A380 dilemma, continue or retire

Marked out as “wrong plane at wrong time” Airbus A380 is great guzzler of air-fuel, almost 3 times that of Boeing 777. As carbon neutrality becomes vogue in the future continuing or retiring A380 becomes crucial decision making in airline industry. An overhaul of airline fleet is now a nagging issue in airline business strategy:

By 2019 Airbus Company had enough of headaches and decided to cease the A380 programme. A two year interim period was fixed to finalize outstanding orders. The last one from the production line had its test flight in May 2021. The Company guaranteed that it would continue to service airlines that have bought A380 till end 2035 for maintenance contracts and supply of parts.

Writing for Simple Flying Jake Hardiman says: “One aspect in which the A380 excels is in what it offers in terms of passenger experience. This is one of the reasons that (Airbus CEO Guillaume) Faury is confident of it remaining an important aircraft despite its production having concluded. He stated that: It will probably remain the aircraft of choice for many, many passengers, because it is, indeed, a fantastic flight experience.” (Here). But the looming question cannot be wished away; that is whether airlines would continue to operate the plane till that date or retire or phase-out this super jumbo.

Most air travellers who used to fly in A380 had good word for the plane in terms of flight experience. Significantly, this spacious plane had many things to offer including wider leg space for passengers and facilities that are unique such as bar, lounge facility and in some cases luxurious suites.

On the negative side operators had to grapple with issues like fuel efficiency in times when the fuel prices are moving northward. More than that, A380 was notorious for emitting pollution that received opprobrium from environmental buffs. Their line of attack focussed on the failure of airlines to incorporate concept of “green line” with least pollution generated, if any.

Unexpected bolt from the Pandemic opened can of worms. Air travel whittled down to almost zero. The heart of the matter is when pandemic would be officially declared over by the WHO. Already air travel is not a predictable stuff and pandemic made it much dicier.

Although A380 is an engineering marvel it is operationally a colossal failure. Breakeven load factor for A380 is steeply above other jumbos. Getting the required seats to be filled specially in the first & business classes remained a tall order for airlines operating A380.

Understandably, there is no appetite for leasing or buying used planes when it comes to this super jumbo within the narrow window of time of 15 years of continued maintenance guaranteed by Airbus Company. The sad demise of this plane is now almost certain as airlines presently using A380 are phasing out or planning to retire these in the next few years. Air France & Lufthansa had already bid farewell. British airways has temporarily grounded it. China Airline & Air Nippon expressed reservation of its continued use. Singapore Airlines is planning to retire these.

Surprisingly, Emirates look at this issue differently. In fact the last plane produced and test flown by Airbus Company is to be despatched to Emirates. In airline business strategy, Emirates is no stranger for creating controversy or expressing contrarian thinking. My take is they have something up in their sleeves. Expect big surprise springing from Emirates!

 

Cheers!

 

Muthu Ashraff 

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist

 

Airline business manoeuvre, adjusting demand to supply

Seasonality on one side and hyper competitiveness on the other, any business manoeuvre that brings success to airline industry should be praiseworthy. Most airlines have in their operational manual action steps outlined to face one type or other situations relating to demand-supply dynamics. Adjusting demand to fit supply is one such scenario. 

Beginning with, airlines use different seating system consisting of three forms of configuration:

Four class:  First class, Business class, Premium economy & Economy

Three class: First class, Business class & Economy

Two class: Business class & Economy

Unlike the first class that is refurbished with mostly permanent features, other classes render themselves to be expandable and contractible in terms of passenger seats. It is the dictum in airlines that instead of flying standard seating arrangements for the entire flight duration adjust the demand to fit different classes that fall vacant in a given flight. Two limbs are interwoven here

Firstly, mean seating arrangement dictates the number of passengers expected for each class and accommodation be made accordingly. Here the airline depends on the past information collected and collated during the last couple of years broken down into seasons such as spring, summer, fall and winter or in terms of days of the week or in terms global events like Olympics or in terms of destinations that attract business travellers or pleasure travellers as the case may be.

Secondly, maximum seating capacity cannot be increased as per air travel regulations. So for example, when the economy class is full demand for it must be adjusted by treating the excess travellers as if they have selected business class and the fare would be increased just below the usual fare applicable to business class travel. What actually happens is the demand for economy is trimmed and the rate of occupation of business class is being jacked up. 

If this method is not feasible in the case of overwhelming demand across the classes, airlines are placed in a dilemma. One way out is to increase the price beyond at a point, say, 80% of the seats are already booked and confirmed. This may have negative effect over the customer pricing policy. Second way of exit is to transfer the passengers to other airlines who are members of same alliance to which the affected airline belongs. The caveat is the other airline must service the same departure & arrival except for the time schedules.

If none of these options are available, airlines staff must persuade prospective travellers to amend their flying schedule to be accommodated in the next flight. In case successive flights are also fully booked sales staff must quietly get the prospective travellers to agree to a near future date when demand could slacken marginally.

None of these manoeuvres however, work in case where the traveller is determined to stick to his travel itinerary. Most business travellers would not stomach this kind of stuff anyway. Hence, trying to help them to travel even by using competitor airline would be a kind measure. This leaves a sense of appreciation in the mind of business travellers, who would come again to the airlines that helped them out. This business manoeuvre balances two aspects. Airline loses cash-flow but at the same time its goodwill is never lost! 

