Is it time for us to re­think our ex­pec­ta­tions of air travel?

The air­line in­dus­try has been sub­ject to dis­rup­tive forces for decades. But what has this meant for pas­sen­gers, and is it time for us to re­think our ex­pec­ta­tions of air travel?

Business Traveller (Asia-Pacific) - - CONTENTS - WORDS ALEXAN­DER FREE­MAN

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 sev­eral rea­sons.

It has had many pos­i­tive ef­fects for trav­ellers, and some neg­a­tive ones, 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 the “Fu­ture of the Air­line In­dus­try 2035” re­port, IATA (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 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, it has been the loos­en­ing of th­ese ASAs – as part of what the in­dus­try calls “lib­er­al­i­sa­tion” – that 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.

Off the back of this ex­pan­sion, air­lines such as China South­ern, Hainan Air­lines and Tian­jin Air­lines have com­menced di­rect ser­vices from their re­gional Chi­nese hubs to the UK. Di­rect ser­vices from Tian­jin and Chongqing to Lon­don, for ex­am­ple, 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.

LIB­ER­AL­I­SA­TION AS DIS­RUP­TION

Lib­er­al­i­sa­tion 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.

It was first pur­sued by the United States in the early 1990s, in the form of bi­lat­eral open-skies agree­ments, so that car­ri­ers could 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, some­thing we take for granted to­day (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 NYC than there are be­tween Lon­don and Dublin. In Asia, the ten mem­bers of ASEAN (As­so­ci­a­tion of South­east Asian Na­tions) in­tro­duced the frame­work for an open-skies agree­ment in 2015, although im­ple­men­ta­tion re­mains on­go­ing, and sim­i­lar open-skies agree­ments ex­ist in many other mar­kets.

The ris­ing pres­ence of Chi­nese car­ri­ers has been a headache for Bri­tish Air­ways

LOW-COST CAR­RI­ERS

The lib­er­al­i­sa­tion and dereg­u­la­tion of open-skies agree­ments has cre­ated the con­di­tions for the great­est dis­rup­tion in avi­a­tion of the last 40 years – the rise of the low-cost car­rier (LCC), start­ing with South­west Air­lines in the US, 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 by cut­ting free meals, drinks and hold lug­gage, and is­su­ing sim­ple pa­per tick­ets. The plan was to cre­ate a prod­uct none of the full-ser­vice car­ri­ers would take se­ri­ously. South­west flew to smaller re­gional air­ports, help­ing to lower op­er­at­ing costs to al­most half that of US legacy car­ri­ers. The re­sult was much lower fares than the in­cum­bents, and the cre­ation of a whole new mar­ket of plane trav­ellers who pre­vi­ously wouldn’t have con­sid­ered air travel. This dis­rup­tion hit not only the air­lines but also the bus and rail in­dus­tries, which lost cus­tomers to this new air­line con­cept.

The South­west model quickly came to Europe through the rise of Ryanair and Easy­jet, with both air­lines us­ing a sim­i­lar model fo­cused on fly­ing out of re­gional air­ports that es­tab­lished car­ri­ers such as Bri­tish Air­ways, Lufthansa and Air France would never have dreamed of us­ing. How things change – Easy­jet was the biggest car­rier at Gatwick in 2017.

Ryanair is now the sec­ond largest air­line in Europe, nar­rowly beaten by the Lufthansa Group. The lib­er­alised 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. Nor­we­gian even went a step fur­ther: reg­is­tered in Dublin, sub­sidiary Nor­we­gian Air In­ter­na­tional was set up to take ad­van­tage of Ire­land’s avi­a­tion-friendly reg­u­la­tory en­vi­ron­ment – op­er­at­ing as a fully in­te­grated sub­sidiary to its Nor­way-based par­ent, us­ing hubs in Spain, Italy, the UK and Den­mark among oth­ers.

DIS­RUP­TION FROM THE GULF

Look­ing beyond Europe and Asia, lib­er­al­i­sa­tion has also fu­elled 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, with Emi­rates cur­rently keep­ing the A380 in pro­duc­tion.

Con­cerns raised by cer­tain US car­ri­ers over sub­si­dies seem to have qui­etened with the US re­cently reaf­firm­ing the open-skies agree­ment with the UAE (and the na­tion of Qatar) in re­turn for greater trans­parency and a prom­ise that Emi­rates would drop any 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 in where it can fly within the Gulf, and Eti­had an­nounc­ing a US$1.52 bil­lion loss in June 2018, an improve­ment on the US$1.87 bil­lion it lost the pre­vi­ous year 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 Bri­tish Air­ways 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

Ryanair is now the sec­ond largest air­line in Europe, nar­rowly beaten by the Lufthansa Group

2017, but the brand lives on un­der Vir­gin Aus­tralia as that air­line’s com­peti­tor to Jet­star.

