• US Transport News

Where Does the Airline Industry Go from Here?

By Eben Harrell


Eighteen months into the Covid-19 pandemic, U.S. aviation has finally started to rebound — but the industry that has emerged is different than the industry that was essentially forced into a coma in the first months of the pandemic. A year after their first interview on the state of aviation, Harvard Business Review sat down to discuss the challenges (and opportunities) facing the industry with Jon Ostrower, the editor-in-chief of The Air Current, Courtney Miller, managing director of analysis for The Air Current, and Dan McKone and Alan Lewis, two Boston-based managing directors at L.E.K. Consulting who have experience advising major airlines.


In May, 2020, you all agreed the Covid pandemic was the biggest crisis aviation had ever faced. Have things played out as you expected?


McKone: Business travel is still way down, and we expected that. But leisure travel has rebounded more quickly than even our bullish forecasts.


Personally, I’m shocked so many people are willing to hop on an airplane during a pandemic.


Ostrower: Everyone has been rightly focused on whether air travel affects the spread of Covid. We did an analysis that asked another question: does the spread of Covid affect air travel? And the answer is “not really.” Demand is not being driven by the number of cases of Covid. If people are allowed to fly, they will.


Miller: And there’s evidence to suggest this holds true in other countries, too. Canada’s passenger numbers stayed at roughly 10% of pre-pandemic levels. Then the government loosened travel restrictions and passenger numbers basically jumped to 40% in a matter of days. Of course, these are almost all leisure travelers.


Will business travel come back?


Lewis: Some of it will. But the longer the pandemic continues, the more habits become entrenched around some of the alternatives to travel, such as video conferencing, and the more CFOs realize that the savings from travel budgets are falling to the bottom line. For the airlines, this is a bad cycle.


Does that pose a threat to the airline industry?


McKone: To its profitability? For sure. There has been some talk of a price recovery, and the airlines are cited as a contributor to some of the outsized inflation numbers that we’re seeing in the headlines, but while passenger volumes are recovering, and the cost of leisure tickets is going up off last year, overall yields remain significantly down from 2019, because the business travel just isn’t there. The fare mix is still unhealthy relative to how airlines normally run their business.


Miller: That’s the key element. Yes, the lowest fares are a lot higher now. So the average traveler thinks the airlines must doing great because their tickets are way more expensive. Well, your flight is more expensive now because the people who used to allow your ticket to be cheap by buying very expensive tickets, they aren’t really subsidizing it anymore.


How will airlines adjust?


Ostrower: It will require a different product mix. So-called premium economy will be a winner — just as it was when corporate travel budgets tightened after the 2008 crisis. Companies coming back with reduced travel budgets won’t want to spend for the long haul, lie-flat product that was the standard for business travel before. Already, the recovery within the premium economy segment has outpaced pretty much everything except the lowest basic economy fares.


Lewis: Interestingly, this is an acceleration of a trend that pre-dates the pandemic. Airlines have been moving to denser, smaller business class cabins, and larger premium economy and economy sections.


Have the government bailouts ended up being good value for the taxpayers? And did airlines handle the bailouts responsibly?


McKone: I know there is controversy over whether we should have had a better return on investment to the taxpayer, or maybe even pushed harder to equitize some of the taxpayers’ investments. But at the end of the day, the airline industry is a public good. It’s a utility we all benefit from, not dissimilar in many ways from the financial system, or the electrical grid. And I think the first order of business last year was just to ensure the industry survived. We accomplished that.


Miller: I agree. We bought economic insurance. You can say, “Did we overpay for it?” Well, what if we didn’t buy it?


Lewis: It’s very difficult to criticize given the uncertainty airlines faced but one area where we might have wanted the airlines to act differently is around pushing early retirement and furloughs at pilots, as we now have a pilot shortage, which exacerbated cancellations. A main aim of the bailouts was to keep jobs in place. Another missed opportunity was the lack of coordination from governments around international travel restrictions — we’ve had a frustrating, changing, piecemeal system with a lot of inconsistencies. But that’s not the airlines’ fault.


There’s an old adage: Don’t let a crisis go to waste. Has there been much innovation during the pandemic?


McKone: At the surface, the focus has been more on survival than innovation. However, there has certainly been some innovation from a safety perspective — everything from applying antimicrobial coatings to the seats, to disinfecting aircraft with UV light, and a whole series of advancements around biometric identification for passengers. All of these advancements will transcend the crisis.


In addition, at an industry level, we’ve had literally dozens of new airlines launched globally. There’s still a great capacity to be entrepreneurial and to drive ambition in the airline industry, despite all these headwinds. There’s also been more innovation in aerospace and other sectors of aviation — in commercial space travel, eVTOL, drones, and so on.


Ostrower: I sometimes get asked to give U.S. airlines a letter grade through the crisis. But for a crisis like this it’s better to think in terms of pass/fail. The airlines are still in business, they haven’t been nationalized. For a few months last year it seemed like that outcome would require a miracle.


What’s up with all the fighting at airports and on airplanes recently?


Ostrower: I don’t know if there’s a simple answer, but I will say this: When the federal government makes public health decisions, who ends up having to enforce them? The air rage epidemic is at least partly result of the fact that flight attendants have had to become the arbiters of public health requirements.


Executives at private jet companies must be licking their chops.


Ostrower: Private aviation has benefited enormously from the pandemic. I was just recently at what can be described as an airplane petting zoo. Effectively it was a showcase for small aircraft manufacturers. Business aviation is red hot right now. But it’s being driven less by fear of infection or air rage and more by the fact that airline schedules are changing so rapidly. Private aviation allows the certainty of knowing you’re going to get from point A to point B without being rerouted or cancelled. That’s the main attraction.


McKone: We tend to think of private aviation as a niche industry serving a rarefied customer base, and while that is true, the number of people who have the wherewithal to fly private is a multiple of the number that has historically done it. There’s room for growth.


Lewis: Yes, and you’ve seen innovation in this sector too, whether it be charter, fractional ownership, aviation clubs — there’s so many more ways to consume the service that didn’t exist 10 years ago, which makes it easier for customers to trial private aviation and get into it.


Has aviation lost its allure? Is the industry still sought-after as a place to work?


Ostrower: The allure of airlines is always there because you get the free travel benefits to go see the world. That’s always going to be something that attract people. And there’s exciting developments in aerospace, around future technologies like electric and space that are big draw for staff; the magic of leaving the ground has always been a great lure for people and I think that that’s going to continue.


This article originally appeared in Harvard Business Review.


0 views0 comments