The Golden Age of Airlines’ Profitability is Over
The golden age of airlines! Probably that’s how we’re going to call the period from 2014 – 2019 in a few years. Years in which many airlines operated at relatively high-profit margins. Of course, we witnessed the bankruptcies of airlines during that time. However, from my point of view, most of them were related to standard market mechanisms.
Airline Profitability 2013 – 2020
in billion USD
Airline Profitability 2013 – 2020
in billion USD
In total, as shown above, airlines generated a profit of 175 billion USD from 2014 to 2019. But undoubtedly, this golden age came to an abrupt end with the outbreak of the COVID-19 pandemic. You don’t need a Ph.D. in Aviation Management to forecast the advent of a considerable period determined by financial loss, bankruptcies, state aid, etc. How long it’s going to take? Actually, no one knows.
Profit and Technology Spendings Went Hand-In-Hand
Correlating with increasing revenues and profits, SITA reported that airlines’ spending on technology and digital initiatives reached records year after year from 2014 to 2019. Having worked closely with many airlines over the globe during that time, it was amazing to see how airlines accepted the digital challenge and started to transform their business. The amount of digital initiatives that have been kicked off seems to be endless.
Additionally, many airlines —especially flag carriers and airline groups— formed new departments and incubators to develop innovative digital solutions. Some airlines even set the goal to become a tech company with aircraft operations as an add-on (that means, tech’s first, aircraft operations “just” an add-on).
Personally, I think the digitalization of the airline industry was needed and overdue. The question is, how is COVID-19 going to affect technological developments and digital initiatives?
Devastating Impact on Airlines Digital Development
Unfortunately, I believe that COVID-19 has a devastating impact on airlines’ digitization process and the ability to develop modern, digital solutions. Especially during the next 12 to 24 months, airlines will re-concentrate on their core business: flying. But I’m also convinced that this approach —as necessary it might be— will make airlines vulnerable. From discussions with airline colleagues, it seems that taken measures are pretty similar — depending on the financial situation and percentage of remaining operations:
- Nearly all airlines stopped a considerable amount of technology and digital projects immediately. Although “stopped” isn’t equal to “canceled,” I’m convinced that the status switches during the next months to the latter.
- Many airlines already assess scenarios to further and sustainably cut down IT/digital headcount. The range varies from a few percentages to +50%.
Re-Thinking Digital Strategies in the Airline Industry
Accordingly, airlines will reassess their digital strategies on a broader scale during the following months. However, the results are pretty evident from my perspective, especially when taking the above into account.
- Airlines will strip down the digital investment for the years to come massively.
- The concept of in-house digital departments will slow down.
- Related to the last aspect, the use of off-the-shelf products will increase.
- Accordingly, the dependency on software and solution provider will increase.
State Aid As A Key Differentiator?
In 2020, many airlines received state aid. Depending on the carrier’s size and relevance, governments pumped millions and billions into struggling airlines. However, state-organized financial support may play a decisive role in the future digitalization of airlines.
Here are two reasons why:
- In general, airlines equipped with state aids most likely will have a slightly broader scope when it comes to financial decisions and digital investments.
- It isn’t unlikely that states will combine their support with requirements. What we’ve already heard in the news is the combination of financial support combined with environmental measures. Probably there will also be requirements in terms of more digital and user-friendly products.
Airline Digital Transformation: Moving at a Slower Pace
Regardless of the details, there’s one thing for sure: The entire airline industry will reduce its investments tremendously. First and foremost, this is going to happen in non-operations-relevant areas. Accordingly, I’m genuinely convinced that we will see an industry developing at a much slower pace in digital and technological aspects.
The Digital Revolution Isn’t Waiting for Airlines.
The thing now is that the digital revolution is going to continue. Most likely, we will even see an acceleration of digital developments due to the Coronavirus. The rise of de-central offices and home offices is just one prominent example of an area where COVID-19 disrupts heavily.
The question is if the airline industry has financial equity to keep up with digitalization in the future. I’d rather doubt it.
Less Digital Grows Airlines’ Vulnerability
In that case, the whole airline industry will become vulnerable. Vulnerable in a way that external players enter the market aiming to disrupt the entire industry. I know it might sound crazy that external players with new digital approaches disrupt airlines’ business models. But it happened the same way with hotels and taxis.
From my point of view, one of the main reasons why external players disrupt the industry lies in the fact that the industry lags behind digital development. Indeed, the entry barriers are pretty high due to the required assets and related financial effort. But, conversely, no one knows how a disruptive approach will look.
What Do You Think?
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