Following my shared experience on Why Video-Conference Will Not Impact Air Travel, I attended the first virtual conference. Without networking, another barrel burst! We need interaction, but this was all push-content. But conferencing is about networking. And networking = interaction.
If the developers of the software and the organizers of virtual conferences believe what I experienced these days to replace conferences in the real world, they will have a harsh wake-up quickly. And I am not afraid those to replace travel and conferences in the real world anytime soon.
Sessions being Webinars
While we can “learn” making use of contemporary webinars, it is even worse than on a real-world conference if the speaker does not provide know-how, but self-indulgence and company marketing. But conferences are about meeting people. Ones you know, but more important even the ones you do not know.
The conference contained some “sessions”. But while they might be interesting to some delegates, it’s never all delegates in the session room. Some topics are more, some less relevant. That is a lesson from the Real World (RW). Now, what is the difference between a virtual conference session and a webinar? So those sessions were a bucket full of webinars. Which I can replay later. So why would I need to be there “on time”? Except if I am one of those who use the comments to interact?
And what else could we have learned before this first “online conference” from webinars? Worst than in a real-world (RW) conference, if the speakers are not focused to provide valuable insight but self-indulgence and product marketing, such webinars are a loss of time. For a virtual conference, it is the more important to have truly interesting topics, inspiring speakers and value for the audience.
I am reminded of the Passenger Terminal Expo (PTE), the event I always have overlaps on the multiplicity of sessions, which are all interesting. And times without any session of interest. And sessions with speakers I found to be self-focused, promoting own products instead of delivering valuable insights to use my time for. Time I spend “on the floor”, meeting and speaking with people. It is why PTE became one of the “must go”-events in our industry.
Scheduled Appointments vs. “Networking”
There are four ways I do scheduled appointments at good RW conferences. First two options are exhibitors, where it is possible to either have a scheduled meeting, or try to “drop in”. The third option is “networking events”, usually dinner, where delegates meet. While many stick together with there “known friends”, I found those the most valuable to stroll around and look for new faces. The final option then is to meet people on the exhibition floor or infront of the session rooms.
Online, the website offered to “connect” and set up meetings with delegates, exhibitors and speakers. What they totally failed to replicate in the virtual world is the “casual networking”, which is the most important: On RW conferences, I don’t approach the speaker asking for an appointment, but I approach the speaker after his speech. I also make use of the coffee or lunch breaks to meet people in a casual scenario. Or talk during a conference session I don’t attend “outside” over a cup of coffee.
The conference makers of that conference failed on that casual networking that is integral part of any conference. I even tried to add my e-Mail to my description, which was removed by the software – excuse me? But it got worse.
Networking vs. Zombie Delegates
Now at the virtual conference, most “delegate profiles” were merely the registration data (company, name, title). I wasn’t allowed to put my mail-contact into the public description. Why can’t I see, entering the floor, how many are there? Who is there? Who looks for networking?
The typical paranoid misunderstanding of event organizers, “mothering” me and avoid networking opportunities. Excuse me? Ain’t “networking” what this is about? No, it was about some webinars, sponsors and show-off. Which was reflected also in the missing ability to “chat” on the conference website. Nothing resembling “the floor”. If you want to contact a delegate, set up a meeting (min. 15 minutes). Of which zero were confirmed on my agenda. For which the conference site issues e-Mail notifications – no pop-up on the conference site anywhere. Then sitting five minutes in the Zoom-room they provided (all available/unused at all times I’ve set up meetings) waiting if they’d show up anyway. Which they didn’t. My impression: Most those delegates were zombies. Registered and never at the event. Some having registered for one of the “sessions” aka. webinars. Coming for that and likely left immediately after. Did they attend the webinar? Or watch it “later at leisure”. It’s “push” anyway, no “real interaction”.
So what value has such a virtual conference if it doesn’t motivate live interaction? None. It’s nothing better than some webinar series.
A virtual conference without networking? A webinar. Or several webinars.
Anyone planning a virtual conference musthave learned from the real world conference and improve on it. It is kind of frustrating to see again how IT crippled the good idea! And supposed subject matter experts (conference companies) selling such a crap to an audience. The only reason I can see to do such stunt would be to promote the real-world event and intentionally make the user feel the incompetence of online compared to real-world. Though that incompetence for me backfires on the event company and such an impertinent execution.
Virtual Conference missing interactive networking becomes a barrel burst! So I look forward to my first real-world conference scheduled now for December:
There has been an increase in shares vouching for video conferences to replace air travel post-Corona.
Face to Face
There is a lot in a personal conference that is not available in a video call, especially on multi-personal level. Who stands with whom, looks at each other, stands apart, shuffles papers, scribbles notes, shows interest, looks away (and why). Aside the sole focus on the call or conference when you’re onsite and out of your “common environment”. You paid to get there, you focus on the conference and not on your daily chores and tasks.
