As health authorities around the world combat the spread of the COVID-19 virus, airlines are taking drastic measures to minimize the impact on their business. How should one maneuver an airline through these stormy times? Six questions to Christine Weigner, Associate Partner at Lufthansa Consulting in Frankfurt:
COVID-19 has a massive impact on aviation. What is your assessment of the current situation for our industry?
Following years of strong growth, the aviation industry already slowed down in 2019 in some markets, driven by economic and political uncertainties as well as the rising debate about the effect of travel on the climate. With COVID-19, we see a significant cut for the entire industry. The shut-down and isolation measures that began with countries like China or Italy escalated to the closure of the US market for European travelers, traditionally a very large traffic flow. This was then dramatically worsened by most large countries closing their borders to international visitors. Domestic travel may also be hit, as seen by the week-long suspension of flights in India and the drastic reduction of capacity in the USA. These global restrictions on travel are an existential threat to many players in our industry. Only those who have built up a financial buffer and resilience, with the flexibility to react immediately to this development, will be able to emerge from this crisis stronger.
What financial impact will the crisis have on aviation?
In my opinion, it is still too early to evaluate the real cost of the crisis for our industry. In its latest update, IATA estimates a global loss in passenger revenues of over 250 billion USD. That is a little over 40% of airline revenues in 2019, and does not account for the losses that will be borne by other operators along the aviation supply chain. And, given the scale of the disruption, every airline, especially smaller ones, have to respond to the individual threats to their revenues and cash flows in order to survive.
What are your recommendations to airline leaders in these days?
First of all, to protect your employees and promote compliance with hygiene recommendations. Besides that, the biggest challenge is uncertainty. Nobody knows, how exactly the virus will spread, which markets will eventually be affected most and how long the slowdown will last. While everybody is hoping for a short-term impact only, I would rather recommend to anticipate a challenging 2020 and maybe beyond. Demand may bounce back in one or two quarters, but the financial aftershocks will be felt longer.
From a business perspective, the foremost priority must be ensuring financial liquidity. Drastic and courageous cuts are necessary to minimize cash out and optimize those products and routes that still deliver a positive cash contribution. The challenge lies in identifying those in times of daily changes in demand and travel regulations. Examples of selected air freight routes show that these opportunities do exist. And, looking ahead, this is an opportunity to rethink business models and recommit to leaner, more efficient ways of operating. For some airlines, the crisis might even be a chance to play an active role in further consolidation of the market.
Looking at cost positions – what are the main drivers from your perspective?
Airlines need to ensure that they have the liquidity to cover all costs that are relevant for operations, such as fuel cost, ATC fees, leasing/financing costs, salaries, etc. They can only ensure this through drastic measures of cost reduction. We recommend bold moves on one side and on the other hand keeping a strong focus on those actions that allow for a fast and smoothest-possible recovery from the crisis.
Prominent measures are immediate budget reductions in routine functions and projects. A hiring freeze and the negotiation of short-term work compensation programs can also lead to a significant relief of the cash-outflow. Obviously, in times of shortage of skilled labor, large-scale layoffs can only be the very last solution. Airlines also need to consider carefully which of their strategically relevant projects should continue in order to ensure fast recovery and achieve a potential competitive advantage after the crisis. Grounding aircraft is a measure that needs careful consideration of the costs for ‘mothballing’ and recovery as well as the resulting real benefit. If aircraft are leased, negotiating with your lessors and financiers might offer more relief. Airlines have learned from prior crises that the pace of recovery after the slump depends on the decisions made at the beginning.
For airlines that were already struggling to produce sustainably positive financial results before the crisis, often only fast and well organized ‘stop-the-bleeding’ programs to optimize cost positions are the solution.
You also mentioned securing revenues. What are your thoughts on this one?
Obviously, at a time when travel is so significantly impacted, this is easier said than done. First of all, an efficient and highly flexible network as well as revenue steering can help. On a daily basis, the network planning experts need to ensure that the combination of offered frequencies and operated aircraft type is steered to an optimum. This should be complemented with state-of-the-art highly flexible revenue/pricing management that allows airlines to react to demand and competition in order to remain attractive without wasting revenue potential. Dealing with the uncertainty of travelers is a key success factor. Therefore, introducing flexible re-booking and cancellation policies can also be of help to avoid cancellations (which would then negatively affect your cash position) and secure demand in markets, which are not affected too much. For airlines in full or sub-charter business as well as for those players with a high share of large accounts (for example, business travel), we recommend a very close exchange with your clients to understand their current issues and assess the impact on your business to reduce the risk of uncertainty.
Have you experienced similar situations? What was your advice to clients back then?
We are supporting several airline leaders in these days and the reaction is always the same. This situation, especially in Europe and North America, is unprecedented because of the global and simultaneous effects on business as well as leisure travelers. Nevertheless, there were similar situations in the past from which we can learn such as the Asian crisis, 9/11, SARS in 2003, the global financial crisis in 2008/2009 or the ash cloud over Iceland in 2010. This crisis is unique in its global scale and duration, yet manageable amid the uncertainty. Every crisis had its own dynamics, but the combination of revenue protection, cost cutting and preparing to jump-start the business after the crisis was the common denominator to navigate through them. In the last 30+ years Lufthansa Consulting has successfully guided its clients through these situations to not just survive the crisis, but thrive in the recovery. An experience from which our current and future clients all over the world will benefit.
If you would like to discuss the measures you have taken or challenge the scenarios you see for the future, please contact our experts for further information.