The Covid-19 Crisis is an Opportunity to Enter New Markets!
During the IATA’s Summer season 2020, in an aviation market plagued by lock-down and travel restrictions, more than 25 new routes were launched each and every day. It represents a significant drop versus 2019, however who would have expected in the midst of the Covid-19 pandemic that some airlines decided to launch a new destination?
Looking at Predictive Mobility’s Aviation Market Database, we have identified three key strategic objectives that these airlines want to achieve, and we will further suggest a practical analytical grid to implement on your flight network.
The initial objective airlines wanted to achieve by starting a new route was to operate on a monopolistic destination. With the yield dropping on their trunk routes, made to both stimulate the demand and match their competitors’ pricing, the challenge was to limit the losses by finding niche markets with no or limited competition. Even if the weekly operations were limited, the focus was on the net margin each passenger would bring to the company. When, according to IATA, in 2020 airlines would be losing an average of USD 66 per passenger boarded, finding a high yield route generating a positive contribution to the balance sheet of the company was of paramount importance.
The second underlying reason for launching a new destination is more structural, and was somewhat already implemented by some airlines, especially the low-cost carriers (LCCs). It is called network agility. Focusing on the bi-seasonal flight schedule, Summer and Winter, with few adjustments, is something from the past. The “new normal” is to work on your route network not twice but rather 4 to 5 times a year, with more differentiation of your schedule during an IATA’s season. The rational is both to help fight the lower yield trend by looking at pockets of revenue opportunities during the peak summer or around some key vacations, and to respond more quickly to underperforming markets. LCCs are very agile and ditch routes that do not perform after 2 months, and look for new replacements, rather than carrying the burden of a dead market over a full IATA season.
Another development that will also mark the way companies will work on their network is the destinations portfolio concept. Airlines are focusing in segmenting their destination around some key categories such as pure leisure sea and sun, diaspora, business regional, etc. During, and as an exit of, the pandemic crisis, the objective was to focus not only on the most resilient typologies of clientele but also to have destinations with a positive price elasticity of demand, being able to fill up the seats despite a limited sale period. For example, in Europe, a regional subsidiary of Lufthansa Group, Air Dolomiti, flew 1 million more seats during the summer 2020 against last year to serve the high yield regional business market in Germany and Europe. Similarly, the low-cost carriers were prompt to start multiple new summer holiday routes to meet the demand of frustrated lock-downed urban residents wanting to see a brighter horizon after weeks stuck in their neighborhood!
To embrace these three perspectives that will remain in the future and should constitute the base of your strategic actions, your first objective should be to implement and segment your current destinations on a yield and load factor matrix. The low-yield high-volume routes and high-yield low-volume destinations are the most important one from a route development perspective. Why? Because these are the markets which are the most dynamic, and if effectively managed should drive a positive net margin, with the medium-term objective to become your high-yield high-traffic destination. But to be in this position, it means focusing on your margin, being agile on your network, and have a portfolio strategy. This will be the way you will turn the Covid-19 crisis as an opportunity to enter new markets and rapidly reconstitute your cash flow position, and ultimately get your company balance sheet back in the black!
Christophe Ritter,
Managing Partner Predictive Mobility
