Airlines on the upswing, but pilot shortage and slump in earnings loom

With a value-added share of around one percent of global GDP and an annual market volume of more than 800 billion US dollars, aviation is a key driver of international trade and tourism, which historically accounts for more than 5 percent of economic output in Austria. Following the pandemic-related slump in air travel, spending on air travel is approaching pre-pandemic levels again, reaching 0.8% of global GDP in 2023 (compared to around 1% before Covid). Demand has recovered significantly, particularly for vacation travel, which rose sharply in 2021 and 2022.

According to the new Kearney aviation study of 35 major airlines, global available seat kilometers (ASK) rose to 95% of the pre-pandemic level in 2023. Low-cost carriers (LCCs) in particular benefited significantly more from this than legacy carriers (such as Lufthansa, Austrian or KLM). "In Europe, the recovery was uneven, with LCCs such as Wizz Air and Ryanair rapidly expanding their ASK after the pandemic. In contrast, traditional airlines such as Lufthansa, Swiss, Austrian and Air France/KLM had and still have greater difficulties in regaining their pre-pandemic status," says Philipp Bensel, Partner at Kearney. In 2023, Swiss Airlines is slightly behind the pre-pandemic production of 2019 with 13 %. The competition, such as Air France/KLM and British Airways, recorded a decline of around 10 %. In contrast, low-cost airlines such as Wizz Air recorded an increase in available seat kilometers (ASK) of over 17 % compared to 2019.

The 5 key factors in the aviation industry

Kearney's aviation experts have identified several key factors that will have a significant impact on the renewed increase in supply in the various regions:

Purchasing power: Business travel is only recovering slowly. New guidelines, which recommend or in some cases even prescribe train travel instead of flights, and changes in business practices such as the increase in online meetings, are having an impact on shorter distances in particular. However, a slowdown is also expected in the tourism segment in the medium term. This and customers' decreasing willingness to pay will ultimately lead to prices falling.

Crew on board: There is currently still a shortage of crew members - especially pilots and flight attendants. Some lost their jobs during the pandemic and do not want to return. According to estimates, there could be a shortage of almost 80,000 pilots in global aviation by 2032. However, training new staff is time-consuming and the availability of training pilots and operating capacity is limited. LCCs, on the other hand, especially in the USA, have recovered better as they have had to make fewer redundancies. As a result, traditional airlines are now actively recruiting pilots from LCCs and offering higher salaries. However, these are likely to rise further due to hard-won wage settlements. For example, the salaries of Austrian's cabin crew will increase by an average of around 20% by 2026.

Airport staff: In 2022 and 2023, many European airports had difficulties coping with traffic peaks, particularly during the summer season and vacation periods, due to a lack of staff. This in turn forced airlines to reduce their flight frequencies in order to cushion potential delays. One of the notable exceptions was Madrid Airport, which was able to maintain its workforce during the pandemic thanks to government support. The rapid increase in operations there therefore went smoothly and also contributed to Iberia's effective recovery.

Maintenance staff: In both the USA and Europe, redundancies, early retirement schemes and reduced training measures during the pandemic have led to shortages of maintenance staff, resulting in increased maintenance backlogs and longer aircraft turnaround times. This is exacerbated by the increasingly ageing fleet of many airlines, particularly in Europe, as the aircraft ordered are not arriving as planned.

Aircraft manufacturer backlog: Reduced orders due to the economic situation and production losses during the Covid pandemic, as well as the rapid growth in demand after it ended, have led to delays in the delivery of new aircraft, which is hampering airlines' capacity to meet rising passenger demand and retire old aircraft. Global aircraft orders rose to an unprecedented 16,000 per year by the end of 2023 - a new high, exceeding the previous peak by over 800 aircraft. In their plans for 2023, manufacturers assumed a regeneration rate of only 80 percent and are now unable to keep up with the rapid pace.

In order to cope with the increasing demand for long-haul flights, airlines are putting aircraft that have already been decommissioned back into service, extending leasing contracts, optimizing their fleets and negotiating delivery deadlines with manufacturers. Lufthansa, for example, has reactivated its previously decommissioned Airbus A380 fleet at considerable expense. However, the new aircraft are still urgently needed by the airlines, as they consume less fuel, thus contributing to climate targets and should boost ticket sales with their more modern equipment. There are some initial rays of hope, as the delivery of the first B787 at Austrian in May shows.

Strategies for the future

How can airlines define a consistent overall strategy in this mixed situation between rising costs due to ramp-up problems and falling revenues, and where can they find innovative solutions that strengthen resilience and enable sustainable growth? Kearney sees the following potential for the industry:

• Exploring alternative strategies for aircraft procurement:

Alternative strategies are needed to overcome the shortage of new aircraft. Economically viable maintenance checks will sustainably extend the service life of existing aircraft. In addition, the balance between agility and the cost of upgrading aircraft is key. In addition, increasing the productivity of the current fleet or strategic agreements with wet lease companies can also be effective approaches to increase availability, but also to reduce costs or make them more flexible.

• Increase in crew productivity:

An increase in crew productivity and the associated cost reduction potential can be achieved through improved data transparency, adapted control processes and the initiation of new tools for process automation and optimization. In addition, unfavorable long-term working arrangements must be identified and renegotiated.

• Introduction of scenario-based planning:

Scenario-based planning helps to better predict and manage future uncertainties and potential bottlenecks. In addition to revenue planning that takes account of changing demand, this ideally also includes fleet planning that takes into account the limited availability of new aircraft and - last but not least - personnel planning that focuses on critical areas such as airline and airport ground staff and is more strongly oriented towards seasonal fluctuations.

All strategies will make a decisive contribution to cushioning cost increases and thus continuing to be able to offer affordable ticket prices for customers.

Source: www.kearney.ch