AIR TRANSPORT Air bridges and Covid-19

In for the longest haul
Blue ocean strategy in the post-Covid-19 era

LINUS BENJAMIN BAUER (Founder and MD) and DANIEL BLOCH (Principal) from Bauer Aviation Advisory report on the potential of air bridges and a ‘blue ocean’ ultra-long-haul strategy to connect low-infection areas of the world.

Qantas

The implications of Covid-19 has sent shockwaves throughout the aviation industry, sending a myriad of liquidity strapped airlines across the globe into administration or part government ownership (Bauer, Bloch and Merkert, 2020). Perhaps most indicative of this, global flight capacity has been slashed by up to 90%. To this end, the International Air Transport Association (IATA) has recently released a new set of revised figures that predicts, as a direct result of the coronavirus, the sector will be forced to incur losses between $248bn – $260bn.

In turn, the inherent uncertainty levels that are synonymous with current times have left a wide array of airlines struggling to navigate uncharted territories. As a result, there is an urgent and existential call for action across the entire value chain of the sector, which must be founded on the basis of strategic creativity, prioritising human health factors, sustainability and profitability all in tandem.

Making the comeback

In light of this, various clients, executives, industry professionals and trade journalists have come forward with the following questions:

  • How do we collectively create demand during a recovery phase, rather than fighting over what exists?
  • How and why might genuine cost leaders or differentiators be able to cope better with that challenging situation?
  • Are there new ways of thinking or approaches in existence that could upend traditional thinking about aviation strategy? 
  • What are the core requirements for strategic success in the post-Covid-19 era?
  • What kind of emerging business models, with blue ocean potential, could be accelerated by Covid-19?

Let’s try to shed some light on these questions. Most strategists at airlines around the world will agree that business is all about making hard decisions, in the midst of crucial and often binary trade-offs, that hold vastly different pathways ahead. The economist and business strategist Michael Porter breaks down the choices that companies must make by claiming that successful firms will either take up a position of price leadership (eg low-cost carriers) or product differentiators (eg full-service network carriers). As such, those who fail to identify themselves within one or either bracket often encounter difficulties in ascertaining a competitive advantage, which only becomes further accentuated in a time of crisis.

 IN A POSTCOVID-19 CONTEXT, A BLUE OCEAN STRATEGY WILL NOT ONLY NEED TO PURSUE A NEW ANGLE TO PRODUCT DIFFERENTIATION OR PRICE LEADERSHIP FOR A GIVEN MARKET, BUT IT MUST ALSO DO SO IN A WAY THAT INSTILLS CONFIDENCE BACK

On the one hand, this theory provides a strong theoretical foundation to assess the nature of airline business models and how they would respectively go about re-emerging after the Covid-19 pandemic. However, it fails to recognise the volatility and imbalance at present between international markets, such that some regions of the globe will be slower to open up than others, thereby generating a set of arbitrary ‘winners’ and ‘losers’ which can largely only be attributed to luck. To this effect, it would allow specific airlines to operate approved flights once again, before the rest of the competition.

For example, an airline such as Qantas with the strong future prospect of an Australia-UK travel bubble opening-up, could look to lay claim over the UK-Australia market from either a price-leadership or product differentiation standpoint. This is on the basis that Qantas’ competitors, which typically operate one-stop itineraries between Australia and Europe, would not be able to return to services as quickly as the Australian national carrier. Due to the highly competitive market along the ‘Kangaroo Route’ (Australia-UK), within which Qantas competes with hub and spoke carriers such as Emirates and Singapore Airlines, the market context can be considered as a red ocean.

Historically in terms of market share, a small group of ‘sharks’, (see image right) namely the Gulf state carriers (EK, QR, EY), have dominated the market, with the remaining competitors across Australia, Asia and the UK classified as ‘bait.’ However, in recent years, Qantas has sought to differentiate its service by providing direct, ultra-long-haul operations between Perth and London. In turn, this new-age approach has to date delivered the national carrier significantly strong returns, thereby proving the premise that there is indeed a market for a differentiated, long-range, point-to-point product.

Taking the direct route

In turn, looking deeper into this prospect, there is significant scope to suggest that the Covid-19 crisis has provided the foundations for a range of blue ocean opportunities to existing ultra-long-haul operators, such as Qantas. To this end, ultra-long-haul could become an emerging business model for full service network carriers (FSNCs) in the post-Covid-19 era, on the basis and condition of the following factors:

  • The operating airline maintains access to a strong domestic feeder system
  • An expected increase in demand for direct services (+ domestic feeder flights) in the next 24-36 months takes place
  • Fast-changing customer behaviour sees stronger prioritisation of health, security and sanitisation factors, of which ultra-long-haul services provide significant benefits. Among travellers, there will be a greater willingness to pay for direct services, especially among business and visiting friends and relatives (VFR) travellers with strong needs and motivation to travel
  • Generation of higher seat-load factors and yields, supported by efficient, twin-engine, long-range aircraft with moderate cabin density and heavy premium configurations – e.g. Boeing 787-9/ Airbus A350-900ULR
  • Point-to-point ultra-long-haul affords the operating airline with a heightened level of network flexibility, vis-à-vis hub and spoke operations, with the agile ability to adapt O&Ds based on peaks and troughs in demand, as well as any regional re-emergences of the virus in specific parts of the world
  • Ultra-long-haul affords passengers with the unique health advantage of being able to avoid connecting through a densely populated hub airport
  • Ultra-long-haul avoids the heightened complexity associated with connecting at large hub airports, which otherwise entails an increase in costs, a higher risk of operational setbacks and delays, as well as minimising the need for two take-offs and landings on one itinerary 

All these previously-mentioned factors contribute to the creation of new, additional demand for direct services between Australia and Europe in the near future. With this in mind, in such a blue ocean context, airlines can create demand rather than fight over what exists. In this case, Qantas could create new demand by launching additional ultra long-haul services between Perth and other European cities (eg Paris, Frankfurt and Manchester) in addition to the existing service to London. Moreover, a doubledaily Perth-London service (eg SYD-PER-LHR, in addition to the existing MEL-PER-LHR) could also become a viable option in the foreseeable future.

Via Author

Red ocean rivalries

In the pursuit of sustained and profitable growth, airlines tend to engage in head-to-head competition. Yet in the airline industry, which has faced crippling overcapacity issues prior to the Covid-19 outbreak, head-on competition has largely only resulted in fierce red ocean rivalries, with a shrinking pool of profit being fought over until the end. Rather what must be considered, now more than ever, is that the establishment of lasting success more often will come from the creation of blue oceans, in which untapped, underserved or changing market spaces are explored in full.

Importantly, in a post Covid-19 context, a ‘blue ocean strategy’ will not only need to pursue a new angle to product differentiation or price leadership for a given market but it must also do so in a way that instills confidence back into the base of airline passengers and stakeholders alike. Simply stated, a failure to do so will compromise any new venture’s ability to succeed in a post-pandemic era.

Options beyond price wars

To this end, the airline industry must recognise that, over the past years, it has been competing itself to death. On the one hand, fares plummeted to unsustainably cheap levels, both from a financial and environmental point of view, with the quality of product and service declining in turn. While effective for a portion of the market, this increasingly overbearing approach was not attractive to other customer segments, who longed for access to better products. Several airlines fell victim to simply following the herd in this regard; however, there have been exceptions. For example, Qantas through its ultra long-haul approach has sought out an uncontested niche market that captures a whole new demographic of additional customers.

Heathrow Airport

Passenger Experience, RAeS Online Conference – 3-4 December 2020


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