Airlines: Outlook on Travel Demand | In Practise

Airlines: Outlook on Travel Demand

Former Chief Strategy and Planning Officer at Etihad Airways

Learning outcomes

  • Outlook on short and long-haul travel demand
  • How airline executives think about managing capacity
  • Strategic fleet management decisions for airlines
  • How Etihad managed the hub-and-spoke network during the 2008 crisis
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Executive Bio

Wayne Pearce

Former Chief Strategy and Planning Officer at Etihad Airways

Wayne has over 40 years working in the airline industry. He spent over 27 years working for Qantas Airways, Australia’s flagship carrier, where he worked his way up as a leading revenue management executive. He then led a turnaround at online travel company Gold Medal Group in the UK before joining Etihad as Chief Strategy and Planning Officer where he was responsible for pricing, capacity and fleet management for the group. In 2012, Wayne joined as CEO of Oman’s flagship carrier before moving on to advise the CEO of Thai Airways on a turnaround plan. Read more

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Wayne, how do you compare today’s situation, in the airline industry, to 2008?

The incredibly interesting thing about both of these is that they built up over a number of weeks. In fact, 2008 took even a bit longer. There’s this sense that something’s coming. In the beginning, we were getting assurances of, don’t worry, it will go away. That’s usually what political leaders try to tell the general population, or otherwise, we’re too worried about too many things. But really what happened in 2008 was, there was this moment when Lehman Brothers went over, back in about August. When that happened, there was an immediate, impending fear that went through the community. We all started to feel, my god, are we really looking at a total collapse of the financial system and is this the verge of the Great Depression, again? We were all very, very worried.

I remember sitting around the board table, at Etihad, thinking what are we really dealing with here? Fortunately, in that situation, we were in Abu Dhabi, which is one of the most oil-rich countries of the world, prices had spiked, we knew the government had money and we knew we’d get through it. From a personal point of view, it was a very terrifying situation, as well.

We also had a tremendous amount of aircraft on order. As the chief of strategy and planning, where I looked after fleet, network revenue management and a lot of the issues that involved, my concern was, what am I going to do now? You immediately go from the big issue to, how do I make the business work and minimize the damage and, actually, try to look for some opportunity.

Just looking at demand, can you give me a sense of how executives were looking at demand and the evolution of consumer behavior and demand, in the boardroom, in 2008/2009?

What you’re really dealing with there is one of the most important things of all and that’s staying on top of your data. Companies that are really good at being data intensive, analytical quickly, and not getting immersed in the data – the old question about paralysis by analysis – but instead, understanding it, working out where you are and doing something, is super critical. Companies that immediately go to the data, get a conclusion and work their way through it. People who don’t look at data and just sit around, get into terrible trouble, very quickly. Once you get into trouble, it takes a lot longer to get out of it than you think.

How did you look at demand, coming out of 2008/2009 and how would you compare that to the situation today, for both business and leisure travel?

Then, it was better, because it didn’t stop. Now, it’s stopped and hardly anybody operates anything at all. It’s just completely finished and you’ve got virtually nothing operating. Back in 2008, we could see demand collapsing and there were certain routes that held up better than others. The trick was to – when you run a network airline, with a big hub and spoke – look at what is the traffic that is surviving and you move the capacity to it and really focus on it. The place where capacity is failing, you take it away from it.

If I go back to an earlier example, which was 9/11, which happened in later 2001 and ran through to 2002, and I ran a travel company. I was fortunate that I’d invested in an intensive data management system. I could see, literally within two days, demand had moved away from people going from England to the United States and had moved enormously to the United Kingdom going to Europe. I shifted our whole sales and marketing program to that market and that’s how we survived. I always go back to data. You must look at the data and look at the revenue and compare it against your cost.

How do you think consumer behavior will change for travel, in the next five years?

It all depends on whether or not there is a solution. Is there a vaccine or not? If there’s no vaccine, you’re only going to get the bravest people or those with the greatest need to travel and everybody else is going to be very conservative. We can already see, in society, that there are people who are willing to take a lot more risks than others, but the great bulk of the population is following the government’s restriction. So if there’s no vaccine and we don’t get a breakthrough on what happens when you get sick, you’ve got to think that people are going to go a lot more local. You’re probably going to start to get a lot more travel around the UK, if you’re a resident there, or the US, if you’re a resident there.

But I tend to think a lot of the more exotic destinations, like going to Africa, Far East, long-haul travel, even going to Australia, even though it’s safe, people will always be afraid, in case something happens and they can’t get back quickly.

Can you elaborate on that strategic decision. You’re at Etihad; you’re managing the network, you see travel and demand change, in routes and across the network, how do you think about managing that hub and spoke network, during that tough time?

When you’re looking at that issue, you can see that certain travel did hold up. Some of the business travel sectors, on the big blue-ribbon routes, were still okay. When you got to routes that you were trying to stimulate business traffic to and it was leisure travel buying up, that tended to fall away, because people really wanted to go for price. Everyone became extremely cost conscious.

So what happened in that situation is, to get the traffic, you had to drop your price. We were in a position that we could, in that with a big hub and spoke network, you can look for wherever the traffic is willing to come from and to and go to that market, but we did discount a lot. It really was terrifically bad, from a profitability point of view. The impact rolled on for about two years. From Lehman Brothers, a bit less than a year. It was pretty bad. But once you got through that, it did come out a lot more quickly than I thought, after about nine months, actually.

With the hub and spoke model, if you do lose a slot or a route, does that multiply the impact on your network, because you’ve reduced the number of connections?

Yes.

How do you look at managing that challenge, in a down market, where you’re actually reducing capacity, overall?

It’s a good question. In a situation like that, let’s say you operated a flight from Abu Dhabi to a point in Europe and that flight was losing a lot of money, the question becomes, is it still covering the variable costs? The basic costs that an airline has got to cover is the independent cost of actually making that operation. That’s going to come down to things as simple as the fuel, the cost of the crew’s salaries, air navigation charges. Are you better off grounding the flight? So the issue that you are always looking at is, if you can cover that, the next decision point you’ve got is, can I find somewhere that I’ll get a greater revenue, at a greater delta? In a situation like that, it’s very hard to do it, because normally, when an airline puts on a long-haul flight, it takes up to three years to get it from losing money, to profitability.

On the whole, you’re better off sticking with what you’ve got or giving it up and grounding an aircraft when you’re in very bad times. But that’s a tough decision, because then it starts to trigger employee numbers and furloughs and lay-offs.

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Airlines: Outlook on Travel Demand

April 28, 2020

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