By Kimmo Ruotsalainen (Helsinki, Finland)
Who’s Online? Can You Hear Me? Mute Your Mic Please!
As most of the countries are now in lock down mode and people are working as remote or conducting e-meetings, this is becoming at least partially a ”new-normal” way of working. The current crisis so far has proved that this ”new-norm” means of working is at least manageable, as in my home country Finland, even school kids are relatively well engaged with eLearning. It remains to be seen if e.g. Skype, Zoom and Teams meetings will become even wider accepted way of working and perhaps at least partly replacing business travel after social distancing and other restrictions will be lifted.
We are experiencing the biggest shock in global aviation’s 100+ year history. At this moment, most of the air travel has been suspended at least for next three months in Europe. The aviation sector is fighting for survival as the virus is now hitting hard in United States, hitting a grim milestone of a quarter million confirmed cases (Statista).
Regarding the aviation business recovery in terms of passengers and capacity, Lufthansa Group CEO Carsten Spohr’s view is that it will take multiple years for Lufthansa Group to return to its pre-coronavirus capacity and fleet. According to him, all global airlines will have to go through some form of fleet reorganization and scheduling due to the crisis. Mr. Spohr also argues that growth in air traffic will shift even more dynamically from business travelers to private customers (Source: Der Spiegel, 30 March, CAPA). Similar view is also shared by Airport Council International. According to DIrector General Angela Gitten, recovery will take up to 18 months until traffic will reach pre-corona levels.
As nobody can confidently say how long the crisis will last, there are a range of opinions and scenarios on recovery offered by various economists. Their current views vary between V-shape and U-shape, however from industry experts, the aviation business will be most likely rebound at a slower pace. As of today, flight capacities are globally down by 50% compared to what had been planned in the beginning of the year (OAG). As the current uncertainty will most likely carry-on until next it will have direct impact to air travel as the virus could in worst case scenario come back.
For the time being, airports are maintaining operations to support repatriate flights, small number of scheduled and cargo flights. At the same time, their key focus is on cost base management, cash conservation, strengthening of balance sheet, and evaluation of CAPEX strategy, including investments in other strategic areas like digitality, training, customer experience management, sales and marketing.
Historically, airports have been owned, managed and operated by governments but there has been a worldwide trend towards private sector involvement with varying degrees of private ownership and responsibilitie, including public-private partership (PPP) models. Hence, due to the crisis situation, some publicly owned airports could benefit from a PPP model to ensure required fundings on existing and/or new airport infrastructure.
Airports business models are also dependent on long-term partnerships with non-aero concessionaires. Thus, they need to consider deferring or waiving payments by concessionaires during the crisis. More specifically, in the context of airport cash flow and revenues, it is vital that airport operators attract and liaise with the right blend of retailers, as well as other concessions, on their non-aeronautical side of the business. This means not only crafting a concession agreement to maximize net revenues from commercial activities but working closely with these concessions to jointly achieve the ultimate end goal of maximizing the overall customer experience (source: ACI).
In order to safeguard airports’ aeronautical revenues during the crisis, Airport Council International (ACI) is urging governments not to suspend airport charges for airlines as according to Angela Gitterns, ACI Director General, doing so ”will place airport operators in greater financial distress.” She calls for non-discriminatory relief measures that can help all affected actors in the industry. According Director General national authorities have now a key role to play to ensure the sustainability of the entire aviation system by granting relief on airport taxes, on passenger-based taxes and on taxes on air transport in general to incentivize the return of passenger confidence to travel (source: ACI press release).
Aeronautical & Non-Aero Revenue in Post-COVID World?
The biggest misstep airports could make, once this unprecedented crisis blows over, is exclusively managing the cash liquidiation crisis instead preparing and transforming the busines for the new-normal. It will be utmost important for airports to be more vigilant, capable of enhancing digital transformation in operational and commercial context as well as re-positioning themselves in global aviation market.
Route development attracting new airline clients, retaining and growing with existing customer base as well as updating and executing route development strategy will play a pivotal role in thes post-crisis landscape. Changes in customer base, operator network and schedules offer new opportunities to drive growth. Commercial policies to airlines need to be attractive to safeguard the existing business and capture market share from competition to ensure higher aeronautical revenues typically via passenger fees and landing charges.
The other key component, non-aero, plays perhaps a more critical role in incremental revenue generation. Airport’s non-aero revenues typically can contribute 40-60% of total revenue, but the margins from these revenues can be very high and they may contribute almost 70-80% of the EBITDA (ACI).
Secondly, airports can directly influence the non-aeronautical revenues by improving the service environment and human factor in order to enhance customer experience and raise the overell satisfaction and ambience thru the customer journey. In fact, customer experience execution is crucial, since the best way of increasing non-aeronautical revenues is to increase the customer satisfaction.
Furthermore, airports need to better understand the ”new customer profile” and segment passengers on their preferences and needs. Hence, they need to invest more in passenger survey data, customer insight and data-driven analytical tools to gain business intelligence and understand of their passenger profile in order to personalize services.
It could be argued though, that if under the current circumstances, airport retail customers will be keen on shopping in traditional airport retail store and stand in lines to wait for payment process as they have just become more accustomed to social distancing and sensitive to hygiene, as well as using various digital online shopping channels.
To overcome this monumental challenge, omnichannell retail could offer new growth opportunities for airports to grow their commercial revenues. According to McKinsey & Company, 42% of millennials in the U.S. prefer the online retail experience and tend to avoid traditional way of shopping. Thus, the consultancy argues that the retail store of the future must offer an omnichannel experience to customers (Source: ACI) – a trend which will only be accelerated in the aftermath of COVID19.