How travel can weather the unexpected...with connected planning!

If you'd asked me a few months ago - when I had just returned from the US for the first time in more two years - whether 2022 would be the year we would all return to travel, I would have said yes without reservation. Demand is pent up, and anecdotally, people are ready to start flying again.  

Fast forward to March 2022 and Booking.com's managing director for Asia Pacific, Laura Houldsworth, made waves in the news when she cited entry restrictions into borders across the region contributing to a slower recovery in tourism. Furthermore, Houldsworth said the invasion of Ukraine has caused many Russian tourists to cancel their flights to popular beach destinations like Thailand, Indonesia, India and the Maldives.

Yet, there's still some hope for recovery as Australia, Cambodia, Indonesia, the Philippines, Singapore, Thailand, and Vietnam have now opened their borders (though there are some travel restrictions you should know about).  

Taking all of this into consideration, I think that one goal will remain clear on any company’s 2022 agenda—to evolve from pandemic-induced setbacks and seek opportunities for recovery and growth as governments reopen borders through deeper bilateral cooperation.

Travel and aviation are poised for a resurgence, but the economics may look very different.

While hopes for a quick and full recovery in travel have been dashed, if only for the moment--the sector will continue to see a significant uptick in demand. As it is, Singapore Airlines reported impressive earnings this past March, with quarterly profits soaring again for the first time since the arrival of the pandemic, mostly due to Singapore's VTLs and the government's sustained efforts to revive international travel.

Airlines that have weathered the downturn will need to plan and model their business to consider all the changes and unpredictability that is now the norm, from variable ticket pricing to flight routes to capturing whole new audiences through new experiences. In fact, airlines have had to tweak their operations for a variety of reasons:

• Capital Expenditure & Lease Planning: With an average cost of >100m USD per plane, the airline industry is one of the most capitally intensive industries in the services sector. These large capital expenses are generally supported with breakeven planning based on a detailed projection of things like expected demand, flight routes, aircraft capacity, commodity prices, staffing plans, and other operating costs. However, all of these variables were massively disrupted over the past couple years and – as a result – we saw many top airlines reduce the size of their fleets due to the high cost of maintenance, repair and overhaul (MRO) needed to keep planes flight-ready. Now, as demand resurges, some of those same airlines are scrambling to restock their inventory but finding it difficult due to supply chain shortages and an over-reliance on major players like Boeing and Airbus who are capacity-constrained. Adopting a platform that enables next-generation capital expenditure planning by seamlessly integrating into use cases like supplier collaboration, spare parts planning, and lease accounting can help avoid this “bullwhip effect” and be a competitive differentiator for the leading airlines of the future.
• Workforce Agility: In 2022, we witnessed record numbers of flight cancelations happening due to workforce shortages and other operational issues (Alaska Airlines' pilots picketing, for instance). And while COVID-related furloughs and layoffs of 2020/2021 didn’t help, they just augmented the impact of an underlying generational issue.  Similar to the aging population crises in countries like Singapore and Japan, the airline industry is dealing with a situation where there are more pilots retiring than there are new pilots joining the workforce. In fact, the issue is so dire now that it is inducing policy proposals to increase the retirement age while some major airlines are reducing training requirements for new pilots. And while major global players are generally able to backfill their pilot shortages by “poaching” from smaller, regional airlines, the problem just trickles down until the rubber finally hits the road (see what I did there?) at the flight academies themselves. This, in turn, is bringing more about calls for more outreach to underrepresented populations to encourage a more diverse set of potential talent. While a more robust headcount and capacity planning solution may seem the easy fix here (and it would certainly be a good start!) there is also an opportunity for the industry to try and attack the root cause of the issue by re-thinking its approach to HR overall and embedding more mature practices like diversity, skills, and succession planning into their overall workforce planning DNA.  
• Consumer Behavior: There is no doubt that there is pent up demand for travel. However, the composition of the travel audience, their patterns, and their preferences may look very different. For example, with the accelerated adoption of video-conferencing and virtual engagement, the threshold for what constitutes “necessary” business travel has been raised.  This means airlines will have to rethink forecasts for some of their short, high frequency, repeat-customer routes. In addition to representing a plurality of their most profitable (business class) reservations, these business travelers also happen to represent some of their most loyal and predictable customers which airlines often monetize into significant revenue streams. In fact, in some instances like Jet Airways, their loyalty program was more successful and resilient than the airlines it represented. After 2+ years of no travel, however, many of us have been “reset” to zero in terms of our loyalty status and the playing field is more level than ever.  Successfully identifying what the modern business traveler cares about most, pricing their premium cabin tickets accordingly, and re-designing loyalty programs to most effectively “trap” this audience, obviously represents a huge opportunity – but it also requires robust data exploration, predictive modelling, and iterative simulations.
• Route Profitability & Capacity: If all the disruptions above weren’t quite enough, let’s add on a geopolitical conflict for good measure as well. With Russia closing its airspace to European airlines, operators have had to divert their flights to alternative (and often longer) routes leading to increased airfares due to increased fuel usage, higher maintenance costs, and longer flight times for crew. This logistics problem has been further exacerbated by challenges in commodity prices, with crude oil prices surging due to the bans on exports from Russia, the largest oil and products exporter in the world. These two factors, combined with continued considerations on seating arrangements due to social distancing, have completely altered the unit economics of specific flights and thus negatively impacted their overall P&L. To better understand these business drivers and optimally allocated resources, airlines will need to extend far beyond corporate planning and budgeting and leverage their FP&A functions to calculate route profitability and build dynamic ticket pricing models to ensure they can cover material changes in underlying cost structures. 

Conclusion

While the travel industry has seen some recovery, global tensions amidst the Ukraine invasion and the escalating pandemic situation in certain Asian markets mean that airlines are still not able to operate optimally.   It’s not quite the good old days again yet.

Given the largely unpredictable economic environment, some simple but critical questions continue to keep C-suite executives awake at night. How do we accurately forecast demand, and allocate resources and assets? Will demand improve gradually or will it fall again? Will there be another Delta- or Omicron-like variant that changes the business equation for everyone?

This constant shifting in allocation and investment in investments, people, and planes can be volatile and leave airlines exposed. In this sense, even while the resurgence of travel represents a once-in-a-generation opportunity to grab market share, the concept of connected planning has never been more relevant and vital in addressing the unpredictability and volatility of the world today.

Already, cloud and data-driven platforms that allow leaders and decision-makers to interpret such macroeconomic swings are a reality and can enable the travel sector to be primed for whatever comes in the remainder of 2022 and beyond. Ultimately, organizations need to understand that the best approach to recovery is to incorporate agility and planning, philosophically and technologically, to ensure their operational models can repivot wherever and whenever needed.