Looking to the Future of Air Travel

Looking to the Future of Air Travel

by Eben Harrell - May 04, 2020

As the battle against the SARS-CoV-2 virus takes it toll on the global economy, no industry has been harder hit than aviation. In the United States, the major carriers have seen passenger numbers and revenue plummet. In 2019, the United States transportation security administration (TSA) screened around 2.5 million passengers every day across the U.S., with some variation according to the day of the week. In April 2020, that dropped to between 90,000 and 130,000 passengers.

Harvard Business Review sat down to discuss the challenges (and opportunities) facing the industry with Jon Ostrower, the editor-in-chief of The Air Current, Courtney Miller, managing director of analysis for The Air Current, and Dan McKone and Alan Lewis, two Boston-based managing directors at L.E.K. Consulting who have experience advising major airlines.

Is this the biggest crisis the aviation industry has ever faced?

Jon Ostrower: Yes.

Alan Lewis: Not even close. 

In recent years, major airlines listed a pandemic in shareholder communications as one of the risks they face. Should they have seen this coming and have been better prepared?

Dan McKone: True, this is not a “black swan” in the classic sense of the term. Many people predicted that a pandemic would eventually break out. But I’m not sure there’s any way to fully prepare. The crisis is so extensive.

Courtney Miller: I agree. Any CEO that would have hoarded cash to prepare for this eventuality would have very quickly become an ex-CEO.

Ostrower: I have a slightly different view. I think we will see how different strategies that airlines took going into the crisis will play out. For instance, Lufthansa believes they are better prepared to survive something like this because they own their own airplanes, and so don’t have as much debt to service.  Time will tell.

This is the second time in my life that major U.S. airlines have had to ask for a bailout. Does it suggest that there is something structurally wrong? That shareholders aren’t rewarding the right type of management?

Miller: I don’t think so. There’s been a lot of attention paid to all the dividends and buybacks from airlines in recent years, and questions raised over whether they could have squirreled away the cash instead. But any business without revenue can’t sustain itself. I don’t see a way the airlines could have survived this on their own, even with a different management approach.

McKone: I’d add that the government was right to prop up the airlines. They play so many critical roles in terms of our economic and national security.

Two of you (McKone and Lewis) have written a book on ancillary revenue. Are there any innovative ways that airlines can use to try to find some revenue at the moment?

McKone: Traditionally, airlines have found ancillary revenue by unbundling services and selling them a la carte - so things like checked bag fees, seat selection, and so on. This source of revenue obviously is close to zero now, because there are so few passengers traveling. Instead, airlines are looking to find any use for their aircraft in the absence of passengers, whether it be cargo or moving medical supplies and personnel to different markets.

What will be more interesting will be how airlines approach revenue creation when demand returns. What add-on features and services will they offer? Perhaps they will allow customers to more easily book out a middle seat for distancing. Or add some sort of “peace of mind” product that guarantees the airline will take care of you if flights are cancelled or quarantines are put in place. The trick will be determining what customers will be willing to pay for above the ticket price and what they will expect as part of airlines’ delivering a safe experience.

Do you really think anyone is going to be willing to sit in a middle seat again?

Miller: An airline could absolutely block the middle seat, but then you have a third of the airplane empty. You automatically limit your load factor to 66%. How long are airlines going to be willing to do that? The answer can’t be “forever.”

That’s disappointing. I was hoping this crisis would change the passenger experience for the better.

Lewis: There will be innovation to ensure peace of mind.  In Asia, where carriers are back up and running to some markets, you are seeing the use of gloves and masks by flight attendants, the use of more disposables within service, a general reduction in the amount of interaction with flight crew. Emirates ran a pilot in Dubai where it tested all its passengers for Covid-19 before they boarded the flight, though its unclear if airlines will be able to scale rapid-testing.

Longer term, you will see the introduction of technologies to increase hygiene. Touchless seats that connect to Bluetooth on your phone to lower your seat back or fold out your tray; touchless lavatories; more regimented boarding procedures so people aren’t falling over each other in the aisles. At airports, you’ll see facial recognition technology and tracking through customs and boarding, so customers and staff aren’t touching the same boarding pass.