Call Quality, Disruptions
Then there is the (video) call-quality. Especially on video-calls and webinars these days, even using the best provider to organize it online, the video often enough fails, speech becomes unintelligible, not just users, even the speakers get disconnected. Disrupting the thought, the statement, the information. Surely at the most inconvenient of times!
Lesson Learned 2002
What it does keep reminding me is that for 2002, in the wake of 9/11, we had the very same discussion. And I brought in a video-conferencing-specialist to speak at ITB Travel Technology Congress. And while the big players added video conference rooms to their portfolio, they turned to dust-bins quickly. I know, c’mon, that was 20 years ago. And we simply don’t tend to learn from history. There’s all the young smart-asses leaving university. They have no experience with extensive travel, their live has been virtual, they are still to learn the lessons.
The last issue is emotional, psychological. Which we found out post-9/11 already. There is the factor of “importance” when you are send to travel to meet your client. And I do not speak about the true importance to show your flag at your client. But the perceived importance for the traveler.
A face-to-face is valued a lot higher than any video-call. Have I met the person in real-life? What was my impression? Those are valid reasons to justify your trip to your boss. But especially for middle and lower management, the effect is fare more on a motivational level. To be “allowed” to travel raises your perceived standing. In the company much more important that with your client. The meeting could be sufficiently covered with a video conference, especially when done properly – not via Skype, Viber, etc. But to be “allowed” the expense to travel to the client raises your internal standing, your (imagined) “importance”.
Whereas for the manager of the traveler, that very motivational impact might very well justify the travel expense. So don’t disqualify it. But be aware of it.
Video-Call Will Replace Travel?
Naaaw. No it won’t. I have video calls with my family when traveling, my mom living 600 km away, friends around the world. And especially during the lock-down I keep with my network attending webinars, video and voice-only conference and one-on-one calls. And can’t wait to see all my counterparts in person either on conferences, on business trips and visits. Video-calls replace phone calls. But they don’t have what it takes to replace the real face-to-face.
A few days ago someone on the media compared Corona to the “new measles. Ever since I use the analogy and sure gave it some thoughts how that will impact our industry.
Like the Measles, Corona is a virus that is in the wild. About 5 March, WHO admitted Corona containment to have failed, taking another six days to declare Corona officially a pandemic. While in hindsight it shows the failure of the world health system and China to contain the virus quickly and efficiently, pointing fingers is futile and does not help.
Ever since, political and health care PTBs (powers-that-be) started a spiral that now pushed the world on the brink of commercial collapse. Sweden and other countries going less wild where accused to spread the virus but again in hindsight seem to have done everything right.
Crisis Communication – Scaremongering
To date, the PTBs communicate in the sense to stop the virus. That is crap and they should know it. The time of containment has been missed, see above. So it is not about stopping it, but to flatten the curve. To make sure our health care systems, our hospitals can manage the infected cases with severe, life-threatening symptoms. Until we have a standard treatment and can avoid infections with a commonly available vaccine.
While there will be reasons why aviation will recover slowly, it will likely be mostly economic reasons. People recovering from the economic impact to their lives are more likely to “safe the money”. But in Europe, U.S. and other “developed regions”, there have been crises and travel recovered relatively quickly.
P.S. 24. May 2020
I have been asked to add the referral I usually use here: We came to live with the Measles, with the Flu, SARS (since 2003), HIV (no treatment or vaccine yet), Polio, Malaria, Ebola and many other threatening viruses.
A brief lock-down was possibly called for to make people aware of the need of social distancing, but like in Sweden, it is time governments lift the bans and return their countries to life. And trust their citizens to be careful – and if they aren’t, live with the consequences.
And our (aviation) lobbies to make a case that airplanes are safer than hospital operation rooms, that travel is at own risk and that use of disinfection at airports and in the aircraft cabin and there also the use of face-masks is useful. But we must hold the horses and come back to the new normal. A normal that takes into account another lesson learned but won’t require acrylic seat shields, empty middle seats or other such placebos.
I’ve been asked to put my statements and assumptions on Corona-impact to the aviation industry into a short article. And learned while summarizing that there’s quite a few, topic-related issues.
Pre/Post Corona Vaccine
There will be no start into a recovery before a Corona vaccine is commonly available. As such, we must discuss the options pre- and post-vaccine-availability.
There is a lot of discussion about face masks required to fly, new seats and plastic shields between seats or other such “smart ideas”. They are all placebos. And while some high demand routes may be flown pre-vaccine, those will be exceptions and at high cost. Keep middle seat on a 737 or 320 empty takes out 1/3rd of the seats. Low demand will likely reduce the real passenger load to 50% or less. Even with face masks, you never know who sits next to you and a sneeze can spread up to half a meter. Think about the typical rush into the aisle, even before the aircraft has come to its complete stop.
