Wednesday, 19 July 2017

General Airline Commentary - More on Key Success Factors

The airline industry continues to confound observers, academics, investors, owners, employees and passengers. The financial ups and downs over many years make for good reading and bad returns. Surely there is a formula for success? Well, not so fast!. Whilst it may be possible to identify key success factors and isolate pitfalls, it does seem that airline management hangs on for dear life as the numbers plunge from boom to bust. Warren Buffett is reported to have said that the total returns in the airline industry are less than zero if you look at the entire global industry.

There is consensus that the airline industry is a difficult one. If we build a Porter model to assess the difficulty or competitiveness of the industry, we will find that the airline industry does warrant a “difficult” rating, with certain exceptions where monopolies, duopolies, or oligopolies exist.

The factors which contribute to the difficulty come from two key areas. Firstly, it is an expensive business to operate. Aircraft ownership, fuel, pilot salaries, and maintenance costs make for high unit costs. Secondly, the airline seat is perishable. Its value drops to zero as the flight is closed for departure. This means that airlines will adopt pricing models that seek to minimise empty seats, and are often unable to establish a breakeven price. In a competitive market, this can lead to aggressive price competition, with no “stop loss” level.

Additional complexity, or difficulty, arises from both the need to maintain high levels of safety and security, as well as the need to satisfy multiple market segments within a single product strategy. It is also fairly clear that the fortunes of the airline industry track the global oil price fairly closely.
In spite of this, there are willing investors and entrepreneurs who will support new entrants, or come to the assistance of struggling ones. The desire to put assets to work often outweighs the clear prospect of returns. There also seems to be a fascination for the “glamour” of the industry, and a desire to say “I own an airline”.

So if it is a given that airline businesses will continue to be launched, relaunched, and rescued, what can be done to minimise the business risk? There is no “silver bullet” and we believe that there are few universal key success factors. Critical factors in one market, may have no impact in another.

In any form of business there are some typical “vital signs” which must be monitored and actively managed, and these generally apply at the high level in airlines. So, for example, we look for ruthless cost control, good branding, visionary leadership, operational efficiency, solid human resourcing, and clear understanding of market and customer needs.

However, in airlines there are another group of key success factors which are dependent on situation and strategic decisions. Typically these are the “train set” of the business – where to fly, what to fly, when to fly, what to charge, and what to give. In more airline jargon we could refer to these as “network planning”, “fleet planning”, “flight scheduling”, “yield management”, and “product and service design”.

In ongoing articles we will attempt to break these topics down into digestible portions, and get as close as we can to a recipe for success.