Ostrower: I think all of these changes will be positive from a passenger’s point of view. But on the flip side, I suspect flying may become more boring for a while, as airlines try to recover financially. We’ve already seen airlines pulling in-flight entertainment system content out of seat-backs, Qantas for example. I think you will see many airlines cancelling or scaling back contracts with Hollywood to play all movies and TV shows. Many will reconsider in-flight wi-fi. There will be huge pressures on the cost side.

What impact will virtual meeting platforms have on airlines? Will people become habituated to meeting virtually and stop flying as a result?

McKone: L.E.K Consulting did a detailed study on this during the global financial crisis 10 years ago. We found that the technology would not have a material impact on flying patterns. But I think this time may be different. We now think there could be some lasting behavior change, with so many business people being conditioned to use virtual meetings like Zoom, etc. At the same time, people are still going to continue to fly in great numbers if you take a long-term view. And leisure travel will be less affected.

Miller: Maybe instead of sending 10 people to each meeting via air travel you send the two sales executives and keep the support staff on Zoom. That sort of scenario is likely, and akin to what we saw after 9/11.

We’ve looked at how new technology affected air cargo. The fax machine was supposed to kill the express business. But couriers like FedEx survived and even flourished - they lost high-yield business, but the overall growth trends were in their favor. I suspect something similar will play out with airline travel. Traffic will come back - but it will be different.

Lewis: Zoom and other videoconferencing platforms are going to have a much bigger impact on the commercial real estate market than on airlines. So many people are now working from home, I don’t see them all coming back.

What does the future hold for regional airlines - the smaller carriers that serve smaller markets?

Miller: Things are tough across the entire industry, but regional airlines that fly on behalf of the major airlines are relatively well positioned, particularly the independent regionals such as Skywest and Republic. First, their contracts with the major airlines protect them from a lot of the downside risk from a slowdown. The entire airline network is going to shrink. So now the larger markets are going to be looking for the smallest, cheapest assets to fly, which are regional aircraft. Seat costs are irrelevant if you can’t fill the seats. As an indication of this, you’re already seeing airlines retiring many of their larger, wide-body jets. They just don’t anticipate having need for them in the short term.  Regional aircraft are going to be needed.

McKone: I’d add a note of caution. Most regionals get paid for feeding traffic to the major airlines’ hubs, however. Secondary markets serviced by regional aircraft tend to be the “tip-of-the-whip” when network capacity shrinks.

I have a lot of frequent flyer points built up. Should I be worried about them? 

Miller: Frequent-flyer programs are important sources of revenues for many airlines - especially through the resale of miles to financial services firms. Just as one example, Delta’s contract with American Express was worth $3.4 billion to Delta in 2018. If you’re a frequent flyer with a ton of miles, I wouldn’t be worrying that your balance is going to be going away. Even when multiple airlines went through bankruptcies some years ago, the miles of the individual passengers were preserved and came out valid on the back end.

Lewis: Airlines need to make sure that customers keep their frequent-flier credit cards and keep spending on them. If people start feeling that frequent flyer points aren’t as useful to them now, that they’d rather have other benefits, that’s going to be a real problem for airlines. So I wouldn’t be surprised if you don’t find plenty of good redemption opportunities, at least in the short term, when travel opens back up again.

Ostrower: The downside is that so many flights have been eliminated from the network. As the network shrinks, it will be harder to travel smoothly from point A to point B. So while you may find first-class itineraries, they will likely be two or three-stop itineraries now. That’s just going to be part of the reality.

Will there be any unexpected winners from the slowdown in the aviation industry?

Ostrower: Amazon. Surprise, surprise! As airlines retire their wide-body aircraft and shrink their fleet, the aircraft are going to conversion shops to become cargo planes and then sold to companies like Amazon. The glut of aircraft is going to drive the price down. Not just for Amazon but for other growing cargo companies - the Chinese postal system, for example. The crisis has shown how integral e-commerce and package delivery is to the aviation industry.

Eben Harrell is a senior editor at Harvard Business Review.