Revenge Travel and The Industry’s Flight Path to Recovery ✈️
Flying has always been a pain: the endless security check lines, the squeezing into a seat, the annoying neighbor, the ear-popping, the sodium-packed in-flight meals, the boredom.
But somehow what we thought was already so bad, got even worse after the pandemic. The new normal for air travel typically includes some variation of last-minute flight cancellations, overbooked seats, violent altercations over mask mandates, and loss of baggage. Despite the poor service, the industry is selling at some of the highest prices in aviation history.
If you searched for any flights this summer, you probably experienced some sticker shock. According to Canadian travel app Hopper, domestic airfare in North America is up 34% this summer compared to the same time in 2019, and international airfare is up an average of 2.5% compared to 2019. In Indonesia, OTA Pegipegi noted that June 2022 tickets for domestic and international flights in Indonesia were up 100% and over 500% respectively compared to 2019 numbers.
So why are flight prices taking off?
The spike in flight fares was primarily triggered by an imbalance of supply and demand for commercial flights. The loosening of restrictions skyrocketed people’s enthusiasm for travel or what has been termed “revenge travel” — both domestically and internationally. Eager travelers are no longer willing to delay their first trip since the pandemic, yet they face the challenge of limited aircraft schedules and finite seat as most airlines are not yet flying on the same frequency as they did pre-pandemic days. Airlines that used to fly 8 times are now only going 1 or 2 times. They fly fewer routes, operate less planes, and deal with staffing shortages following furloughs and stringent vaccine mandates. In addition to that, there is also rising costs ground handling, air navigation and traffic. Indonesia’s Ministry of Transportation also announced an adjustment to the Air Passenger Service (PJP2U) tariff or airport tax by 20-40%.
At the same time, these airlines companies view the recent economic upturn and the increase in travel demand as an opportunity to reap much higher margins to compensate for the losses and repay all the debts they amassed in the past 2 years. Throughout the Covid-19 lockdowns, the aviation industry was hanging by a thread—many airlines, those with weaker balance sheets, have already stumbled. By October 2020, around 43 airlines have filed for bankruptcies, including Thai Airways, Scandinavian airline SAS, Philippine Airlines, Norwegian Air. Many others had to borrow huge sums of money to stay afloat and cope with the high burn rates. Tapping into state-provided aid, credit lines, and bond issuances, the industry collectively amassed over $340 billion worth of debt in 2021, according to Bloomberg. British Airways owner IAG raised €2.75bn from shareholders and tapped corporate debt markets, including a £2bn state-backed loan. Lufthansa obtained a €9bn bailout from the German government. Several US airlines have even put up their frequent flyer programs as collateral to raise money. Repaying these loans have also become even harder by worsening credit ratings and higher financing costs.
Aviation Turbo Fuel Price 2021-2022: Soekarno Hatta Intl. Airport
Source: One Solution Pertamina
To top things off, there is also the rise in aviation fuel prices, which can account for as much as a third of airline costs. In Indonesia, Aviation fuel price saw a 77% increase YoY in July 2022, driven by the rise in crude oil prices and further worsen by the Russia-Ukraine crisis.
Trends in Today’s Flight Path to Recovery
Financial woes aside, the pandemic’s longer-term effects on aviation are emerging. Some of these are obvious: rapid offerings and adoption of mobile app services and stringent hygiene, safety standards across domestic and international flights. Other effects, though, are more profound. Some emerging trends and its compounding impact on the sector include:
Airline recovery will rely heavily on leisure travel and price-sensitivity will likely trigger a new wave of budget carriers
In event-triggered downturns of the past, such as 9/11 and the 2008 financial crisis, low-cost carriers had an advantage due to their lower operating costs. Today, they also have a revenue advantage because their primary market — leisure customers — are recovering much faster than the business travel market. In Indonesia, low-cost carrier Lion Air now dominates the country’s domestic market share with 43%, up 13%, followed by Batik with 16% market share. Meanwhile, Garuda Indonesia’s market share fell from its high 19% (2nd place) in 2019 to a mere 5% in 2022 (6th place).
Remote work and other flexible working arrangements have proven to be quite effective and reduced the frequency of corporate travel needs. As such, business travel will take much longer to recover and might never reach pre-pandemic levels. This serves as a major problem for full-service airlines that are highly dependent on business travelers—those high-yielding passengers who contribute to a significant chunk of their bottom-line. Although leisure passengers fill up most of the seats on flights and help cover a portion of fixed costs, their overall financial contributions in net marginal terms are often negligible, if not negative.
Consequently, some full-service airlines are now building their own low-cost carrier subsidiaries. British Airways also announced plans to launch a new low-cost short-haul entity dubbed BA Lite, along with ANA, which plans to launch its own budget carrier Air Japan for medium haul routes in late 2023 or early 2024, utilizing 787 aircraft configured in two classes. The availability of discounted preowned aircraft will also enable the proliferation of low-cost carriers from new entrants. In Indonesia, we saw the emergence of Super Air Jet, a low-cost carrier linked to Lion Air Group, in 2021 and the revival of state-owned Pelita Air, a subsidiary of PT Pertamina, in 2022.
