The risks airlines took during the pandemic will serve them well going forward.

Reflecting on the changes the airline industry underwent in 2021 and thinking about air travel in the new year

Cover photo credit - www.pixabay.com.

Airline travel looks different than it did before the pandemic. For now, the industry has achieved a "new normal". It won't be the last.

The Economist likened flying in the pandemic to air travel after 9/11. Following 9/11 airlines locked cockpit doors, added armed air marshals, and banned sharp objects. Later, liquids, shoes, and laptops came under scrutiny. Now, travelers expect a consistent if intrusive airport security experience.

The airline passenger experience is still evolving. Countries continue to change entry and exit requirements based on health data. Airlines have rolled out enhanced cleaning, health, and safety protocols. Cabin crews enforce government policies, like mask mandates.

As the pandemic "ends,” some industry changes will stay. Carriers may vary their policies and the stringency of enforcement. But health officials are likely to continue recommending masks, quarantines, and vaccine passports. In five years' time, it will not be uncommon to see passengers wearing masks, even if not required.

Air carrier business models have changed

Airlines grounded hundreds of aircraft starting in March 2020. I imagine the scenes at airline headquarters looked like Wall Street in 2008 (like this clip from Margin Call).

Governments stepped in to support, preserving jobs and saving the industry from bankruptcy. Though controversial, this support allowed the airlines the necessary breathing room to plan. Without it, they would've only kept a barebones corporate staff to manage the tactics of a shutdown. That's before mentioning the effects on aircraft values, airline supply chains, and frontline workforces.

This allocation of resources to strategy allowed airlines to reset in several ways. Corporate "bloat" is like a smoking habit. You tried something, got hooked on it and found it was harder to quit than you expected. Like most businesses, airlines hide a lot of bloat in their corporate structures. In airline world, "bloat" is many fleet types, unprofitable routes, and operational inefficiencies.

So during the pandemic, inefficient and aging aircraft types left the fleets in droves. The gargantuan Airbus A380 is a good example. Lufthansa, Etihad and Air France all retired their A380 fleets. Other carriers such as Singapore Airlines and Qantas retired A380s as well. One airline leader, Nico Buchholz, estimated that nearly half of the global A380 fleet will remain grounded forever.

Changes were not limited to long-haul or high capacity airplanes. Airlines culled both their mainline and regional fleets as well. The optimization equation involves several factors: useful life, ownership, operating, and opportunity costs. The post-pandemic mix of aircraft is what you'd expect—boring and efficient. Fewer types with lower unit costs and increased consistency.

Demolition, though, is only half of the renovation process. After deciding which aircraft to part with, airlines examined their future fleet needs. Most airlines emphasized the need for flexibility in designing their future fleet structures. Future demand, particularly for corporate travel, is quite unknown, so the ability to adjust system capacity quickly is important.

Ultra Low Cost Carriers remain bullish on the return of leisure travel. It has been the most resilient demand sector in the past. While mainline carriers downsized, Indigo Partners, private equity owner of Frontier, Wizz Air, Volaris and Jetsmart, placed an order for 255 Airbus A321neos.

Networks, too, got a refresh. JetBlue, for instance, finally closed its Long Beach focus city and shifted the flying up to LAX. While Long Beach Airport is convenient for many in Southern California, it wasn't the right hub airport for JetBlue. Since 2015, JetBlue’s West Coast network has focused on premium (business class) transcontinental markets. Passenger demographics and the revenue environment at LAX make it a better fit than Long Beach.

British Airways shuttered its operations at London Gatwick early in the pandemic. The airline has reopened Gatwick with mainline long haul operations. But rather than restarting its old short haul network, BA is launching a new low cost airline instead. Called EuroFlyer, this has likely been the right commercial fit for Gatwick for some time. As with JetBlue in Long Beach, the pandemic gave the BA team the political cover to actually do it.

Airlines are also adjusting their approach to revenue. Here, they seem to be converging more toward the carrot and less the stick. First, the big three eliminated change fees altogether. They also rolled out an increased number of low cost premium seats. Delta completed installation of its Premium Select cabin on widebodies. The cabin is similar to international Premium Economy or US domestic First Class. Interestingly, space for this cabin seems to have come through a slight reduction of Delta One business class seats. Emirates, too, began flying its previously announced Premium Economy product.

