Aviation consultant John Strickland talks with Karen Walker about how airlines are adapting to the latest crisis.
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Karen Walker: Hello everyone, and thank you for joining Window Seat, our Aviation Week air transport podcast. I'm ATW and Aviation Week group air transport editor-in-chief Karen Walker. Welcome on board. Now, this week, we're going to talk a bit more about the ongoing impacts of the Iran War, airspace closures and higher oil prices on the world's airlines and airports. So, I'm absolutely delighted to be joined by an industry expert, John Strickland. John, welcome and thank you so much for joining Window Seat.
John Strickland: Thanks for inviting me, Karen. Good to be here.
Karen Walker: Now, John is director at Air Transport Consultancy, JLS Consulting. He has over 40 years’ experience in the airline industry, specializing in network planning and revenue management, and he has held senior positions at multiple airlines, including British Caledonian and British Airways. So we are truly in the hands of an expert today. So, John, the war continues, of course. It could end tomorrow or next week or whenever nobody knows. And the first thing I'd just like to talk with you about is what does that uncertainty mean to demand for air travel and how airline and airport managers work through this crisis? What's the important significance, if you like, of uncertainty?
John Strickland: Well, of course, this is a particularly complicated crisis. We've seen the Gulf carriers and their hubs become what I would say is an essential piece of the infrastructure of aviation in the 21st century. I'm old enough to go back to the beginnings when Emirates began in the 1980s, and then we thought it was a bit of a pie in the sky idea. And of course, today we're talking about hundreds of aircraft, not these wide bodies from [Boeing] 777s right up to [Airbus] A380s. And people have become used, particularly on east-west routings from Europe, not only to the Middle East region, but through onto India, other parts of Asia and Australia, to go via Gulf. It's not a thought to consider maybe other ways. They've managed to develop such a good reputation on product, price, quality, safety, of course. So when that is taken away, as it was so suddenly, we're dealing with an immediate challenge where we're talking about maybe half a million people a day going through these Gulf hubs, a large percentage of which are transferring—were never expecting to be in Dubai, Doha, Abu Dhabi, more than a few hours, not stuck there for days and days. Aircraft are thrown out of position along with their crews. There were aircraft turning back, aircraft diverting even in points of destination were not in places where we're supposed to be. Parallels, of course, of what happened after September 11 in the terror attacks in New York back in 2001 when planes ended up in wrong places, but the scale of this is enormous. So that's the initial immediate problem for the Gulf carriers. But of course, the region is also major area of activity intraregional with many, many other airlines, for example, Air Arabia, Fly Dubai, Saudi airlines such as flyadeal and flynas and other long-haul airlines. And of course, overflights for the region, which should already become more intense in the last four years because of the fact that Siberian, Russian airspace has been off limits for European carriers on many of their Asian routes.
So they were already routing more circuitously over the Gulf, including Iran and Iraq. So, lots of things were happening even before we started to see what that meant for bookings.
Karen Walker: You raised an interesting point there about the fast rise, if you like, that took everybody by surprise, I think, of the Gulf airlines and airports, fantastic airlines, fantastic airports, and very innovative. Yes, they have a lot of government backing, but there was a real vision there that really has, as you said, changed the global air transport landscape because people could suddenly now very easily and nicely connect and get to places with just one stop. We're seeing some airlines, particularly in Europe and Asia, reporting an uptick and a surge in demand for their services because they can use those airlines to bypass the Gulf region, which is understandable. But I guess my question for you is, do you think that this, if you like, reputational damage right now to the major Gulf airlines and airports, is it a long-term thing or a blip? Will it all go back to normal once the situation changes?