 

Cheers!

Muthu Ashraff

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist

 

Airline business manoeuvre, adjusting supply to demand

Airline industry functions in most competitive and seasonal ambience. Every airlines have approved operating manual regarding business manoeuvre that must be applied to adjust supply to demand during slump times when travel is on low side. More of an art than science successful airlines are adept in choosing the right business manoeuvre.

Statistics for the year of 2019, the last one before pandemic struck, indicates few pertinent points. US Airlines had on average 85% seats filled in a typical flight. This is slightly edged over the global percentage of 83. But budget airlines did well in filling seats. For example Ryanair recorded close upon 96%. Come post pandemic the chance of getting high quartile figure in terms of seats filled is not feasible. Hence adjusting supply to demand as business manoeuvre is recommend strongly for full service airlines.

Predicting exact demand schedule is not within the scope by even prestigious airlines like Emirates and Lufthansa. Computer aided programmes can do wee bit. But many airlines depend on the raw power of marketing and the image that was built over the period of time as a reliable and convenient one to fly with. The underlying philosophy is to get the most seats filled as an airline takes over for a single destination journey.

Plainly speaking, regulating supply is sine quo non in times of low demand or during the initial period of post pandemic traffic. Possibly demand is expected to fluctuate in terms of time, destination and the type of travel.

1. Time: Indeed time is in essence. Provably, travellers would prefer to travel during the times pandemic is slowing down and the duration of such slowdown lasts. Recently, Thailand which relaxed air travel regulations for vaccinated tourists had to roll back the reforms and introduced additional quarantine measures. Arising from this incident airlines must be ready to change flight schedules taking into count of the latest situation prevailing in and around destinations

2. Destination: It is doubly important as recent experience suggests that lockdowns could be announced with least notice. Major travel destinations such as Dubai, Hong Kong, Singapore & Bangkok in the Asian region must be under constant scrutiny of airlines as much of business and pleasure tours are oriented towards these destinations

3. Class configuration: Most airlines have a common three tiered system of first class, business and economy. At times of slumping demand, economy class travellers would be willing to travel more as they can manage the risk. Business class ranks next in terms of demand because business travellers have no option other than using an available flight to reach their desired destinations.

Evidently, first class travellers are few and far between. In this scenario, airlines must be able to adjust seats allocated to each class in order to optimize occupation of seats across the three classes. This must be done carefully without compromising upon the in-service quality earmarked for each class. Moreover,   the prestige of the airline must be preserved at any cost!

 

Cheers!

 

Muthu Ashraff 

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist

 

Malaysia Airlines, can government let go of its hold?

High profile disappearance of MH 370 in March, 2014 and shooting down of MH 17 over Ukraine in July, 2014 were twin disasters that shook Malaysian Airlines at its core. Since then the airline is bumping from one crisis to another. Can Malaysian government being the solo owner let go of the airline to another party? Here are my thoughts… 

The total operational loss amounting to MYR 15 Billion (about US$ 3.7 billion) is an albatross the carrier, tagged with IATA code name MH, carries forever. For more than one occasion MH was given life support. Yet it did not recover from habitual loss making. Instead of allowing the Malaysian Airlines Berhad (MAB) who owns the airline to go bankrupt creditors were forthcoming in the last ditch effort to rehabilitate so much so, in January 2021 they got approval from the courts to proceed with. 

The restructuring plan envisages a turnaround of short term profitability with long term sustainability. The solo shareholder of the MAB, Malaysian Sovereign Wealth Fund, Khazanah Nasional Berhad (Khazanah) immediately announced the injection of MYR 3. 6 Billion (US$ 800 million) as emergency funding in addition to creditors forgiving part of the debt. But can this solve the chronic problems faced by MH for quite some time now? 

Troubles were spotted by 2000 in the airline. Corruption, mismanagement, favouritism in grating employment on political grounds were rampant. Overcapacity was another ill as purchasing planes was not aligned with the demand factor. Covid–19 also had its toll. Last quarter of 2020 was a case in point which made the break-even load factor climbing steadily towards almost 100% making the entire operation of the airline untenable.

The government is placed on an unenviable position. It has twin responsibilities. One is to continue the national carrier as pride of Malaysia.  Secondly, ushering in connectivity of both domestic and international travel with the people in order to ensure supply line dynamics is paramount.

In the final analysis it is the geoeconomics compulsions that force Khazanah to hold on as sole shareholder despite the fact there is investor appetite to buy into this national venture. Recent offer by Air France – KLM duo to buy 49% stake is a case in point indicating that MH stands probable chance of getting  on to its feet. No government can be seen as weak in the geoeconomics chess board. Two factors support the position why Khazanah business strategy compels it to hang on with MH. 

1. In case MH folds up Khazanah appears to give entire air travel on the plate to Air Asia, the budget airline that is already making inroads towards MH market share in domestic travel.  Given full control over both domestic & international air travel market to Air Asia is counterproductive towards the goals & objectives of the government in terms of safeguarding national interest & sovereignty of Malaysia as nation. 

2. Primary duty of the government is to foster national development and to ensure continuous growth of both private business & national enterprise. Cannibalising one for the benefit of other would upset the equilibrium. Moreover, it would impede the progress Malaysia had so far in balancing risk & opportunity and supply & demand dynamics over geoeconomics parameters!

 

Cheers! 

 

Muthu Ashraff

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist