UK Aviation; Covid, Brexit - 12 months on (Part 2)
In part one of this two part series Simon looked at the havoc the pandemic has wreaked on the aviation industry. In the second part of this blog, Simon looks at the future through a more objective lens, explores the challenges, the opportunities and what the industry must do to seize the initiative.
The decimation of aviation in Europe has, without doubt, left a large scar on the industry. What happens now depends on what treatment we give it; it can either heal or fester.
Despite government roadmaps and optimistic forecasts, it feels as though we may still have some way to go before we finally emerge into any kind of actual daylight. In mid-2020, IATA forecasted that the 'average' airline would start to run out of cash after 8-9 months in early 2021. Further investment can be a double-edged sword; whilst it can provide some life support for those already on oxygen, it also exacerbates an already precarious financial position. Much longer without a significant and consistent revenue stream is likely to result in only one outcome for many companies. The next few months could be interested.
“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know”
The Challenges
The challenge is enormous. Much has changed, and the aviation landscape has shifted. In early 2021, it was estimated that half of the world's pilots are not currently flying and 30% are now unemployed. Many are unlikely to return. As the weeks and months go by, crippling levels of debt will inevitably pile up; combined with continued uncertainty, it may well get worse before it gets better.
PANDEMIC UNCERTAINTY
Having travelled myself several times during the pandemic, I've concluded that travelling has become complex, uncertain and, to a degree, stressful. We need to find ways to change that.
To encourage EU countries to restart flying, EASA recently stated that 'people travelling during the COVID-19 pandemic should not automatically be considered as high-risk' and 'treated in the same way as local residents'. Based on the cross border measures being taken in many countries, this is obviously not a view shared by all.
Many factors are contributing to that;
The introduction of global vaccination programmes appears to create a realistic timetable to 'freedom'. However, politics, funding and general disorganisation all hinder its progress.
Some countries are sceptical about opening up mass travel too quickly, the possibility of the virus or a new variant being reimported.
Spikes and surges in infections rates often initiated by new variants often result in short-term restrictions imposed with little or no notice. Anything could change in a week.
There is no single, consistent Covid global entry requirement; the differences create additional complications for travellers. Australia is rumoured to be introducing a vaccination or hotel quarantine rule for those wanting to travel there.
Vaccination certificates or passports are not yet currency when entering most countries; PCR tests remain the requirement for now. At an average cost of around £100 per test, UK travellers could require up two PCR tests per person per trip from a so called ‘green list’ country and four tests from an amber or red list country.
The overall uncertainty combined with the lead time and cost required to mobilise both stored aircraft and out of recency crews makes effective planning very problematical.
SOCIETAL CHANGES
Without a doubt, the pandemic has changed how many of us think and behave; these changes may now be permanently embedded in some of us. With an apparent and strong initial pent up demand for travel, there are indications that there could be heavy initial discounting to stimulate the market.
There are also concerns;
A survey of 8000 people undertaken by Expedia in early 2021 indicated that 46% would travel when a vaccine becomes more widely available. According to the SAP Concur study, 38% of millennials want to travel during 2021, whereas older travellers currently prefer to stay nearer to home.
Unemployment (currently at 1.7 million in the UK, forecasted to rise to 2.1 million by year-end) means a higher proportion of the global population will not have the resources to travel in the near future.
THE COST OF FLYING MAY INCREASE
The well-publicised heavy debts and huge revenue loss that the industry now carries combined with simple economics means that the cost of flying must inevitably increase. The cost to industry and, ultimately to individuals, means that travelling could, for a while, become the domain of the well off, literally flying in the face of the low cost ethos, making it accessible for all. The rebuild of the industry may be more difficult and longer than anticipated.
Initial recovery is likely to focus mainly on large hub airports. 77.6% of all UK flying is currently at London-Heathrow, leaving just 22.4% at all of the other regional airports combined. A similar scenario plays out across Europe.
A US-based analyst expects fares to rise by around 6% per month from March 2021, possibly levelling out in the summer.
Airports such as London-Heathrow have already been permitted to raise their passenger charges to 'claw back' debts created by the pandemic, charges that are passed on to the travelling public.
Forbes report that business travel may decrease by anywhere between 37%-50%. Making up around 10% of total travellers, business travellers account for anywhere between 55-75% of the revenue.
Slot waivers at large airports around Europe initially provided relief whilst flying was at its lowest point. Extensions of the waivers generally protect, in particular, large legacy, slot holding carriers at large hub airports, distorting competition.
The heavily indebted aviation supply chain will struggle to provide the discounting level that the airlines need to reduce their costs.
“If opportunity doesn’t knock, build a door.”
The Opportunities
If there is a will to build a new, different aviation industry, there has never been a better opportunity to do so. With the sector largely in pause, there has been both time to reflect and change. With societal attitudes, beliefs, behaviours, and norms changing, the industry must also change, futureproof itself, seize the initiative, and lead the way. Evolve or die.
