Consultants’ Corner: Four questions every airline CEO should answer now
The operating environment of airlines has suddenly changed and might take two or three years, if not more, to return to pre-crisis levels, according to OAG. In this period, much might happen, according to Sylvain Bosc, who has had various senior airline jobs, including CCO at Corsair, South African Airways, and FastJet, and SVP of Europe for Qatar Airways.
The new demand and supply context
Newly-gained habits of working, meeting, or training online will partially replace highly profitable business travel. Leisure traffic will be severely reduced by fear of flying and lack of disposable income. Many countries are also likely to take this ‘reset’ opportunity to impose overdue ‘green’ taxes.
At the same time, supply is bound to remain excessive. The global airline industry, with the exception of the USA, is still overly fragmented with many state-owned players – who are more prone to irrational and predatory competitive behaviours – in the mix. The temptation to sweat assets and generate quick cash will be irresistible – especially with low fuel and associated variable costs – leading to a general drop in yields and profitability. Furthermore, abundant availability of cheap financing and distressed capacity at record-low rates will inevitably open up opportunities to aggressive and ambitious new entrants with ultra-low-cost bases and digital best practices built at the core of their strategy.
Four questions every airline CEO must answer now
In this environment, there are only three possible outcomes for incumbent airlines: nationalisation, concentration, or liquidation. In some cases, the third option is inevitable and should be pursued. For the rest of the 800+ airlines in the world, shareholders and management must take radical decisions to have a say in the upcoming consolidation phase.
- How much capacity – and of what type – do we really need in the new context?
- How can we reset our fixed cost base to resist pressure from potential new entrants? And in this context, how can we build flexibility in our operating model?
- What role can digitalisation play in this context?
- How can we achieve scale and capacity discipline through M&As, JVs, or cooperation?
A zero-based budget approach is advisable and might very well lead to divestiture or even liquidation decisions. For government shareholders, funding questions will come at a time when numerous other priorities will require urgent interventions and massive resources from the moneybag. Some will once again save lame ducks (Alitalia), others will draw a line in the sand and courageously face the inevitable (South African Express). But resources will not be infinite.
The time to take stock and rethink the business is now – and decisions need to be taken immediately.
This article was brought to you by Sylvain Bosc, an independent aviation consultant. See him here.