by Horst Findeisen and Brock Friesen, September 2020
Abandoned airport terminals are an eerie sight. Airlines will not bring back capacity as long as passengers are afraid of flying. Such adversity necessitates fresh approaches. Opportunities do exist that were not available previously. Even impenetrable mega hubs will see changes. Creative airports, large or small, will recover faster than those that sit back and wait for business to bounce back.
Adversity necessitates fresh approaches. There are opportunities for route planning at all airports that did not exist while hub airports were operating at or near capacity. Creative airports will recover faster than those that sit back and wait for the previous normal to come back. Some will use the COVID downturn to position themselves for more flights and passengers after the pandemic than they served before.
Historically attractive growth rates
The aviation industry has been blessed with predictable, long-term growth rates. True, periodic crises hit from time to time, but demand has always bounced back. In hindsight, compared with this year’s COVID shock, previous impacts appear almost trivial. The long term trendline pointed upward for decades and air traffic grew at rates of roughly 2 x GDP. Virtually all players in aviation had gotten used to this ever-expanding business and invested accordingly: air frame manufacturers, leasing companies, airlines, maintenance and catering companies. Airports are in this group.
Communities love growing airports because they create high quality jobs. In order to attract more airlines, airports institutionalized their marketing and created specialized route development teams. Their job was to engage with prospective airlines, to educate them, and to convince them to start new routes.
But some route development teams did little more than offer discounted airport fees or marketing funds. Best practice departments looked at the bigger picture from the customers’ perspective. They tried to fully understand the airlines’ end-to-end decision-making process, replicated their business case structures and spoke their jargon. They used available data, intelligence, and advanced forecasting tools for traffic and profitability. Even better, some mustered the additional resources of their catchments’ organizations to find synergies and provide compelling offers to prospective airlines.
The Pandemic Shock
COVID-19 has eliminated the very premise of this game – predictable growth. Overnight, air traffic came to a complete standstill and declined precipitously. Airlines ran out of cash. Those airlines not lucky enough to get government bailouts or lifelines from their lenders will perish. Even carriers virtually guaranteed to survive have cut their fleets substantially. OEM’s aircraft orderbooks are melting. For airports, discontinued flights mean lost landing and handling fees, and absent passengers, high margin non-aviation revenues like parking and retail are also gone.
Airlines Forced to Contract
The IATA industry outlook is that it will take until 2024 before traffic volumes will be back at pre-COVID levels. Absent sufficient passenger demand, the airlines’ focus will be on orderly contraction, and on keeping options open to restore services as demand recovers. Carriers will deleverage risk by trimming their existing routes, reducing frequencies and operating smaller aircraft types that are easier to fill.
Likely, many airlines will come through. Once survival is secured, wise airlines and airports will make the most of this crisis. They will get their cost structure in order and become more agile to compete aggressively once growth returns.
Opportunities for Airports
Airports can either wait for recovery or use COVID as an opportunity to innovate:
- Historically, large flag airlines dominated airports like Heathrow, Narita, and Miami and built connecting mega hubs. This often meant that finite airport takeoff and landing slots at the hub were not available to other airlines
- If such hub slots are no longer grandfathered indefinitely for dominant incumbent airlines, then this offers new opportunities for other carriers to access previously constrained airports and to launch flights to previously unserved airports. Spicejet’s entry into London-Heathrow is a case in point.
- Traditional hub and spoke networks may become less important. Point to point services using highly efficient long-range narrow body aircraft, such as the A321 XLR will thrive. Some experts believe that COVID will create a preference for point to point services rather than risk infection at a connecting airport.
- The economic viability of the hub and spoke business model may be undermined if business travel is permanently reduced as a consequence of substitute internet-based communications.
- If the hub and spoke business model becomes less important at crowded hubs like Heathrow, there will be landing slots left over and opportunities for new point to point services that were not previously possible. Airports that previously had no non-stop services to hub airports may ask their marketing departments to work with airlines to support such services.
- If customer demand shifts toward point to point services, there will be additional opportunities for airports to attract services to new destinations.
- If smaller airports use the COVID lull in air services to secure new routes to hub airports, they will have invested in services for the long term since the hub slots will be secure for the post-COVID era.
- Major airlines’ decision to retire wide-bodied passenger fleets like the A380 and 747 means a reduction in cargo belly hold capacity. All cargo air services may be a big opportunity created by COVID-19.
What route development teams can do now
A strategic shift is warranted.
- Priority One for airports and airlines must be to reassure travellers that flying is safe.
- Airports need to invest to enable the safe passage of travellers through their airports. Schedule and pricing initiatives will fail if passengers are afraid to fly.
- Airports need to do all possible to facilitate economic operation of their incumbent airlines.
- Given that passenger demand may shift to point to point services, airports need to be open minded to existing and new airlines wanting to serve new destinations, possibly with long-haul narrow-bodied aircraft.
- Hub airports may become largely point to point airports in future and airport route planners need to be aware of this possibility. Opposing shifts in genuine customer demand generally fails so airports would do well to go with the flow.
- Those airports that have the resources to support a long-term view will do well to encourage new services to markets that were underserved or not possible when hub airports were full. No doubt, these hubs will fill up again so this maybe the only opportunity for small/medium sized airports to grow and optimize their services to hub airports. Government and other tourism entities would be well advised to support such initiatives for the long term.
- Passenger/cargo combination services have dominated the industry in recent decades. If COVID leads to a clear separation of these businesses, airports would be advised to facilitate the transition.
What this means for Airports
It is time for visionary thinking to lead. Historic time series and meticulously calculated trend extrapolations are now worthless. Airport and airline planning models that rely on such input have already given way to strategic types of planning with rapid trial and error iterations.
More than ever, airports must show flexibility to their airline customers. Cut them some slack and help them to experiment. Do away with any cumbersome administrative hurdles until they have found the right gauge and frequency for their continued service to your port. This will be the basis from which growth can happen down the line.
UNEX is there to support you.
There is incredible experience among the UNEX consulting group, and there is expertise at working with clients to be the catalyst to define a practical vision. In close coordination with your team, UNEX is ready to support with strategic advice, systematic methodology, revised parameter settings and expert judgement of competitive market dynamics.
We see three main value adding activities at this junction:
- Find the New Normal: Market scenario planning to identify broken trends and new forces
- Adapt Route Development: Retaining existing services
- Identify and chase new opportunities. New Point to point services, new airlines, new all-cargo air services
UNEX partners have deep personal experience in airline management on executive levels that we love bring to bear for our airport customers.