Pre-Vaccine operations will be restrictive and expensive.
CASK, Low Cost & PSO
The Cost per Available Seat Kilometer (CASK) combined with a slow recovery in demand will require increased ticket prices.
The Ryanair model will suffer most. Which region can afford the indirect subsidies inside the Ryanair model. The authorities will be under high scrutiny what they invest into airlines. There will be more PSO-routes (Public Service Obligation) and a need to improve the requirements for such.
Given all the grounded aircraft, it will take three to four years for the surviving airlines to reutilize them and bring them back into the air.
During this time, only very few, if any, new airline will be delivered by the aircraft makers. Mostly ones where the loss of downpayments is higher than the loss from owning a currently dead asset.
Regional Aviation – Use of Smaller Aircraft
Aviation will recover with smaller aircraft on the previous high-density routes. Testing the waters: Will the passengers return? This will be for scheduled flights the same as for tour operators.
The first ones to recover are domestic and regional flights, using the smallest aircraft the survivors can fly.
In many cases, it will be cheaper and healthier for our industry to let the dinosaurs die. And allow the mammals to take their place. It’s called evolution and survival of the fittest. And if you save them, demand the overdue change. Sustainability. Social responsibilities (also towards “your own”). And no more “Shareholder Value” at all cost!
It can work, we have developed KOLIBRI.aero from the ground up on those two principles, in line with profitability, USPs and business cases. But if you save the dinosaurs, you deny or slow such evolutionary developments. Investors interested to fund a Corona Profiteer, get in touch with me! If you know investors, trigger their attention for me.
Who Takes the Risk – Who Pays
Everyone is proud to “get rid” of cost, securing the own survival. That show of the Saint Florian’s Principle will hit us in the back!
Who takes the risk and who pays the bill. Airlines? Really? I see a revival of Tour Operators taking the risk by chartering a flight. PSO Routes. Scheduled service guarantees from the regions (re)connected limiting the airline’s risk.
“As for your Future, your task is not to forsee the future, but to enable it!” [Antoine de Saint-Exupéry]
Food for Thought
Comments welcome! And personally get well through the crisis!
Discussing with a friend and intellectual sparring partner, why we focus to establish a new airline and not simply buy a failing airline, the reasoning was easy.
If you acquire an airline, you acquire it’s heritage.
To which he replied: “I couldn’t agree more. I have seen the same firsthand when it came to [product] engineering. Initially we were going to work with an established manufacturer and have them make modifications for us. That was quite the trip down the rabbit hole, and more trouble than it’s worth. Now we’ll get [products] that were custom engineered for us, from the ground up.”
Most of the times I was asked for support in project management, the project itself was fine. What caused the trouble was the missing change management.
Air Berlin Example
In direct conversation, one of the later board members of Air Berlin told me, the airline would not kick the bucket because the new CEOs wouldn’t have good ideas, but because they failed on the heritage. The existing “networks”, afraid of the change, afraid to loose their job, torpedizing the management.
When Stephan Pichler took the helm, he i.e. identified the “different fleets” as a concern. With little to no interaction on scheduled flights or tour operator charters. Still, when he left, there were still the different departments interacting little to none. There was a lot more to Air Berlin’s unnecessary demise, as there was to FlyBEs. Usually it is attributed to the management, but “internal resistance” can be a first-class back-stabber.
Save the Dinosaur or Fresh Start?
As addressed in To Save or not Save in the Corona Papers, The question in my opinion is mainly, how much funds you are willing to pump into the existing airlines and for how long. And if you now start to shove money down their greedy throat, will that ever end? The U.S. carriers complained instantly when they learned that they get only 30% of the bailout “for free”, but would get the other money as a credit.
To turn this around. We developed a business concept to invest € 1.6 billion into a new airline covering Europe. With a business concept based on USPs, profits, low residual risk, attractive profits, but also socially responsible and sustainable. i.e. A positive overall impact on greenhouse gases.
Triple that amount to invest into three new players instead of just one and you cover what we have today. Now airlines asking +$50 billion in the U.S., € 20 million for Germany, IATA calls for +$ 200 billion. Emirates will take up long haul, maybe challenged by a U.S. carrier and a Chinese one – connecting the long-haul world.
The existing airlines will need to survive. Realistically downscale. At first and until a vaccine becomes available in sufficient quantity, we talk about “leave the middle seat free”. That cuts one third off the seat capacity of 189 seat A320 or B737. 126 seats. Given an inital slow start of traveler confidence to use flights agin, we realistically talk about max. 50% average load. Down from above 90%. That means that the ticket prices will likely be double. But the “administrative overhead” must be split to less aircraft, so we will have a totally different cost level.
