ANALYSIS: Why Commercial Aviation Needs Disruption
We are nearing the end of 2020 and in some parts of the world the pandemic panic is mostly over, while in others COVID-19 is rampaging or resurging.
It was foreseeable in March that the aviation crisis would definitely not be V-shaped. This assessment proved to be correct. In April, commercial air transport came to a near standstill. Nobody expected this drastic event, but we now can see that for many of the stakeholders in the system, there needed to be a reset. This imposed “pause” has provided those in the airline industry an opportunity to rethink their business model or elements of it, but it remains to be seen how many will take advantage of this opportunity and how many will fall back into old patterns.
Old habits may seem like a dream when the industry is struggling to restore some of the magic of flying, which is needed more than ever to get passenger numbers and revenues back up. The airline mindset of prioritizing around fleet (only a means), networks, crew conditions and finances, as well as the hundreds of farebuckets typically offered, may need a rethink in ranking and approach. As does the legislation that is partly stifling not only aviation, but the economy as a whole through inconsistency and too many regional measures.
Airlines—collecting the external cash into the system—airports, financial institutions and OEMs always talk about and believe in the underlying resilience of the global air transport system. Some tend to ignore that this industry’s growth was made possible by disruptive changes in technology and business models. Speed, size, range, safety and economics—including environmental elements—were significant growth drivers.
Lately, we have only seen some incremental improvements to the system, like saving a bit of fuel or cost here and creating a low-cost airline there. Some disruptions were triggered by those OEMs that defied the traditional economies-of-scale thinking by offering smaller aircraft that offered unit costs on a par with significant larger aircraft. Some airlines understood what this meant and jumped to procure, even though the business case for airlines was lessened by lower oil prices. Some did not know how to jump because their systems could not cope with change.
Airlines are masterpieces of operational and economic complexity, way beyond what airframe or engine manufacturers must deal with. However, airlines historically have not really adapted their business models to address the true needs of mobility. Airlines still partially define themselves as the fleet plus some other elements. Yet the fleet is a commodity; the Airbus A330 or Boeing 777 of Air France is the same as that of Cathay Pacific or other airlines. Cabin interiors are not vastly different, apart from the color schemes.
Airlines traditionally use historical data, revised with sophisticated mathematical models, to determine price elasticity for the sale of their product and to plan their networks according to a schedule and volume of transport that meets the speed and cost requirements of their customers. However, due to the COVID interruption, this historical data do not provide any clues for the future. There is a lack of information about the dynamic disruptive changes caused by the pandemic, the political measures taken by governments that restrict the mobility needs of customers, and the impact of the huge structural changes caused by this.
There are good algorithms for determining demand that do not describe the trips from airport to airport, but focus on the actual need for mobility. But the key question on air mobility remains slightly opaque: What does the customer really want? To lie flatter than flat, to have more legroom, to enjoy a second glass of wine, check bags for free or be handed a newspaper? All these elements of travel can add value to the product, but the basic need of the customer is to satisfy his need for mobility—to get from door to door in a reasonable time frame and with the comfort chosen for the price chosen.
It is not about flying on an Airbus or a Boeing or about changing flights at a specific airport, or for some, not even the departure airport.
This leads to the question of whether there are potential lessons already available to airlines that could help lead them out of the current crisis.
Airlines, as already stated, generally fall back into old patterns. In some cases, they are handicapped by their HR structures and people evaluation models, but the key elements of an airline are pricing, capacity and cost. What the customer wants is a “relocation” from one address to another address. Do customers care if the connection city is A, B or C so long as they get to where they want to within a given time window at a certain price and comfort?
Cargo carriers like FedEx, DHL and UPS have various capacity layers and offer a product based on speed, weight and price. They consolidate their cargo at gateways; passenger airlines call their consolidation points hubs. Passenger airlines can learn from the cargo concept because there are a lot of beneficiaries in the mobility chain that make good money because the passenger airlines focus only on specific airport-to-airport transportation. There is too much siloed thinking.
Also, in a restart phase, many managers work on the basis of trial and error and in fear, spending a lot of valuable time protecting themselves through internal politics and discussion potentially frustrating the few passengers they have. This is time and creativity lost to the cause of implementing radical change management. Everybody agrees they need to change, but nobody really wants to be the one to push it.
Some airlines have a policy of staff rotation. This can be good in some areas, but dangerous in others, such as when employees experienced in core functions have rotated away and their know-how is missing during a crisis.
There is also a chance today to create the new normal through a sustainable approach that considers environmental-social-governance, or ESG, as a framework to allow the attraction and retention of talent. OEMs understand talent migration in their engineering divisions. Does demand need to follow supply or vice versa? That is a key question for any airline’s future setup
In summary, disruptions are necessary in terms of business models, and the definition of what is truly required also encompasses the environmental footprint of travel modes. Corporate structures, including the behavior of managers, can stifle innovation and in many cases does so. But innovation, (uncomfortable) lateral thinking on a holistic scale, must be permitted, so that employees and managers can grasp the holistic picture from a new point of view to pursue truly innovative, promising solutions.
For airlines, fleets are not the key; they are a production tool. There may be aircraft disruptors and some better or less good aircraft, but without the right business model match, nothing will happen. The Airbus A380 is an example of disruption in terms of production requirements, but only an evolution for the operator with limited commercial benefits at increased risk (seat mile cost if seats cannot be filled without discounting). That singular focus started the demise of the A380, something that became apparent a decade ago.
Would it be fair to say that the Airbus A220 using new engine technology (prompting the Airbus A320neo family and the Boeing 737 MAX) and the Boeing 787 (prompting the Airbus A350) were disruptors?
They were, because both the development and the later use of these aircraft entailed risks with unchanged business models
But they alone will not change history going forward. Corporate culture as an “enabler” or “killer” plays a key role, including the assessment of internal and external uncertainties and how to create topline growth.
Nico Buchholz is co-founder of Flight-Level 500, a Brussels-based global aerospace and mobility management company. He has held executive positions at airlines, airframe and engine OEMs, including CPO at Bombardier and EVP group fleet management at Lufthansa. He also serves as advisor to some innovative startups. The views expressed here are his own.