Airlines are old hands at running restructuring programmes to see them through the downturns. This time, however, the deep structural shifts taking place in the market have already persuaded some to be much bolder in seeking to reinvent their business.
SAS Scandinavian Airlines is the latest network major to scrap its conventional recovery plan and take the plunge, with a bold and fundamental reinvention of the business. Gone are the classic short-term cost targets and job cuts, designed to see the carrier through the storm. In its place is a radical plan to split up the group, make a step change in unit costs and so fly "wing-to-wing" against the no-frills carriers on fare levels. To date, it is only one of a handful of majors to have taken the plunge, but is unlikely to be the last.
The transformation at Aer Lingus has already shown the way in Europe, a success that SAS readily admits acted as a beacon. British Airways has, albeit less dramatically, reinvented its short-haul business, pulling it back from massive losses to what is likely soon to show a modest profit. America West too reworked its business model to become a low-fares network carrier and has, literally, seen its stock rise. Air New Zealand (ANZ), having fought its way through a near-death experience in 2001, has emerged with a very different shape, not least, turning its entire domestic service into a low-fares operation.
In each case the management teams have accepted that the changes now taking place in the market mark a deep structural shift rather than short-term stress. They are right. While recession plays out in the foreground, in the background amix of new low-cost competition, consumer power and creeping deregulation look like changing the landscape for keeps.
At its bluntest, the market price for short-haul air travel is shifting down. At least a quarter of journeys in the US domestic market are already being made on low-cost players and the FAA reckons that will be half within a decade. Their share of the European market is already in double digits and growth on the same scale looks quite reasonable if nothing changes. By then, low-cost will not be so much a phenomenon, or indeed a market segment, but the norm.
In many ways the much lauded low-cost model is based on some very old-fashioned virtues. Low fares, high utilisation and high load factors are hardly radical new goals and neither is the desire to fly high-frequency point-to-point. It is, after all, what "legacy" carriers do every day on the North Atlantic.
A single class cabin is new, but not dramatically so. Admittedly direct online sales represent a step-change, but it is one equally open to a legacy carrier. The main impediment has been the confusing fog of different fare classes and ticket restrictions which simply did not translate onto the web.
Where legacy carriers too have reworked their fare structures into simple everyday pricing, their online presence has boomed. Look at the speed with which Aer Lingus shot from no web sales to speak of two years ago to more than half of all tickets sold online. BA, ANZ and others have similar tales to tell.
Neither are low-cost carriers immune from competitive pressures. Perhaps more than the network majors they need to keep growth moving at a lick to gain economies of scale and impress shareholders. Even labour discontent has begun to rumble at Southwest Airlines and could yet spread as the sector matures.
There is no reason why network majors should not compete and all know that they must - the question is how.
Despite the bruising lessons of the US majors in the 1990s, the first reaction of many has been to launch their own low-cost offerings. As a short-term move to defend the existing empire that may look tempting. But it assumes that the empire is defensible. What SAS, and others before it, have come to recognise is that, on short-haul at least, the business market they hoped to defend is already largely lost.
At worst, setting up a new low-cost unit simply distracts attention from the need to transform the core business. That was exactly the reason that BA sold out of its successful Go subsidiary and got down to work on the much bigger prize of fixing the massive losses on its European network.
Then there is the risk of confusion in the minds of customers and employees alike over where low-cost ends and mainline economy begins. In most cases there is little to distinguish the two products except for the price.
In any case, if there is profitable growth to be had from low fares and low costs, then why not capture that for the core business? The answer is that it is hard to contemplate and even harder to do. Relinquishing a premium is never easy and risking labour strife is tougher still. However, as SAS has made clear it saw no other long-term choice.
Charles Darwin famously remarked that in the evolutionary race, it is not necessarily the strongest that survive but the most adaptable. There is little doubt that the airline environment is changing and that its players must evolve.
Source: Airline Business