Ryanair’s O’Leary clings to keep his “known model” and predicts even more aggressive discounting post-Corona. But in the end, someone must pay the bill. Does anyone really believe O’Leary to not plan for the stupid to pay his bills? Including airports, regions and naive passengers… I wonder how long even a Ryanair could keep that illusion up?
… meet Evolution
Doing a staged setup and focusing to stake our own claims, select strategic bases aggressively outselves, we can establish the company for a mere €25 million. € 15 million per additional base. A fraction of the food the dinosaurs demand to survive. Condor now half a billion? What evolutionary wonders we could achieve with that money.
We’re the mammals. We’re effective, profit focused, sustainability and social responsibility driven. Evolution. Don’t pump millions and millions into the dinosaurs until the crisis is over. Invest into the future.
Aviation banks say new deals on pause until ‘market bottoms out’ (ISHKA)
The market will be flooded with surplus of 150-seat up aircraft. (ISHKA webinar)
Aside those headlines, two ideas shortly (too short?) addressed in the ISHKA-webinar triggered my thinking:
Is P2F (passenger-to-freight-conversion) a strategy for aircraft owners? And is part-out, cannibalizing aircraft for spare parts, an option?
P2F – Passenger to Freighter Aircraft Conversion
Bill Cumberlidge addressed P2F shortly in the ISHKA webinar. As the need for quick transport increases, the belly-freight in passenger aircraft has gone missing. That increases the demand for classic freighter aircraft. But keep in mind that this is a temporary peak only.
But given passenger airlines taking up that surplus transporting goods in their passenger aircraft, the question now is not if we need more freighter aircraft, but the aircraft owners sitting on “dead capital”, seeking their own bailout – by considering to convert them to freighters seems a good idea. Or does it not?
The main issue there seems not to be the demand for conversions exceeding the available resources, companies with the experience in such conversions.
Then you cannot simply convert all the grounded aircraft to freighters, without flooding the market. Offer and demand will simply result in surplus freight capacity, ruining the prices both for freighter aircraft as well as for airfreight cost. So the idea will quickly backfire. What I heard first from truck drivers, seems now to become an issue in the airfreight industry. Passenger airlines, offering cheap passenger aircraft for ad hoc transport ruining the prices.
While there is a current peak, promising a use of lots of large freight aircraft (A380, B747, B777, B767, A330, A300, etc., etc.) that demand bubble will last maximum one year.
Seabased shipping will still do the majority of transport. And while shipping cost will likely peak, ship-operators (I avoid the word shipping company) will possibly recover their eroding revenues in the crisis. If they don’t make their own mistakes.
But how many containers does a single container giant today transport? And how many of those can you put onboard an A380 or B747? There were a lot of hurray and self-praise of airlines that one aircraft transported 500,000 masks to somewhere. Whereas the population there is a multiple of that number. Airfreight is expensive and a drop on a hot stone.
And the rush now to the common idea everyone follows will backfire and hit us in the back soon.
Parts-Out – Cannibalizing Aircraft
Another, very standard “fallback idea” is the “End-of-Life”-strategy to cannibalize the surplus aircraft for spare parts. Given the immense surplus of 150-240-seat aircraft, this bubble is instantly doomed. In several expert discussions I heard 50%, even up to 70% of the fleets to be grounded. Recovery of likely 80% within two years. Let’s say we decommission 20%. Which ones? Where? Who starts?
Bill voiced a valid concern too. What if airlines neglect the engine maintenance, but use the engines of the grounded aircraft? Sure, once traffic picks up you can lease new engines. Which might be even cheaper than servicing the neglected engines. But. If all airlines follow that strategy, I predict a shortage in new engines to hit us in the back. And we will have hundreds of aircraft engines to be written off.
Cognitive Dissonance: Who Pays the Bill
All those ideas try to secure the profits, moving the losses to others. Whereas we so much promote that we are all in this together, in reality it is very much egoism at play. Back to the good old Saint-Florian’s Principle: Oh holy dear Saint Florian, don’t burn my house, take the neighbor’s one!
A good example is basically the question about aircraft. Airbus and Boeing reduce their production. Because airlines do not take the aircraft as planned. Realistically, there won’t be much demand of their aircraft in the next two years (or more). But could they sustain two years without revenue? Beyond some spare parts.
Then the airlines return aircraft to the leasing companies or cancel orders, even at the expense of financial penalties. Such piling up the dead capital with them. i.e. Brussels Airlines, representing the mighty Lufthansa Group, cancelling their wet lease deals with CityJet. Leaving them out in the cold. Lufthansa style.
And then there are the investors. Who will loose big money as a result of a surplus of aircraft they had focused on. Without realistic concepts how to make money or turn their dead capital to assets again.
