Leading an airline in 2021

1. Senior airline executives discuss the current status of aviation during the ongoing COVID-19 pandemic.
2. What are the forecasts for 2021 and how accurate are they?
3. Can the airlines survive on reduced capacity flight schedules?

Chief Commercial Officer of Air Serbia Jiri Marek and Chief Commercial Officer at Swiss Tamur Goudarzi Pour and Senior Vice President Channel Management at Lufthansa Group discussed with Executive Editor Commercial Aviation at Aviation Week Network Jens Flottau a critical thinkers session of CAPA Live that focused on leading an airline in 2021. Transcript of the session follows:

Jens:

I’d like to start with a question about the current status and the renewed travel restrictions in Europe, and how they are affecting Swiss and Air Serbia. I guess you’ve essentially been forced to cut back further than you thought in the past few days, right? Jiri, you want to start?

Jiri:

Well, definitely. Thanks. Hello, everyone. I think that we have on this a bit different perspective because since we are already outside of the EU, basically over the last year, we’ve been already heavily impacted by these restrictions, where our colleagues within Europe, they can still serve the demand within the Schengen area. However, for example, Serbian citizens are not allowed to enter Europe already since July last year.

So, we already had to adjust through the course of the last year to something which we called really essential travel. So basically, people which has to travel, they’ll travel, or the people usually with dual nationality, a resident permit in both [inaudible 00:01:59] and so on. So last Thursday, Euro control a new forecast, which is again, more pessimistic. It came a bit as a surprise, but it will not require too much adjustment on our side because we already been on this limited capacity. We currently operate around 38% of the 2019 capacity. It’s a slightly above EU average, which was in January certified, but we will of course do the optimization, but it’s not really faster, because there is no really big change in the travel restriction versus what was for us through the whole last year.

Jens:

Tamur, in Swiss you just reduced in Geneva and in Zurich, right?

Tamur:

Yes, of course we have reacted to the recent developments of the pandemic and we have further reduced our capacities as a European carrier with global reach. We of course affected all regulatory regimes of European, of worldwide regulations. So, we had to react very quickly and flexibly, as we have learned since the beginning of the pandemic. And we have just reduced our capacity to about 10% of flights, about 20% of ASK of what we had in 2019 for the month of February now.

Jens:

Yeah. Jiri, you said you didn’t really change much, but Tamur, from where did that come down? Before this latest cut, where were you before?

Tamur:

We were about double the capacity of that, but let’s remember most of the European carriers had a small Christmas peak that was lasting until probably the first 10 days of January. And after that, the demand of course went down. Plus, now the extra regulations and the changes in the pandemic definitely have led that most carriers, like us as well, have not adjusted for the month of February or the end of January for February. And I’m pretty certain that for March, there will be further adjustments too.

Jens:

Yeah. So, let’s look ahead a bit. The summer is nearing, vaccinations not quite as fast as everyone would have hoped. How do you prepare for this? Do you prepare several scenarios and then decide at some point which one to pursue, or are you just continuing as you go? Jiri, what’s the process in Serbia?

Jiri:

Look, definitely the processes are completely different than it was before, as we used to know. And I would basically claim that what we know for sure is that the things will change because that’s the only one which is a hundred percent granted. And I think that the main issue, what we see is now that still any kind of independent external forecast, being Latta, being Bureau Control, at the moment, each of these forecasts is still coming down. The question is what is about them? We already saw at the bottom of last year, however, is the latest forecast from the Thursday, it’s still going down. So, the question would be rather when it will start to go up.

I would rather say that, yes, we are working with this couple of scenarios constantly for the longer term window as well and we keep adjusting them to be aligned with the external sources. However, like all the bookings and demand is now usually happening in last 10 days before departure. So, it’s more critical as the processes, which you also, which my colleague mentioned, how you basically manage your network now on a very quick and flexible way in order to adjust to fluctuation of the demand because the regulations are changing on very short notice, and it has a strong impact on the demand.

