Author: Christine Druce, Civil Aviation Senior Consultant, VEGA

Introduction
Through the dual effect of astronomical fuel prices and decreases in passenger loads primarily caused by recession-like conditions in both the US and Europe, the aviation industry is facing its biggest challenge yet.

Already in 2008 at least 25 airlines have ceased operations,. There have also been profit warnings from prominent airlines, along with announcements of schedule reductions, staff cuts and grounding of aircraft as a means of managing spiraling fuel costs. Although, many airlines have taken out fuel hedging to various degrees and values – Flybe 76% of its 2008/09 fuel needs; Qantas 59%; British Airways (BA) 65% of its 2008 fuel – there continues to be increases in fuel surcharges to passengers.

Ryanair’s CEO, Michael O\'Leary warns that ”half the airlines would certainly go out of business if oil hit $200 a barrel”. Yet it is Ryanair that has not undertaken fuel hedging to mitigate this risk.

Despite the actions that have been undertaken, there is still considerable fear about the impact of how airlines and associated businesses in the aviation value chain will survive. So, what are other ways to minimise the impact of such unprecedented change, and what is the best solution for your business?

By developing stronger relationships with stakeholders, and making short, sharp, well communicated changes that are aligned to company strategy, improvements can be seen rapidly.

The aviation value chain, where you fit and what you can do Do you know your best strategic move? Is it to postpone expansion, or does the competition make this inappropriate for you? If aircraft are grounded, what cost does this incur? Would there be a loss of slots and grandfather rights on bays at key airports? How does your decision impact your stakeholders?

As a business in the value chain of airlines, what impact would changes in the airline’s strategy have on your business? Are you prepared for these? What can you do to work with the airlines and minimise the impact of the current economic pressures for both your businesses?

Leading US aviation consultants predict greater use of the alliances, along with the announced reduction in capacity and increased ticket prices. There are also further efficiencies than can be obtained through more locally focused co-ordination.

Airlines

As suggested by the US Aviation consultants, alliance airlines must reduce the competition they create amongst themselves when operating the same routes at similar times of day. By splitting flights and ensuring different departure times, airlines can retain their current presence on their key routes, continue to provide a choice of flight times for their customers, yet still benefit from reduced operating costs.

Already, many airlines in the same alliance utilise the same ground-handling services at individual airports. By smoothing the schedules across the alliance, ground services companies may be able to roster staff more efficiently, reducing overtime and hence costs. Fewer check-in desks, gates and baggage claim belts may be required at peak periods due to reduced service duplication, allowing major overhauls or upgrades to be undertaken in a more efficient and timely manner.

Within competition laws, joint purchasing of fuel, catering and other services can also be considered.

Taking things a further step, if alliance airlines shared in-flight products, such as pillows, blankets, crockery, headrest covers, headsets, duty free items, emergency evacuation cards, amenities kits and the like, stocks at each airport can be reduced. Ideally re-useable products. such as pillows, blankets and crockery, would be de-branded to allow cleaning and re-use at all destinations.

Airports

To a certain degree, airports may be the winners out of a downturn in the industry, particularly those currently suffering from capacity restraints in terms of landing slots, parking bays and terminal space. Although the airline initiative to reduce schedules will also reduce landing fees and service charges for affected airports, it could provide some much needed space to allow for airport upgrade activities and a reduction in delays through having greater flexibility for recovery from earlier delays.

Airlines will also be looking to protect any grandfather rights they have to slots and gates. Inevitably, discussions will be held to best manage this.

In respect of Heathrow, if enough airlines reduce scheduled services to this airport, it might provide the flexibility required to re-establish their airline relocation and terminal development programmes to a point where they can recover the time lost from BA’s decision to delay moving their long-haul flights to Terminal 5.

Ground Handlers, Caterers, and Refuelers It is ground handling businesses that are going to suffer most. Not only are they also being hit by high fuel prices, but they operate on low margins and are labour intensive. A reduction in business, with little prospect of picking up new business at the same airport, is likely to see major cutbacks in staffing levels.

Larger operators with corporate and / or parent airline support could take the opportunity to undertake key equipment maintenance and upgrade, as well as implementing training programs for service and efficiency improvements.

Smaller, single airport operators will need to lobby their customer airlines for guarantees of service minimums, and investigate alternative business opportunities.

Opportunities through collaboration

Although all businesses in the aviation value chain will be looking for ways to reduce costs in order to compensate for reduced income and increase fuel costs, by involving their supply chain companies in strategic decisions, all parties may benefit.

An example may be airlines working with airports and ground service providers to identify schedule patterns that allow the most efficient rostering of staff at the airport, reducing the need for overtime or split shifts. By airports encouraging all their airlines to consolidate their schedules to operate during fewer hours of the day, more time is available for major airport development / maintenance work in the out-of-hours period. As such, planned improvements will be completed earlier, to the benefit of operators and customers at the airport.

The next steps

Some of these initiatives could be undertaken by skilled staff employed within these businesses. However, where collaboration is required across multiple companies, it is recommended that an independent party, such as VEGA, be utilised to facilitate the process.

Of course, the first step is to start discussions with the businesses in your supply chain so that you can be prepared for changes before they hit you and manage them appropriately.