AIRLINE ECONOMICS DURING THE TRANSITION TO A POST-PANDEMIC WORLD

  • Home
  • blog
  • AIRLINE ECONOMICS DURING THE TRANSITION TO A POST-PANDEMIC WORLD
blog image

Let us get right to the point …….

The airline industry is fragile due to many factors:

·      High fixed cost of operations

·      Low variable cost of operation

·      Aircraft Purchase decisions have to be made for many years into the future.

·      Business risk does not move down the distribution chain.

·      Extreme sensitivity to external events

·      Government Regulations and Oversight

·      International trade agreements

·      Natural monopolies at airports and limitations on economically efficient airport slots

·      Typically, very low margin business with a tendency towards a boom or bust cycle.

The global pandemic is just one example of the extreme sensitivity of the airline business model to events that are beyond the airline’s control. In the case of the pandemic the problem is compounded by additional factors that handicap the airline industry in its attempt to restart business.

·      Severity of the virus transmissibility.

·      New virus variants may be even more transmissible and potentially more deadly.

·      Transmission control actions at the national level are mixed.

·      Availability of an effective vaccine is constrained by production and distribution.

·      Population behavior in accepting the vaccine.

·      Government rules and restrictions on airline travel

·      Potential new breakouts of the infection as restrictions are eased.

All these issues introduce a large number of variables for the airline to consider when deciding to restart services between cities. The historical airline data regarding traditional traffic flow patterns will have been disrupted by the collapse in airline route networks, the propensity for people to travel will have been reduced not only by “stay at home” instructions but also by the inevitable safety concerns associated with the air travel process (Uncertainty about booking flights for some future date, airport processes (check-in, Security lines, Immigration lines, airport departure Gates) etc. Social separation requirements are extremely difficult to maintain in such settings especially when segments of the population may not be as rigorous as others in wearing masks and maintaining the recommended separation.

As we know, airlines survive on the cash flow they receive from passengers booking flights today for a departure at some time in the future. This means that if the passenger advanced booking behavior changes due to uncertainty regarding when they can be vaccinated or restrictions on travel are lifted, one can expect to see a shift from longer range bookings to much closer to departure bookings, This has implications on both passenger demand and advanced booking revenue (cash flow). It should be noted that small changes in passenger demand (1-3%) will have serious implications on the viability of many airlines. This in turn will typically trigger significant sales actions by airlines in efforts to stimulate sales and capture traffic from competitors.

A further challenge will be the mix of traffic observed pre-pandemic versus the mix of traffic observed in the post-pandemic world. For example, it is projected that the propensity of business travel will change as more people become comfortable in using video conferencing products such as MS-Teams, Zoom etc. Supporting this projection is the recognition that many business segments will emerge form the pandemic in a weakened state and in efforts to protect cash-flow will enact stricter travel policies that will further weaken demand for air travel.

I have noted the potential impact on the business travel segment as this segment is relatively small in volume, but extremely important to most airlines as they traditional occupy the business cabin on an aircraft and typically pay much higher fares than the Economy traveler. The economic impact of just a 10% reduction in the business segment has a significant long-term negative revenue impact on the airline. If we note that the airline has already invested in the business cabin configuration (cost has already been incurred), operating with empty business seats is not feasible and filling these seats with paid upgrades from the Economy cabin may not offset the lost revenue from business class fares. An approach that may be adopted by airlines is to promote the benefits of the extra space available to appeal to more safety conscious travelers. This however is a two- edged sword.

The economy cabin is likely to see less impact on demand. This will be for several reasons. Visiting Friends and Relatives (VFR) will likely see an increased demand as people seek relief from the isolation imposed by the pandemic, Vacation travel will recover as more and more people are vaccinated and as companies struggle to restart their business. It should also be expected that previous company policies that allowed business travel privileges are likely to become more restricted and staff will be downgraded to Economy travel, at least on shorter range flights.

Airlines are likely to struggle through 2021 and 2022 even as the pandemic is brought more and more under control. In this extended recovery period, Travel patterns will continue to change, demand volume will change, and all the historical data sets that airlines used to support decision making, will continue to be suspect as the basis for forecasting future travel decisions.

SO, WHAT CAN THE AIRLINES DO?

One answer is to make more effective use of the existing data sets to obtain a more holistic view of how travel patterns are evolving as the days to departure reduce. Many airlines still tend to manage their business in silos. Network Planning utilize QSI models to generate attractive network and schedules where the quality of the product and the utilization of each aircraft are major considerations in the designing the overall product offering.

This data set is used infrequently outside of Network Planning. Similarly, Revenue Management and Pricing utilize booking and departure data with competitive pricing metrics to assess how many seats to sell at what date and what price. This data is for the most part, not utilized outside of Revenue Management. If we now change our focus to Sales and Distribution, we observe that this function utilizes MIDT/DDS data to assess the airline’s share of the traffic in each market, how each distribution channel is performing, and which Travel Trade partner is providing the level of business that was anticipated when negotiating incentive/compensation agreements.

Of course, the above scenario is accurate to varying degrees, depending on the level of sophistication in the data management and decision support environment at the airline. Traditionally, the availability and integration of these data sources for decision making today, still follows a silo-based approach to managing the airline business. The reason for this philosophy is because, if the complete airline problem is too complex to solve, then break the problem down into its component parts and solve the set of simpler problems. However, when the solutions for the set of simpler problems are combined to address the overall airline problem, there is no guarantee that this approach generates an optimal solution of the actual full airline problem.

We must also recognize that as airlines emerge from the pandemic, they will all be competing aggressively for whatever travelers are available in the market. It is anticipated that availability of airline seats will exceed the demand for those seats. This will inevitably lead to airlines making decisions to try and capture as much of the available demand as possible. Network, Schedule, Pricing and Seat Availability decisions will all be impacted by the perishable nature of the airline seat that drives the imperative to “capture passengers from the other airlines. The adage, “You are only as smart as your dumbest competitor”, will continue to apply and drive airline behavior.

REVEMAX WORKS DIFFERENTLY.

It brings all the different data silos available in an airline to be integrated into a single cloud-based environment. The use of elegant and intuitive Dashboards and Drill Down capabilities supported by predictive analytics and Alerts, enables an airline decision maker to have a more comprehensive and understandable perspective the best decision for the Airline. The traditional silo-based view of an airline performance is replaced by a more comprehensive and integrated view across all of the available data silos. ReveMax provides a major step increase in the ability of airlines to manage through turbulence and chaos in a rapidly changing world.

Leave a Reply

Your email address will not be published. Required fields are marked *