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A New Shape for the Future Airline Industry

Apr 30th 2020

As the world ponders its future after COVID-19, many are wondering how and when things will get back to normal. Undoubtedly, the impact of the COVID-19 pandemic on commercial aviation has been, and will continue to be, unprecedented in its scale and scope, affecting airlines everywhere, in a more interconnected world.  In this article, I discuss my views on how the future might look for airlines as the COVID-19 crisis ebbs, exploring the outlook following this economic tsunami and how airlines will need to re-engineer their operations to both thrive and survive.

A Triumph of Human ENDEAVOR

Let’s start by taking a step back and recognising that commercial aviation is a triumph of human endeavor. Airlines are the refinement of science and engineering, the management of risk and the very pinnacle of commercial acumen. Arguably, the ability to understand and measure risk and create a worldwide business that offers a level of travel and speed far ahead of all other forms of transport is something that is very special. When you consider the mode where you encase 100’s of people in a metal tube and move that at 37000 feet at 500 mph you cannot be anything but in awe.

Since its beginning in the 1960’s the modern airline industry has brought the human race into the space age and has enabled distant economies to exist together as a community, connecting the world for all of us. It could be seen as one of the most powerful engines of recent human civilisation. We all expect to be able to get anywhere in the world within a day or so and this, is an amazing human achievement.

This achievement has been made not just through technology but though sound commercial thinking, investment and planning. The airlines have benefited from demand to travel and that demand has created more and more airlines. Up until the COVID-19 crisis there seemed to be no end to this increasing demand, it has been creeping up year-on-year as prosperity increased around the globe. However, the unprecedented impact of the COVID-19 crisis has curtailed people being close together in an aircraft with a dire and profound effects on global demand. In order to try and protect the industry, governments have stepped in to assist the larger of their national businesses where there is an awareness of the importance and value of these world airline networks to their countries. Some airlines have been prudent and have protected their balance sheets over recent years and have furloughed staff to survive in a mothballed grounded state. Others sadly have hung up their boots and have ceased trading. Will demand growth quickly return following the lifting of lock-downs in the US, the UK and further afield? Whichever way you look at it, that is not likely, as people are now aware of the need to keep a “social” distance and do not want to risk catching the virus or carrying it to their families. Consequently, I envisage that demand will return very slowly as we get on top of this virus through vaccinations or its eradication


The outlook

The International Air Transport Association (IATA) has increased the potential impact that COVID-19 could have on the airline industry by a factor of four from its estimate two weeks earlier, stating that airlines may lose $113 billion in sales in 2020.

If we take an optimistic view, a vaccine available in the first quarter of 2021 then another year to convince the public worldwide that all is safe we are optimistically looking at perhaps a slow return in demand over the next year to 18 months. In the short-term demand may be as low as 20-30% as the lock-downs are lifted. These estimations are nothing more than empirical and based upon my gut feel though are probably equally as valid as any model, given the accuracy of models. But if you think it through you will get to a similar place if not worse than my personal expectations.

So, as we come out of this crisis our most technologically advanced travel businesses will be hit by a slump in demand and will need to adapt to survive and thrive under these new market conditions. Naturally, many businesses are the proponents of handling survival, encompassing people that want to create and change the world. There are always two ways of looking at things and the COVID-19 crisis is no different. To take full advantage of these new opportunities, airlines will need to adapt to be a different shape than before the crisis.


Does a changing landscape call for a new approach?

With fuel making up between 20-30% of an airline’s operational input cost, lower prices would surely provide respite?  Whilst this might help the aviation survivors to jump-start their operations, for most airlines the lower oil price won’t actually benefit them in reducing costs and could actually be more burdensome on some carriers than beneficial.

Another consideration to increase airlines viability is in reducing operational costs. They are already doing this by reducing their staff and there is one area where this could really deliver results for these airlines and this is to increase outsourcing of certain complex aspects of the operation to expert suppliers who have the benefits of specialisation and the economy of scale. Airlines are already familiar with this for a great many of their operational activities and extending this makes sense. A good outsource partner can and will deliver on many levels.

All enterprises are complicated and have many moving parts in terms of staff, regulators, equipment or air-frame suppliers, facilities providers and so on. The airline business is a good example of this. All areas or departments, in themselves, are complex sub-organisations and each has its own set of risks. For example, an airline where it is the norm to have an in-house team of technical publications experts. Around this team will be a set of technologies including, almost certainly, bespoke IT infrastructure, an assortment of software licences, a special configuration for the teams’ workstation, separate and specific operating procedures and training in order to deliver and on top of all of that the real estate load to house them. The cost of these type of operations is not just the wages for the staff but the support infrastructure around them.

The key to outsourcing success is to get the exact solution for the area you are removing. If you do get the right fit then all the risks associated with that internal department are effectively rolled into a service agreement and if you have done your due diligence, are understood well by your outsource partner, and further, are lower than your internal risks would otherwise be. In addition the result you get from your expert partner will be superior to that which was delivered by your expensive in-house solution as it should necessarily follow that an expert operation focused on a single discipline should be able to easily demonstrate a superior ability in the area to that which an internal department could.


Simplification delivers profound benefits

In addition, the solution partner will simplify your operation significantly in that area. In the example given the airline will suddenly be free of all the IT overhead, the costs around maintaining infrastructure, the real estate load, the software dependencies, training etc. The peripheral costs saved, and the operational simplification gains made by changing an operationally busy department for an outsourced expert solution are profound and significant. The enterprise will be nimbler and will immediately be able to respond to renewed growth demand without having to consider internal departmental load in this area. Due to improved operational delivery, compliance risks are reduced as the delivery of regulated material to your crews is no longer a concern but an agreed and expected reliable service level.

There are going to be many pressures from this crisis and a correction in the way airline businesses operate will certainly follow. It will be those enterprises that are bold and ambitious that will leap ahead of the competition. They will be fleet of foot and will have engaged in the benefits of the digital world.

The central aim that comes into focus when considering the right path to take, in highly risk- conscious businesses when you consider the whole picture is simplification. If you can simplify, you can reduce cost, improve performance in just about every area and you will be free to concentrate on your core objective. In the case of the airline, getting people from A to B as safely and profitably as possible. Simplification has profound benefits. If you look around you will see that the winners know this already.

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