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The Future of the Airline Industry

The airline industry has been hit with a global pandemic, uncertain energy prices, and political risk with climate change: can we re-imagine its future?



Background

Disclaimer: The airline industry is not my area of expertise; I am a customer and observer. However, what I do know is Energy. Specifically, hydrocarbon fuels. As a former employee of the Refining and Marketing sector, I know that fuel prices make up a significant percentage of the operating budget of every airline. There is a delicate balance between weight restrictions, ticket pricing, logistics, and customer service that must always be weighed. It is a complex business model involving sophisticated modeling and analytics. Health and Safety is also critical to this balance. There are many issues to juggle at the same time. Currently, Caribbean Airlines in Trinidad and Tobago is cutting salaries and offering furloughs. Globally, this is what is occurring with most local and international airlines. We need to have this conversation sooner rather than later. How can the airline industry use this very challenging time to pivot and develop strategies and plans to become more resilient or maybe even “anti-fragile”?

The COVID-19 pandemic has put a significant halt on international travel, cutting revenue at a time where most airlines expect significant movement of persons traveling locally, regionally, and internationally. Energy prices have brought significant uncertainty to the industry which has made planning difficult. On top of this, there is the looming threat of climate change and the need to decarbonize this sector of the transport industry.

Where can the airline industry go from here? It is not only the holiday traveler who is wary of the airline industry and airports with COVID-19. There are schools of thought that the COVID-19 pandemic may change the behaviors of businesses. The typical business traveler or industry executive will go to conferences and meetings with clients across the globe. Now, most multinational businesses are still conducting business using online tools. Zoom, Microsoft Teams and Google Meet, just to name a few, has seen a significant rise in usage by the private and public sector. The long-term impacts of these new behaviors and their ability to last in a post-vaccination world is uncertain. In a recent US Congress testimony both Dr. Redfield, Director of the Centre of Disease Control and Dr. Fauci, Director of NIAID highlighted that there is a possibility that a vaccine will only be 50%-70% effective when approved for use in the wider population. So even with the vaccine, we may still have to employ public health measures of social distancing with wearing of masks and personal hygiene practices of frequent washing hands until some level of population immunity is established. Can the airlines operate with this level of uncertainty?

The airline industry must make a bet on the future. The bet is simple, and these questions are what must be discussed. Will airline travel return to “normal” once the world learns to live with the COVID-19 virus and we develop a vaccine? Even if it returns to “normal” how long will it take, and can we survive with very low utilization rates and low cashflows? Maybe the most important question for publicly traded airline businesses are will shareholders wait? Will investors understand that things will return to normal soon? Will bondholders for those who have debt also be willing to wait? I do not have the answers to these questions, but risk management requires any responsible firm to develop plans and actively manage the uncertainty that they face.

Moving from Uncertainty to Risk Management

My love of books serves me well here to share concepts that should be considered. Nassim Taleb in his work Antifragile and his work Fooled by Randomness speaks about converting uncertainty to risk. He focuses on the concept that a business should not try to predict the future. This is impossible. We need to become “antifragile” where uncertainty and disruption make the business stronger. It is greater than being robust or resilient but becoming antifragile. How can an airline become antifragile?

One of the ways is a tried and true business strategy of diversification of the strategic portfolio. Dr. Arie De Geus in his work The Living Company identified that businesses who have survived for hundreds of years have always used the strategy and culture of having the ability to pivot and reinvent their business model to capture the opportunity in chaos. We are living in chaos now. But where is the opportunity?

Diversification, Diversification, Diversification

Kellerman et al (2019) stated that Drone technology “combines three key principles of technological modernity - data processing, autonomy and boundless mobility. They provide access to (new) spaces and enable their analysis with the help of unprecedented methods of data collection.” This has been facilitated with the advancements in the reduction in the cost of sensors, machine learning, AI and digitization. Algorithms process data at a much faster and more efficient manner than human beings and creates the opportunity to develop new ways of transport and logistics. In Kellerman and his teams’ work they identify that drone technology in Europe and the US has already been widely adopted in sectors such as the Security sector, Oil and Gas industry, Retail Industry, Airports and the Power Industry. The Drone industry is expected to grow to 1.8 billion US dollars by 2027 in the United States alone.

The advancements in battery technology and the ability to recycle lithium-ion batteries has made this possible mode of transport a viable business model for an airline to diversify into. The core competency of the Airline industry is not only flying planes safely, but it is really about logistics. Movement of people, goods and services is the foundation and bedrock of the economy. The technology is still in its infancy but with COVID-19 these ideas have taken the forefront. Safety in transport will be priced at a premium. This is an opportunity for the industry. Technology is rising to the challenge.

A breakthrough in battery research: Tesla battery researchers have achieved approximately 360 Wh/kg energy density with new battery chemistry known as the anode free lithium metal battery cell. Elon Musk has said that after reaching 400 Wh/kg, electric aircraft will be possible. They are using these batteries in Teslas. Boeing already has a passenger air vehicle almost ready for manufacture that can carry 260kg and make regional flights in the US. Countries are making a bet on the technology as well; in Dubai, they are already changing laws to allow these drones to transport persons around the city. I believe these programs will de-risk the technology and open a significant market.

Imagine a future where your taxi service, inter-island transport and logistical service delivery in terms of packages can be managed by an airline industry and pilots who already have the relevant training and skills to create a safe and reliable service. The argument on a cost structure and business model that works is where most people try to shoot down bold ideas. But my response to this is that we can create these systems to make it work once we get the technical support; we are almost there. Let us be honest. This will not be the last pandemic and the pressure to change because of climate change will increase for the airline industry. The technology to make very long flights “green” is not available yet. But short duration trips can be done. Equinor (Oil and gas company) has already started delivering goods to their offshore platforms using drones (MFAME 2020).

This approach is not without significant risk. First, the business model must be right, you will need regulatory support. The cost structure and pricing must make this a reliable option for customers to travel and for businesses to use. The ability to scale the business is also important, not to mention the technical support, Health Safety and Environmental issues with new Drone technology (battery lifecycle issues) and insurance issues for cargo and people. Also, technology knowledge transfer and competence to maintain these systems. I can go on and on. Is there an upside to this risk? Is it worth it? Strategy starts with imagination: Can I use drones to run a taxi service on the air bridge between Trinidad and Tobago? Can I make it cheaper than it currently is without compromising safety and efficiency? We are a few years away from this, but my argument is that the time to start looking at it is now.

Author

Brendon James,

BA Geography, MBA Occupational Health and Safety, MSc Process Safety Management, MBA Sustainable Energy Management

LinkedIn: https://www.linkedin.com/in/brendon-james-94332a18/

"I am a lover of Economics, Energy, Stoic Philosophy, Crix and Milo in that order."

References

De Geus, Arie. 2002. “The Living Company”. Harvard Business School Press. New York

Kellerman, Robin, Biehle , Tobais and Liliann Fischer. 2019. “Drones for parcel and passenger transportation: A literature review”. Online. Accessed 20 September 2020. https://www.journals.elsevier.com/transportation-research-interdisciplinary-perspectives

MFAME (For Marine Fuels and Marine Engines). 2020. Worlds first Offshore Drone Cargo Delivery”. Online. Accessed 1st October 2020. https://mfame.guru/worlds-first-offshore-drone-cargo-delivery/

Taleb Nicholas Nassim. 2014. “Antifragile- Things that gain from disorder”. Random House. New York

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