52015 2015 Aviation Trends strategy& Industry perspectives 2015 Aviation Trends The airline industry is hampered by slim profit margins, forcing carriers to focus on both cost reduction and revenue growth through better customer interactions. Efficiency @ Attitudes ‘The global aitine industry continues to grow rapidly, but consistent and robust proftabilly is elusive. Measured by revenue, the industry has doubled over the past decade, from US$369 billon in 2004 to a projected $748 billon in 2014, according to the International Air ‘Transport Association (IATA). "Much ofthat growth has been driven by low-cost cariers (LCCs), which now control some 25 percent ofthe worldwide market and hich have been expanding rapidly in emerging markets; growth also came from continued gains by carters in developed markets, the IATA reported. Yat profit margins are razor thin, less than 3 percent overall Inthe commercial aviation sector, just about every player in the value chain — airports, airplane manufacturers, jet engine makers, travel agents, and service companies, to name a few — tums a tidy prof. Yet i's one of the enduring ronies ofthe industry thatthe companies that actualy move passengers ‘rom one place to another, the most crucial link in the chain, struggle to break even. ‘Thats largely due to the complex nature ofthe business, marifested in part by the significant degree of regulation (which minimizes consolidation}, ang the vulnerability of airines to exogenous events that happen with great regularly, such as security concerns, vyoleanic eruptions (independent.co.uk), and infectious giseases (routers.com). But ongoing price pressure is also a factor; the airline industry is one of the few sectors that have seen rico fall for decades. Since the 1950s, atine yields (defined as the average fare ald by a passenger per klometer) have consistently dropped. Given these unique circumstances, airines must continue to focus on top-line growth because their limited profitability depends almost solely on revenue gains, while increasing productiity in order to shore up and perhaps even increase margins. The way individual commercial airlines react to and navigate several trends playing out across the globe will determine carrier performance inthe coming years. Increasing consumer expectations Paople have grown accustomed to seeing significant improvements in their experiences with things they buy. Large and small products are more reliable and more user-friendly than ever before. Consider haw cars have progressed even in the past decade, with upgraded safety and entertainment features, and far better handling and fuel consumplion. Yet air travel has not folowed ths pattern. It remains for many a disappointing, grumble-worthy experience. Consumer disaffection is chalonging for carers to address because upgrading the “hard product” —the aircraft —is an expensive way for airlines to diferentiate themselves, and the payback could be long in travel remains for many a coming. Enhancing the sot produc — through a welcoming and seamless disappointing, grumble-worthy customer experience across al aspects of atavel fomresenaton'> experienc touchdown — is cheaper, bu often more diffu to implement. Typically. such enhancements entail a wholesale behavioral and cultural shit within the organizaton,parteuar for ronine,customer-facing employee. thipdhwwrwstalegyand pwc comiperspectves!201S-avaion-rerds 4852015 2015 Aviation Trends Growing pressure to reduce costs and improve operational efficiency Airlines need to make large and ongoing improvements to operate more efficiently. With few exceptions, the most successful aitines are those with the strictest cost controls. The biggest (albeit cash-intensive) lever to reduce costs les in fuel efficiency, as jet fuel typically accounts for 40 to 55 percent of operating expenses. Carters with sufficient funds have been gradually modernizing ther flet to incorporate more fuel-efficient aircraft. Yet, because planes are so expensive, this approach has real value only fit is thoughtfully implemented in line with the carrier's long-term plans forthe configuration ofits network, such as the programmatic expansion of certain routes over a period of years Cost reduction can also be achieved through enhancements in organizational structure, operating model, and work practices. In particular, legacy airines have often built up complex processes over decades that cost far more than the streamlined processes of the Lees. For example, the systems that legacy carriers have in place to handle transfer passengers —how to price connections, how to handle baggage between the two fights, whether to hold @ connecting ight for a few late passengers or simply rebook them, and so on — ‘were designed when their networks were far smaller. Today, those systems have layers and layers of complexity bul in, making them cumbersome and costly in many cases, Shifting airline landscape ‘The rapid grovah of air travel in developing markets, such as Latin America and especially Asia, is shiting the industry's center of gravity. Middle East-based carriers such as Emirates, Etihad Airways, and Qatar Airways are taking a large slice of the formerly profitable Europe-Asia traffic from those continents’ legacy aitines. The Middle East carriers are highly dependent on connecting traffic, because their home markets are limited by the smaller population oftheir region, Yet their unique geographic positioning — most ofthe world’s population is within eight hours’ flying time — means they are able to capture a disproportionate share of long-haul market