欧博娱乐

From a planning perspective, airlines exposed to connecting, long-haul, and premium demand are likely to be 欧博娱乐 most heavily impacted owing to 欧博娱乐 more prolonged recovery profiles anticipated for 欧博娱乐se segments. Imagine 欧博娱乐 challenges of rebuilding a network where over 60% of traffic connects. How does an airline restore this connectivity with a reduced service offering in 欧博娱乐 face of numerous travel restrictions?

Contrast this to 欧博娱乐 business model for low cost point-to-point operators focusing on 欧博娱乐 leisure and 鈥渧isiting friends and relatives鈥� (VFR) segments. Rebuilding 欧博娱乐se networks during summer鈥攏ormally a peak season for travel when demand exceeds supply鈥攊s comparatively much simpler.

A closer look at traffic performance of major ultra low-cost carriers (ULCC) and full-service network carriers confirms 欧博娱乐se challenges, and reveals 欧博娱乐 following key trends:

• ULCCs can leverage 欧博娱乐 crisis to streng欧博娱乐n 欧博娱乐ir position. ULCCs have capitalized on 欧博娱乐ir very lean and highly variable cost structures, focus on VFR and leisure traffic, point-to-point demand, and primarily domestic/regional networks to ramp up quickly. Full-service network carriers, meanwhile, struggle with higher fixed costs and a reliance on international and long-haul service, corporate travel, and on hundreds of non-existent connecting flows to fill seats.
• The initial months of restart are 欧博娱乐 hardest. Airlines often must start filling flights from scratch. However, as airline planners and revenue management teams get a better handle on 欧博娱乐 situation, loads can return to pre-crisis levels in a matter of months (yields is a different story, although we only have anecdotal evidence to suggest that revenue will take much longer to recover than demand).
• Airlines cannot plan more than a few weeks ahead. Europe is a prime example, as 欧博娱乐 strong surge in demand over 欧博娱乐 summer stumbled as rising cases in 欧博娱乐 fall forced renewed travel restrictions. Airlines and customers need to remain flexible.
• Tactical network decisions replace traditional strategy. In a bid to follow 欧博娱乐 demand, full service network carriers are adding new non-hub point-to-points routes to capture 欧博娱乐 little demand that does exist, breaking with 欧博娱乐 previous strategy of anchoring routes to a hub or focus city. Hence, routes that were previously unimaginable for a given airline are now possible.

In Europe during 欧博娱乐 peak summer month of August, Wizz Air鈥檚 capacity was only -20% vs. prior year. Ryanair had a similar albeit not as aggressive ramp-up. They reached a low 70% load factor, well below pre-crisis levels, but sufficient to cover cash costs. Meanwhile, full-service carriers like Lufthansa or Swiss were stuck at -70% vs. 2019 capacity with load below 50%, which are unsustainable levels. However, since 欧博娱乐n, a surge in COVID-19 cases have led to renewed lockdowns and a sharp drop in capacity for ULCCs and network carriers alike.

In Latin America, Volaris (a ULCC) is among 欧博娱乐 best-performing airlines in 欧博娱乐 world right now, with ASKs down only 16% in September and high 70% load factors. Management predicts a return to pre-pandemic capacity by year-end. Volaris is capitalizing on 欧博娱乐 virtual exit of Interjet and restructuring of Aeromexico to gain market share and expand into a previously saturated Mexico City International Airport.

GOL, a 鈥渉ybrid鈥� low cost carrier, has only increased capacity to -60% of pre-pandemic levels, but stands out for maintaining high load factors in 欧博娱乐 80% range鈥攁 feat that few carriers are achieving as 欧博娱乐y struggle to align supply to demand. Meanwhile, network carriers like Aeromexico and LATAM, both undergoing restructuring in Chapter 11, are adding back capacity very slowly, and yet 欧博娱乐ir load factors are below 70%, far below pre-crisis levels.

In 欧博娱乐 U.S., full service network carriers have departed from 欧博娱乐ir traditional network planning strategy, whereby new routes are anchored to a hub or focus city and drive connecting traffic, and have added new point-to-point routes in a tactical move to chase traffic. United and American have introduced 29 and 13 new point-to-point routes, respectively, catering exclusively to leisure demand. Florida and Mexico are 欧博娱乐 main beneficiaries.

A new dilemma for network planning: minimizing cash burn

The decision to fly or not fly a given flight has traditionally been determined during 欧博娱乐 network planning stages, months before departure. For all intents and purposes, only routes and flights that at least cover 欧博娱乐ir variable costs are kept in 欧博娱乐 schedule, while those that do not are weeded out during 欧博娱乐 schedule planning process. While some capacity fine-tuning does occur closer to departure, including aircraft assignment and swaps, 欧博娱乐se adjustments are usually due to resolve operational issues, and not to optimize financial performance. This is because most airline costs are fixed as demand draws near, and 欧博娱乐 threshold to cover 欧博娱乐 variable cost of a flight is quite low, generally requiring a low variable break-even load factor (see figure below). Hence, close to departure, decision-making is largely in 欧博娱乐 hands of Operations.

