Return To The Skies Poses A Huge Challenge For Airlines

As the lockdown is gradually lifted, airlines are getting ready to take to the skies once more. But airline planners are now faced with a new challenge. Specifically, how to plan a flight schedule and network given the lack of ability to incorporate behavioral changes which cannot be quantified. Without these the anticipated demand is at best a wild guess. And with fragile balance sheets and liquidity positions at airlines that in some cases can’t cover more than two days of expenses, the situation is precarious.  As such planners are left with no easy answers. 

The challenge of flying at a loss

To begin with there is the challenge of costs. Airlines are notorious for their high fixed costs. These costs ideally have to be recovered in a manner that provides for returns that at the very least cover the cost of capital. While declining fuel will most certainly help, the dollar has risen by 8%, financing costs are up by 4% - 7% and airlines are carrying the cost of excess fleet which now is amortized over a lower spread. Staff expenses have been slashed via forced furloughs at some airlines and salary cuts in others. But these only constitute less than 10% of the total cash outflow. The other outflows remain and the inflows will pick up initially (as folks stranded due to the lockdown get back home before lockdown 4.0) before again settling to very minimal levels. In most cases they will not cover the total cash-outflow. For airlines this poses a challenge. Because if each time the aircraft takes off there is a net-cash-loss to the airline, then ceteris-paribus the rational decision is to continue to be grounded till demand picks up. A second or even last-mover advantage beats the first-mover advantage in this case. 

The evaporation of demand

Add to that the fact that some segments of demand will simply not return. Because while the Indian aviation market grew at a CAGR 8% over the last ten years, the truth was that growth was driven solely by pricing and was unequal across segments. This included weekend travellers, SMEs, students, mid-premium segments and premium segments. And varying yields from segments were a point of contention and competition. As long as prices were extremely low, everyone took to the skies. This will no longer be the case. Because price may influence purchase behavior in an atmosphere of optimism but it certainly cannot do it in an atmosphere of fear and general malaise. With policies around social distancing coupled with the cost of carrying excess fleet, airlines are left with no choice but to raise prices. That effectively means that some demand segments will disappear.

Planning for behavioural changes

The final challenge for airlines also traces back to business planning, forecasting and an accurate reading trends. The old management mantra of quantifying all things and “what cannot be managed cannot be measured” simply does not work in the current context. Because quantitative data simply does not reflect behavioural changes. And more than anything else the pandemic impacts how we think about travel which then informs how we travel. For planners the challenge is to look at a broad set of parameters which do not necessarily correlate and to build on that to discern trends. The trends include quantitative and qualitative factors. And qualitative factors cannot be gleamed at sitting at a desk. One has to be in the market, experience the market and look at other factors that are completely unrelated to understand what is happening. Because there is no formula for this, such an approach often is met with significant resistance. 

Airline planners are faced with a world where qualitative inputs that deal with human emotions have to inform business plans. No regression model or forecasting tool can beat sustained interactions across levels -- towards coming up with an understanding of the key drivers and influencers on the metrics that matter. Understanding trends also help understand a change in the competitive environment. This can affect entire business plans and strike at the heart of business viability. 

As far as travel is concerned there is likely to be segmentation into essential travel and non-essential travel. Considering all the risks, the safest mode of transport may change. Overall, the perception of air-travel is undergoing a change: from one of convenience to one of risk. For airlines this means revisiting entire network and fleet plans and adapting to the new reality.

As of now there are no easy answers. The past no longer informs the future and aping the west and force-fitting frameworks that may have worked earlier simply does not hold in the current situation. The return to the skies poses a huge challenge for airlines.