That self-centered thinking will hit us in the back soon.
Supply Chain Management: We are ALL in this Together
My first boss taught me an important lesson in supply chain management ethics. It is not always about the cheapest offer. There is always someone cheaper. But part of good supply chain management (and beyond) is the reliability of partnerships. Especiallywhen times are challenging.
#weareallinthistogether. Exactly that catchphrase so many now use for #whitewashing. Again. It’ll hit us in the back.
Food for Thought
P.S.: Things can be handled differently. If you Think Outside the Box. And beyond. We’re looking for airline investor(s) who understand “doing different” being the core to the Unique selling proposition. We have some sound, profit- and USP-, sustainability and social responsibility focused business out for funding. Contact me to learn more.
Airbus announced to reduce the monthly output of the A320 fro 60 to 40 aircraft, citing problems handing over ready aircraft to their customers. Aircraft being parked at Rostock Airport (RLG).
Lufthansaannounced their fleet changes, retiring (decommissioning) mostly large aircraft like A380s, A340s and 747s, but also 11 (out of 62) A320s.
— and so on, and so forth.
Aside such news articles it is rather difficult to come by good, hard data about how Corona impacts the industry on a global scale. On LinkedIn, I received a graph by The Air Current.
The Air Current Graph
Having discussed those numbers in a conference call, it seems that there are some interesting factors that impact that graph.
Freight Use + Repatriation Flights
Many if not most of those seat miles are repatriation flights as well as passenger aircraft transporting freight! Those are and can be only temporary remedies. In Germany, Condor recently published their foreign farm help shuttles, now the Polish state-owned PGL owning LOT and most Polish airports cancels their rescue-takeover of Condor. Likely the end of that tradition-airline.
Large Aircraft (Twin-Aisle)
Very visible is the mass grounding of large aircraft. The Airbus A380 is already no longer built, now airlines retire, decommission that aircraft in large numbers. Flightradar showed quite some of those aircraft being flown to the scrap-yards, also called aircraft graveyards. The same applies to many 747s, not being “parked”, but decommissioned. The same fate even seems to hit the Boeing 777. Coronavirus also seems to seal the fate of many Boeing 767. For all those aircraft, more than 80% are grounded – many of which are being decommissioned for good.
Midsized Aircraft (Single Aisle)
Coronavirus also seems to seal the fate of many 767 and 757, though American Trans Air seems to have a sound business model for the 757s; an excellent aircraft that might have been the saver bet for Boeing to upgrade instead of the old 737-frames. With Lufthansa not just grounding, but decommissioning not just 11 A320, but also the entire Germanwings with 23 A319 and 10 A320. Reflecting their managements disbelief in the post-Corona market for that aircraft. Boeing had already shelved the production of the new 737MAX and seems to have also trouble to handover the currently produced ones to the intended customers.
What stroke me odd was the Embraer E195, showing 75% grounded, as well as 65% of the E190s. Both very good aircraft. But very few, large operators grounding their Embraer fleet in favor or their Boeing/Airbus operations seem to have resulted in their large groundings.
Generally, the regional sized aircraft with below 150 seats (below A319 or 737-300/700) by the time that graph was compiled operated still 50% of their pre-Corona regional services.
Outlook into the Crisis
Optimists outlook is a two-year return to “normal” (AF/KL). Flightglobal headlines Global airliner fleet returns to 1990s levels, John Strickland writes on Aviation Week For Airlines, The Shock Has Just Begun. At the same time I see and here seasoned airline and other aviation manager expressing an ongoing cognitive dissonance on a surprising level. It’s beyond my understanding how anyone can vouch for unsecured credit by demanding vouchers when we don’t know, if those airlines, cruise companies, etc. will survive. I expect a large number of claims against governments, where such vouchers are legally made normality. Anyone expecting a quick recovery, think again. And yes, that includes people like IATA chief economist Brian Pearce. I consider it a dangerous, if not criminal belittling of this crisis.
And while optimists still hope for a quick recovery and flights to recover even within this year, realistically we must expect worse. In many webinars and discussions there is agreement by seasoned professionals that this year and likely next, maybe even beyond we will be living in crisis mode.
Now Flightglobal headlines that Cash reserves give Boeing 10 months of breathing room. The MAX-grounding came at the worst possible time for them. Thinking about their intended acquisition of Embraer, there are already news in the media questioning the value of Embraer in the time of this crisis. Does the deal make sense at all? Not in my opinion. Airbus published reduced A320 output and many of the ones rolling out of production being parked at airports like Rostock (RLG). Until they can be delivered to clients who want them. Clients who can afford to pay for them within the crisis.
Overall, which aircraft will be shelved, either by the airframe makers or by airline and especially aircraft investment companies’ demand.
