How do airlines leverage crises?

Covid-19 has impacted aviation possibly more than any other industry. I predict that there will be a fundamental reshaping of the industry in the next few years, a theory that has inspired the creation of this blog. This is the first post of a series that will examine airlines that are well positioned to emerge stronger from the current crisis in spite of the challenges they face.

Though travel has been all but eliminated this year, there is no question that the aviation industry will ultimately return to growth. Over the last twenty years, economic and health crises have deeply affected the industry, multiple times over. In my lifetime, the list has included the dot.com burst, 9/11, the global financial crisis (GFC) of 2008/09 and other, smaller-scale pandemics (e.g., SARS and Ebola). The chart below illustrates how the industry has continued to grow in spite of temporary setbacks. I’m confident that, in time, history will once again repeat itself.

But what will the return of the aviation industry look like?

Global crises tend to act as an accelerant to trends that were already underway prior to any resulting economic slump. For example, the GFC of 2008/09 hastened the demise of the traditional travel agency model and increased online bookings, leading to the rise of digital platforms including Skyscanner and AirBNB.  In the US, it hastened industry consolidation into three major airlines with the Delta/Northwest, Continental/United and US Airways/American mergers.

The financial crisis also marked a turning point for two airlines in particular: Wizz Air and Jet Blue. By examining their past strategy, we can better predict which players may emerge successfully out of the current crisis.

Wizz Air

Wizz dominates the growing Eastern European market and is actively (and very publicly) looking to exploit the opportunities stemming from the current crisis (It has opened multiple new bases and over 100 new routes). It started flights in 2004 and by the end of that year it had already carried one million passengers. Five years later – and post-financial crisis – it had carried 7.5 million passengers. This is impressive growth in normal times, let alone over a period of weak demand. In 2009, it increased its capacity 22.4% versus 2008 and signed a Memorandum of Understanding for 50 Airbus A320 aircraft at the 2009 Paris Air Show. The growth trajectory continued for the next decade with Wizz taking full advantage of the bankruptcies of Sky Europe and Malev. At the close of 2019, Wizz had carried just under 40 million passengers.

JetBlue

The global financial crisis of 2008/09 came at the right time for Jet Blue, too. Jet Blue started flying from JFK airport in 2000 and experienced a rapid 2-3 years of initial growth. With its vision statement of ‘bringing humanity back to air travel’ it created a niche for itself in the market, offering new in-flight service levels such as in-flight entertainment in every seat – something that was not standard on domestic carriers at the turn of millennium. The combined strategy of improving customer experience whilst maintaining low overheads – it didn’t offer in-flight meals and avoided building a hub network – enabled its success. After five years, it was grossing over $1 billion in revenue. When it hit a few bumps after the initial honeymoon period , executives were quick to revise strategy, change leadership, and ultimately regain profitability just as the financial crisis kicked off.

JetBlue pioneered the drive to ancillary revenue with fees for extra legroom and checked bags and carried on its growth in the decade after, including pivoting to a new revenue stream with its Mint business class product on transcontinental flights. It was also a contender to acquire Virgin America in 2016 and is now the fifth largest airline in the US.

What do these stories teach us about how airlines can pivot during a crisis?

Firstly, that these airlines were already established and up and running before the crisis. There’s lots of talk about whether this is a good time to start an airline but these case studies and others show that airlines with a strong foundation are those best positioned to grow.

Secondly, what was true before a crisis, is true during and after a crisis. If an airline was in trouble before the crisis, then their troubles are only going to be exacerbated. We can see this with the troubles that have beset Virgin Australia, Thai Airways, Flybe, Virgin Atlantic, and Avianca – all of whom were in financial trouble well before coronavirus struck. We can see this in previous crises too. In the aftermath of 9/11, the US Senate passed the Air Transportation Safety and System Stabilization Act (2001) to support struggling airlines. It dolled out $5 billion in grants and $10 billion in loan guarantees to seven carriers. Four of these carriers ultimately entered bankruptcy within the next couple of years and shut down. Being well positioned, profitable (and growing) with a clear strategy before the crisis is important.  The ability to be agile and react to changing circumstances is paramount.

What does a well positioned airline look like? It’s a combination of the following:

• A clear fleet strategy. if you look at the examples I have cited above, Wizz has focused entirely on the Airbus A320 family aircraft and JetBlue grew the same way initially before later adding Embraer E190 aircraft for shorter routes.  Ryanair has a fleet of over 250 aircraft, all Boeing 737-800s.  The reverse is true for airlines that are struggling. Thai Airways has six different aircraft types for a fleet of 75 leading to significant additional cost and complexity.
  • A simple network strategy – Again, both Wizz and JetBlue have a focus on point to point flying. They have avoided creating hubs and put a lot of thought and data in identifying new route opportunities. They are cautious before opening bases and are able to open and close routes in short time frames. This is not to say a hub strategy is wrong, but airlines that have a complicated network often end up with significant challenges. A recent example of this is Norwegian which has had multiple network strategies including regional flying within Scandinavia, short haul flying within Europe, domestic flying within Argentina, low cost long-haul from Europe to the US (and South America), and low cost long-haul from Europe to Asia. It’s no surprise that the airline is barely scraping through this current crisis.
  • Market segmentation. Given how few airlines make a profit, the world is surprisingly not short of new airlines. Many of these fail, often due to lack of differentiation. We’ve seen how Jet Blue differentiated itself through its product and Wizz Air differentiated itself by building up a strong network flying out of fast growing Eastern European countries.  Airlines that have tried a hybrid strategy often come unstuck – in the UK the sad failure of Monarch in 2017 was partly attributable to its start as a long haul airline before later pivoting to a short-haul strategy, where it was unable to distinguish itself from market giants Ryanair, Easyjet, and Thomas Cook.

The last lesson to take away is that legacy carriers are rarely those that emerge stronger in the aftermath of a crisis and are typically the slowest to recover. This is something that is only likely to be enhanced with this crisis. Whilst Europe looked like it was continuing down the path of consolidation as IAG closed in on Air Europa, now none of the airline groups will be able to consolidate anytime soon. For example, Lufthansa is expressly prohibited from doing any M&A activity until it has repaid 75% of its bailout loan.

Carriers that have emerged strongly from the financial crisis (initially) are the low cost carriers.  Why?  Crucially, they are typically unencumbered by historic issues and high cost labour. They also have a low cost base (e.g. Wizz Air has a cost base of 3.39 cents for every seat kilometer flown) and as a result are able to drop fares and stimulate demand via pricing.  Furthermore, low cost airlines are not reliant on business class travel and typically have a network that is heavily skewed towards domestic travel or short-haul international. This time round, short-haul travel may also rebound quicker due to a perceived lower risk.

Despite the challenges of Covid-19, for many airlines the pandemic could offer an opportunity to grow and develop their market share, if they do it right. For those that were already struggling, it will be an opportunity to reset, cut back and remove what was not working and start again. For others, this crisis will unfortunately be terminal (if not immediately, then in the next 1-2 years). Look out for a follow-up article examining which airlines are well placed to use this crisis to emerge as a winner in the post-COVID world.