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Airline Planning In An Era of Extreme Uncertainty

Three months after IATA released its 2020 forecast, the Covid-19 pandemic decimated the airline industry. IATA had optimistically projected the industry’s eleventh consecutive year in the black.

Some governments are still hoping that the Covid-19 lock down is a temporary disruption and that national economies can simply be switched on when the “curve flattens.” The airline industry reverted to growth following 9/11 and the 2008 financial crisis. Why should this time be different?

Given the severity and nature of the Covid-19 shock, we argue that it would be prudent for airline managers to proceed on the more likely assumption that the airline industry has been profoundly changed in ways that are not yet clear.

The IMF predicts the “Great Lockdown” recession will be the steepest in almost a century. And prospects for a rebound next year are clouded by uncertainty.

Covid-19 has created a deep rooted ‘fear of flying’ that will dampen both leisure and business demand. This will take time to reverse.

As long as Covid-19 continues unchecked, there will be more safety-related government travel restrictions that will dampen air travel demand. Countries have already severely constrained travel, in particular internationally. Such measures may be ongoing and other as yet unknown measures are a threat. Before international travel can come back both countries need to be open for business and lift travel bans, possibly even a third country if passengers connect through a third country hub.

The business travel segment, in particular, may shrink indefinitely as business travellers discovered during the “lock down” that video conference calling can be a substitute for travel to a greater extent than previously expected. On the other hand, when the economic recovery takes hold, there will be pent up business travel demand as people resume travelling to get their businesses going again.

Leisure travel demand will be slower to recover. It will lag in line with high unemployment rates and depressed incomes. Vacation travellers may fear flying in high density aircraft. Yet there is pent-up demand; vacation air travel has become a lifestyle in developed economies and people will want to break out of their stay at home seclusions to go see the world again.

With global tourism destinations struggling for business, governments and airlines will be pressured to restore air services even if uneconomic for the airlines. Perhaps governments and airports will want to subsidize this segment.

Huge amounts of cargo have traditionally been carried in the bellies of wide-bodied passenger aircraft. With this cargo capacity severely reduced, there are significant new opportunities for all-cargo services.

Governments around the world are supporting airlines, often by paying their employees’ salaries. Yet some airlines may perish and consolidation will accelerate. The competitive landscape will change in unknown ways. It will be airlines with pro-active managers that will lead this process.

Airline alliances and joint ventures helped the industry through economic downturns and post-9/11. They could be an excellent opportunity for airlines to cope with the post-Covid-19 downturn. They can achieve some of the benefits of consolidation more quickly and with less complexity.

Post-9/11, for instance, UNEX partners assisted several large international airlines to reconfigure their networks. Inevitably they, too, had to trim their fleets and schedules. But by intelligently finetuning codeshare connections beyond their respective alliance partner’s hubs they were able to largely maintain their portfolio of sellable destinations.

Price will likely be the driver to win back both leisure and business travellers. This will be difficult for cash strapped airlines. There will be intense pressure to invest in automation to lower costs and increase efficiency, including distribution and airport services. Low fuel prices could help.

Until a vaccine is available travellers may favour point-to-point flights on long-range, single aisle aircraft rather than hub connections to minimize airport interaction with large numbers of people post Covid-19. Many carriers may find themselves with too many aircraft or the wrong fleet types. Some airlines may find themselves with under-utilized, expensive hub investments.

“All we can do at this point is plan

for a variety of scenarios”

Gary Kelly, CEO Southwest Airlines, April 13, 2020

Given the unprecedented uncertainty, airlines will need to constantly consider alternative ways forward. Airline planners more than ever will rely on scenario planning and data analytics. For every plan, there will need to be alternative back-up plans that can be implemented quickly. The lifespan of business plans will now be measured in weeks, not months.

Advanced network planning models are very useful in normal times. The Covid-19 situation is different, though. Tools designed and calibrated in steady state environments don’t work well in exceptional circumstances. How do they cope with data time series that suddenly drop to zero for no apparent reason? How do they calculate passenger preference when a hitherto absent parameter becomes the chief decision criterion – the fear for one’s health.

Blindly relying on these computer models may lead to disaster. What’s needed now is the experienced touch of airline executives and experts, honed over decades of airline management through unprecedented emergencies. Crisis-proven UNEX consultants are uniquely positioned to support airlines through this uncharted territory.

One certainty is that Covid-19 has profoundly changed the industry in unknown ways. The airlines with the highest probability of survival will be those that are able to rapidly and effectively adapt to changing circumstances. This an especially tall order in a complex, capital-intensive business.

Written by Brock Friesen and Horst Findeisen


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