What we usually see is that if there is no restriction, let’s assume a hundred percent, as soon as you impose some travel restrictions that you limit some nationalities to travel, usually you get, let’s say between 20, 40% reduction. And if you introduce a PCR is another 20 and it is less impacted than if you introduce a quarantine. If you introduce a quarantine, and especially how we saw that very much between Serbia and Switzerland, the quarantine has basically taking 80% of the demand immediately from one day to the other. So, it’s really, and if some countries have like PCR plus quarantine, that basically almost like the fight ban.

So, I think that at the moment, what we foresee for Q1, we will more or less operate around those 35, 38% of the capacity. And this is what we really manage on daily basis. And we have couple of scenarios for summer but those might dramatically change depending how the market goes around, what the restriction will be, also if there will be finally some coordinated restriction, because it’s a big jungle now to understand which country, what restrictions you have. And we will try to obviously flexibly adjust ourselves to it, what we’ve been in successfully so far.

Jens:

And what are the summer scenarios? You say you’re at 38 right now.

Jiri:

The summer scenarios at the moment, we are forecasting ourselves between the last two Eurocontrol scenarios, because even during 2020, we’ve been always operated above the average of the rest of the EU with a higher KPIs achieved in terms of road factor. So, we at the moment forecasting between those scenarios so I would say as a Q2 we would be around most likely 40, 45% of the 2019 level.

Jens:

Okay. And Tamur, with Swiss, what are the scenarios that you’re looking at right now?

Tamur:

I think we have to distinguish between short term, medium term and the long term. The very long term, it’s of course a question also of sizing and dimensioning of each of the carrier’s operations in the kinds of groups. Swiss does the same. In the short term, we already mentioned, we expect demand to drop now, this will go into Q2. And I think we will not see a major uplift for Easter. I think that will be, if at all, a small peak. And then the big question for the whole industry, not only for us, is what’s happening in the summer. And when you take together the expectation of vaccination, penetration, testing regimes, testing regulations, and quarantine regulations all together, I think at the moment, the expectation that in Q3, during Q3, there will be some substantial change. And it’s only the question is it with the summer business or without?

And I think that is a, for some area carriers it’s a question of survival. For us it’s rather it’s we have enough liquidity, it’s the question of how we can shape this future. And I think we definitely will not say it’s a forecast. We are talking about scenarios and we are now thinking of three different scenarios for the whole year. It could be a 14, a 50 or 60% scenario. I think that’s the range we’re talking about a moment about and how big the summer peak will be and how much pent-up travel there is, we will see. We definitely get from the customers a lot of response that there is a big wish to travel. A lot of people really can’t wait to really do a summer vacation since they have skipped one or two of those vacations since the start of the pandemic. And so, we have still optimism that there will be summer business, to what degree we will finally see only according to the development of the pandemic and the vaccination points.

Jens:

I’ve seen different, or I’ve heard different views about the pent-up demand. There are some people that argue it’s really a big factor and once we’re allowed to, we’ll all start travel, be traveling, because we  haven’t done so in such a long time. And then there’s other that say, “Well, actually caution will prevail,” and that peak won’t be as big, as high. Jiri, do you have a view on that pent-up demand issue?

Jiri:

Well, it very much depends on overall picture and how the puzzles will connect together. I’ll give you as example, exactly, again with Switzerland so it’s close to my colleague as well. In October, we’ve been actually last year operating more frequencies than in 2019. We’ve been flying 22 flights a week. Some days was even for daily with 84% load factors. And it was not only that the demand quickly returned, but it’s also because the rest of the network was restrictive. So, you actually channel the demand to the market, which was less restrictive because there was basically no PCR. There’s no quarantine required. Despite this, the Serbians couldn’t still enter Switzerland. It was mostly the [inaudible 00:10:28] province was traveling.

