COVID-19 has landed a debilitating blow to the airline industry — one that has made a larger dent than the combined impact of 9/11 and the 2008 global financial crisis. As an industry that operates on 7-10 percent return on capital, it does not take much to conclude that substantial financial aid will be crucial for airlines to commence their operations.
The future of this industry post COVID-19 remains ambiguous – which airlines will survive? What role will governments play? Will there be many Mergers and Acquisitions (M&A)?
As airlines go into recovery mode, they certainly cannot expect a level playing field. Governments of some countries such as U.S., Norway, Singapore and Italy are committed to helping their airlines through relief measures. However, the bailout and loans are contingent on the airlines achieving certain levels of sustainability and financial performance.
To avoid bankruptcy, airlines that do not get funding, might have to resort to sale of equity or M&A. Even then, the more likely scenario would be of airlines cherry-picking certain areas they would want to consolidate — rather than the entire entity.
Consolidation could be a good option for airlines in the Asia Pacific (APAC) market due to excess capacity problems. A lot will also depend on the legislative checks and balances of various governments across the globe in allowing cross-border equity sales and partnerships. In such a scenario, we will most probably see M&A bids for regional airlines in Europe over the next couple of years.
Reining in Costs
As airlines try to scale up demand and growth for the next year, cost efficiency will be an immediate goal. They will need to focus on finding quick and effective cost-saving options to ensure positive balance sheets for 2021, even as they plan to pilot different models to achieve long-term goals. In Table 1, we highlight certain areas where airlines can curb unnecessary costs.
Table 1: Cost Efficiency Measures for Airlines
Apart from the above cost levers, airlines will have to be prepared to grab market share as soon as the economy re-opens. Business travel is likely to make a faster comeback as opposed to leisure travel, and overall, the industry has to brace itself for some permanent market reductions. Airlines will thus have to make decisions on fleet re-commissioning and flight routes. There may be a fall in demand for wide-body aircraft, as airlines look at deploying narrow-body jets to deliver efficiency and value for long-haul travel.
Digital platforms / solutions can provide data-driven insights and simulations to enable airlines in speedy and improved decision-making on network and fleet. Ancillary sales will have to be re-visited through cross-selling initiatives. This type of recovery planning should start immediately backed by a robust strategy.
The need for transportation of Personal Protective Equipment (PPE) kits and medical supplies is putting significant strain on air cargo operations. This has led to a shortage of freight aircraft — and an increasing number of airlines are now seeking permission to use their passenger fleet for cargo purposes. Similarly, COVID-19 has led to an increased demand in the e-commerce sector, which will continue well into the future. Airlines can also look at expanding into this area to augment e-commerce operations further.
Now would also be a good time to re-design operating models, processes and organizational structures. This exercise will add immense value to both efficient recovery and be a sound blueprint for the future. While the recovery will be a long road, a data and technologically driven approach will definitely help airlines weather this storm. In the words of Peter Drucker: “The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday's logic.”