Headwinds Aloft

When we hear about disruption in aviation, we tend to think of lost luggage, flight delays or cancellations. However, disruption can also have a wider meaning for the aviation industry and business in general.

Disruption displaces established practices and challenges the status quo. As Uber did for taxis, Airbnb for hospitality and Amazon for retail, new business models also subject the aviation industry to disruption.

The difference is, unlike Uber, Airbnb and Amazon – whose rise came with the evolution of the Internet and digital technology – disruption for airlines has been happening for longer and for many reasons. The effects for travelers have been both positive and negative. But to understand where things are heading, it’s necessary to remind ourselves how we got to where we are today, and why airlines often seem unprepared.

Rules and Regulations

Generally speaking, airlines aren’t fond of change – yet if the events of this century are any indication, change in aviation is inevitable. In its Future of Airline Industry 2035 report, the International Air Transport Association points out that, “As arguably the most global of industries, the externalities international air transport faces are numerous. The winds of change buffeting the industry can come from many directions.”

Take the enormous cost of capital investment, add complex levels of regulation and the omnipresent influence of states and geopolitics and this “buffeting” can become severe turbulence.

Regulation is often thought to stifle innovation, but that doesn’t always hold true. States have traditionally controlled air travel in the form of bilateral air services agreements (ASAs), which regulate the number of flights and airlines permitted to operate between countries. An international airline can only operate services where these ASAs allow it to.

Traditionally, ASAs were restrictive and protectionist, harking back to the “glory days” when state-owned airlines dominated the industry. With global trade increasing, the loosening of these ASAs – as part of what the industry calls “liberalization” – has allowed increased competition, with free market access leading to a greater movement of passengers and cargo.

That was certainly the case in 2016, when the UK and China agreed to expand the number of flights permitted between the two countries from 40 per week for each nation up to 100 (which subsequently rose to 150 in 2017). Restrictions on the number of destinations that the airlines could serve were also lifted – meaning that flights could now operate from any city in the UK to any city in China. Previously, airlines could only fly to six destinations in each country.

As a result, airlines such as China Southern, Hainan Airlines and Tianjin Airlines have commenced direct services from their regional Chinese hubs to the UK, a development which would have been unthinkable ten years ago when services were largely limited to the state flag carriers such as Air China and British Airways operating between the main hubs of Beijing, Shanghai and London.

Still, this change hasn’t been good for everyone. The rising presence of Chinese carriers has been a headache for British Airways. It was forced to stop services to Chengdu in 2016 due in part to this significant rise in competition from Chinese carriers flying similar routes.

Liberalization as Disruption

Liberalization as a form of deregulation has been disrupting the airline industry for the last 30 years by breaking monopolies, increasing competition and setting the stage for the airline industry of today.

The United States started the trend with the 1978 deregulation of its domestic airlines. Then in the early 1990s, the US forged bilateral open-skies agreements allowing global carriers to operate any route between countries without significant restrictions on capacity, frequency or price.

The same happened in Europe with the creation of the single EU aviation market in the 1990s, which put an end to the system of individual ASAs between EU member states – the effect being that European airlines could operate freely within the EU (although Brexit may change that).

In 1992, the EU signed its first open-skies agreement with the United States, which is one reason why there are more flights per day between London and New York City than there are between London and Dublin, and similar open-skies agreements exist in many other markets.

Low-cost Carriers

Moves to liberalize and deregulate have created conditions for the greatest disruption in aviation of the last 40 years – the rise of the low-cost carrier, starting with Southwest Airlines, followed by Ryanair and Easyjet in Europe.

When they created the company strategy, the team behind Southwest avoided copying what other airlines were doing. Instead, they adopted a bus company model, providing lower service standards compared to the other airlines. Southwest flew to smaller regional airports, helping to lower operating costs to almost half that of US legacy carriers. The disruptive result was much lower fares than the legacy incumbents, and the creation of a whole new market of travelers who previously wouldn’t have considered going by air.

