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Thu 21 May 2020 03:11 PM

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Airlines: a reformation in the making?

The Covid-19 pandemic may prove to be a defining moment for the airline industry, writes Howard Leedham

Airlines: a reformation in the making?

I recently took what must be one of the top-ten most memorable flights of my life. This, on the face of it might not seem that remarkable. However, if I add-in that I’m a former navy pilot, airline pilot, business jet pilot and airline CEO perhaps you might gather the context.

Additionally, since that flight, Warren Buffet has purportedly “dumped” all of his airline shares, London Heathrow’s CEO stated that socially distanced queues at the airport would be kilometres long; and Emirates president Tim Clark was quoted in the media as saying “I don’t see any way ahead at the moment”.

The challenges that the airline industry faces are undoubtedly the most significant since the sector’s inception in 1914 and this may well be end of airlines as we have known them.  However, I think it’s safe to say that this will not be so much of a finale, as a necessary reformation.

Coming back to my recent flight, which was from Dubai to London, it was shocking and poignant but demonstrative of why Tim Clark perhaps said what he did.

Upon arrival at the airport, with a reduced maximum of just 25kg baggage allowance and a restrictive ban on hand baggage, the customer is faced with a long, socially distanced line, outside of Dubai’s Terminal 3.  The PPE clad security detail permitted a slow but sensible trickle of passengers into the prestigious terminal; no non-travelers’ were allowed. 

Arrival at the check-in desk, having been scanned for excess body temperature, took about 30 minutes from exiting the taxi.  Desk check-in was the old-fashioned way, there was no automation in passport control, which negated the need for fingerprint scanning and the line into security was long; again due to social distancing. 

The once vibrant and ever bustling Teminal-3 was a veritable ghost-town.  The flight schedule displays indicated a total of only twelve flights that day, of which four were cancelled.  There was just one coffee stand, which was adequate for the few passengers.

Inside the Terminal the treasures of the vast duty-free emporium were wrapped in cling film, the usually busy cash registers eerily silent. 

Outside, rows and rows of Airbus A380 and Boeing 777 aircraft could be seen parked complete with a sight I’d never seen before...they all sported engine covers, indicating they were out of service.  It was gut wrenching to see the stunning and hard earned success stories of Emirates and Dubai Airport brought to such a standstill for what is no fault of their own; but they are just one example of all airlines and airports the world over.

The departure gate area was expanded and individual seats taped off to ensure social distancing. The plane was carefully boarded and the flight attendants in full protective equipment were as polite as ever.  Face masks for passengers and crew were mandatory throughout the entire experience.

The allocation of seats within in the aircraft had been painstaking organised to optimise social distancing.  The in-flight service was limited to soft drinks and a boxed cold sandwich meal. Both Dubai Airports and Emirates did an exemplary job under very difficult circumstances, their teams are to be congratulated.

At Heathrow, we were the only flight arriving at Terminal-2, there were no additional checks for Covid-19 and no enforced social distancing.

The entire experience left me taken aback and asking myself, “how will the airlines and airports cope?”  What will be the new normal?  Certainly capacity has to be radically reduced, not just from aircraft being limited on social distancing capacity, but also from the ability of airports to deliver socially distanced passengers to the aircraft door in timely fashion.

I reflected that perhaps airline travel will have to revert to the days of the 1960s where only those who can afford it will travel, or perhaps there will be a new dawning of disruptive technologies that will permit aircraft to fly at lower capacity and operating costs.

The real issue is that current airlines, no matter how good or bad, have inevitably bought in at the top of a comparative market, so all are vulnerable this seismic collapse.  In June 2008 when fuel prices rose to $150 per barrel over 155 airlines went out of business. 

Many of those airlines that survived introduced tariffs on bags, food and extras and, even though fuel have prices trended lower since 2011 and aircraft became more fuel efficient, many airlines simply never removed tariffs or reduced fares, hence passenger sympathy for the airlines remains low.

In 2008 fuel price represented over 55% of airline costs, today with oil at 1/8th of the price that overhead is significantly lower. 

Aircraft design, although fabulously complex, inevitably remains on a game of catch-up.  The Airbus A380 designers played catch up with the Boeing 747 and now the A350 is playing catch up with the Boeing 787.  The first Boeing 737 flew in 1967. It's external appearance has remained the same through upgrades and extension, the latest disastrous derivative being the 737 Max, which had already plunged Boeing into an unprecedented crisis before unprecedented times.

All aircraft, no matter what variant, are powered by ever more powerful gas turbine engines that seek increased fuel efficiency. Their design is, however, still founded in Frank Whittle’s patented design of 1930.   (i.e.  compressors delivering air to a combustion chamber that delivers energized gases to turbines which, one way or the other, produce thrust). 

Just as there is an inevitability that all cars will be electric in a decade or two, technology exists today that uses super magnetic conducting coils in lieu of connecting shafts to drive compressors and turbines, the fuel savings are said to be in the region of 80% over current engines. 

However, the technology represents creative destruction to engine and aircraft manufacturers who would, literally, have to go back to an expensive drawing board that would make production of current aircraft pointless, which, let’s face it, given the glut of grounded aircraft, is an event that has in all likelihood already arrived.

Warren Buffet once said you have to wait for the tide to go out to see what someone is wearing from the waist downwards.  This is one of those moments for the airline industry.  It is going to have to be extremely creative in order to survive, but it is also going to have to be visionary in order to ensure it never gets caught in a low tide again.   The sector is at a unique moment in time to re-birth itself and fortune will doubtless follow the brave, innovative and imaginatively financed.

Any airline operator that doesn’t believe me only need look as far as Thomas Schumpeter’s theory of evolutionary economics, “that capitalism can only be understood as an evolutionary process of continuous innovation and creative destruction". For the airlines, this has never been so apparent.

To utilize Mr. Buffett’s analogy, the airlines now need to choose new clothes before the tide comes back in.

Howard Leedham MBE is a former Royal Navy commander and British Special Forces officer. He is now managing director of Consilium, whch offers special project consultancy services. 

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