The Beginning Recovery
What they also agree upon is that whenever the recovery starts, the recovery will be slow and need small airplanes!
Operators + Leisure Travel
In a recent conference call, two attending tour operators flight purchasing managers emphasized a recovery on the basis of previously high density high volume routes. They emphasized that while VFR (visiting friends and relatives) will recover a bit faster, the “normal” traveler will be busy recovering their jobs and lives and income – they expect only very little demand for the typical vacation for 2020. And they, as tour operator flight experts raised a question: “Who will want to spend some hours in an airplane having the reputation of being a sardine can?” This will even impact the vacation travel in 2021 and beyond. There will be a revival of ground-based and localized travel at the expense of air travel. It will take time to recover from that blow.
The same conference call had corporate travel managers and representatives of two different business travel management companies (BTM, corporate travel agents). They expected an even more restrictive point of view. Corporate travel managers have for years been made sensitive about their responsibility for the well-being of their travelers. So now they fall-back to what they have been taught, now they will restrict travel to the most needed, qualified as important cases, until the traveler can be vaccinated against Corona.
An exception the BTMs mentioned: Travelers who went through the infection and are such immune and noncontagious may be the first to start traveling again. But it was also consensus that a comparison to flu vaccination would be not comparable, after all the hysterics we went through.
Maybe some people won’t vaccinate. But that will not make much of a difference about their reluctance to travel by air for a while.
Slow Passenger Growth
All this lead to the expectation that even on former high density routes, the use of B757, A321LR and such smaller airplanes may be the first routes to recover on long haul. Some very high density routes may recover using larger aircraft such as the remaining B747s or B777s. Where I see Emirates likely to stake their claims quickly, possibly even basing some of their aircraft out of country to serve remote routes.
Also on regional routes, operations using anything larger than a 150-240 seater (A320-family, Boeing 737s) will be very unlikely. It’s also the signal aircraft retirements within the IAG group (BA, Iberia, etc.),
Long-Haul, Hub- and Connecting Traffic
As for the anticipated return in passenger numbers, except for the very high density routes like New York-London, airlines will start with shorter hub-to-hub-routes, like back in the 80s the availability of two-leg-connections between any two cities will be limited, three-leg connections again becoming quite normal. Expectation was also voiced that most operators will shelve most, if not all twin-aisle aircraft.
Given Emirates fleet of A380 and B777, it is expected that Emirates will expand by “round-the-world” services, connecting most of the long-haul/high-density-routes! That in turn will make it difficult for the other network carriers to cash-in on those routes.
Low Cost + Regional Aviation
Given the expectation of questionable safety regarding load factors and demand for 150-240-seat aircraft, this will be a turning point for the low-cost industry. For a long time, I considered “low-cost” carriers (LCC) as a cost-sensitive regional aviation player. Connecting point-to-point without a focus on connecting traffic. As the fleets grew, the routes got longer, the LCCs started experimenting with classic concepts like GDS-sales, hub-services and connecting flights, etc., etc. As the classic airlines learned to adapt to the new competition. It was long questioned on conferences and other discussions, if you can still group LCCs, that dates back even to fierce discussions about the status of Air Berlin as a LCC.
But at least in Europe, the promising routes allowing sustainable services became scarce. And now the passenger growth evaporated, many routes will no longer be viable for the LCC on a “low cost”. Will they increase the ticket prices? I expect so. In fact, I hope so. The number of tickets sold below the average cost per seat will shrink. Then the LCC will be “just another airline”.
In most of the webinars, calls and discussions of the past weeks, the expectation was expressed that as regional flights were the last to be cancelled, they will be the first ones to recover. 150-240 seats are the domain of the former LCCs. There problem will be the very slow growth of passenger numbers post-crisis. Suddenly their “more seats” turn from benefit at full load into a severe challenge. Similar to tour operators, they will focus their recovery on the former high density routes. In a perfect scenario, they would slowly pick up speed. Realistically, they will rush it, risking a lot, flying below cost. How long they can sustain that must be seen. If aviation truly cuts back to traffic of the 1990s, the demand for flights served by 150-240 seat aircraft will be rather limited. A lot of Airbus-320- and Boeing-737-families’ aircraft will be grounded for time to come. With a devastating impact to aircraft leasing companies focusing on those aircraft.
At the same time, while that would have been a perfect business case for FlyBE, the airline was (among) the first to shut down in the crisis, neither owners nor other stakeholders understanding the impact of the crisis to future passengers’ development, nor FlyBEs value in a post-crisis. I expect other airlines operating the smaller aircraft with 50 to 150 seats to be the first to recover and be the winners in the immediate post-crisis.