Very similar, we saw, for example, on Turkey, before they introduce a PCR test, a lot of demands when we were fighting daily 87% load factor. So, it’s very much depends. I agree that the demand is there, and we are expecting that the demand will rebound very quickly, but that all the markets will reopen at the same time, I think it would be rather [inaudible 00:10:50]. It will most likely be again, uncoordinated and depending once you’re open, if this will go as kind of dominoes through the rest of the markets, or if we will see another spike, what would happen actually during the summer is that market re-opens, and it start to close again because the locations and the virus was circulating over. So that will be a rather quick revamp, I believe, but it will not be like one goal. It will be like market by market.

Jens:

Do you think that for your airlines, there will be a structural shift towards more leisure demand and more, a customer base that’s more leisure driven? For the industry as a whole, many people expect it, that air traffic will recover quicker than business traffic. But if that’s the case that will have huge implications for the airlines, right? Do you need to adjust your cost base to your, probably lower yields, passengers and tickets? So, A, do you foresee that for your airlines and what are the consequences? Tamur?

Tamur:

Yeah, I think, when we talk about pent-up demand and in the medium term also structural effects both together, we really have to look at what traffic streams and what demand segments we’re looking at. I think we all expect a quicker rebound in Europe than in the long haul. I think that there’s no conventional wisdom. Then we expect for sure that leisure comes back earlier, but the leisure summer businesses will very much depend on the possibility of people to travel and the feeling that they are having a smooth process for that and they’re having a safe travel possible for that.

VFR, visiting friends and relatives, is a segment that’s very crisis-prone. And so, its price-resistant and that’s something we would expect at any time that people can travel also for the summer. So that’s the segment we believe to come back probably quickest.

Within corporate travel, I think you have to differentiate. I think the smaller, medium-sized business will come back earlier. Their social capital is even more important. You have to meet the people. It’s probably less so for large corporation in general travel, that will take longer, probably replace, but also there is a question in which economic area you are, and particularly which industry you’re working in. So, there are different degrees then of how the business comes back. And depending on how you as a carrier, they rely most on in your model as a point to point or hub and spoke here, like we are, and from what economic basis you’re working and geography you’re working from, you have to make your assessment about dimensioning of the fleet. You have to make your assessment about, of course, the cost base, but also of the way you want to operate your hub and spoke system, as we do with the strong long-haul focus and being a premium carrier.

We still believe that there is a market also in the next normal out there for us with a strong base in Switzerland and with strong ties in Europe and transplanting in Asia. So, we believe that overall, our business model is very valid, still, also in the post pandemic situation, but definitely we’ll have to look at our sizing and to our dimensioning. And that’s why we question then giving up the business as such, which has worked perfectly well in the past with the profit margin we were out to achieve.

Jens:

Jiri, did you see these structural changes, and what do they mean for Serbia?

Jiri:

Look, I would look into it a bit differently in a way that I think that this crisis is not only changing our industry, changing many other industries, but it’s also changing the social life and the way how the people approach the thing. So, I think the typical division between leisure, corporate and other segments it will become a bit blur because, for example, now many companies already announced that the working from home will be applicable up to end of 2022, some even 2023. I think that the typically corporate travelers, which we saw in the past, maybe they will be replaced with a higher end pleasure, the people which are in senior management and will work from home and will travel and have some virtual offices all over the globe, because many of their destination and are targeting now this group.

So, it will be different segment groups in the future. I agree that the leisure will come first, typical leisure, would be now, but there would be maybe the new segment, which will arise up through this crisis because this will change completely as a way we work up to now. And that’s influence will stay for the future, seeing many companies, it will take them years to return to the person to person meetings, and we will have to serve this new customer trends in the future as well. So, as I look at it, there will be new opportunities coming up and same way, like we managing this crisis, whoever will react faster and flexibly and more agile to these changes will be the winning factors for that.

Jens:

Let’s talk about processes again. We touched on it earlier, bookings that are coming in late, the scenarios are changing constantly. The historic data that you’ve relied on for your decision-making in the past doesn’t really help here because you don’t know whether it actually is valid. What does that mean for your processes? How have you changed? Tamur, do you want to go first?

