Investment & Innovation: The Travel Industry

PART 1: INTERVIEW WITH BILLY KYRIAKOPOULOS

 

During our third quarterly webinar, we invited Billy Kyriakopoulos, Director of Corporate Sales for Air Canada, to give us the industry view and speak on the strategies that the airline industry (and specifically Air Canada) is taking to ensure travellers will face a more tailored environment. The discussion was conducted by our strategy analyst, Fred Gatali. Below we have summarized some of the questions that were asked.

To watch the entire webinar, please click here.

Fred Gatali (FG): We’ll jump right in, as I’m sure many viewers are eager to get your view on a few topics. I’ll start off by asking….. Are you seeing any signs that things are starting to turn around and how has Air Canada adjusted to that?

Billy Kyriakopoulos (BK): For Air Canada, a lot of the efforts put in over the past 7-8 months ensured that we’d be on the right footing to serve our business travellers. We’ve been ensuring the whole experience is safe and put together policies that enable our business travellers to start the new way of travel moving forward. A lot of the focus has been on technology, on a touchless experience, and an enhanced offering, as people start returning to the skies.

FG: What has been some of the cost-benefit of these changes regarding the gains and losses in the past year?

BK: There have been some direct changes such as onboard services that have changed a lot, and even the lounge experience, which have been pulled back. The offering the last few months has improved in those services, to ensure that the experience is at least pre-COVID-like. We have pushed to ensure that there is flexibility, and [travellers] have a few more options.

FG: Were some of these technological changes a trend that was seen before COVID or are these very COVID specific measures?

BK: A lot of the innovation that existed pre-COVID had to do with providing the traveller a seamless experience, so it has been worked on for a few years. This period of COVID gave us another layer where we added additional opportunities to implement new measures, such as the entrance to the lounge where you no longer need to go to the agent but go in through our technology, and even be able to pre-order meals. Those items have been in the works for some time and this crisis, like others, provides an opportunity to spur innovation.

FG: Delving into the recent government loan to Air Canada of $5.9 billion to Air Canada, how does it affect the operational standpoint of Canada? And how does that translate to the Air Canada traveller?

BK: The loan is more of an ability to access those funds, which Air Canada has not done so, and might not, due to its currently strong balance sheet. This gives us greater flexibility. What it did was give us an opportunity to work closely with the government which had taken some time. We are in a much better position to work on a roadmap on how the travel business emerges out of the pandemic. On the point of the refunds, in many cases, we make use of goodwill policies that exist. It has helped everybody feel that there is a defined step of where we’re going moving out of this, as businesses will certainly come back.

FG: What does the roadmap look like now between Air Canada accessing new markets and Air Canada going back into markets that were reduced because of the pandemic?

BK: Certainly, some routes will come back as early as June domestically and some more internationally. We are really constrained by government restrictions now. You will continue to see Air Canada come back to many of these markets and fly to more markets. We have seen increased demand for travellers visiting relatives and friends, many being markets that were not seen in the past. In the next six to twelve months, you will also see us work more with our joint venture partners like United and Lufthansa. In many cases, what was once a non-stop will likely be a connection through a Frankfurt or Chicago in the short term, as we finally get to a place where there is a more consistent approach to travel and we are able to expand to our full network.

Please follow this link for the full 25-minute discussion (first half of the video).

 

PART 2: FINANCE & INNOVATION

 

The Year in Review

In 2020, airline revenues totalled $328 billion, around 40 percent of the revenue seen in 2019. To compare these revenues, they had not been seen since 2000. The sector is expected to be smaller for years to come; at current projections, traffic won’t return to 2019 levels before 2024.

There was also a 64% reduction in passenger volume compared to 2019, helped by some recovery of domestic travellers through low COVID rate months.

