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Supporting Airlines Through COVID-19 Part 2: Realigning Business Models

While the effects of the coronavirus pandemic are still being felt around the world, airlines must effectively manage their assets, operations and cash flow to ensure sustainability and, ultimately, long-term business success. In the second instalment of this three-part series, we delve into how revisiting and realigning business models can position airlines to better meet the demands of a post-coronavirus market.

While the effects of the coronavirus pandemic are still being felt around the world, airlines must effectively manage their assets, operations and cash flow to ensure sustainability and ultimately, long term business success. Preparing for travel in a post-coronavirus world must happen now – and we’re here to help airlines make the most of the current situation.

Key considerations are right-sizing fleets, revisiting and realigning business models, and ensuring they have adequate access to capital to carry the business through the pandemic.

In this three part series, we’ll cover each of these steps to success, during and after COVID-19.

Revisiting and Realigning Business Models

COVID-19 has put airlines into a period of reflection and restructure. The underlying assumptions that had historically driven the airline business model have been put to the test. While the industry is going through a reset, there’s no better time for airlines to revisit their current business models and realign them with the drivers of a post-coronavirus market. It will be the airlines that adapt and position themselves to the realities of the market that are able to achieve long-term business success.

At this stage, there are still more questions than answers – but some key considerations in a post-pandemic market are listed below.

Passenger Demand

It’s no secret that aviation has been one of the main industries that have been deeply affected by the ongoing COVID-19 pandemic. Due to the complexity and uncertainty surrounding the initial spread of coronavirus, governments and regulators alike moved to restrict air travel in the first quarter of this year. As per IATA’s latest guidance, global passenger demand on average is forecasted to decline by -54.7% in 2020. In terms of the effect of the pandemic on the bottom line of the industry, airlines globally are expected to incur a loss of USD 84.3 billion this year alone.

Air travel restrictions are easing worldwide and airlines are starting to gradually fill the market with capacity, but it will be interesting to see the impact this will have on the sentiments of passengers: will they be incentivised to start travelling or will they forego travel plans and wait for a vaccine before deciding to return to normalcy?

There’s an opportunity for airlines and passengers to reach a middle ground, to help aid a faster recovery of passenger demand. For instance, airlines in the US have taken a multipronged approach to restore consumer confidence in air travel, by imposing varying levels of mandatory health and safety guidelines for all passengers. Some airlines have strict measures in place – such as an indefinite ban on passengers that fail to abide by their guidelines – whereas some are taking a relatively lax approach and have not addressed the consequences that offending passengers may face.

Passenger safety will always remain a cornerstone of commercial air travel. Airlines that are proactive in their approach to address consumers’ uncertainty about flying in the current environment will have a competitive advantage against their peers.

Realigning Business Models

As the industry slowly shifts into recovery, one of the key aspects to consider is the impact of the pandemic on individual passenger segments – and corresponding airline business models.

The overall economic impact of COVID-19 may cost the world economy as much as $82 trillion (USD) over the course of five years. As a result of the economic distress already caused to individuals, it is probable that the LCC airline business model may prove to be the catalyst needed to kickstart a recovery. On the other hand, passengers may be more averse to the “no frills” approach of the LCC model, shifting their preference to full service carriers that are willing to go the extra mile for passengers.

Before the pandemic, legacy carriers like Emirates and Etihad were on a path to diversify their product offering, by joining forces with or investing in other LCCs (flydubai & Air Arabia Abu Dhabi). Owing to the unprecedented stress caused to the balance sheets of airlines globally, many airlines that have traditionally functioned as legacy carriers may explore the feasibility of following suit, and look to provide their customer base with a leaner flying experience – both to reduce operational costs and to stimulate passenger demand.

In any case, it’s crucial for airlines to adapt their product offering and marketing message to address the changes in the passenger mix, to ensure long standing success.

