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24/10/2021

Airline and Airport Bailouts: Short-term aid vs. sub-optimized thinking

René Armas Maes / Lunes, 22 Marzo 2021 - 17:59

Is it counter productive to keep bailing out businesses in the airline business? Does it prevent meaningful transformation and innovation to occur when multiple aid packages are given to the same player? Does it further entrench old practices that won’t allow a business to remove cost inefficiencies? 

Recently, the US government cleared the 3rd CARES Act support package. Although demand rebound optimism was highly visible last week among US airline CEOs, most likely in the next 45 days from today March 23rd we will hear once more about the implications of not supporting a 5th package and as in the past unions will join in that effort. In my view, government aids can help out up to a certain point (maintain a business afloat, protect jobs, etc.) but they are not allowing airline CEOs and management to execute meaningful top down and bottom-up business reviews let alone transformation and innovation in the industry that must occur to reposition a brand for sustainable growth.

Then other key questions come to mind: Up to what point a government should keep supporting a national brand? Should additional financial aid be considered basely on meeting/exceeding key targets and milestones (i.e., CASK reduction, leaner processes suing technology, etc.), or should additional support be given based on business viability, competitiveness, leverage position, caliber of management to turn a business around, etc.?  

In my opinion, continuous government support packages are a vicious circle that won’t allow airlines and airports to think thorough their businesses and remove cost inefficiencies while business may get used to run a sub-optimal organization. Moreover, the current demand reset is a key opportunity to rethink a business from multiple angles: Business model tweak, implementing leaner cost structures, low Capex expansion in a light asset manner, revenue diversification, vertical solution selling and running more efficient operations to name a few.

Therefore, airlines and airports that do not execute a thorough revision while waiting for additional government support on a recurrent basis, will end up at a clear disadvantage down the line. Few European airlines and Middle Eastern ones come to mind even pre-pandemic era.

But what are the key implications of bailouts in the medium to long term?

1) Unfair competition. Especially when not all players are bailed out. One example, Full-Service Carriers and Ultra Low-Cost Carriers.  

2) Governments continue supporting running a sub-optimize business including cost inefficiencies. Cost inefficiencies cannot be removed and may be further embedded in the organization while preventing real transformation, strategic planning and innovation to occur.  

3) Key structural and long-term changes may not be executed especially when a government helping hand is radioed to be expected down the line if demand and revenue environment conditions do not improve.

4) In the case a government equity investment is considered, it may further tie  up management hands up to a point where it can slow down business agility, flexibility and quick decision making which are key today to stay afloat.

5) Others.

Consequently, bailouts are a short-term / short sighted solution that governments use as a mechanism to protect jobs and national brands. However, they can’t guarantee viable and sustainable operations down the line as they may slow down the opportunity to execute a meaningful reorganization which many business should have gone through in the last 12 months and potentially new rounds of cost cutting could be expected this year as we (besides the overall optimism in the industry which is good to observe) are not close to be out of the woods yet. Otherwise, management could be putting a business at a higher risk of insolvency including bankruptcy or even closing doors.

However and in a more positive note, we should observe permanent changes executed by airlines and airports either if a bailout was offered or not as I am expecting that global airlines will come out of this more agile, leaner and with an overall lower cost structure that will end up maximizing margins and profitability in the future. However, the caveat for those bailout businesses is that they might be able to cut cost but not as deep as they should due to the inefficiencies embedded when multiple support packages are expected and granted. But at the end, we may observe a more cost balanced battlefield among FSCs and ULCCs in the near future which will be very interesting to watch.

Related to airports, I am expecting that the key permanent change (besides cutting costs) will come from a diversification strategies from loyalty programs especially from those airports that compete within a 100-mile radius, a closer airline/airport data sharing relationship resulting  in a better understanding of their target passenger and profiles, retail business optimization, distribution channels expansion, vertical selling solutions to optimize margins and the use of technology especially as they envision to reduce risks and protect from revenue swings.  

Final food for thought comment: It is true that airlines and airport associations job is to lobby for their members support and there is nothing wrong with that but in parallel the focus should be on helping their members to reduce cost, build leaner operations and higher ROI businesses. Otherwise, they could be well slowing down business transformation and their members potential to maximize returns especially in an industry with low historical margins when compared to other industries.

René Armas Maes is Commercial Vice President and associate at MIDAS Aviation, a London-based consultancy specializing in aviation. The projects he directs focus on business restructuring, strategic planning, business development and cost reduction. Likewise, René is an instructor in airline and airport management. Recently, René participated in a number of webinars on behalf of Embry-Riddle Aeronautical University, McGill University, the US analytic firm OAG and the entrepreneurship program at the University of Barcelona in Spain. You can contact René through his Linkedin page.

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