Airline Business Model And New Normal-Satyendra Pandey

As the corona pandemic continues, airlines planning departments are on overdrive. Whether it is planning fleet reductions, reviewing options for restructuring, or looking at contractual obligations, each item is being reviewed and models run to analyze how flights can be profitably put back into the air. The outcomes though are not too great. The pre-pandemic airline model that enabled 4.5 billion air-trips in 2019 is at odds with post-pandemic realities. Historical data no longer informs the future. The only option is to start from scratch and zero-base the airline model. Towards addressing the new normal.

The current airline model has seen little innovation in the last 50 years
Airline business models at their core have seen little innovation in the past 50 years. The airline product, namely transporting passengers from point A to Point B, has become slower, more cumbersome and more suspect. Aircraft sizes have decreased, the commodification of the experience has increased and for the most part, the customer experience has gone from bad to worse. Low cost-carriers leveraged this aspect and offered a bare-bones product while promising lowest fares. Effectively they reasoned that revenues were not to be had so the success depended on costs. And accordingly, costs were addressed via financial, operational and strategic measures. Quick turnarounds on the ground, leased assets, high aircraft utilization, crew-efficiency and ancillary revenue grew. At the same time, customer experience did not become better rather the customer adapted to the new reality. And the levels of discomfort customers would go to for a low fare kept setting new standards. Accordingly, innovation has been non-existent. Convenience has often been cloaked as innovation and this includes a slimmer seat, charging points on seats and the ability to check-in at kiosk.

But the Corona pandemic has changed all of this. The airline model itself is at odds with anticipated policy changes post the pandemic. While much uncertainty remains, key amongst these is sanitation, security procedures and social distancing.

Increased aircraft times on the ground will carry revenue impact
Post-pandemic the largest change to the airline business model will be the increased times that have to be planned for. Both on the ground and in the air. This carries with it significant challenges.

The current airline model relies on efficiency towards ensuring that airlines maximize the use of their most expensive and most core asset: the aircraft. And at a cost of 50million dollars to upwards to 250 million dollars per aircraft, it is imperative to drive as much productive utilization as possible. This is partly enabled by minimal times on the ground. Quick turnarounds also maximize labour efficiency and amortize costs over concentrated activity driving down unit economics. Thus, whether it is having ground crew’s ready to clean the aircraft as soon as it arrives; catering food; ensuring no delays in enplaning and deplaning passengers or having flight-plans pre-loaded into flight management computers – each element adds to the efficiency and reduces time on the ground. But add to this sanitation, security and social-distancing measures and the ground time effectively goes up.

What increased time on the ground means is that an aircraft that is flying 12 to 14 hours a day now can only to 10 hours or less. That is, the asset is now producing lesser revenue over the same period. This revenue loss has to be made up by higher prices. And higher prices act as a deterrent to demand which is already depressed and expected to fall by 50% post-pandemic.

A cumbersome travel experience wanting for solutions
If that wasn’t bad enough, airlines also face the fact that the broader travel experience will be more cumbersome. Travel is driven by convention, cost and convenience. And for the most part, as long as the costs were low travellers justified the convenience of air-travel overlooking comfort. The inconvenience of airport security – which has been the most stressful part of the travelling experience since 2001 – was overlooked because of the sheer amount of time saved compared to other options; the discomfort of being packed into smaller seats has overlooked the price of air-tickets made for a compelling proposition, and the non-existent service standards were overlooked because of the joy of experiences and exploration post-arrival. Sadly, the entire travel experience especially airport security is likely to get even more cumbersome post the pandemic. And for the first time in the recent past, the customer sentiment involves an element of fear.

Also read: Rethinking The Airline Hub

While measures are still being debated – it can be safely assumed that the line wait times will increase and the requirement to get to the airport early will be enhanced. Onboard- a cough may be greeted with the same suspicion as using the lavatory nearest to the cockpit. And the mini chips and peanuts coupled with the can of coke priced at five times the retail value may not even be available. Note that addressing fear is something where measures have still not been well thought out.

On the ease of travel, the travel experience is wanting – and has been wanting for decades. Not just innovation that drives convenience by taking away the human element (which has other motivations on why it was introduced) such as booking tickets online, checking in via-kiosks and buy-on-board meal options, rather innovation that goes to the heart of air-travel including seamless security, faster and more comfortable (and yet economic) aircraft, and a return to rational and sustainable pricing methodologies which can be driven by technology and transparency.

Confidence building measures will be key to business success

The government has already come up with guidelines for airlines that will be allowed to fly as the lockdown restrictions are lifted. These currently include keeping the middle seat empty and keeping the last three rows of the aircraft unoccupied in case a passenger has to be isolated. Put together these reduce the capacity (number of seats that can be occupied) by up to 40%. For instance, on a 180 seat aircraft with 6 seats to each row, only 27 rows with 4 seats each can be occupied. That is 108 seats. The airline now has to recover its cost of operations from 108 passengers as opposed to the usual volume of 150 to 160 passengers and the only way to do this is via higher ticket prices. Throw in the price sensitivity of air-travel demand and airline planners are left wanting for solutions. Social distancing also impacts the ability to stretch one’s legs on board, let alone buy food and products onboard.

In all elements of airline travel, touch-free interaction will be essential. Technologies such as facial recognition, RFID and computer vision can be leveraged at the airport. In the air, manufacturers like Airbus and Boeing may have to rethink aeroplane designs – from seating to air-circulation and perhaps a focus on speed oversize will once again find its way to the forefront (note: subsonic and supersonic technology exists already that can enable Delhi-London flights to be flown in three hours – they just have not found the focus to make them commercially viable).

The new normal may very well be more pleasant than the old ways of travel
As it stands, airlines are staring at a steep descent and efforts are underway to recover and stabilize. Air travel demand is likely to be depressed and many echo the sentiment that initially only the folks who absolutely need to travel will take to the skies. Gradually as confidence builds (or declines) depending on reports and reactions, incremental measures will be taken. As it stands airline model will not only require tweaking but the transformation to enable profitable flying in the times to come.

And regardless of the pandemic, in time folks will fly again. Because exploration has always been a part of our lives; because we’ve not only conquered the skies but we’re also getting closer to commercial space travel; and because the connectivity is core to our being. And air-travel makes all of this possible.

The current narrative assumes that the new-normal builds on the old base and old ways of travel which will by all accounts be more cumbersome. But with innovation, there could be another reality: where the new normal may very well be more pleasant than the old ways of travel.

Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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