The opportunities are there, but they will be hard-fought;
INDUSTRY & GOVERNMENT
The relationship between these two parties is perhaps the most blatant missed opportunity of the pandemic.
Leaders with significant influence must take the initiative to step up and properly represent our industry. The notable absence of British Airways and, sometimes, easyJet in making any meaningful representations is unhelpful. Like it or not, they can, if they choose, have a considerable influence.
It's time the government listened, but it's also time that the industry spoke. A strong and united voice is what is required. Unfortunately, it appears that our industry leaders don't yet seem to appreciate the real difference that this would make.
REMOVE THE BARRIERS
Industry speaking with a loud voice can help government understand what the industry needs and how it can be rebuilt to thrive.
Measures that could help:
We have already seen that the cost of flying is likely to increase; suspending APD will really help mitigate this.
Urgently renegotiate the "no-objection" policy (prevents foreign operators operating within the EU from gaining flight permits if a domestic airline objects).
Stop approving increased charges that allow large businesses to pass their recovery costs to the travelling public, such as those that Heathrow Airport recently announced.
Stop the slot waiver extension as soon as possible; it protects the large operators but stifles fair competition
PRODUCTIVITY & COST
Imagine if the standard industry business model was predicated around a constant and laser-like focus on cost reduction and productivity increases? Sounds obvious, doesn't it, but in practice, it doesn't happen that way.
Instead, when finances get squeezed, such as an increase in oil prices or simply poor management or decisions, organisations often embark on regular rounds of cost-saving measures, attempting to take X% of costs out of the business? But at what cost? Covid simply exacerbates this, and with margins already tight, additional downward pressure isn't helpful.
Covid is currently performing a kind of natural selection, slowly weeding out the weak and inefficient. It will be a world where only solid and well-managed organisations that have deep pockets will survive.
Is it time that the airlines stopped looking to the supply chain to bail them out?
GROUND OPERATIONS & GROUND HANDLING
We work extensively within these sectors, and here there seem to be some obvious opportunities for change, some directly Covid related, some not. Either way, the pandemic at least presents the opportunity for something better;
Partnerships; It may sound obvious, but the best results will always come from fair partnerships where staff have a stake in success; the more common parent/child relationships just don't produce results.
Contracts and SLA's that drive performance - we see a lot of poorly written agreements and ineffective and unrealistic SLA's often with un-executable penalty clauses; this simply wastes everybody's time.
Internal performance measurement; in depth understanding of how well you are performing. I've noticed that this is often absent.
SLA penalty clauses; temporarily suspend penalty clauses, find other ways to encourage good performance. This could help Ground Service Providers.
Charges; agree on fair handling rates. Aggressive negotiation of ultra-low handling charges is simply a race to the bottom, without winners. In this environment, the supply chain cannot survive on crumbs from the table, and it merely undermines the whole ground handling proposition.
Charging mechanisms; many of the contracts we see build in a tiered bulk handling rate based on volume. Consider a more equitable approach, such as a retainer type charge that protects GSP's when their revenue sources suddenly dry up. Consider something similar for ad-hoc service types such as De/Anti-Icing.
All-inclusive rates; although not popular with all, we have seen that this approach, in some situations, offer an excellent opportunity for airlines to negotiate more efficient rates creating simplistic and more accurate reconciliation processes and also saving a significant amount of overall costs. Keep it simple, remove complication, save costs.
Specialist services; use of specialist services to undertake non-core activities can pay off. We have seen that we can often undertake a task quicker, better and cheaper than doing it internally. The market is now better set up than ever, with many companies offering very professional and high-quality services.
The industry is dead, long live the industry!
Ultimately, the sector must be lean and efficient to survive. The hard truth is that many companies, Ground Service Providers in particular, found it difficult pre-pandemic. With their high cost bases several companies had no choice other than to contract, possibly never to return. But as one door closes, another opens and this paves the way for other companies with lower cost bases to fill the void and hopefully thrive.
Partnerships or joint ventures with companies who have proven track records in cost management and service delivery within their industry, companies like Lidl, IKEA partnering with GSP's surely isn't beyond the bounds of the imagination. Radical? Maybe. The industry appears to need disruptors to make it look at itself, discard the old inefficient ways and bring in something fresh. I've long believed that there is much that other industries could bring much to our table.
There are no easy answers, no silver bullet, just educated guesses. Our industry is inextricably linked to world events and rebuilding off the economy. Until its eradicated we must learn to live with the pandemic, not see it as an obstacle; carefully negotiate around it and that inevitably means more change. If we are bold, if we learn the lessons, we will eventually return to a new normal, ultimately turn a profit and soar again - it will be worth it.