growth. Similarly, LCs continue to experience above-average growth rates forthe industry, particularly in emerging economies with many frst: time fers, Worth noting, however, is that LCs also increasingly face rising customer expectations, especially in mature markets, These carriers will need to find the right balance between making investments to improve the experience they offer and maintaining their cost advantage, ‘And consoldation will play @ role in the industry as well. To a large degree, the industry's low margins are driven by its fragmentation, and the resulting overcapacity in many markets. Stil, U.S. carriers have been able to improve their financial performance dramatically, primarily trough bankruptcy restructuring and a series of major mergers. Recommendations In response to these trends, we believe that airlines must take several specific measures to remain competitive Get to know your customers better. As is true in other industries, understanding individual customers’ preferences and consumer- related activites is essential to delivering personalized service and targoted offerings. However, airlines must evolve beyond their reliance on existing loyalty programs, which can generate significant customer data (such as spending pattems through an airline branded creditcard) but don't automatically lead to real insights about travel behavior and choices. In most cases, carriers need to invest in more advanced customer analytics. And technology alone isnot enough; airlines must also rewire their organization and processes to embed customer service into their organizational ethos. For example, at each point of interaction between the passenger and the airline —looking up flights, booking, check-in, boarding, and in-fight experiences — airlines can capture richer data about customers’ preferences, and constantly seek to exceed thelr expectations. ‘The benefits of greater customer knowledge and, hence, intimacy are an improved passenger experience and targeted offerings, such as proactive recommended fights to a passenger's preferred destinations. As a resul of such an approach, ailines gain a greater chance to generate ancilary revenue, and — through loyal customers —a higher percentage of sales coming through direct channels (rather than through online travel sites, which take a cut of revenue). T approach wil also allow full-service carriers to unbundle existing products and charge fees for specific aspects ofthe trp, such as fast-racking security ines or advance boarding, without alienating customers and putting their premium positioning at risk. thipdhwwrwstalegyand pwc comiperspectves!201S-avaion-rerds52015 2015 Aviation Trends Use digitization to reduce operating costs, Airines must also use new technology internally to streamline their operations and reduce costs. For example, systems that can enable real-tme resource planning and allocation drive greater ulizaion. Tech-enabled engines can notfy maintenance and operations centers of performance issues while an aircraft is sill inthe air, and request that a replacement part be waiting when it lands, Such measures can reduce downtime and greatly imprave performance, driving down costs hile also bolstering passenger satisfaction through more frequent on-time arrivals and departures. Cut the fat, not the muscle. In reducing expenses, airines must determine not only how far to cut, but also where to cut. A cftical part ofthe process is identifying the set of essential capabilties that afferentiates them from their rivals in the view of customers. In many cases, those capabilties may require renewed investment. Yet management needs to be ruthless in cutting costs in all other areas that are not relevant to safety, reputation, branding, or customer value Partner strategically. Finaly, because the legal frameworks of bankruptcy restructurings and consoldation inthe United States are not applicable in . . most ather markets, and government equation will continue to limit much Airlines need to cut costs in consolidation, aiines should continue to seek partnerships that can areas not relevant to safety, complement and even improve what they do bes, aswel as cose slog reputation, branding, or ps. n most cases, these partnerships willbe more targeted and synergistic than the traditional aliances that now dominate, Those aliances Customer value. allow route sharing on a broad basi, but they aren't tailored narrowly enough to allow aiines to strategically filin specific gaps. Cantas, which was already part ofthe oneworld alliance, recently forged such a targeted partnership with Emirates. Qantas did not have the traffic to fly profitably to multiple cities in Europe, yet that was a significant demand among is loyal customer base, Emirates, by contrast, had sufficient demand to access a large number of destinations in Europe, but it did not have a loyal base of local customers in Australia. The new partnership gives Qantas access to many more destinations in Europe, and it gives Emirates access to an extremely loyal base of customers. Conclusion ‘The aire industry has long struggled with margins, but the current growth phase in most markets, coupled with evolving technology and customer preferences, offers a real opportunty. By adopting the measures described here, carriers can forge better relationships with customers, cut costs selectively, and improve their financial performance in a sustainable way — either alone or with the right set of partners. Authors by Baward Clayton ‘Andreas Hite kk ‘About us Contact us essental advantage. 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