AIRLINES | Pull Out of Your Dive

I’m a travel aficionado thanks to my parents–they opened my eyes to the benefits of travel when I was very young.  Since then I’ve embraced the motto | Getting there is half the fun!  This seemed to be true for most forms of travel, particularly airline travel.  That is until 4 key events happened  |

• 1978 Airline Deregulation Act
  • End of long-term airline profitability
• September 11 attacks of 2001
  • Initiation of the U.S. Transport Security Administration (TSA)
• Retirement of the Concorde in 2003
  • End of commercial supersonic flight
• COVID-19 pandemic of 2019
  • Exacerbation of ongoing air and service cleanliness issues

Each of these events accelerated the airline industry’s dive in customer service.

I know what you’re thinking:  it wasn’t all doom and gloom.

True.

• The price of coach airline travel plummeted.
• During the last five years, first-class service and seating has improved on airlines, particularly the ME3 (Emirates, Etihad, Qatar) as well as on Singapore.  Even Delta’s service has improved.

But, there’s a catch.

• The dive to the bottom of coach fares has required that airlines increase the lavishness for the few who can travel in first class in order to allow airlines to finally become significantly profitable during the last 5 years.
• Simultaneously, the comfort for the majority of passengers flying on an airline (coach) has substantially decreased due to the ongoing decline in seat pitch (legroom) and seat comfort.
• And then there are those added fees that plague many travelers flying in coach.

Profit

The fundamental driver of all these changes is profit.  Or the lack of long-term profit when it comes to airlines.

Inflation

Since 1975, inflation in the U.S. has increased the cost for major purchases by approximately 4% per year on average (mean).

Examples  |  Average (Mean)

• Vehicle  |  4.5%
• House  |  3.9%
• Household Income  |  3.8%
• Airline ticket (coach, refundable)  |  1.1%

See where this is going?

Had airline tickets kept pace with Household Income inflation, we’d be paying $838 for a non-stop coach class (roundtrip, refundable) from Los Angles to Chicago instead of today’s fare of $275 on Delta Airlines.

While that sounds like a fantastic bargain, it’s caused airlines and the aircraft industry to stop major innovations because funding is not available through ticket revenue.

Changes

What’s been happening is a shift in the way that people travel.

• Absolute Lowest Cost (ALC)  |  Switched to driving if the one-way distance is less than 500 miles (800 kilometers) or to flying on low-cost carriers if the distance is greater than 500 miles or requires travel over an ocean (Example | Southwest Airlines)
• Business travelers  |  Also driving or making do with products such as Delta Comfort+ types of seating which is essentially a coach class seat from 1975 in width and pitch (legroom).
• First Class  |  Those who can afford it are switching to chartering a jet aircraft.

 

Wait a minute!  |  I’m not driving 500 miles for a business trip.

Detroit to Nashville.

The distance between these two music capitals is 535 miles (860 kilometers) or between 7.5 and 8 hours (non-stop) of travel time in a car (depending on traffic).

I’ve made this trip by car many times over the last few years.

Why?

In order of importance  |

1. Just about any car is more comfortable than an airline’s coach seat.
2. I get to select who sits next to me.
3. I can eat great food in a restaurant.
4. I can bring as much luggage as I want at no additional cost.
5. The door-to-door travel times is only two hours longer than flying with an airline.
6. It cost less than half as much as a coach seat on an airline (58% savings).

Note  |

• With the exception of travel in a car, only a fraction of the door-to-door travel time (purple area in the Travel Time chart) is being expended on actual core travel between the destinations (Example  |  2 hours for Detroit to Nashville).  The majority is taken up by the process of getting to and from an airplane (Travel too and from the airports, check-in, TSA, etc).
• Safe First Class.  I’ll come back to this new strategy later in this article.

Note  |

• Cost is inclusive of all items required for travel by a particular mode.
  • Example  |  Travel by car includes the amortized cost of the vehicle purchase, insurance, and maintenance plus fuel.
• Ammotorization of fixed costs when applicable assumes a 20 year ownership period.
  • Example | vehicle purchase price
• As applicable to the mode of travel, four roundtrips per year are included.
• Had airlines inflated ticket prices at the same 4% average rate since 1975, the current $863 round trip for two people in coach should actually be valued at $3,174.
  • Note |  price includes all travel expenses including ticket, parking, and car rental at the destination)
• Safe First Class.  I’ll come back to this new strategy later in this article.

 

Recession  |  2000 Dot Com/Housing Bubble

From 2005 through 2007, Delta Airlines went through a protracted bankruptcy.  After emerging from bankruptcy it closed on its merger with Northwest Airlines on 2008 October 29.  All this was going on while the U.S. economy was continuing to recover from the 2000 recession.

Continuing with our series called Recession | A Good Time to Start or Expand Your Business? here’s how Delta’s stock performed after emerging from bankruptcy.

While Delta was already profitable in 2010 (Income before income taxes), it’s stock didn’t regain parity until the stock market had fully recovered during 2013 as measured by S&P 500 performance.  Although a short segment of Delta’s long history, the correlation between the airline industry and economic performance is high.

