The Airlines’ Next Assignment: Bring Assets Back Under the Roof

Key Fact #1: Overall, global profitability for airlines is negative and always under threat.

One of the most visible industries on the planet – airlines – has long been one of its most troubled, in terms of overall sustainability and profitability, and substantial changes in management strategy must occur for things to change.

Over the past few decades we have witnessed numerous amalgamations and acquisitions in which major players absorb their competitors in order to gain access to the most lucrative routes. Longer range, more fuel-efficient planes made of lighter materials have been added to fleets, and codeshare agreements have become a standard method for expanding an airline’s impression of reach and flight frequency.

Despite these innovations, the industry faces significant challenges.

Volatility in the price of fuel, route restrictions and excessively high landing fees at major airports represent typical and ever-increasing operational costs. A more profound and far reaching impact can be seen in the changes to the way flights are selected and booked, largely through online travel services. These have substantially reduced per-seat-per-kilometer profitability by opening the market wide and forcing airlines to compete directly against each other for every reservation. Many business travelers are opting to replace their flights with video conferencing. And while all these changes happen, the airlines themselves must commit to purchasing planes that tend to have a long lead time – months or years in terms of manufacture and delivery – a particular Achilles heel in an economy that now marks time by the minute.

In short the margins can be razor thin.

Key Fact #2: Online technologies threaten profitability, but can also be the source of the solution.

Social media must also be recognized here as having a substantial impact on profitability. One of the most notable examples of this was the 2017 incident on United Airlines flight 3411, in which a passenger, Dr. David Dao, was forcibly removed from his seat after declining the airline’s request for four people to surrender their seats for crew. The altercation was captured on cellphone video and the resulting public backlash wiped one billion dollars off United’s books in the immediate news cycle period, with the longer-term loss being adjusted to $250 million. The flight 3411 incident might have been one of the most infamous, but many other incidents involving airport construction/expansion snafus (London Heathrow Terminal 5 for example), mishandled passengers, animals and luggage, and major industry developments like the grounding of the Boeing 737-MAX have all had significant impacts on the bottom line.

Global Variances in Profitability

Being a thoroughly global industry, results can vary from region to region, while averages tell a different story. For example, in 2018, quite a few U.S. based airlines reported significant profitability, with the top four, United, American, Delta, and Southwest averaging $2.66 billion in profits that year.

Elsewhere in the world, especially the Pacific rim, airlines continue to struggle to return their cost of capital.

According to the International Air Transport Association, many of those who profit from the airline travel business are on the logistics side. Freight forwarders, ground handling and air navigation services tend to recognize profit year-over-year, while travel agents, airlines and airports do not.

Interestingly, when one looks at the most profitable airlines globally, they are not all U.S. based, nor are they all among the elite, top-tier service airlines like Singapore Airlines and Fly Emirates. In fact, Ireland’s low budget airline Ryanair routinely occupies a place at this table.

The Metrics of Customer Experience

Key Fact #3: Understanding and addressing consumers’ desires through data and communication will remain vital to an airline’s prosperity.

Airlines and airline travel will never vanish from the consumer marketplace, but specific airlines and jobs might. It is important for airlines to understand the changing needs of their customers. Do they prefer the lowest price? Frequency of flights? Loyalty/points programs? Comfort, such as extra legroom? Better baggage options? Personalized service?

As such, it is vital that ongoing research remain a key priority. Surveys, follow-up calls from contact centers, and analysis of social media chat can help draw a clearer picture of the items and experiences their customers like and dislike. The same goes for using mystery shoppers to experience the quality of customer service first-hand. Teaming up with other vendors, even those in unelated areas to pull and analyze demographic is vital, and transparency – both in terms of fare structure as well as public relations/corporate communication goes a long way to ensuring long-term trust.

Where Will They Go Next?

The future of the airline industry will likely lie in procuring assets once again. Over the past twenty years, much attention has been given to breaking up the operations of an airline into a service model, outsourcing IT, leasing equipment, and focusing on short term expenditures in place of long-term asset value.

Key Fact #4: There is potential in strengthening the procurement role and bringing assets back in house.

Now opinion is starting to move in the other direction, with industry experts suggesting that the same technologies that threaten its livelihood (online travel sites and “software-as-a-service” suppliers) be used to maximize an airline’s procurement budget through techniques like clean sheets and auctions.

In short, this signifies a reversal of the trend that has dominated the e-commerce boom – of disintermediating all the elements of the business through leasing and outsourcing in order to focus on a company’s main mission. The most obvious example of this type of outsourcing across all industries is the move to the cloud for storage and mission critical infrastructure. Basically, moving key parts of an enterprise out of the house and into the hands of professional third-party managers.

Given that the data now shows that for the airline industry at least, such an approach has made winners out of the supplier organizations, at the expense of the airlines, there may be some wisdom in inviting the procurement team to sit at the strategy table much earlier in any fiscal cycle, to bring assets back under one roof. Times are different than they were twenty or even ten years ago. So, bringing assets back in house should not be thought of as a mindless pendulum swing, so much as the next step forward in the context of a quickly changing global economy.

Key Impacts

  • Airlines remain on a razor-thin profit model in general despite better technologies and reduction of competition
  • Profitability (or lack thereof) is not universal, but varies significantly by region
  • The most consistently profitable airlines are not all from the same sector, like ultra-luxury.
  • Understanding the individual customer through surveys, mystery shopping, data analysis and direct experience will be more important than ever.
  • Procurement of assets in place of full-scale outsourcing, managed by more modern techniques may be the next opportunity.