Managing Director & Senior Partner, Travel & Tourism Global Leader
Two events at the end of 2020 encapsulate the challenge for airlines. First, several vaccines came to market in record time, raising hopes of turning the tables on the pandemic. Then a new, more contagious mutation started to appear around the world, leading to immediate lockdowns, border closures, and travel bans and fueling fears of a COVID double or triple dip. Airline executives could be excused for complaining of whiplash.
It’s an almost impossible environment in which to plan. But airlines, like all companies, must continue to look to the future and try to determine where they will be one, two, and three quarters out. A few things are becoming clear, at least for the near term. Even with the apparent success of the new vaccines, the outlook for business travel is mixed, with substantial variation by geography, sector, length of haul, and other factors. As our slideshow indicates, more than half of business travelers still do not expect to fly in the next six months.
Consumers are also staying closer to home, making shorter journeys, and driving more. When they do decide to fly, they want flexible booking and cancellation policies, online direct purchasing, and touchless interactions.
At the airport and onboard, all flyers are looking for cleanliness and explicit health-focused procedures, including social distancing. And of course, they want it all for less: consumers understand they are in a buyer’s market, and they expect great deals from carriers.
Based on the best modeling of our health care experts, our ongoing research among consumers and businesses about their travel plans, and our work with governments worldwide, we have analyzed several potential scenarios for the future and their short- and longer-term implications for airlines. This planning exercise builds on our first one in March 2020, which included five scenarios (the two least likely of which failed to materialize). The three remaining scenarios are presented in the slideshow below. We will examine the implications in the text that follows.
We hardly need to point out the importance of balance sheet strength in times of crisis. This means more than conserving cash, however; no one can tread water forever. Even as uncertainty reigns, it is important to revisit historical models for cost and revenue production and question whether past assumptions and constraints still apply. Equally, companies can benefit from a thorough review of their competitive advantages and core competencies, which can lead to placing strategic bets in a measured way. Airlines have rightly been operating in crisis mode, and the need for that has not changed. But as an end to the pandemic appears on the horizon, it’s also time to shift focus and resources and think about post-crisis positioning.
Agility amid uncertainty is also critical. Some airlines, such as low-cost carriers, are structurally advantaged with lower and more flexible cost bases and a stronger focus on leisure traffic. But all airlines can act with agility to make immediate short-term changes to better position themselves for the new reality, such as by reshaping their networks to focus more on leisure destinations. All options should be on the table. Actions that appeared unrealistic months ago may now be worth considering again, depending on circumstances, as the marketplace will continue to evolve. Opportunistic organic and inorganic moves may fortify competitive position.
In the longer term, structural market changes are likely to require that airlines consider significant adjustments to all three aspects of the business model: network and fleet, commercial, and operations. Here are some key questions that airline management teams should ask themselves in each area.
Two main factors are at play here. First, short flights are doing poorly now because people are choosing to drive. Long-haul flights are also doing poorly because of border restrictions and people being uneasy traveling far from home. How long will these trends continue as COVID vaccines roll out? Second, the long-term impact of the crisis will be more pronounced on business travel: amid economic uncertainty and tight budgets, companies cut back on business travel, and this crisis has proven that remote working is somewhat viable. Both factors have an impact on airlines’ networks, fleet plans, and fleet configurations. Here are some key questions:
In addition to shifts in the passenger mix, we’ve seen consumers move toward booking direct through airlines rather than through travel agencies. This is partially because of the change in the business-leisure travel mix and partially because consumers are more comfortable booking directly with suppliers in the current environment. How much this shift will stick is still unclear. Complicating matters, the COVID crisis renders historical data irrelevant given the changes in travel habits. Key questions include:
Customers are also booking their flights much closer to departure than they used to. Some have moved out of cities to rural locations served by smaller airports. Airlines have parked aircraft or even entire types of plane. These changes raise the following issues:
Looking ahead, the overarching question is this: As airlines emerge from the pandemic, will the new dynamics support a healthy high-margin industry similar to what airlines experienced pre-COVID, or will the environment more closely resemble the industry economics of the early 2000s?
Either way, in the near term, airlines need to move quickly and with agility to deal with the immediate demands that COVID-19 has imposed. Looking further down the road—and assuming the arrival of vaccines signal a return to rising traffic in the next few years—there are any number of big issues to tackle. Even amid the uncertainty, there’s no better time than now to get started.
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