John Strickland: Well, I think precisely because I've seen that model develop over such a long period. When I myself was skeptical, I remember a friend when I shared a flat in the early '80s coming home from work one day, and he'd got a job with dnata, the Dubai Tourism Authority in London and said, "Oh, guess what? We're going to start an airline in Dubai." And I said, "Why don't you do that? What a stupid idea." And here we are 40-odd years later. So I've seen the slow buildup. This has not been an overnight sensation. It has been a long buildup to where we are today, and we are in a different place in terms of types of aircraft, and as you said, the quality of what they offer. But what has also happened more recently, which I think makes it more complex, in some ways more interesting to observe, if you can in any way, extract yourself from the terrible challenges which are going on, and that's that the kind of routings that people would've taken on many destinations before the Gulf carriers got as large as they have, particularly in the last 10 to 20 years, on routes like say UK and Europe to Australia. I worked at BA as a network planner when we had as many as three 747s a day going to Australia, certainly at least two. So you're talking about nine aircraft out of a fleet being committed to Australia. You had Qantas, of course, doing similar levels of capacity. And your competition was Singapore Airlines, Cathay Pacific, Thai going via their Asian hubs. Well, not only have those carriers in some cases reduced frequency, but again, the pandemic intervened and the high-capacity aircraft, the trustworthy, the iconic 747 has gone. There were not many A380s around outside of Emirates itself, and some of them have gone. Also with, for example, Malaysia and with Thai, of course, Air France-KLM in Europe, but not many large aircraft left.
So capacity on those routes have shrunk. We're talking now more about widebody twins like the 777 or even smaller with the 787. So the alternative routings in the schedules as they were when this conflict began recently were already smaller on numbers of seats. And of course, booking profiles on flights when this happened, most airlines are flying at least 80% for long haul. They already were pretty full in the weeks ahead of that conflict. So when we heard in more general media about, "Oh, are airlines ripping people off?"—it was simply that the last seats were going at higher prices. So there's been a real change in the mix of traffic. Now we've heard, as you said, some European airlines, Lufthansa actually made quite a lot of noise of their recent results earnings that they were going to put on extra flights to Africa and Asia.
They've announced a number of those. I think British Airways too has added capacity on Singapore and Bangkok, but at the moment that may be temporary. I wouldn't, coming back to the core of your question, I would not believe that somehow these Gulf hubs are going to melt away. I mean, of course, we don't know how long this conflict is going to last. We hope it'll be shorter rather than longer. But if we look at other challenges already faced in the last 10 to 15 years, be they a financial crisis when people were predicting the death of Dubai, as it were, the pandemic, when everybody was affected and airlines worldwide were grounded, these airlines have got through these crises. And of course, Dubai was one of the countries that encouraged people to get confident to fly long haul again quickly after the pandemic by making them feel sure that they could do it without risk.
And again, coming back to Dubai's credentials. So I would think knowing that, knowing the caliber of management in these airlines with decades of experience, whether you're talking about somebody like Tim Clark at Emirates, Ghaith Al Ghaith at flydubai, Adel Al Ali at Air Arabia and more, they've got experience of conflicts, of challenges, and they have plenty on their plate right now, but it's a case of coolly, calmly working through. So I'm not somebody to think that this is going to change that landscape.
Karen Walker: I completely agree with you. Yeah. The innovation and the expertise and the sheer way that they just look at things and calmly, as you say, work out, okay, how do we adapt? What do we do? I think ultimately that is going to be the case. As an expert, particularly in being at the frontline as you have been on airline networking, we're hearing a lot about all the adaptations people are making to their networks, to changing routes, et cetera. But that's not easy, is it? And it's not inexpensive to put it mildly when you're changing routes and destinations. Can you just talk a little bit about that more broadly and the impact that's having?
John Strickland: Well, you're quite right. I mean, we saw airlines of all kinds becoming more innovative and adaptable in the pandemic. Once airlines could fly again, I mean, first of all, there was a use of passenger aircraft as cargo, but in many ways the more interesting thing was particularly looking at the value of VFR traffic—visiting friends and relations. That became a much more prominent part of airlines' thinking. And we saw airlines flying, some airlines fly to destinations and countries they'd never flown to before because that traffic was desperate to get moving before we even talked about the revenge travel coming back. But as this conflict has been playing out in recent weeks, I've been looking, thinking about airlines like British Airways who's not massively exposed to that part of the world directly looking at their whole network—I mean, I think roughly about 5%—you're still talking about six or seven widebodied aircraft today.
So as you said, my network planning taste buds, we don't really want to have, but it's six or seven planes sitting at Heathrow not doing anything. But you can't easily redeploy them in terms of long-term planning because I mean, BA, as we speak, has already announced they won't go back to Dubai at the current time until June and other points in the Gulf very similarly pushed back, but you want to try to use those aircraft differently. So I mentioned some of the ad hoc flights which should be put in place because planes are available. Crews are available as we discussed—the fact that there are less alternatives on a number of Europe-Asia routes and Europe-Australia routes in capacity terms than in the past. There has been capacity put that way. It doesn't mean there's going to be a wholesale change of how that capacity is deployed.