Travel is one of the first things cut when an economy turns to recession for both business and leisure customers.

Note  |

I’m using Delta Airlines as an example in this analysis since |

• They’re the best performing major airline of what’s called a traditional network carrier (legacy carrier) in the U.S.
• One of their largest hubs is in Detroit.
• They have a considerable amount of competition at their Detroit hub.

Should Delta have Merged with Northwest Airlines during a Recession?

Yes, with a caveat.

While they did almost everything identified in our Recession | A Good Time to Start or Expand a Business? article, they focused on a mid-term business strategy instead of a long-term, robust strategy.

 

Here’s what Delta and other businesses in the transportation industry should do.

 

New Business Strategy

We’re now in the COVID-19 recession and what’s needed for the airline industry is a complete rethink of their business model.

Business Strategy  |  Absolute Lowest Cost (ALC)

Clearly, there will always be a customer who is willing to trade cost for convenience as well as trade cost for taking on a certain amount of risk.  That’s their risk/reward metric and low-cost airlines have been profitably serving this market for decades.

Strategy  |  Short-term and Mid-term
Focus on travel greater than 500 miles (800 kilometers)

• Former passengers will continue to replace air travel by using teleconferencing or travel by personal car (less than 500 miles, 800 kilometers).
• Airlines should focus on city pairs greater than 500 miles (800 kilometers) in distance (the drive/fly breakeven point) or when travel requires flying over an ocean.  These airlines should make safety their highest priority.
  • Note  |  Passengers must be part of the active safety solution by following safety guidelines (PDF file).

Strategy  |  Long-term
The Flying Wing

• Efficiently increase the size of an aircraft by developing the flying wing into a commercial aircraft.
  • Benefits |
    • Flying wings are inherently more efficient from both seating and aerodynamic perspectives.  This would enable airlines to increase the number of passengers while retaining the 6-foot radius safety perimeter.  Price would decrease since more customers mean reduced per passenger costs.  Additional savings would result from aerodynamic efficiencies leading to a further price decrease.

Video | FlyingV (flying wing) by Delft University of Technology and KLM

Business Strategy  |  First Class/Price Insensitive

For busy business travelers, there has always been value in reducing travel time, increasing flexibility, and increasing privacy.  Now safety is the additional value:  Travelers are able to select their traveling companions.  With COVID-19, that value proposition moves higher up the decision ladder.

Strategy  |  Short-term
Charter aircraft

• Companies such as NetJets and Delta Private Jets/Wheels Up should redouble their efforts to land more business travelers as new clients.
  • Note | The drive/fly breakeven point could be shorter for this market segment.

Strategy  |  Mid-term
Private aircraft ownership and supersonic travel

• For mid-distance travel (500 miles to 2,000 miles, 800 kilometers to 3,200 kilometers), automated private aircraft ownership is an option.
  • The private aircraft industry is on the verge of a major revolution.  But, as a private pilot, I can attest to the fact that learning how to fly is currently a time-consuming and expensive endeavor.
  • Affordable aircraft for purchase or rent are primarily propeller-driven aircraft with cruise speeds in the 100 to 200 MPH range (160 to 320 KPH).  This seems fast, but when you add in pre-flight and post-flight activity, the door-to-door travel time isn’t much of an improvement when compared to travel in cars for distances less than 500 miles (800 kilometers).  And aircraft in this performance category usually don’t have the range or altitude capability to fly around or over bad weather.
  • There’s also the issue that most of these aircraft are flown by one pilot.  What happens if the pilot is incapacitated during a flight and none of the passengers are pilots?  This is a significant concern for those traveling in single-pilot aircraft.
  • The convergence of relatively inexpensive private jet aircraft with flight automation is the mid-term future of this aircraft industry segment.  Certification for fully autonomous flight and a reduction in acquisition and maintenance costs is all that stands in the way of an order of magnitude increase in aircraft sales.
    • Example  |  The Cirrus Vision Jet is a good example of an aircraft that’s nearly ready for fully autonomous flying while having the capabilities of cruising at over 300 MPH (480 KPH), significant usable range, and commercial jet altitudes.
• For long-distance travel (greater than 2,000 miles, 3,200 kilometers), business supersonic travel is what’s needed for this market segment.  Combining NASA’s X-59 aircraft frame program to reduce the supersonic boom of the Concorde so overland flights become feasible with new engine efficiency so an afterburner is not required as part of the engine (Supercruise) creates a much faster and lower-cost option to what was available with the Concorde.
  • Example  |  Mainstream aircraft companies are teaming up with innovative startups including the AS2 by Boeing/Aerion/GE

Video | AS2 future supersonic travel by Boeing/Aerion/GE

Strategy  |  Long-term
Hypersonic and supersonic meets autonomous point-to-point travel

• Cost-effective hypersonic travel for long distances (greater than 2,000 miles, 3,200 kilometers).
  • Example  |  SpaceX has proposed a version of their BFR space launch system as long-distance hypersonic travel that connects any two points in the world with a flight time of approximately 40 minutes, all for a ticket price in the range of current first-class.
• Supersonic travel for mid-distances (500 miles to 2,000 miles, 800 kilometers to 3,200 kilometers).
• Autonomous point-to-point ground and air travel (less than 500 miles, 800 kilometers).