Scoot, Jet­star, Joon, Level, Eurow­ings and Nor­we­gian all of­fer a pre­mium cabin par­tially aimed at cap­tur­ing the cost-con­scious cor­po­rate mar­ket, par­tic­u­larly SMEs. More “pre­mium econ­omy” than “busi­ness” ( Joon ex­cepted), it’s not yet clear how dis­rup­tive this will be, with cus­tomers fac­ing more choice than ever. The strat­egy isn’t new – Bri­tish Air­ways tried it short haul with Go, and United with Ted; both can­ni­balised their par­ent’s prod­ucts, low­er­ing prof­its, and so th­ese sub-brands were dumped.

GOOGLE FLIGHTS TAKES OFF

All this comes at a time when air­line-re­lated tech­nol­ogy is also sub­ject to enor­mous change. 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 pric­ing graphs, and fac­tor in al­ter­na­tive dates and flight op­tions at al­ter­na­tive air­ports. While this is hap­pen­ing, Google is able to col­lect (and re­act to) data al­ready avail­able from the booker’s use of the search en­gine, some­thing most other sites (in­clud­ing the air­line’s own) can’t do, giv­ing Google an ad­van­tage.

Tech­nol­ogy is im­por­tant for most fre­quent trav­ellers. IATA’s 2017 Global Pas­sen­ger Sur­vey found that pas­sen­gers ex­pect tech­nol­ogy to give them more “per­sonal con­trol over their ex­pe­ri­ence”, with avi­a­tion think tank CAPA (Cen­tre for Avi­a­tion) re­port­ing that the “ma­jor­ity of pas­sen­gers just want to get through the air­port as fast as they can”. It ex­plains why tra­di­tional check-in desks are al­most retro in 2018, with smart­phone check-in fol­lowed by au­to­mated board­ing of­ten re­plac­ing hu­man con­tact.

Tech­nol­ogy also presents a chal­lenge to travel man­age­ment com­pa­nies (TMCs), who are be­ing forced to present their cus­tomers with so­lu­tions that pro­vide a sim­i­lar level of im­me­di­acy and flex­i­bil­ity through­out the travel man­age­ment process. In the case of di­rect book­ings, where the tech­nol­ogy re­duces the num­ber of staff needed and can of­ten cut costs for pas­sen­gers, for a TMC it’s an ex­tra fa­cil­ity to pro­vide that has no im­pact on staffing re­quire­ments. The added ex­pense is then passed on to con­sumers, in the short term at least. Dis­rup­tion has brought greater choice and cheaper tick­ets, but some­times less com­fort as air­lines pack more pas­sen­gers into the same space. Space can no longer be taken for granted, even on es­tab­lished car­ri­ers; legroom in econ­omy shrinks while the more prof­itable pre­mium econ­omy, first and busi­ness classes ex­pand. As tech­nol­ogy has­tens the ad­vent of ul­tra-long haul air­craft, which can cur­rently fly non-stop for 17 hours, this will raise new is­sues, in­clud­ing health and safety: spend­ing a day in an econ­omy seat may not be ap­peal­ing or even fea­si­ble for some.

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 un­think­able only a few years ago. On the one hand, there are fully en­closed suites avail­able in first class; on the other, some air­lines are charg­ing for wa­ter. Given the cycli­cal na­ture of most economies, air­lines face the chal­lenge of find­ing sus­tain­able busi­ness mod­els that at­tract con­sumers, but are also prof­itable. What in­no­va­tion we will see over the next ten years will also de­pend on the in­creas­ingly high ex­pec­ta­tions that de­mand­ing, but fickle, trav­ellers con­tinue to set. The hope is that com­pe­ti­tion will im­prove cus­tomer ex­pe­ri­ence, and new air­lines will con­tinue to launch. Para­dox­i­cally, with­out state sup­port, many well-known legacy and na­tional air­lines would fail; and with­out reg­u­la­tion, merg­ers would re­duce choice and per­haps com­pe­ti­tion. We all want to en­joy 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 and of­ten through so­cial me­dia, but the over­all in­dus­try may also be to blame; and be­hind that, gov­ern­ments; and per­haps, ul­ti­mately, our­selves. Dis­rup­tion is in­evitable, but we need to re­alise it is partly driven by what we, the con­sumers, de­mand.

With­out state sup­port, many well-known legacy and na­tional air­lines would fail

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