Pending question was if there will be enough consolidation to leave enough niches for the survivors. Or if the stabbing and fighting for routes will continue – with the pre-crisis effect on revenues and commercial sustainability of the air carriers. While we all expressed hope for the first, we all fear that airline managers will fall back into their old modus-operandi to focus on marked share and loads instead of revenue and profit.
Especially of concern are the LCCs, suddenly sitting on a fleet of too-large aircraft. Likely to push them in the market with low ticket prices trying to fill them up. Will they understand and be able to adjust their business model to a drained market? Ask for “sustainable” prices, covering the cost of operation of half-empty aircraft? If not, we will see them burning up quickly like a flash in the pan.
The recovery will be slowed down as “low-cost” models at the beginning will such pose high risk – low return, airlines will need to focus initially on low load factors but the need to create profit after the drought.
The recovery will also demand shrunken cost, fleets, etc. – also including a elimination of non-essentials, redundant developments with the teams associated to them. There will be very hard decisions. A lot of developments will be faced with the need to provide hard evidence on USPs, impact on profits.
With KPMG, ISHKA and other professionals saying that the average return on aircraft fund investments to be around 4% pre-crisis, there have already been the large players as the winners, with many losers. There also was a focus on “me too”, many smaller players, like banks or funds, focusing on the “safe bet” on more and more 150-240 seat Airbus or Boeing aircraft. It was always an issue that those aircraft were leased out to small start-ups, which failed, releasing it at lower return to other airlines, just to minimize the losses.
At the end of 2019 aircraft investors said they’ve been only surviving because of the grounding of the 737MAX. Now suddenly that entire market (finally) imploded. And despite a lot of “experts” expecting the market to recover quickly, all signs are on a slow recovery for that aircraft type. And while a factory new Airbus A320ceo was sold pre-crisis at a cost of 1/3rd of the list price or even less, there is now a fight at play that will turn that aircraft a burden for a long time to come!
What about larger aircraft? The A380 was the warning shot. First the production ended last year, now a large number has not only been grounded, but flown to known scrapping sites. The same true in the few weeks since start of the crisis for 747-400, 777-300 and other large aircraft that was expected to be entering the secondary markets – markets that suddenly evaporated and are unlikely to make it back any time soon. And now there are many reports like Blue Swan Daily‘s addressing the conflicting interests in the current crisis between airlines, aircraft lessors and investors. Everyone following the Saint-Florian’s Principle about who shall take the financial repercussions of grounded aircraft.
Speaking to investors about investment in different aircraft with USPs (yes, I talk about KOLIBRI.aero), I was told repeatedly that they prefer those common aircraft models as they know what they are and everyone does it. So now may be a time where investors will recognize that doing what all others do is (and always has been) a paved road to disaster.
Holistic Investment Models
Speaking about KOLIBRI.aero we also talk about holistic investment. Writing this, there is a report on TV about the wake-up-call against “outsourcing” of pharmaceuticals to China. Developing the business plans for KOLIBRI.aero, we intentionally looked at insourcing as a means to reduce the cost. 30+ years ago, my senior manager in the company accompanying my education in whole-sale and foreign trade economics told me what I found true ever since: You always pay for outsourcing. Either by paying more or by loss of quality. A classic outsourcing is consulting. And my rule offering consulting has always been: If you need know how temporarily, you pay a consultant. If you need know how long-term, you may pay a consultant to train someone on your payroll. Temporarily. If you pay a consultant permanently, you do something wrong.
This is the same in aviation. If an airline flies somewhere once a day, it makes sense to order external ground handling. If you have your base or focus city, you better do it yourself. If you have one airplane, you better outsource the maintenance. You acquire flight crews someone else trained. You outsource your IT, your marketing & sales, etc., etc. And pay for it. Better do not expect to be able to be competitive to your local low cost competitor. If you have a fleet of aircraft, you better do it yourself. Lower the cost, secure the quality. Yes I know, I addressed it in my post asking last December, why airlines do keep failing.
Now, surprise surprise, the current crisis proves that this is the very same with aircraft investors. If you just look at aircraft but have no idea how to use it, you’re doomed. It will work a while, it did work a while. But even before Corona, this model was doomed and I addressed it. If an investor invests into the aircraft but outsources (the risk of) the operation. Then those small failing airlines return the aircraft after not paying the bills for several months.
While the large lessors could shift the aircraft rather quickly between different clients, the smaller lessors often swallowed losses, accepted leasing the aircraft out at lower rates, all biting into their revenue. There was a lot of “academic believes”, “cognitive dissonance” and “wishful thinking”. And a lot of banks and investors avoided to look into new ideas. New ideas reflecting usually unique selling propositions. Not necessarily all winners. But following the flock ain’t the answer either, right?
Since starting to turn the idea that turned out to become KOLIBRI.aero we looked at what I learned back in the very early days of my aviation career. To think beyond. To not “think it can’t work because everyone says so” but to do the maths myself, to calculate ideas. And guess what: Those ideas mostly worked.