And as you also said, Karen, you have to think it's not just a simple matter of making a decision in the next day. You send the plane, send the crew, you've got to have all those resources in the right place. Can airports give you slots to get in at the right time of day? Can you get a handling agency? Can you get check-in space? Can you get a catering company? Where do you put your crew in accommodation? Even that is not a case of booking a local Marriott or a local Premier Inn. It's a case of is the hotel suitable? Are they okay for security depending on countries and nationalities? So it all takes time. I'm just sure there's a lot of extra scenario planning and what-ifs going along with a lot of airline network planning teams right now. I mean, there would've been some work already done, but it would be intense at the present time.
Karen Walker: Yeah, I'm sure some people are working very, very hard indeed behind the scenes through all of this. And as you say, it's very complicated and you can't just quickly say, "Oh yeah, we'll change and do that." There's a whole lot of things behind that. Can I ask you about another thing that's getting a lot of attention right now, of course, which is the sharp increase in the price of oil and the concerns about not just the price of oil, but the availability of it given what's going on and the maritime passages in this region. So obviously oil is incredibly important to airlines. It's typically the most expensive cost for an airline. Sometimes these days it's the second one to labor, but it's significant. And a lot of airlines were not forecasting ... If anything, they were expecting oil to be cheaper per barrel this year than last.
So, some profitability forecasts were hinging on that. And then the other thing is this thing called hedging, which we're very familiar with in this industry and which people's attitudes to that has changed. A lot of the European airlines still hedge, which is basically locking in a price. It's a sort of insurance for oil, but the American airlines have very much gone away from that. It's interesting. I've been hearing some of the US airline senior managers talking about things like natural hedging is what they're able to use because demand is still so high. They're comfortable still raising the price of fares to help offset the increase in oil price. So, I guess two questions for you: Do you think hedging may come back in fashion, particularly for the US airlines? Is it going to be seen as a better thing than it previously had? And can airlines continue to raise fares to help offset the price increase?
John Strickland: Well, it's certainly a real tricky nut to crack. Of course, airlines, as you said, that 25%, 30% is the ballpark figure of fuel's contribution to total cost; it obviously does vary depending on price. And as you said as well, prices have been quite benign until recently. We've just had year-end reporting first by the US carriers and more recently by the European network carriers talking about those big six airlines. We’re waiting year-end on the European low-cost carriers shortly, but many of them on the European side, as you said, they're heavily hedged. They've gone in for this philosophy of buying at a fixed price. And I think what sums it up to me is the rationale to do it in their eyes is nicely expressed by one airline that we're not specifically looking at now, but it's relevant, and that's Ryanair. Where Ryanair is also hedged generally pretty high.
And if you ask Michael O'Leary or his team, they would say, "Well, we're not trying to game the market. We're not trying to guess and hope we get the best price. What we want is certainty because it is, as you said, such a big cost. We want to know when we're planning year ahead like other costs, what is our budget going to be?” Then at least we know what we can do, especially an airline like Ryanair that wants to duck and dive and have fare promotions and discounts here, there and everywhere for whatever reason, they know then they've got a high degree of certainty. Not, but what if fuel goes up? And then we're suddenly in a mess because we've offered too many low fares. As you said, the US carriers felt some years ago they wouldn't do this. And they said, "If you look over the long term, well, yeah, we would've been better off to hedge now because we would've missed this massive jump in price." But if you look over the long term, we wouldn't.
But I think that other point you mentioned is one that strikes me as more relevant, this kind of natural hedging because I don't think you see all the short-haul airlines, whatever side of the Atlantic, suddenly sticking fare increases in normally, especially with low-cost carriers, they just adjust their revenue management parameters. They use the sophistication which exists these days with human intervention to, as you said, manage the number of seats they sell at high prices and low prices. And that way they can automatically push prices up if they think that can be sustained in a market based on booking trends, based on seat factors that they have. It hasn't always happened as much in the long-haul arena. And I think in some ways many airlines not using that mechanism because in the past you had the cozy days of IATA. Everybody agreed, we're all going to put the fares up 5% and it was just a standard, say, nevermind smoke-filled rooms.