Tamur:

Yeah, I think that’d be a lot of changes. And one change definitely has been an even closer relationship between network planning. I think operations being nimble and being flexible to ramp up or ramp down operations is really crucial in this time. And here, I think it’s not the first mover advantage, but the second mover advantage because people that have moved too quickly up, I think have realized that things take longer. And I think a more conservative approach there has proven much more efficient. So that’s one of the learnings.

It might be different now in the ramp up. We have to see, and we have to get near the sweet spot, at what capacity is needed. I think that internal collaboration has even strengthened. Also of course, the degree that cargo plays a role. And so, the cooperation between cargo business and network business is important. I think that is something really that is becoming really recipe for success, particularly in the long haul business.

Then you have complete change of revenue management systems. As you said, we cannot rely on the traditional historical data, so we have adjusted that. We have adjusted over two million fares and loans for Lufthansa group and its share for Swiss. So, we have done a lot of changes there. The way you steer the flights, I think has changed. Many, many aspects, and very important is also I think again, how you interact with the customer.

I think the learning was that when you come into the crisis, you’re also exposed to the deficiencies that you have and let’s take the big refund topic where all of us have suffered a lot in the crisis and for example, for Swiss, I can say now with a lot of AI, a lot of also human touch and a lot of process change we have managed now to come back to pre-COVID, answering times of our refunds and to pay them back in time, a hugely important topic for confidence for the customer, but also the question, how you channel information to the customer and get also a two way street of conversation. I think there’s more we can learn from other industries so we’re not at the end of the road. There are some hard learnings also, but so many aspects in terms of customer, of operations, of planning and of steering where we have changed and have learned in the crisis.

Jens:

You’re a big organization, don’t you also have to be much quicker than in the past?

Tamur:

Yes, of course. That’s something, we have the advantage that we have the top structure in Europe. So, it’s not just one big hub and we have to manage that, but we have, of course, we have Frankfurt, we have Munich, we have [inaudible 00:18:44], we have Zurich, so there, we can also do things on a smaller scale and we can, I think, act more flexibly and quicker and use the benefits also of such a hub structure and not relying just on one big hub. That is the advantage now often in terms of group. That’s something we have used in the learnings that we could exchange for each other.

Jens:

You’re talking about how the learnings are actually beneficial for the future and how some of the customer interaction may be improved, refunds being one of the most prominent examples that didn’t go so well in the past few months, do you have a similar view? Is that crisis a push for some of these digital initiatives that should have been made earlier?

Jiri:

Look, I think that there is a famous saying, like never waste because a good crisis forces new opportunities. I think that in our case as well, many decisions, which we have planning in our five-years plan and had ambitions to implement that in the future, we just simply use this crisis to implement them now because it’s like when else you can implement it? We already have enough resources to deal with those things because your capacity is reduced. And also, let’s say the market dynamics change dramatically, so for example, we significantly fast track our mobile channel and our direct channel. We recently introduced the GDS surcharge, which is something already known for a couple of years by colleagues from the Lovaza group, but not so much for the regional airlines.

We do a lot of these changes, which may be in a way strategical and dramatical for many of the airlines. But now is the best time to start to completely revamp and change the way you operate. So that was, in terms of what we fast track, what we actually learn during this crisis, that also our internal processes has to much more streamline, typically organization, even if you are a small regional carrier, you still operate very much in a silo system. Even if you are within one area, for example, commercial, even for example, network revenue management, e-commerce and the other things, they not necessarily communicate well together, but now you need to streamline this and make them all one big operational center to make quick decisions.

And one of the keys, actually what we learn is to in this crisis to really make the call center part of the also decision-making process, because now the customer is key, and the customer you need to satisfy his needs. And many times, it happens that they learn something about the travel restriction from the press and the official communication from the official also it is coming usually four, five, six hours later. You don’t have the information to the call center, what they can provide to the customer. So, this kind of information flow and gathering and making a call center the first one to be aware of any decision which is happening to your network, to the travel restriction, because they are your ambassadors now to the customer where you have actually very limited contact because of all the external circumstances.