Different aircraft, different business model, focus on profit, identify USPs. And Corona did not disqualify our business model. Quite to the contrary. So now all we have to do is find an investor, understanding the value of creativity and interested to make a change. Thinking outside the box. If you try to repeat what others did, look at their failures.
Food for Thought Comments Investors welcome!
P.S. Not all of the links are publicly available but require a subscription. Apologies.
For quite a while, I am stumbling over the issue of the common investor understanding of Corporate Social Responsibility (CSR) and their implication that it is the same as Sustainability. Which it is not.
Wikipedia a.k.a. an Academic Idea
Reading the Wikipedia page about it, they see it as a high-level code of conduct for large, international organisations. And focused on the representation of the company towards its customers. I think we must step back and make a change. A change to how we must understand corporate social responsibility. And not just, but especially in times of Corona, this is not a nice to have, it is a desperately needed definition update!
Shareholder Value vs. CSR
If you focus on shareholder value, human resources and only your own, personal profit, you end up in a deep, dark pit. Sometimes, like Boeing’s Muilenburg and others who have been on the Olymp, just for that much deeper a fall. Examples aplenty.
In most cases, it’s like the recent decline in employee morale at Lufthansa, Carsten Spohr shelving Germanwings in a “strategic” and likely necessary move, but without the touch to understand the emotional repercussions on overall staff. Them having very well in mind the fate of Contact Air, Cirrus Airlines, but also Air Berlin with their last CEO a Spohr-lackey sent to liquidate the airline. And sure, there is quite some green- and whitewashing involved by such CEOs, having their own “sustainability” and “CSR” departments.
So what is “CSR” truly about? Or should be? Like with all such “definitions”, there has been a basic idea. Then it was abused to abstraction to #whitewash investments and make them attractive to investors.
To understand the original idea behind corporate social responsibility you simply need to read it. It is everything about the social responsibilities in corporate (organisational) environments. Is it social to support sustainability? Definitely. But not only. Those definitions applied to CSR crippled the original definition. Then the #whitewashing continued. As Wikipedia refers to, there’s a cost-benefit analysis. Don’t get me wrong, it makes sense. But then let’s name it – it’s a business model, has nothing to do with philanthropy.
Micro Level Social Responsibility
Corporate Social Responsibility starts with your immediate environment: Your own organisation!
When I started my aviation career with American Airlines under Bob Crandall, we were a family. My friends at Delta and Pan Am envied us for that family spirit, called us “brain washed”. To date, we were not brain washed, but professionally motivated. Something I miss since the button counters took over. Something Carolyn McCall at easyJet understood and (as I predicted) what left easyJet with her. The top management understanding that humans are no resource and that motivated staff and service are invaluable assets!
“What always drove us was our people, our AllStars . It’s what’s drives us every time we are in a Crisis. We must do whatever to protect their jobs.”
CSR the KOLIBRI.aero Style
Co-Founder Ndrec coming from a military background, me grown up with American military and starting my career with American, it was clear from the very start, that developing such a better airline, aside profitability ☑ (check), USPs ☑ (check) and sustainability ☑ (check), we must take care of “ours”. What we considered and consider true “CSR”. From the outset, we such looked at staff management and banned to wording of “Human Resources” and its shortened version “HR”. And we looked at the locations we plan bases for, beyond the company, but the impact such development has to the communities “we serve”.
It might be surprising to the bean counters (accountant-mindset “managers”) that all of our related “cost centers” turned out to be no just driving loyalty, but to be true profit centers and vital in our attempt to melt the cost factors to competitive levels. As a start-up, investing into all the company’s assets, you must be competitive against all those large, established companies like easyJet owning around 70% of their fleet, cost down to maintenance, with roughly 25% being paid off and around 5% being leased to cover ad hoc opportunities (like taking over Air Berlin routes). And while now being a “burden” in Corona times, airlines cannot drop out of leasing either, so the cost still is there. But those airlines can secure credits based on their (aircraft) assets. To develop profit centers that allow to cut down the cost to competitive levels such ain’t a mere strategy, but a vital need.
As in all my posts addressing moral and ethics, I turn back to my father, who told me that you got to be first and foremost someone you see in the mirror and you like the guy. Secondly, despite all mistakes you do, you must keep your sheet clean. Your sins will backfire on you.
So you got to start with the good old (wo)man in the mirror. Then think about “yours truly”, family, employees. Then look after the extended community, local and work. If you look at all that, sustainability will be a “natural development” for you.
“Don’t believe what your eyes are telling you. All they show is limitation. Look with your understanding. Find out what you already know and you will see the way to fly.” [Richard Bach, Jonathan Livingston Seagull]