But it doesn't happen now, but airlines go out and put an increase in, then they get accused of ... Well, of course, they put the price up when the fuel went up. They didn't put it down when it went down and consumer organizations all go mad. Why not use your tools? Use those revenue management tools, then you can do it where you need to and you have flexibility to go back the other way equally if you need to.
Karen Walker: Yeah. I think that what I've always called the black art of revenue management. Again, it's another one behind the scenes, but incredibly important, but what's really changed, I think, over the last few years is just how sophisticated those tools have become, the revenue management tools themselves, and also the expertise of the revenue management people, how they use that. And it's things like that that really, really can help airlines through exactly the sort of crisis they're going through. Yeah?
John Strickland: Absolutely. I mean, it's a fascinating area to work in. It really is something where you've got to be on the case. And since my day when I was directly involved, yes, it's become a lot more automated, but I do believe you need that combination of automation and human intervention because algorithms can look at probabilities of selling seats at whatever price, you can know all the annual data about special events and holidays and so on, but if an airline in the market goes bust or reduces or increases capacity, or you have a pandemic or a conflict of this kind, you can't get all that worked out by a system. That's where you need the analysts to step in. And I think it should be hand-in-hand because you're talking about hundreds of thousands of flights being processed for many airlines each day. Of course, you can't have an army of analysts, but if they can involve themselves in the most sensitive flights, the ones that are going to get most full where there's more to gain from adjusting, you should be doing that every day.
And I think that discipline, which as you said, was the dark art, was viewed with a lot of suspicion by many people in the past. I think it's come to much higher prominence in airlines now, recognizing it's not an adverse thing. It's a necessity and it makes the difference between life and death in some ways to an airline's financial success.
Karen Walker: Correct. With margins being so thin, it certainly makes the difference between profit or loss in cases like this, no question. I have one last question for you, John. This is fascinating conversation, but you've talked about several things. We've talked about certainty, we've talked about oil, we've talked about demand. In your view, I mean, nobody knows right now where and when this situation is going or when it will end. But in general terms for this industry, what do you feel in terms of air travel demand for this industry, what do you think is the most damaging? Is it airspace closures? Is it higher oil prices or for a better way of putting it, negative economic fallout, recession basically, as people lose confidence, which is the most concerning for airlines right now?
John Strickland: I think it is difficult to put your money on one of those particular ones because I would also put in there, of course, as you have talked about in numerous podcasts, the challenge of sustainability, where that puts the industry in the eyes of a number of people and the number of potential consumers, economic challenges, manmade going cycles, and I think airlines have become much better at riding those cycles. I mean, I saw in the recent IAG results, they said good secular long-term demand. And I thought must get out a dictionary … it's not so much to do with a church or non-church, but it means demand is in some ways almost immune to economic cycles. So it was a new one on me. But yes, airlines have become more robust by focusing on cost. Military conflicts are unpredictable. I mean, the pandemic was perhaps the most unpredictable.
So all I would say is in airline management terms, there's a need to be ready for anything. There's going to be something big and unexpected. And I do recall speaking to a couple of airline executives who said they'd done scenario planning for whatever it was, an economic downturn, a conflict, whatever, and they'd assumed that September 11 was the guide and maybe demand would be down by 25% or whatever it was in those airlines that were affected. They never expected to lose 100% of demand as the pandemic did. And for those airlines in the Gulf, they've been close to that kind of situation currently. So it's a case of that ever-focused attention to the detail of costs, which was not always there in the past is there—people like Ryanair and others have learned that—so that you can batten down the hatches, give yourself flexibility, be quick at ducking and diving, as we said, in network and revenue management to adjust quickly to whatever happens and not be waiting in a rather structural, slow and rigid way to sometimes a point when it's too late.
Karen Walker: Yep, that's right. And maybe underlying all of that is always have the crisis management plan, always make sure it's updated. Absolutely. And always make sure everybody knows it and is ready to put it in place if they need to. Yeah.
John Strickland: Exactly.
Karen Walker: John, thank you so much for joining me. I hope you'll do this again.
John Strickland: If you'll have me back, I'll be happy to come. I enjoyed it.
Karen Walker: Anytime, anytime. Thank you, John. And thank you also to our producers, Andrea Copley Smith and Cory Hitt. And of course, a huge thank you to our listeners. Make sure you don't miss us each week by subscribing to Window Seat on Apple Podcasts or wherever you like to listen. This is Karen Walker disembarking from Window Seat.
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