With fragile balance sheets and liquidity positions at airlines, which in some cases can’t cover more than two days of expenses, the situation is precarious amid COVID-19
As the lockdown is gradually lifted, airlines are getting ready to take to the skies once more. But airlines 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 what cities flights will be started from and what the schedules will be is hard to discern.
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, airlines are left with no easy answers.
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
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 a break-even on costs at the very least. While declining fuel will (down by 64% since January) 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 leave at some airlines and salary cuts have been announced across all airlines. But staff expenses at most constitute 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 all things equal 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
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
Add to that the fact that some segments of demand will simply not return. Because while the Indian aviation market grew at a compounded annual growth rate of 8% over the last 10 years, the truth was that growth was driven solely by pricing and was unequal across segments. This included weekend travelers, 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.The student from Bangalore was happy to return to Assam over the long weekend; the newly-wed couple was happy to do a weekend trip to Goa; and the new startup business was happy to fly out to Mumbai to pitch to investors.
Given the low prices which at times were at par with railway tickets (rail: air parity), travelling was really second nature. 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
Airlines are faced with a world where qualitative inputs that deal with human emotions have to inform business plans
The final challenge for airlines also traces back tobusiness planning, forecastingand an accurate reading trends. The old management mantra of quantifying all things and “what cannot be measured cannot be managed” simply does not work in the current context. Because quantitative data simply doesn’t reflect behavioural changes. And more than anything else the pandemic impacts how we think about travel which then informs how we travel.
For airlines, 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.
Airlines are faced with a world where qualitative inputs that deal with human emotions have to inform business plans. No sophisticated 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.
(Satyendra Pandey is the former head of strategy at GoAir. Previously, he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Views expressed are personal)