Back to Normal? Maybe, but not so soon

We keep hearing the Airline Industry commentariat and other views of the industry's recovery trajectory from the COVID-19 catastrophe. There's palpable excitement about increasing flying in some parts of the world. But it's tempered in others, with lockdowns and border closures coming and going, messing with plans, wellbeing and airline fortunes. It remains challenging and somewhat a reality check reading the history and latest projections for the timing for a return to pre-COVID. Initially, six months to a year was the gauge, then a year, maybe two? Now it's three, maybe five. And the "zone of uncertainty" is getting more prominent as the charts project forward. All this information is in the public domain. But all these projections become somewhat uncertain when contrasted with the opportunistic changes some airlines have effected throughout the pandemic.

What airlines are doing and what the surveys and projections, and most of the commentariat keep talking about, is different. Many airlines are taking the opportunity to 'clean house' rather than strategically re-basing their businesses in readiness for what the aviation industry will look like on the other side of COVID. No one is proposing that such corporate shakeups are inappropriate tools in the face of the pandemic or otherwise. But let's not assume they are anything other than short-term levers. Such approaches in isolation ignore the importance of the long game (thanks to Simon Sinek). One wonders how many of them would have occurred irrespective of COVID because the state of the industry pre-COVID wasn't, broadly, in great shape. The aviation industry carried significant inefficiency into 2020, but we believe gutting capability isn't the answer. We think the entire industry needs to come together to strategically re-define and fine-tune itself into a more resilient and efficient version of itself instead of returning everything to the way it was before—albeit with likely fewer people. This will need transcendent leadership, and for the airline industry, there's only one answer. Hello, IATA.

Cleaning house by resetting industrial agreements, furloughing, 'compulsory voluntary redundancy' (what a contradiction in terms), outsourcing or just 'letting go' of 30 to 40 per cent of airline workforces, sending aircraft back to the lessors or the desert saves cash in the short term for sure. But the saving is by no means immediate. At the other end, the time and cost of restoration of workforces, equipment and capability, and integrating the further fragmented aspects of the industry to pre-COVID levels will be eye-watering. Added up and discounted back, it would not be remarkable to see a near zero-sum outcome. Any value finding its way to the bottom line and increasing business net present values would be questionable at best. No, 'cleaning house' alone doesn't prepare airlines for the other side of COVID; it puts 'lipstick on a pig' to attract the investment necessary for survival or deliver M&A suitors. Many of the cuts are so deep it telegraphs that bosses aren't planning for a resumption of 2019 activity or any new-normal any time soon. So if the projections are moot because airline bosses are not working toward the same ends, what then?

The industry will come back, but very likely smaller in many respects and potentially more complicated. At the very least, it'll be different. The short-term benefits of 'cleaning house' will eventually fade to naught — they always do as we've all seen, all too often. And an almost inevitable wave of M&A activity will sweep the industry — that's already begun too. For a time, cash will be king, and everything will be about capturing whatever revenue is out there, no matter how it's dressed up. Cash savings remaining from the purge will evaporate in the complexities of integrating different airlines and ancillary businesses. But that's not all. The industry's issues at the end of 2019, the ones not many were paying attention to, will return — actually, they're still there... lurking. And these were a massive drain.

Readiness for the new-normal means earnings — the bottom line will... must, eventually, be resurgent. Airlines will ultimately turn attention to balance sheets, which means keeping as much revenue as possible as the revenue cash trail makes its way through the absorption sponge that is company operations. And that sponge is highly effective. Boeing once estimated that to save a dollar, airlines must reduce expenses by four or raise revenue by one, demonstrating the effectiveness of increasing revenue and the inefficiency of airlines at the same time. It'll be a balancing act. Airlines could improve revenue by upping prices. They could unbundle more and up the ante on ancillaries. But this will be a risky gambit. The travelling public won't have an appetite for feeling gouged after losing livelihoods to COVID. This week, a McKinsey article discusses how "customer experience is emerging as the challenge of the recovery", finding "mixed signals" in surveys about customer satisfaction in these times, and some "troubling undercurrents" (see Rebooting customer experience to bring back the magic of travel). The article makes it clear customer experience is a crucial consideration to power the recovery. Customers won't be gamed easily, and airlines well know the supply/demand relationship is like walking a tightrope. Any move that depresses demand, like rapidly increasing fares, will be disastrous once pent-up steam blows off. All this means the balancing act must include efficiencies, new and old. And contrary to the enigmatic Bob Crandall, who, on a recent CAPA interview, declared Airlines to be about as efficient as they can be. Codswallop! There is a lot left in that tank.

If we're all honest, nothing here so far would be a surprise. So why not grasp it now, like the opportunities we keep hearing crises present. Why not start developing a strategic path for the entire industry, complete with the tactical guidance necessary to make it all work? That's where IATA comes in—or at least it should. Airlines try to differentiate in multiple ways, and the different approaches taken creates inefficiencies in the airline and the broader industry. IATA is the glue to correct industry-level inefficiencies, and by doing so, airlines benefit operationally and financially. How?

Numerous industry-level bodies have worked to solve a few of these efficiency bottlenecks, and, although fragmented, a suite of elegant systemic solutions exist. Each provides airlines with ready-made opportunities to save. However, a couple of issues persist as barriers to implementation and significantly meaningful efficiency. The industry level initiatives are not aggregated, not integrated in the broader sense. Because different groups developed them, they have taken on a competing aspect even though they are all component pieces of the same vital objectives. While all address medium-time frame targets, many have high value now - right now. 

Scheduled for a significant evolution in 2019, SWIM and all the bits that come before it seem forgotten in the COVID fog. SWIM and its attendant elements have been designed to deliver exceptional efficiency to the airlines and the industry. It's all boxed and waiting. The only thing it doesn't have is a pretty bow, so why the ignorance of it by the airlines? Exacerbating these delays, airlines remain inwardly focussed and inwardly competitive. 'Turf', external and internal, remains a pivotal contributor to airline strategic and tactical outcomes - and the failures. Statistics on this character of airline culture and structure have been a subject of academic analysis for years, and they're not pretty. So why not learn from the lessons and make this a part of the cleaning house exercise? Its benefits will be longer-lasting.

Finally, several of these initiatives interfere with some industry supplier programs. We detail this in another discussion, but some drag on industry efficiency is caused by its long-term approach to technology. The supplier-side develops products (not solutions) that drive processes or procedures instead of the other way around because of a dearth of direction from their customers and industry leaders. The industry should be leading the suppliers instead of waiting around for them to innovate in a vacuum because airlines can't look far enough in advance to tell suppliers what's needed. All this restrains innovation. It's worked this way for a long time because airlines, airports and the industry haven't really changed how they do things that much over time. But times are different now.

Strategic and tactical implementation guidance exists to bring all this together and encourage airlines into a unified industry where integrated information spanning all journey and operational boundaries will be ubiquitous. The years and resources consumed by airlines recursively trying to do this themselves will be consigned to history. And so will the 'sunk funds' and failures, sending the academics looking for something else to write about. The process is tiered and painless and crucially inexpensive in this critical time for the industry. Getting involved is easy, but airlines and ancillary businesses first need to recognise that getting out the lipstick has a limited 'useful range' and won't fix anything in the long term.

It's IATA's job to lead this progression. It has the tools, the people and the gravitas, and it's been offered a plan to get the job done. But in an extraordinary admission, the new boss doesn't think it's their job. Go figure.