By Andrew Tipping, Strategy& US Transportation Practice Lead; and Jonathan Kletzel, PwC US Transportation and Logistics Leader
Last year, the airline industry had an average profit of $6 per passenger – and that was a very good year. Even now, with the extremely low price of fuel, airlines are working with slim profit margins, so the suggestions raised within are still critical for their consideration. Regulation controls consolidation as well as routes and airlines have to contend with many different types of schedule disruptions. And yet, the industry has seen falling prices for decades. So what can airlines do? They will have to focus simultaneously on cost reduction by increasing productivity and revenue growth through better customer interactions, according to our recent perspective on 2015 aviation trends.
Both of these avenues are challenging. While customers have come to expect better products and services, flying can leave many dissatisfied. One problem is the expense of upgrading aircraft; and fares do not compensate for the cost, except in some special situations where the airline and route can command significant profits for super premium options. So, airlines have to look for other ways to please their customers. While this is cheaper, it’s often more difficult to implement.
In terms of reducing costs, airlines need to invest upfront to improve their operations. Legacy airlines, in particular, have built up costs over the years, making them more expensive to run than low-cost carriers (LCCs) – and less profitable. The success of the LCCs is in no small part due to their competitive fares. And now, both legacy airlines and LCCs are forced to compete with carriers based in the Middle East, which fly new, economical aircraft, have lower costs, and a very advantageous location for international flights.
So how can airlines achieve both better service and more profits? Below are some suggestions from our industry perspective:
Get to know your customers better. There are two parts to this: technology and good service. Carriers need to invest in advanced customer analytics to help better use customer data to deliver personalized service and targeted offerings. Also, airlines need to instill a customer service mentality into their business, so that each interaction between the customer and an airline representative meets or exceeds customer expectations. In other words, customers need to think that airlines care about them.
Use new technologies to reduce operating costs. Sophisticated digital technologies can help improve utilization, reduce downtime, and lower operating costs. A good example is an engine with sensors. Sensors can relay issues to a ground crew while an aircraft is still in the air, so that the crew can prepare to fix the issue as soon as the plane lands.
Cut expenses wisely. In reducing expenses, airlines must determine not only how far to cut, but also where to cut. It’s critical that any cost-cutting take place in areas that do not affect safety, reputation, branding, or customer value.
Collaborate strategically. With regulation limiting much consolidation, airlines need to seek alliances that can complement their own routes. While most existing alliances allow broad route-sharing, the routes are not chosen strategically. For example, airlines should consider alliances that expand routes to serve loyal passengers, but for which there is not enough demand to profitably create scheduled flights.
The airline industry is at a major crossroads. Although margins are still narrow, airlines are growing in most markets and technology is providing additional avenues to profitability. This is the time to consider measures – to cement customer relationships, manage costs, create strategic alliances, and improve financial performance – that will enable a sustainable future.