Will SARS-Cov-2 (Coronavirus) hide pre-existing airline difficulties?
I recently read a document on recent deals as well as a social media comment about the headwinds the airline industry is facing. I posted a comment that
“2020 was already heading into headwinds in many markets before this new outbreak. Margins were already weakening, and have been for 3 years. The corona virus will hide many of the systemic issues that were already affecting the industry and allow many poorly performing airlines and airports to continue with business as usual, and blame external factors.”
The reality is that airlines and airports seem to have largely been ignoring the signs.
Yields were falling
Demand was falling
Yet airlines were adding capacity through larger aircraft, new routes and overall fleet growth
There is always a place for launching new routes which provide customers the ability to reach the destination more efficiently. However, very often, all airlines do is launch a competing long haul 1-stop and 2-stop product where numerous other competing, and often superior, products already exist. Airlines tout the new city pair they are connecting, without highlighting that the city pair cannot sustain direct services without significant connections at one or both ends. As such, to suggest the city is now better served that before is more often than not simply untrue.
Aviado Partners directly drove the launch of SFO-AKL, LAX-AKL, DXB-AKL, DOH-AKL as well as the growth on ICN-AKL, BJS-AKL, BKK-AKL, HKG-AKL, MNL-AKL, YVR-AKL and many others. When we started down that path, there were far too few one-stop connecting opportunities from key markets and those were highly congested, even if preferred. Our analysis helped airlines and airports to very effectively analyze the opportunities and launch. However, the challenge often not seen by airlines and airports is that when one starts down this path, the flows are highly constrained and new connections, while not new, provide additional flow for existing underserved demand. Additionally, as new services come online, the excessive yields which were previously enjoyed by carriers in the constrained environment start to fall. As more and more such services are opened, the constraint diminishes.
At some stage, additional/new services only compete with existing services, and in doing so, they drive yields to unsustainably low levels.
Market data shows that this has already started to occur on some flows. Market data also shows, for example, that some services to Australia are simply excessive and drive yields to unsustainably low levels, therefore making it very difficult for airlines to compete effectively and profitably. Not to say that some markets in Australia do not need growth. There are often markets in one country which need new services, but cannot get them because capacity to other gateways is excessive and effectively ‘blocks’ the new services from being launched.
These challenges exist in all economic cycles. They become worse in down cycles as we have been experiencing since 2017, as a result of demand exceeding capacity on certain flows, combined with falling yields, combined with airlines unwillingness to withdraw in what they consider to be ‘too soon’ as they try to milk every last drop. We saw some airlines finally rationalize capacity to Australia in 2019.
Enter SARS-Cov-2… Airlines now see the crisis caused by SARS-Cov-2, but many seem to not separate the effects of SARS-Cov-2 from the underlying deteriorating market dynamics that pre-existed it. Why is this important?
Airlines now see the crisis caused by SARS-Cov-2, but many seem to not separate the effects of SARS-Cov-2 from the underlying deteriorating market dynamics that pre-existed it.
It is important to understand the separate, and compounding effects of these two issues in order to understand the problem better and therefore to define the solutions more effectively. A SARS-Cov-2 solution will unlikely serve the existing issues. Likewise, airlines which don’t see these two as separate issues, may blame all on SARS-Cov-2 and either overdo a correction and lose, or underestimate the issues because the see only SARS-Cov-2 and ignored the other problems.
One can only hope that airlines will take the opportunity to analyze the challenges effectively in order to better design their corrective actions.