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  • Terry Mcclintock

The Airlines’ Summer of Chaos

We’ve seen the social media posts or perhaps experienced mayhem at the airport ourselves as millions of people shed their COVID isolation to finally connect with family or business partners in the Summer That Travel Returned. Some airlines are having more than their fair share of negative publicity, seemingly caught flat-footed by demand that skyrocketed well beyond forecasts, and exacerbated in some cases by weather or computer systems issues that can weigh down an airline even in normal times.

Why have some airlines weathered this perfect storm better than others? And when will the domestic U.S. airline industry be back to something resembling normal? There’s no easy answer, but we have some thoughts about how individual airlines approached their businesses strategically; how they shuffled their people and fleets, and how they’re positioned for the premium business travel that typically (and hopefully) will commence in the fall.

Our analysis might not be entirely helpful while you’re cooling your heels at the airport, but it

nonetheless provides some insight as to why things have transpired the way they have and where they may be headed.

It starts, as always, with the finances. Airlines measure financial performance in many ways, the two most important being a measure of revenue -- Revenue per Available Seat Mile, or RASM; and cost -- Cost per Available Seat Mile, or CASM. The idea is to generate as much RASM as possible while keeping CASM as low as you can.

As the pandemic took the bottom out of airline travel last year, we saw two strategic approaches surface in the industry: the “RASM Hedgers” versus “CASM Hounds.”

CASM Hounds

CASM Hounds are the airlines that had little choice but to tackle costs against a drastic and long-term slowdown in demand. That meant, among other things, addressing an airline’s single highest line item -- labor, and some airlines did so with gusto. The industry eliminated more than 100,000 jobs just in the U.S. through a combination of layoffs, early retirements or voluntary buyouts. Others also accelerated fleet retirements, thinking, perhaps, that they would have a longer window to replace aging airplanes.

A cost focus is undeniably sound in a notoriously cyclical and comparatively low margin business, even in the best of times. It also tends to please boards of directors and financial markets. The downside, of course, is that too much cost reduction can generate the likelihood of the passenger experience so many have found themselves in this summer.

This is because airline employees don’t just “return to work” on a given day at a given time. Flight crews need time to be re-certified on the fleet types they were flying or new fleet types. Idled aircraft returning to service also must be re-certified. Ground operations and reservations centers need time to recall or hire and train new employees -- an exercise made more difficult by labor shortages across the travel and leisure industry. There is no on-off switch, which means airlines will get there, but not quickly.

RASM Hedgers

Counter the cost approach to the approach of the RASM Hedgers who, through a combination of financial support and viability, and strategic long-term business planning, found ways to keep staff, continue spending on capital information technology programs and more basically keep airplanes in the air anywhere possible. These airlines, it seems, are experiencing fewer service interruptions.

Many of the media and public have understandably asked if this summer’s service travails could have been avoided by airlines more wisely using the sometimes massive amounts of government aid they received?

Truthfully, airlines deserve a bit of a break here as the planning function of an airline is a multivariate financial puzzle to solve and forecast even in the best of times, much less during a once-in-a-century global pandemic. It is a balancing act in terms of having just the proper amount of available seats made available at just the right times to just the right places for a given season. Add in the roaring and rather sudden return of airline seat demand we’ve experienced this summer and you have a recipe for a very uneven cake.

So what’s ahead? While we are seeing travel rebound during the traditional price-sensitive leisure-oriented travel season, an airline’s bread and butter is the business traveler, who typically makes his or her return in the fall and winter months. Reliability is key to this customer, but so are fleet types, premium cabins, routes and loyalty programs.

For that reason, we believe global airlines that have the most ready supply of “best in breed” premium economy, business and first class cabins over the coming year will be especially poised to take full advantage of the yield premiums leading to dramatic rebalancing in overall passenger mix across their networks and full-on returns to profitability when the business traveler returns.

Conversely, and perhaps a bit curiously, we are also optimistic that the ultra low cost carrier (ULCC) business model is also poised for profitability, as dramatically increased ‘A-to-B’ non-stop flying options (as opposed to traditional hub and spoke) overpower cabin considerations and traditional airline loyalties. This is occurring now.

Overall, we expect recovery to occur sooner rather than later, despite various governmental restrictions and requirements in place today across the highest grossing business travel lanes in the world. We see predictions of a years-long exercise (i.e. 2023-2024) as overly conservative against current leisure demand spikes and exponentially growing needs of corporations both large and small to lead, create and restore their businesses to more traditional, in-person frameworks.

Looking forward? We hate cliches, but for some travelers, it will still be a bumpy ride as airlines normalize their operations and invest in technology that can improve various elements of the passenger experience. Customers can still expect a highly variable climate for a while, depending on where they’re traveling and on which airline.

That said, we think the business deserves some small measure of praise this summer: they have acted swiftly from a planning and scheduling perspective, in a very difficult environment, to add significant numbers of new direct flights to accommodate an unprecedented surge. Airlines have also learned from this experience and, we hope, will incorporate what they’ve learned for the next drastic downturn.

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