The Southwest model quickly came to Europe with the rise of Ryanair and Easyjet, with both airlines using a similar strategy focused on flying out of regional airports that established carriers such as British Airways, Lufthansa and Air France would never have touched.

How things change – last year Southwest was the third-largest carrier in the US by passenger enplanements. Ryanair is now the second largest airline in Europe, narrowly beaten by the Lufthansa Group. The liberalized EU open-skies policy has allowed Ryanair, Easyjet and more recent additions such as Wizz Air and Norwegian to operate freely out of several hubs in different countries within Europe, including to the US, Asia and beyond.

Disruption from the Gulf

Liberalization has also fueled the disruptive effect of the Gulf carriers on the full-service airline market globally. Taking advantage of location and the open-skies agreement with the US dating back to 2002, the “ME3” of Emirates, Etihad and Qatar Airways have risen to become market leaders in both product and technology.

Concerns raised by certain US carriers over subsidies seem to have waned since the US recently reaffirmed its open-skies agreement with the UAE (and the nation of Qatar) in return for greater transparency and a promise that Emirates would drop plans to launch further direct flights between the US and destinations other than via the UAE.

In any case, Qatar Airways and Etihad have had enough on their plate, with the former still restricted where it can fly within the Gulf, and Etihad announcing two years of losses following the failure of its ambitious Air Berlin and Alitalia experiments. Sometimes, disruption and change doesn’t pay.

New Brands and New Technology

Disruption fuels change and encourages competition, resulting in lower prices and a significant expansion in the types of fare products available. It has also resulted in an expansion of brands. In 2017 BA and Iberia’s parent company, IAG, launched Level – a low-cost brand targeting the cost-conscious leisure market.

In 2018 Air France followed suit with Joon, which focuses on lower-yielding destinations such as South Africa. Lufthansa has done the same with Eurowings out of its Munich hub to leisure destinations such as Bangkok, while operating the mainstream Lufthansa services out of Frankfurt.

In Australasia, the pattern is similar. Scoot, and previously Tigerair, has allowed the Singapore Airlines Group to compete on cost and product with Malaysia’s mega LCC AirAsia, also flying long haul to destinations such as Athens. Jetstar has done the same for Qantas, being used as that airline’s growth vehicle for expansion into Asia. Tigerair subsequently merged with Scoot in 2017, but the brand lives on under Virgin Australia as that airline’s competitor to Jetstar.

Google Flights Takes Off

All this comes at a time when airline-related technology is also subject to enormous change. Technology is important for most frequent travelers. IATA’s 2017 Global Passenger Survey found that passengers expect technology to give them more “personal control over their experience.” The research simply explains why traditional check-in desks are almost retro in 2018, with smartphone check-in followed by automated boarding often replacing human contact.

Consider this: Just when the likes of Expedia and Skyscanner felt they had consolidated their positions, in 2011 along came Google Flights – which allows users to track prices, check alternative dates and flight options at alternative airports. All the while, Google can collect (and react to) data already available from the traveler’s use of the search engine, something most other sites (including the airline’s own) can’t do, giving Google an advantage.

Technology also presents a challenge to travel management companies, who are being forced to present their corporate customers with solutions that provide a “consumerized” level of immediacy and flexibility throughout the travel management process. And IATA’s New Distribution Capabilities standard is giving everyone in the aviation value chain the opportunity to rethink what it looks like to shop for and buy air travel.

What It Means for Passengers

Consumers have seen the impact of disruption in aviation more than in many other industries. The variety of options available today would have been utterly unthinkable only a few years ago. Through it all, airlines face the challenge of finding sustainable business models that attract travel consumers, but are also profitable.

We all want the best service and safety for the lowest price, yet we frequently complain about what we receive. These complaints tend to be most often directed at the airline, but the overall industry may also be to blame; and behind that, governments; and perhaps, ultimately, ourselves.

Disruption is inevitable, but in the end it is partly driven by what we, the consumers, demand.