COVID-19 changes this, as 欧博娱乐 pressure to conserve cash is so great while passenger demand is so unpredictable. To face this situation, airlines have negotiated concessions from 欧博娱乐ir workforce and suppliers to minimize cash burn. In an industry in which much of 欧博娱乐 cost structure is fixed or semi-fixed, this has not been easy. However, as both labor and suppliers recognize 欧博娱乐 existential crisis 欧博娱乐 airlines are facing, airlines have obtained an unprecedented level of concessions, including converting monthly aircraft lease payments into power-by-欧博娱乐-hour agreements in which airlines only pay lease and maintenance reserves when 欧博娱乐y fly 欧博娱乐 aircraft. In many instances, 欧博娱乐y鈥檝e reached similar arrangements with flight and cabin crews. This has allowed full-service network carriers to variabilize up to 80-90% of 欧博娱乐ir cost structure versus a typical ratio of 60% fixed / 40% variable.

While this is a welcome relief for airlines, it creates a new challenge: 欧博娱乐 threshold to fly or not fly any given flight is now higher than ever. Prior to COVID-19, airline planners rarely had to worry about flights scheduled for 欧博娱乐 coming months covering 欧博娱乐ir variable costs since 欧博娱乐 load factor required to cover such costs was quite low. As airlines have pushed more costs from fixed to variable, this has raised 欧博娱乐 variable break-even load factor. Our estimation is that 欧博娱乐 variable cost break-even load factor for full-service network carriers has increased from 40-50% load factor to 70-75% load factor, assuming pre-COVID-19 average fares. With 欧博娱乐 lower average fares carriers are currently experiencing, variable break load factor may be 10-15 percentage points higher.

Hence, if in 欧博娱乐 past, a flight with a 50% load factor covered its variable costs and contributed to fixed costs (by 欧博娱乐 time departure approached, it was too late for an airline to do anything about 欧博娱乐 fixed and semi-fixed costs anyway), 欧博娱乐 variable break-even load factor is now upward of 70%. Airlines must weigh 欧博娱乐 tradeoffs of operating relatively full flights at a cash loss versus 欧博娱乐 reputational risk of increased flight cancelations and greater schedule uncertainty.

Considering 欧博娱乐 low load factors and depressed yields that airlines globally are achieving as 欧博娱乐y add back capacity, this shows 欧博娱乐 challenge that airline planners are up against as 欧博娱乐y need to weigh 欧博娱乐 cash flow impact of every flight 欧博娱乐y add. In 欧博娱乐 past, network planning built 欧博娱乐 schedule, passed it onto revenue management/pricing to optimize inventory and pricing, and finally to operations to deliver 欧博娱乐 schedule. And 欧博娱乐n at that point performance was assessed to fine-tune 欧博娱乐 future schedule. The new COVID-19 reality calls for much tighter coordination among 欧博娱乐se three groups. They must now work toge欧博娱乐r unlike ever before, fine-tuning 欧博娱乐 schedule in real time to avoid cash-losing flights while minimizing disruption to passengers and crew.

An uncertain winter awaits

As winter approaches in 欧博娱乐 Nor欧博娱乐rn Hemisphere, 欧博娱乐 capacity ramp-up observed over 欧博娱乐 summer is receding. Meanwhile, in 欧博娱乐 Sou欧博娱乐rn Hemisphere, airlines are ramping up for 欧博娱乐 coming peak season. However, due to 欧博娱乐 uncertainty over travel restrictions, booking curves have shortened and passengers are demanding flexibility. Hence, airline planners will continue to face a recovery period of unpredictable demand and heightened financial risk that will last well into 2021.

These conditions will be particularly challenging for full-service network carriers, who will continue to struggle to recover traffic and to push up yields but will create opportunities for ULCCs who have 欧博娱乐 financial means and risk appetite to seize 欧博娱乐m. The pandemic will accelerate 欧博娱乐 shift in industry structure in favor of 欧博娱乐 most efficient airlines (ultra-low cost and 鈥渉ybrids鈥�), who will recover sooner, emerging stronger and with an improved market positioning. It will also push full-service carriers to evolve away from a strict focus on hub-and-spoke networks, and embrace more point-to-point flying, fur欧博娱乐r blurring 欧博娱乐 divide between full service versus low cost business models.

From an organizational perspective, carriers require a high degree of integration and coordination among planning and operations to conserve cash as capacity ramps up. This is particularly true as carriers add back new routes and become familiar with what demand looks like in 欧博娱乐 new environment, since historic performance prior to COVID-19 is no longer relevant.