Video | SpaceX BFR long-distance hypersonic travel (Starts at time mark 14:48)

Business Strategy  |  First Class/Price Sensitive

Here’s why this could be one of the most innovative and profitable market segments.

At the moment, all airlines are looking at COVID-19 as the end of an era–it is.  But what initially looks bad, could be turned into a positive new business.

Safe First Class

Note  |  Strategy Canvas

• The point of this graph is to examine the competition in areas that matter to customers.
• Then design a new product or service that differentiates your company from the rest.  The more the lines diverge from each other, the better.
• From there, choose who isn’t your customer.
• Then develop a business model from the characteristics of the remaining people and define that model as your ideal client.

 

Is it more expensive than regular first class?

 

Currently, yes.  Approximately twice the cost of a ticket today.  But half as much as a first-class ticket when adjusted for 4% inflation.

Here’s why it’s worth it

• Physical distancing, face masks, and eye protection to prevent person-to-person transmission of SARS-CoV-2 and COVID-19: a systematic review and meta-analysis, is a study by six doctors and scientists that was published on 2020 June 1 in The Lancet.  It indicates that distance is one of the critical ways to decrease infection.  While COVID-19 has been the ultimate wakeup call, we’ve almost been to this point with SARS and MERS.  And pandemics have a long history of hitching a ride on aircraft and ships (Example | Spanish Flu).
• Increased cleanliness.  The number of contact surfaces that are shared during a flight can also increase transmitted disease.  This can be reduced with Safe First Class.
• Reduced exposure time also decreases the chance of catching an airborne disease.  With the maximum speed of an airplane currently limited to less than Mach 1, Safe First Class can decrease total door-to-door exposure time.

 

Strategy  |  Short-term
Reduced Seat Count

• Seat count on an airplane must be significantly reduced to allow for a 6-foot radius perimeter around each traveler.
  • Example |  Delta’s Boeing 717-200 that’s used for flights between Detroit and Nashville has a current seat count of 112.  For this strategy, the seat count must be reduced to 20 with the subsequent cost of a first-class ticket increasing by a factor of two in order to generate the same revenue for the airline from ticket sales.
  • Benefits  |
    • Physical distancing
    • Fewer seats mean fewer contact surfaces to sanitize.
    • Fewer people traveling on an aircraft means faster loading and unloading which reduces total exposure time.
    • Space for larger and more comfortable seats.

Strategy  |  Mid-term
Add Mezzanine Seating

• Maintain a 6-foot radius but double seat count with a mezzanine level.
  • Benefits  |
    • More customers mean reduced per-passenger costs.

Strategy  |  Long-term
The Flying Wing

• Same as the long-term strategy for ALC passengers.

 

Key Takeaways  |  Pulling Out of the Dive

1. Services similar to Safe First Class has been done before.  Currently, La Compagnie (primarily New York to Paris) comes the closest and the airline’s aircraft could be quickly updated in accordance with the full Safe First Class strategy.  Since most airlines have the majority of their aircraft in storage, now is the time to experiment with this strategy in day-to-day operations.
2. Taking into account the historically low prices of airline travel, pricing for Safe First Class is very reasonable when accounting for normal annual inflation (4%) as opposed to the unsustainably low inflation rate for airline travel of 1.1%.
3. For those accustomed to the present low fare price structure, major technical steps forward should focus on the development of a B-2 bomber type of flying wing into a passenger aircraft.  The significant increase in passenger seating area using the same footprint of a present aircraft when coupled with inherent airframe efficiencies should significantly reduce the cost of the Safe First Class strategy to one affordable by people who presently fly in Coach+ seating.
   • Note |  The process of developing an airliner from a military aircraft has been done before.  For example, the 1963 U.S. Airforce’s CX-Heavy Logistics System aircraft competition was won by Lockheed with their C-5A Galaxy aircraft.  Boeing’s entry in the competition became the 747.
4. Long-term profitability for airlines is a must.  Since the 1978 U.S. deregulation, the airline industry has proven that long-term profitability will always be in question if pricing remains the number one driver of sales.

 

What Happens when COVID-19 is Cured?

We all hope for the day that there’s either a cure or vaccine for COVID-19.

But the premise of the Safe First Class strategy doesn’t revolve around a single type of virus.  It’s the acknowledgment by people and businesses that pandemics have been a part of our human history for a long time and will continue to be part of our future until some type of universal vaccine or cure is developed.  After all, a significant number of people die each year from the flu or common cold although a lot of time and money has already been spent trying to develop a vaccine or cure.

It’s time that businesses prepare for this fact of life with a robust strategy.  The purpose of using the airline industry as an example is to illustrate a formidable problem that requires a long-term solution.

 

Bottom Line  |

It’s time for the airline industry to pull out of its decades-long dive by raising fares and innovating in the areas of business and technology.