Unlike the "penalizing" structures associated with fare unbundling, these changes are customer friendly. They encourage customers to spend more money based on perceived value. These changes started before the pandemic, but are more important because of it. The loss of corporate demand means airlines must capture more value from leisure. In a time of changing conditions, flexibility became an important buying criteria.

These efforts should better align product offerings with customer demands. The trouble is, airlines still don't know what the right equilibrium should be. For the moment, short haul leisure travel has returned. Business travel remains sluggish, though its return is also accelerating. Then again, real estate is valuable even through a downturn. Historically heavy business travel routes, like those to London Heathrow, have not recovered. Yet airlines still find it worthwhile to operate them to protect their real estate.

At last, airlines took capital and reputational risk by partnering with startups

If there is a silver lining to the pandemic for airlines, it is that they have gained the freedom to take risk and innovate.

Why did the pandemic enable this? First, airlines received financial help. This follows the same logic as giving at risk kids reliable housing. If you're not worried about having a safe and quiet place to do your homework, you're more likely to do it. Without government aid, airlines would have had to cut to a minimal corporate staff. That staff would've focused on survival alone, leaving little time for anything else. But with government support, airlines were free to focus both strategically and tactically.

The pandemic also allowed airlines time to experiment. Passenger counts fell to record lows. This allowed airlines to onboard new technologies with minimal passenger disruption. In normal times, those cutovers would need months or years of planning. 

Yet, in some cases, airlines had little choice but to move quickly. This was particularly true of information about travel restrictions and testing requirements. American Airlines, for instance, built a 'travel guideline' tool on its website. Sherpa powers the tool, and though Sherpa was founded in 2015, we can thank the pandemic for this new level of adoption. Verifly is another example. It's a mobile app that airlines adopted to streamline testing and vaccination requirements. As passenger flows recover to pre-pandemic levels, airlines and regulators need increased automation.

The scope of airline investment in future technologies was very broad in 2021. Airlines backed future aircraft types and alternate aircraft propulsion systems.

United ordered Boom Supersonic's Overture and Archer's Maker eVTOL aircraft. Several other airlines including American Airlines, Virgin Atlantic and Japan Airlines also deepened their commitments to the air taxi sector. British Airways and Alaska Airlines threw their weight behind hydrogen-powered aircraft startups.

Concerns about global climate change remain a primary topic of conversation. Airlines, like all industries, must decarbonize. Most of these investments offer a step down the path to sustainable aviation. These are not firm commitments in most cases but they are still meaningful. They prove that startup aerospace has finally captured the attention of airlines.

That may seem insignificant, but airlines have rarely taken so much reputational risk. When the C-Series (now A220) came to market, airlines shied away from ordering it. The Boeing and Airbus duopoly offered easier solutions than taking risk on an unknown airplane type. Even though that type was developed by a highly reputable regional aircraft OEM. 

Yet, tolerance for calculated risk-taking seems to have grown in corporate America lately. It has only been 15 years since smartphones first came to market. Leaders today cannot deny the seismic shift they created. With that rate of change in mind, I'm glad to see airlines leaning forward on technologies of all sorts.

The question is how enduring will strategic airline investing be? It isn't hard to imagine some airlines using technology investing as a marketing tool. Something they can walk away from when the going gets tough.

JetBlue and its Tech Ventures subsidiary are a counter-example. They started investing in travel startups long before the pandemic. Today, they continue to support startups that enable travel. And through the pandemic, they've doubled down on their commitment to the sector. More on that in a future piece.

That we’re talking about the future is a victory

A year ago, the airline industry was on its knees. Its recovery was anything but assured. Yet the fact that airlines are now thinking about their existence 2, 5 and 10 years after the pandemic began is a huge win.

The industry is not yet out of the woods. 2022 will bring its share of challenges and changes. Yet, the structural changes airlines made during the pandemic are here to stay. They will usher in a new era of travel and position airlines for success, despite the continued uncertainty of this time.