Airlines may also look at reconfiguring their cabin layouts to address the increased share of leisure traffic. This might come in the form of business-class seats more suitable for traveling couples or groups or even reduction of the business-class seats. They can also start thinking about shifting in-flight products and services to better cater to leisure passengers.
Airlines will exhibit greater disparity of performance based on efforts and initiatives during lockdown and changes in pricing strategies are imminent
Some airlines have responded to the pandemic by restructuring for greater efficiency; others are scrambling to get by. Occasionally, this is linked to state-aid programs, which may reduce the incentive for much-needed measures such as cost, organizational, and operational restructuring. On the other hand, others are pulling ahead and implementing changes for long-term value creation—quickly adapting and operating assets on most profitable flying, while constantly adjusting route networks and capacity levels.
A group of airlines were busy locking in orders or leases for new aircraft in the peak of lockdowns when aircraft demands were low, and prices were slashed. This includes British Airways, which signed a letter of intent to buy 200 Boeing MAX planes in June 2020, followed by Ryanair with 75 MAX jets in December 2020. By inking deals on aircraft purchases or leases—which makes up 10-15% of their cost base—during the crisis, these airlines secured massive cost advantage. To further illustrate, the monthly lease rate of a 2016 vintage Boeing 777-300ER aircraft was around $1.2 million in 2019. In 2020, the rate fell to less than $800,000, saving airlines a third of the costs. At the same time, these early investments allow them to offer newer, more fuel-efficient facilities to passengers today.
Some airlines also thought of diversifying their line of businesses, such as Singapore Airlines, which took advantage of the robust demand for air cargo—initially driven by protective personal equipment (PPE) and medications, and later by challenges in the ocean-shipping supply chain and strong growth in e-commerce sales—to mitigate risks and offset losses. They increased their cargo capacity to make up for loss passenger seats by operating cargo charter flights using passenger aircraft and scheduling new routes specifically to fulfill cargo needs. Globally, air cargo yields rose by 40% YoY in 2020, and by an additional 15% last year. Load factors were also up significantly, by ten percentage points in 2021 compared to 2019.
Airlines are also stepping up their technological investments. Before the pandemic, airlines spent roughly 5% of their revenue on IT—this is a relatively low number compared to other sectors. By means of comparison, retail spends 6% and financial services 10%. Airlines are improving their revenue management systems to accommodate the now common crazy demand fluctuations and last-minute bookings we see today. They are also revamping their mobile apps to allow for a more seamless check-in and boarding processes, their in-flight digital entertainment devices, connections with distribution services, among many others. Beyond this, we are talking analytics, using data in smarter ways to predict customer preferences and behaviors and enhance decision making.
There will be fierce competition going forward. Airlines with new and improved aircrafts now have the upper hand and can leverage these assets to charge higher ticket prices. On the other hand, those with better fuel efficiency and technology adoption can profit from lower costs, and potentially pass it to customers with lower ticket prices in the future.
Flight prices will lower eventually as operations return to normal and demand stabilizes, but likely remain higher compared to pre-pandemic days
There is a predictable ebb and flow to the yearly cycle of travel in each given market. As they had in previous years, flight prices in most countries spiked in May and June of 2022 – a common pattern driven by the demand of summer holidays – and slowly began to come back down July onwards. With strong demand, airlines can charge higher fares, but the reverse is also true. With the workforce going back to the office and children coming back to school from the holidays, flight demands have slightly subsided and flight fares along with them. Rising inflation, market instability, geopolitical problems in Europe and Asia, and worries of an economic slowdown also continue to threaten the current euphoria of post-pandemic travel. A downturn in the labor market and a decline in consumer spending would eventually drive fares and airline revenue lower.
While today’s prices are still on the high side, great deals are still out there—just much harder to find. As such, price-sensitive travelers would be even more reliant on search engines and airfare prediction tools. We will likely see a strong come back from travel agents, both online and offline—most of which have been suffering miserably throughout the pandemic—if they can win back their market share through quality flight recommendations and attractive pricing models. Conventional offline agents are digitizing their sales channels and operations, while existing OTAs like Traveloka and Tiket.com are actively working with airlines to offer special pricing and benefits e.g., free lounge access and airport shuttle. The next horizon would likely be automated travel itinerary recommendation systems, specifically curated for each user depending on their budget and interests.
Airfare prediction products tools—built by companies like Google Flights, Skyscanner, and others—would need to further tweak their machine learning algorithms, which are trained on the arcane rules of airfare and reams of historical data, to accommodate today’s volatility and ensure customers with the best ticket price. Otherwise, their products might risk becoming obsolete.
The pandemic has taught us that nothing is certain, but travel is essential. The industry is going through a reset, and everyone is aiming for a greener, more efficient travel experience – this requires existing players to reinvent themselves and up their innovation game, while leaving ample room for collaboration with tech players to further transform the ecosystem.
OCBC NISP Ventura
July (Wk4) 2022 Newsletter