 

Changes in Operations

Airlines are making changes to operations to accommodate new travel patterns that have emerged because of COVID-19. For example, there might need to be a more thorough look at the price points between non-stop flight pricing, and flights that have a connection. Previously, travellers who were time-constrained such as business travellers were more prone to value time over price. With the longer uptake of business travellers expected, non-stop flight pricing might need to be reconsidered to match the leisure travellers who might be more price-conscious and choose more indirect routes. The result of this consideration should lead to a gap reduction between non-stop flight pricing and connect pricing.

With leisure travellers projected to hit the ground running first, airlines will have to accommodate a larger share of leisure travellers. This may mean a larger economy and premium economy class and a reduced business-class cabin.

Additionally, to economize and efficiently manage their fleets of planes, airlines will favour their bigger planes which will travel less frequently to certain destinations but ensure that the flights are full.

 

The Surge of Debt Levels

Cash burn is a useful metric in monitoring a company’s liquidity needs. The chart above shows the average daily cash burn for some of the biggest North American airlines in 2020. During the past year, many airlines have needed to borrow large sums of money to cope with the high daily cash burn inherent to the industry. This borrowing has come in the form of government loans, bond issuances and credit lines. According to IATA, the industry accumulated over $180 billion worth of debt in 2020, which is equivalent to over half of 2020 total annual revenues.

 


Source: McKinsey, IATA

The industry is expected to continue taking on large sums of debt which will take many more years to repay. This will be further exacerbated through a snowball effect that may see airlines’ credit ratings decline and higher costs of debt. The chart above looks at the projected increase of debt over the next 3 years, in comparison to pre-covid 2019 levels.

The high debt will mean that the traveller may need to incur costs in the former of higher ticket prices in the medium to long term.

Airlines that slow down on longer-term projects to concentrate on being cash positive in the shorter term will have access to a wider flow of funds as time goes on.

Airlines will also have to continue finding more ways to streamline their services and decrease operational costs whilst remaining competitive. Important metrics such as revenue passenger kilometers (RPKs) and cost per available seat kilometer will have to be closely monitored.

With costs of debt rising and limitations to borrowing, airlines may look to the public market to finance their activities through the issuance of shares. Airlines that can better manage their debt levels will have an advantage in attracting new investors.

 

Mergers and Acquisitions: Crisis opportunity?

Given the large losses by airlines in 2020, industry consolidation for the purposes of survival was expected. However, the industry-wide decrease in bookings did not leave any company unscathed. Buyers had decreased cash flow which limited their deal flow capacity, and companies that were being bought were no longer attractive prospects (lower revenues, low cash flow, and high debt). As a result, we assume that deals such as the Air Canada – Transat deals could not go through, in addition to regulatory hurdles.

Our projections point to a more concentrated effort in mergers of smaller airlines, especially those that have increase routes in the past year. In Canada, those are PAL Airlines, Flare, and Porter; the US counterparts would be JetBlue, Alaska Air, and Spirit.

However, a delayed consolidation would mean more manageable prices for domestic travellers due to sustained competition, which would be a benefit.

 

Tech Integration in the Travel Journey

As you go back into your travel journey, there are some changes you may notice right away, such as the use of:

  • Biometrics facial recognition
  • No-touch eGates
  • Touchless Bag Drops

Airports and airlines are gearing up to decrease the transit period during travel, by targeting time spent in line and passing through immigration and airports.

The trend of digitization of airports and airlines was underway before COVID-19 but has been accelerated due to the nature of the virus.

An efficient way to digitize the travel journey has been through the use of big data and the internet of things (IoT). Big data can allow passenger tracking for crowd control in airports as an example. Furthermore, the use of data through sources such as mobility trends via satellite imagery and maps, consumer sentiment videos, competitor web and app analytics, and financial analytics are all new avenues of data gold that airlines and airports have recently considered.

For the traveller, this will mean more accurate real-time pricing models that will fairly adjust due to demand. Increased use of data for innovation will also mean consumer choices will be reflected much quicker in the decision-making process of airlines.

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