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, asks 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 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 the 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.
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 (see the Economy à la carte feature in Business Traveller’s July/August 2018 edition). 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.
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, 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.
