Does your airline’s post COVID plan stack up?
The COVID pandemic has turned airline business plans across the world into works of historical fiction. Stories written in a different world which now bear little relation to the new reality.
By now, most airlines will have put together a new, post COVID, business plan. It might be a bit shorter term than normal, hastily assembled to prove to the Board and the auditors that the company is still solvent. For a growing list of airlines, even that more limited exercise has clearly failed and has led straight to the bankruptcy courts or to the arms of the government.
In many cases, we are probably at the stage when those new plans are being presented to Boards, to lenders and to investors. Over my 26 year career in the airline business, I’ve probably reviewed more than a hundred such plans. I’ve been involved in writing almost as many. For anyone that is on the receiving end of such a business plan presentation, I thought I’d put together a few questions to consider when judging whether the plan is a work of art, or a work of fantasy.
What world does the plan assume we will be living in?
This is the simplest test. Any plan that assumes that we are going back to the world of 2019 in one, two or even three years is not worth the PowerPoint slides it is written on. I know that there is an industry consensus that we will get back to 2019 passenger volumes by 2023 or thereabouts. But even if that proves to be the case, that is not the same thing as going back to the world of 2019.
When the dot com bust and 9/11 hit the industry in 2001, it took 3-4 years to get back to the previous traffic peak of 2000, much the same length of time as is being forecast now. But the world of 2004 was very different to that of 2000. For example, between the two dates, Ryanair’s turnover grew by 190% from €390m to €1,074m whilst that of British Airways fell 15% from £8,940 to £7,560. In 2000, at the height of the dot com bubble, British Airways’ annual report barely mentioned the internet. By 2004, 50% of short haul leisure fares were being booked through the airline’s web site.
I don’t have the space here to try to forecast how 2023 will be different to 2019 (a topic for a later post perhaps). But any plan that has as its final year a “return to normal” should be thrown in the digital shredder.
Has an ambitious enough target been set for profitability?
Even if an airline has never made more than 1-2% profit margins, or maybe was loss-making going into this crisis, a post COVID plan still needs to be targeting double digit margins within 2-3 years. Ideally much earlier.
It may have been possible in the past to muddle along for years with low margins or small losses, but every airline is going to need the confidence and support of its lenders and shareholders to dig itself out of the hole that will be created in airline balance sheets this year. Inflated debt levels will need to be brought back down through cash generation. Depleted equity reserves need to be replenished through some combination of retaining profits or raising new equity. Both things need proper margins, as quickly as possible.
How dependent is the plan on growth and unit revenue recovery?
Show me two plans, both of which are targeting the same profit margin.
The first assumes that capacity and unit revenue recover, but don’t get back to 2019 levels within the plan period. Challenging, but achievable, unit cost actions are planned which enable the target margin to be delivered despite this.
The second assumes that unit revenues recover fully and that the main reason unit costs come down is because fixed costs are spread over a growing capacity base. Difficult labour issues are avoided by productivity deals that guarantee no job losses. The excess labour is absorbed by growth.
I’ve seen a few examples of the first. Even if not delivered in full, those airlines survived and prospered long term. I’ve seen many more examples of the second. Few of those airlines and none of their CEOs are still with us.
Can we survive the worst case and prosper in the likely and upside cases?
Properly stress test the plan. If the airline can’t survive a reasonable worst case scenario, go back and come up with a more robust plan.
But don’t be overly fixated on the worst case scenario. The plan should be optimised around the likely case and be flexible enough to take advantage competitively of an upside case. In the end, survival is not the only objective. The best airlines will be figuring out how they can gain share and win customers in the new environment.
Fuel prices are low (at least for the moment). Pilots and aircraft will be plentiful for some time. Weak competitors will be exiting the market. Slots will be available, or at least for sale. Work out how to take advantage.
The next few years will be a huge test for airline business models and management teams. You need to make sure you have the right plan and the right team in place to deliver it.
If your management team presents you with a plan which doesn’t meet these tests, change the plan.
I’d also strongly suggest changing the management.
