovery, airlines need to change their strategic thinking and redefine their goals on a step-by-step basis. There is a need for developing step-by-step and contingency modelling for airline strategy. We expect a locational shift in future demand and growth, both during and after COVID-19 recovery phase (Q3/2020 - 2023/2024). Competition should not occupy the center of the current and post-COVID-19 strategic thinking. Across the aviation sector, the COVID-19 outbreak has generated an unprecedented need for the airline industry to pursue, find and explore for instance blue ocean and customer centricity strategies.
Henry Ford once said: “When everything seems to be going against you, remember that the aeroplane takes off against the wind, not with it.” Are you currently seeing any airlines who are turning the Covid-19 crisis into an opportunity?
The future of aviation would likely discourage large aviation hubs and there will be more point-to-point air travel between countries. Global hubs like Dubai could lose prominence in the post-pandemic era. Indian carriers have an opportunity to expand their international presence and draw traffic from some of the large hubs in the Gulf. It could give IndiGo’s future long-haul plans a boost. The problem with the hubs in the Gulf and South East Asia lends various countries including Australia a strong position in the post-COVID-19 era because many of these neighbouring hubs are large, which leads them to be percevied as less safe transit points for health-conscious passengers.
The COVID-19 crisis also has provided the foundations for a range of blue ocean opportunities for existing ultra-long-haul operators, such as Qantas. To this end, Ultra Long-Haul could become an emerging business model for full-service network carriers in the post-COVID-19 era. The economic and environmental advantages associated with flying efficient, twin-engine, and long-range aircraft further would mean fewer aircraft in the sky, leading to a reduction of the economics of hub-and-spoke operators at international hubs. Together with the need for two take-offs and landings, the implementation of additional health safety-related measures, such as the installation of health screening facilities in addition to existing safety checkpoints for connecting passengers, could cause larger complexity and thus increase costs for airports, airlines, and potentially passengers.
In the next 24-36 months, the majority of health-conscious (premium) travellers will favour non-stop flights more than one-stops via Southeast Asia or the Gulf. This may lead to a possible higher willingness-to-pay in all cabin classes and thus an increase in demand for additional ultra-long-haul services. The COVID-19 crisis has also triggered the earlier-than-planned phase-out of many older and larger aircraft in favour of newer aircraft with longer-range capabilities, a lower cabin density, and much better fuel efficiency. This could lead to new market opportunities for airlines, like British Airways, with its premium-heavy configuration on its 787s to bypass hubs on key or thinner premium routes.
It is not just the development of efficient aircraft with the right economics that enables thin routes to be profitable again. Future consolidation may also lead to a greater decentralisation of networks, a higher proportion of point-to-point traffic, and an increase in domestic/continental feeder traffic. Having a large and diverse domestic market for instance is one of Qantas’ key competitive advantages on its competitors on the UK-Australia market. Alongside high-yielding routes, this would be driven by factors including change in customer behaviour, geographical location of cities, employment of highly efficient aircraft with the right configuration and last but not least, the ongoing travel restrictions or the establishment of ‘air travel bubbles’ between countries. Although there are few golden opportunities out there for other airlines, the ultra-long-haul sector remains a niche market with limited realistic opportunities in the post-COVID-19 era.