Wednesday, March 4, 2020

Managing the Network During A Crisis

In the past, most of my posts have been data-heavy. However, today's will be a break from those posts. If you follow me on Twitter (@FlyDataGuy), you likely saw a long-winded tweet providing guidance for airport professionals. I thought it would be appropriate to follow that tweetstorm with my thoughts regarding the coronavirus and how airlines are likely planning their networks with any demand changes.

You all are likely well aware of airlines liberalizing their change and cancel fees while reducing capacity to Asia and Italy as the coronavirus continues to spread. Clearly, airlines are feeling a squeeze in demand as the public reacts to the virus's spread.

Today's post will focus on what I believe is going on behind the scenes and what is weighing on professionals within the commercial groups (network planning, revenue management, marketing, and finance) as well as some considerations these groups have for operational groups. I will reference some of the internal data they may be reviewing, however, since it is... um, internal, I do not have access to it.

I do want to be entirely clear here. While I continue to have connections with professionals across a variety of airlines, you will not find any inside information here. In the unlikely event someone would actually discuss their decisions making process with me (they can't re: NDAs), I feel these types of conversations are privileged and should not be discussed openly. They would, however, help impacted professionals understand the operating conditions and constraints in which the commercial groups would be making decisions. Let's also not forget, the virus is still located in isolated regions throughout the US (we believe). As more cases are suspected and confirmed, it is likely the impact on the aviation industry will continue to grow.

So, where are we at right now? To date, outside targeted Asian and Italy flight reductions, March through August flight reductions have largely focused on domestic travel due to MAX aircraft availability. In total, domestic trips are down 1,776 trips vs 140 trips when comparing schedules published in January compared to current published schedules. MAX reductions to date have removed nearly 10x as many flights as any virus related reduction.

However, it is clear the aviation industry is under intense distress. United seems to be the most vocal regarding the impact. To date, United has reduced capacity to Asia, suspended 2020 earning guidance, canceled investor day, delayed future pilot classes, asked widebody pilots to take a reduced pay vacation, and warned future capacity reductions may be necessary.

How significant are these close in capacity reductions? Huge. Why? Costs. By the time airlines' operate their flights, a vast majority of their costs are largely locked in. Outside, of fuel, incremental maintenance, and some airport costs, cutting flights a couple of days out does not save that much money.

This is why we are not seeing widespread domestic cancellations in March. While I am sure demand is off for the month, cutting these close in flights would make a bad situation worse. As long as flights are covering their fuel and other truly incremental expenses, it is best for the airline to operate the flight rather than canceling it. Costs do not take into consideration the potential nightmare it would be to redevelop flight crew pairings and aircraft routings with near term capacity cuts.

Airline costs are often not well understood. This is often true by commercial professionals as well as the general outside world. When it comes to costs, airlines are capital intensive organizations with largely few variable costs. On the day of departure, nearly roughly 70% of an airline's costs are already locked in. Take United's 2019 cost structure, only ~30% of United's costs could be shed if they were to cancel flights across the network. Even this 30% is misleading. At most major airports, airlines are on the hook for airport expenses depending on the airline/airport operating agreement.

This 30% estimate could also range wildly at the route level. Different fleets and mission profiles may have different cost structures. The point, however, is for airlines to cancel flights due to lack of demand, demand has to really dry up. This appears what happened to United in Asia. According to the Wall Street Journal, US-based ticket sales to Asia are off a little over 50% year-over-year around the middle of February.

With softening demand, airlines have hinted there could be capacity reductions on the horizon. The commercial teams are likely actively working on these a variety of capacity reduction solutions if demand continues to soften. We are likely in the heart of spring and summer booking season. If the softness continues, airlines can start reducing flight schedules in a much more ordered manner which would allow some deferring or eliminating of costs.

When working within a dynamic environment, who do I believe is at the wheel driving decisions? I suspect most airlines have an active war room with commercial executives, revenue management, finance, and network planning. Revenue management is likely informing executives of the current booking trends and projected health.

Revenue management will be analyzing negative booking impact based on expectations of their booking curves. Revenue management would be looking at both near term and further out booking curves to understand the impact the virus is having on their operation.

With this information, executives are likely determining a few courses of action. They are likely guiding revenue management (manages ticket prices) inventory and pricing strategies. Executives from there are likely using the provided information to guide network planning on a general theme of what to cut if they believe cuts are necessary. Network planning will be taking this direction to start reducing capacity in impacted markets.

If you are an airport, your traditional network planning capacity planners are not likely the individuals actually making the decisions on which flights to cut. They might be informed and be able to weigh in on some options, but they are not the decision-maker here. Each airline has a team within network planning which manages the fleeting of schedules, as well as near term schedules decisions. These are the unsung heroes of network planning. They make the schedule operational. They also are at the front line when stuff absolutely hits the fan as well.

These teams are likely working hand-in-hand with finance to determine estimated variable costs by flight as well as revenue management of projected final booked revenue. The network planning team would then start weeding through the schedule to see which of these projected cash negative flights could be removed while keeping the schedule operations.

So here's the million-dollar question, where do I expect flights to be reduced? As always, it depends. If we continue businesses implementing travel bans, I would expect carriers to begin reducing their business networks. This would include large Northeast cities (New York/Washington), Chicago, Bay Area, Dallas, Houston, etc.  But some of these reductions would be dependent upon suspension of slot usage requirements (which IATA is requesting). Airlines are willing to operate empty flights in the short term rather than lose their slots to constrained airports.

Next, if the virus continues to cause long term demand concerns, airlines could take two approaches. First, expect to see long haul flights that overfly hubs to be targeted for reductions. Second, watch for the number of banks within hubs to be reduced. Reducing the number of hub banks would reduce the number of itineraries within a carrier's own network which competes with itself. Finally, as some outlets have started to report, entire fleets that are approaching retirement may see their retirement dates accelerated. This would help reduce some costs associated with unproductive aircraft.

As airlines continue to respond to the virus situation, it is incredibly important for those within the industry, especially airports, to understand how airlines are being impacted so you can plan ahead or you can address concerns as they arise. If you have access to GDS/MIDT data (I do not), you are at least four to seven months ahead of others in understanding the financial impact.

If you are new to analyzing airline revenue or you report entirely on load factors and passengers, please have an air service consultant help you. Trust and respect are the foundation to air service development. Actually understanding what airlines are looking at can help you build relationships with the decision-makers and lead to better results. Solely reporting on load factors and top O&Ds to airlines will not help, especially in dynamic times.

If you need help, please reach out to me. I am happy to get you in contact with some of my preferred air service development groups that can help you understand your airport's current performance and analyze the traffic results when the newest traffic data is released. I do not receive a commission, nor work for any consulting group. I'm offering so that others do not make the same mistakes I made in the past.  

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