About the Author
Those of us in the industry know that job No. 1 for airlines is to fly the right aircraft (fleet optimization) to the right places (network optimization) with the right frequencies (schedule optimization). But doing that job well won’t necessarily ensure a profitable future given the headwinds facing the industry. When I speak at industry conferences and have 1:1 conversations with clients, the same themes continue to arise. Airlines want to improve operational and financial effectiveness. However, strong headwinds make it increasingly challenging to maintain profitability.
For instance, labor costs have climbed dramatically in the U.S. – some 11 percent compounded annually since 2010, far in excess of capacity growth during that period. Global fleets continue to grow and are beginning to outpace true natural demand, leading to steep drops in yields. As oil prices rise, fuel is no longer a tailwind. These pressures on yields, fuel and labor equate to a need for ~15-20 percent or more reductions in other costs over the next 5-7 years to sustain current profitability of airlines globally.
Looking back in 5-7 years, I believe those airlines that will have succeeded will be those that took a step back now to look at the decisions they are making to lay the foundation for a profitable future. In my experience, I find those that make changes at the core can seize opportunities to increase revenue in this challenging marketplace, apply innovative techniques to control cost and be more operationally reliable.
Investing in the new
Fixing the core of an airline is necessary to rebuilding airlines for a profitable future, but that effort is not sufficient. Nor will making incremental improvements be enough. Airline management groups must pivot their thinking to invest in new digital initiatives, applied to revenue, operations and back office, that deliver a long-term return on invested capital. For example, we believe digital transformation of finance and back office can lower costs by 40-60 percent.
We are now assisting our travel clients in transforming via digital technologies the way they identify, interact with and reward customers. Analytics and machine learning are now assisting our clients with measuring customer interactions and unleashing insights that facilitate airline managements in custom-tailoring marketing and pricing strategies to individual customers.
In parallel, we believe that revenue management processes can become more agile, effective and thus “intelligent” by applying integrated analytics, machine learning and robotic process automation to drive enhanced revenue management outcomes. By building a continuous feedback loop of insights, airline managements will be able to make informed decisions or solve complex problems by leveraging data.
Earlier, I had mentioned the steady climb of labor costs. We are also now working to apply digital technology to integrate the workforces of airlines. When day-to-day operations are managed digitally, it will be far easier to communicate with pilots, flight attendants, and airport operations with airlines’ system control functions that will afford a quick way to recover from irregular operations. For example, that helps the airline better manage key challenges, such as flight disruptions. Now, it can automatically send communication to employees on the status of a delay and concurrently update customers in real-time to manage delays more effectively, enhancing on-time performance and strengthening customer loyalty.
Digital platforms enable a new level of operational and cost competitiveness by freeing an airline from its legacy spaghetti systems, and equipping it with an optimized network that allows automation, integration and insights. The platform becomes a hub of knowledge, learning, scheduling, communication and training. In the future, these digital platforms will become a one-stop shop that supports both customers and the employees serving them. Ultimately this will improve employee productivity as well as their overall job satisfaction.
Getting more from the core
Airlines have been doing well up to a point, but they cannot continue to be profitable without freeing themselves from the limitations of legacy IT systems.
The ideas mentioned above are just some of the opportunities to begin strengthening the core of the airline enterprise. Digital capabilities, when combined, create an intelligent back office that yields increased returns on invested capital.