Revisiting the Network and Fleet Strategy

As per IATA’s revised global passenger forecast, domestic and regional travel demand is poised to recover faster than the demand for long haul travel in the coming years, due to the slow and uneven easing of international travel restrictions. Domestic and regional travel demand is already showing signs of recovery due to the easing of restrictions in large domestic and regional markets, primarily in Asia.

Values of widebody aircraft, conventionally operated on long haul routes, have come under immense pressure when compared to narrowbody aircraft. Resumption of long haul travel is by and large co-dependent on how successful countries across the world are in terms of mitigating and managing the risks associated with the spread of COVID-19, and the gradual easing of restrictions on international travel. As such, recovery of demand for long haul travel and corresponding widebody asset values will remain significantly depressed in the short-term.

The airlines most at risk must realign their network strategy accordingly. Will the shift in passenger preference for short haul travel have a significant impact on how airlines design their network structures (hub-and-spoke versus point-to-point models)?

One of the greatest advantages of a hub-and-spoke model is how efficient it is in terms of the distribution of passengers through the use of a centralised hub. Alternatively, the point-to-point model offers reduced journey times for passengers; this may be of additional importance to passengers who are looking to avoid mass interactions, an unavoidable trait of the hub-and-spoke model. This is an important aspect that airlines must assess in the context of their relevant markets and geographical position.

One other essential aspect to consider for airlines is the viability of their current fleet composition. In light of the contracted passenger demand and traffic flows, airlines need to measure their capacity requirements over the short, medium and long term, and remodel their current fleet to an optimal fleet mix that will fulfil this.

Rethinking Distribution and Operational Gearing

The world has undeniably taken a significant, permanent step towards digitisation. In the same way, will passenger consumption trends shift permanently? Airlines need to ensure that their existing distribution channels and strategies are still relevant in an increasingly digital market. Ancillary consumption could change with new health and safety standards – are existing systems capable of maximising revenue from these new channels?

The abrupt decline in passenger revenue against a large, fixed cost base has driven record-breaking losses for airlines. Airlines might consider adding additional flex into their business models through greater use of outsourcing; at the risk of a second wave or similar pandemic in the future, some airlines may seek to maintain a core fleet for minimum market demand, developing counter-seasonal capacity partnerships to address peak periods. Airlines could outsource traditionally in-house capabilities to third party services providers to increase their flexibility and responsiveness to future changes.

Revenue Diversification

Scheduled commercial airlines have been the hardest hit by the pandemic. We’ve seen the most significant losses in the long haul scheduled passenger segment – but airlines operating in the ad-hoc charter and freight segment have fared far better.

The dedicated freight market in particular has seen a significant increase in both volume (due to the absence of belly cargo capacity) and pricing (due to the absence of supply).

Airlines may now consider diversifying their businesses into alternative revenue streams, such as freight; more significantly, airlines could look to diversify their business models outside of passenger transport altogether, to mitigate the risk posed by future global pandemics. Airlines may also consider diversifying their operations geographically by means of establishing subsidiaries or investing in existing airlines like Wizz Air (Abu Dhabi) and Qatar Airways (IAG, LATAM, Cathay Pacific). This can help create airlines that are less susceptible to regional shocks that may arise due to a future pandemic that will hopefully be better contained – like the SARS outbreak in the early 2000s.

Strategise Effectively During COVID-19

The state of the industry today, combined with the uncertain outlook of commercial aviation in the near future, has left airlines across the world with an onerous task: to effectively mitigate risks and strategise for a market that is now facing unprecedented challenges.

From providing restructuring support to developing and rethinking airline business models, ACC has been instrumental in assisting airlines in this process. Our strategic consulting and asset management services are aimed at enabling airlines to withstand the challenges brought on by the current pandemic, adapt their business models and transform them into entities that remain sustainable and add stakeholder value.

For more information about our complete range of services or to enquire about your airline’s specific requirements, get in touch or speak with a member of our team on +971 4 250 0373.

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