Airline’s strategic responses to the Covid-19 pandemic
THIS article analyses airline reactions to the Covid-19 pandemic along with the typical crisis response strategies of innovating, persevering, and creation of hybrid models.
The aviation industry has lost more in six months, than what the industry has made in one year. This is an industry that is now in a deep hole and must start looking for footholds and ways to climb quickly out of the financial abyss.
The International Air Transport Association (Iata, 2020) expects that the Covid-19 crisis will see airline passenger revenues drop by US$314 billion in 2020, which would represent a 55% decline compared to 2019.
This estimate is based on a scenario with severe travel restrictions lasting several months (Iata, 2020). It could even be worse, with extended restrictions or, in the case of a second wave of the Covid-19 pandemic.
The already weakening global economy, with the world's three largest economies slowing down (the US officially in a recession ending the longest economic expansion in US history, Japan and Germany showing virtually zero growth and heading for a recession).
The aviation industry (and especially the passenger carriers) has absorbed a large part of the shock.
If necessity is the mother of invention, adversity must be the father. One positive outcome of the pandemic’s drastic impact is the innovations that surely will rapidly emerge (Airline Leader, 2020).
When it comes to raising financial capital, nothing is off-limits for airlines mired in the Covid-19 crisis. That is not surprising considering that revenues of most airlines have almost completely evaporated and will only come back gradually after a period of unknown duration (with some resuming flight operations at the time of writing).
Despite airlines' coherent immediate and almost unanimous attempts to minimise cash burn in the revenue-stifling crisis, airline behaviour has varied significantly as the crisis extends. However to date, all airline strategies have one thing in common: they are about short to medium term survival.
Airlines have now engaged in tactical moves in the form of innovative, persevering strategies and the creation of hybrid models.
An innovative strategy refers to a strategic renewal of the organisation during a crisis. This response may turn out to be a significant move in long-lasting crises that tend to advocate “irrevocable traces in the business landscape that render a return to the previous order impossible” (Wenzel et al., 2020).
Airlines have also engaged in, or continued with, strategic moves that promise to improve their strategic position in the long-term, such as preparations for joint ventures, entering new markets, or creating new initiatives.
Examples of airlines that have engaged innovative strategies include:
AirAsia Group: Started an Amazon.com ecommerce style platform selling fresh fruit and vegetables. Their objective is to use the airline’s cargo logistics and payment capabilities to connect Malaysia farmers directly with hotels, restaurants and supermarkets.
Royal Brunei Airlines: Launched a new Dine and Fly 85 minute scenic sightseeing tour. The tour gives passengers the opportunity to view the iconic landmarks over Brunei’s coast and the island of Borneo.
Thai Airways: Transformed the cafeteria of its Bangkok Headquarters to an airline themed restaurant with plane parts and seats. This restaurant is open to the public who can enjoy the onboard dining.
Persevering strategies aim to preserve the status quo of the organisation — that is, get through the crises with minor changes in the organisation's strategy — and reflects an expectation that, in a post Covid world, this provides a competitive advantage for persevering organisations.
Examples include debt financing and getting state aid. In general, it is considered effective as a response strategy, particularly in the medium term.
Most European airlines have engaged in persevering actions by assessing external resources to get through the crisis: many airlines have addressed the governments of their respective home nations to solicit subsidies.
In Europe, this is reflected by the variety of credit or loan guarantees and state aid provided to airlines. Often the state aid has been nationalistic and tied to huge demands from governments that have often included mass redundancies.
The largest beneficiary in Europe has been Lufthansa, receiving €9 billion in a combination of partial (20% equity) nationalisation and loans.
In Romania, the government is finalising details for state aid for Blue Air and TAROM, subject to the European Commission (EC) approval and restructuring plans. It is reported the government will provide state guarantees of up to RON 600 million (US$146,1 million) to the two airlines. It is hoped that both airlines will emerge from this process with a streamlined operation and a more secure financial footing that should ensure their survival.
In the UK, Virgin Atlantic has just completed a £1,2billion (US$ 1,56 billion) private-only solvent recapitalisation of the airline and holiday business. This comes at a price that will include painful cuts to its workforce. Nevertheless, this strategy will help Virgin Atlantic rebuild its balance sheet, reshape, and resize the business in the future.
The last strategy is where airlines pursue a hybrid approach model. Academic studies have demonstrated that airline business models are diverging from the two homogeneous strategic archetypes (Jean and Lohmann, 2016). This new level of competitive heterogeneity amongst airlines challenges Porter's (1985) original competitive advantage (CA) theory, which stated that firms could either compete on the basis of cost or differentiation.
Leaning on the notion of a hybrid strategy, a concept delineating the parallel pursuit of seemingly contradictory generic strategies (Baroto et al., 2012), we refer to these as the hybrid response approach. For example, there are occurrences of grouping financial persevering and crisis-specific innovating strategies.
British Airways for instance represents a case of combining two components, permanent exit from Gatwick and pursuing a workforce reduction. Hybridisation is used by airlines as a strategic response to the Covid-19 pandemic.
The industry that emerges in the next few years will be considerably smaller, less competitive, and higher-priced, with greater government interventionism.