Saving Airlines from The Pandemic Trap through The "6G Strategy"

Saving Airlines from The Pandemic Trap through The "6G Strategy"

Taufikurrahman's Linkedin Article

Among the business sectors hardest hit by the COVID-19 pandemic is the transportation sector, including Airlines. Restrictions on people mobility between regions and between countries have clearly made passenger volumes drop drastically and of course have an impact on the company's revenue and cash flow. If they do not immediately adapt and adopt the right business strategy, the impact will be massive and may lead to bankruptcy, especially for airline companies that have poor business fundamentals, even before the pandemic. Such airlines are very vulnerable to being caught in a pandemic trap, and may require extraordinary efforts to get back on their feet.

For such airline companies which had unhealthy business fundamentals even before the pandemic, the impact of the pandemic worsened conditions and accelerated the bankruptcy process. So usually the urgent step that must be taken is to first carry out a basic restructuring of various obligations and financial position, and then identify the right adaptation strategy to turn the business wheel so that it gradually becomes healthy. In this case, especially for airlines whose shares are owned by the state, sometimes government assistance is needed in the form of a bailout program, capital injection, soft loans, or various other policies.

The question is, what's next? What are the adaptive business strategies that need to be implemented in order to strive for systemic business performance improvements in airline companies after restructuring their finances and liabilities?

In this simple article, I would like to propose a business strategy package called the “6G (Six G) Strategy”, which allows an airline company to gradually improve business performance after conducting financial restructuring, which consists of:

(1) Going Freight

When there is a restriction on people mobility due to the pandemic, then of course the income from the passenger transportation business can no longer be relied on. Airlines must immediately make efforts to cover the falling cash flow by optimizing revenue stream that can still be relied on, in this case freight, cargo transportation. Because in a pandemic situation, the flow of goods is still needed to keep people's lives going, and by itself can become a more reliable source of income for the continuity of the transportation business, including Airlines. United Airlines, for example, is an airline company that is quite successful in increasing its cargo business so that it is quite helpful in supporting the company's cash flow resilience during the pandemic. In the first fifteen months of the pandemic, United Airlines managed to fly more than 15,400 cargo-only flights. Although the volume may not increase much more than in the pre-pandemic period, the advantage of the cargo transportation business is that the profit margin is better than passenger transportation which is generally more sensitive to ticket price increases.

(2) Going B2B

When there are restrictions on people mobility, the number of individual passengers will certainly decline. So airlines companies need to target B2B (Business to Business) business based on long-term contracts and generate recurring revenues, both for transportation and non-transportation businesses, such as the utilization of company assets and property. When a pandemic occurs, many institutions and companies still require mobility for the transportation of their employees by implementing stricter health protocols, and also to transport various goods and commodities. Airlines companies can take advantage of this momentum to aim for more B2B cooperation with various institutions and companies that need these services. Likewise, if there is an opportunity for cooperation in the utilization of assets and property, for example, it can be managed as a source of additional income through various B2B cooperation contracts.

(3) Going Basic

In times of any crisis, including a pandemic, the best strategy is to strengthen core competencies, provide affordable basic services needed by customers. Likewise in the transportation business such as Airlines. Luxurious services are needed less, and must be shifted to services that are more urgently needed, for example the provision of health protocols that provide a sense of security for customers. Airline service users need more standard services that are affordable but with good health protection procedures. Although of course this will depend on the segment of the target market, but in general it can be said so for the industry average. Airline companies that have succeeded in gaining public trust will be able to recover more quickly after the pandemic, or when the pandemic begins to be more controllable. Southwest Airlines, for example, managed to make a profit during the first three months of this year, although of course it was still small compared to the period before the pandemic, and became the first major airline company in America to do so since the pandemic.

(4) Going Low

The most generic step during a crisis, including during a pandemic, is efficiency. Keep costs as low as possible, but of course must not sacrifice costs related to flight safety, because airlines' main business is customer safety. The management of airlines companies must thoroughly explore every component of financial statements, every element of costs and revenues, perform detailed analysis. Monitor cash flow on a daily basis, and take more efficiency and cost control efforts.

An airline CFO must understand which cost elements are significant and must be controlled. For example, if the cost of airplane fuel is very significant, then he/she must understand how the cost control strategy should be designed and implemented to make it more controllable and less volatile, he/she must understand the fuel-hedging strategy, through the strategy of oil contracts, call options, collar hedges, fuel swaps and so on. An airline CFO must understand the term of Three-Way Collars hedging, for example. If these strategies have never been carried out before - due to certain regulations, then they should try to seek support from policy makers to allow the implementation of rules in accordance with business and good governance principles that are generally accepted in other countries. Financial strategies must be well-constructed, not only in terms of high-level financial restructuring, but also more operational financial strategies to seek financial resilience and improve financial performance from day to day to ensure the resilience and recovery of the company's business during and after the pandemic.

(5) Going Variable

One of the aggravating factors for most companies during a crisis situation is the large portion of Fixed Costs components, which inevitably have to be paid and spent even though the business capacity is lower than normal conditions. The management of Airlines companies must make every effort to reduce fixed costs, or even negotiate with certain asset providers or suppliers that allow the conversion of fixed costs to variable costs. It will be very challenging to do so, but in a crisis situation, there is usually a mutual understanding between the parties to seek survival together, for both parties.

(6) Going Digital

During pandemic, digitization is a must, at least in terms of customer services, and if possible, conducting more holistic digital transformation to enable more efficient business processes. A digital platform for customer services will greatly assist consistent engagement with customers despite the physical distancing policy. Even when a customer does not buy a plane ticket, for example, airline companies must still ensure ongoing engagement with customers, to provide information and keep the company's brand image in the customer's mindset. Airline companies that have a good digital platform will find it relatively easier to maintain good relationships with customers and even allow more creative services expansion to add to the company's revenue stream portfolio. Thus, when the economic recovery really occurs after the pandemic, a powerful digital platform will greatly help airline companies to be better prepared to recover faster and win the competition.

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