Airline response to COVID-19

The year 2020 was unprecedented in aviation history. Never before has the airline industry seen such a dramatic and sustained reduction in demand. According to Airlines for America, as of Jan. 5, 2021, U.S. air passenger volumes and airline departures were down 52% and 37%, respectively, compared to pre-pandemic levels, and domestic load factors averaged 61% compared to 85% in the previous year [1].

Airlines responded to the COVID-19 crisis by quickly developing new business processes and operations research (O.R.) models. Longer term, airlines are also seeing a shift in their O.R. development priorities and unique opportunities to conduct research.

Perhaps the most visible responses to COVID-19 – at least from the perspective of the traveling public – have been the modified boarding and de-boarding processes, reduced-contact/contactless in-flight service, mandatory mask requirements and blocking the middle seats on planes. The blocking of seats in particular has been somewhat controversial given the ongoing debate about the true risk of transmission during a flight and the impact that reduced seating capacity can have on airline profitability. While most airlines initially blocked middle seats, Delta is the only U.S. airline that continues to do so [2]. Further, on select routes where customer demand is high, Delta actively looks for opportunities to upgrade to larger aircraft or add more flights to provide additional space on board [3]. This desire to provide additional space and thus lower load factors places additional pressure on revenue management systems to more accurately predict demand and increase yield.

Sander Stomph, vice president at KLM, notes that at the beginning of the pandemic, airlines had to reinvent how they looked at bookings and revenue management, as the previous booking curves were no longer relevant and the training data used for machine learning algorithms were no longer valid [4]. Many airlines initially reverted to a manual process for forecasting demand or began incorporating shopping data, and are currently “exploring new ways to shorten the historical period used in forecasting, pick up on trends more quickly, and incorporate demand adjustments made by human revenue management users” [5, 6]. Richard Cleaz-Savoyen, director of revenue optimization at Air Canada, notes that as airline demand has been returning, they have developed a process to help decide when to transition from manual forecasts back to historical data for their no-show forecasts – a process that relies on ensuring forecasts based on historical data are consistent and stable. Air Canada is planning to use a similar approach to help them decide, on a market-by-market basis, when to transition back to historical data for their demand forecasts [7]. 

Airline Changes Post-pandemic

The focus on recovery post-COVID-19 significantly impacts revenue management development priorities. Air passenger demand today is fundamentally different than it was before the pandemic. The booking horizon has decreased to around 10 days and nearly all tickets are refundable [8]. Consequently, the demand mix has changed and leisure travel has become more prevalent than business travel. In this environment, the role of revenue management is changing. As Peter Belobaba at MIT explains, “revenue management has always been traditionally one of managing demand when demand is very high and optimizing to protect seats… but that’s not what the world looks like anymore…. Even with low demands you have demand that is selling down or buying down, and estimation of elasticity becomes much more important” [6]. As a result of these new changes many airlines including Air Canada, United and Qatar indicated they were placing a greater emphasis on dynamic pricing and continuous pricing [5]. In part, this shift in development priorities is driven by the belief that post-COVID-19, business travel will take longer to recover and the passenger mix will have a large proportion of leisure travelers and those visiting friends and relatives (VFR). New O.R. models will be needed to account for a post-COVID-19 environment in which flexible and refundable tickets become the norm.

Operations. With regard to airline operations, COVID-19 has precipitated many changes and innovations. For example, Tim Niznik, director of analytics in the Integrated Operations Control Center for American Airlines, describes a flight cancellation model his group developed at the beginning of the pandemic that incorporated several new dimensions: The model did not leave crews overnight in COVID-19 hotspots, reaccommodated passengers on other flights while adhering to social distancing load factors, accounted for abnormally high no-show rates, and distributed excess idle aircraft in stations that could accommodate the aircraft while facilitating their short-term, intermediate and long-term storage [9].

Sanitation. Separately, there have been significant innovations in the way aircraft are cleaned. In the passenger cabin, JetBlue was first to pilot the ultraviolet (UV) cabin cleaning systems produced by Honeywell International Inc. in partnership with Dimer [10]. In the cockpit, United Airlines has begun cleaning its flight decks using handheld ultraviolet C (UVC) lighting technology made by the American Ultraviolet company of Lebanon, Ind. [11]. The new cleaning protocol was developed by the Cleveland Clinic, and other companies, such as Texas Air Industries, are proposing to leverage their ozone building cleaning technology for aircraft [12]. Looking ahead, many airlines see a need to permanently incorporate aircraft sanitation procedures into turn times at the gates without impacting aircraft utilization.

Air travel. COVID-19 also created an unprecedented situation in which we are currently operating aircraft in uncongested skies. Consequently, as Tim Niznik points out, as airlines ramp back up operations, they will have an unprecedented opportunity to learn when exactly delays start occurring and determine the most effective ways to manage congestion [9]. Separately, there is much speculation that air travelers will soon have to provide evidence that they have been vaccinated and are free of COVID-19 via a “health passport.” Such a process will require additional infrastructure to enable secure storage and transfer of the necessary information between the entities (airlines and government) who will require access to the information in a passenger’s health passport to determine whether they should be allowed to travel and/or enter a specific country, and could also raise ethical issues.

Scheduling. Before the pandemic, flight schedules were fairly stable. Today, however, many airlines have a lot more capacity in their schedules than they will actually fly. As Eric Ruhlin, managing director of revenue decision support at United Airlines explains, the challenge today is “figuring out what the demand is really going to be, keeping your schedule out there until you decide how many flights you’re actually going to be able to fly, and then reducing the schedule,” which in turn creates new challenges across multiple business areas including revenue management, operations, maintenance and flight scheduling [13]. Given the high degree of uncertainty in demand and flight cancellations, Sander Stomph of KLM notes that “we’re moving to a world where we build 100 different schedules instead of one and make operational planning for all of them and then choose at the latest [possible time] a particular schedule to operate” [4].

Finances. The pandemic has also highlighted the complexity and crunch of cash flow in the industry. While flights suddenly came to a standstill, other costs incurred by airlines due to aircraft ownership and maintenance costs, as well as crew and staff salaries, continued to be incurred. IATA estimated that airlines incurred costs of $51 billion in terms of unavoidable costs, debts and refunds in the form of vouchers and credit to customers whose itineraries were canceled due to the pandemic [14]. The crisis spawned a new metric of “daily cash burn” to measure airlines’ performance [15]. In October 2020, IATA’s liquidity analysis on the cash flow management at different airlines estimated that the median airline has 8.5 months of cash remaining at current burn rates [16]. 

A New Model

Airlines find themselves in the challenging position of trying to continue to attract customers while respecting changing lockdown rules dynamically imposed by governments, as well as dynamically changing schedules, which in turn affect the itineraries they offer. This is further compounded by fewer resources in the form of fewer aircraft, fewer flights and nearly one-fifth frequencies in some markets. To offer customers a variety of products (itineraries and fares) that can translate to purchases amidst the changing climate, airlines have been creating micro-alliances with other airlines that allow them to offer the partner airline’s content, new destinations (defined dynamically based on countries whose borders are open) and create new itineraries so customers of the airline still retain a diversity of options. The key difference in these micro-alliances compared to existing alliances is agility, flexibility and granularity, i.e., the ability to forge alliances and create contracts at the level of single seat or customer instead of 5-year long expensive contracts or code-sharing agreements.

Kartik Yellepeddi, cofounder of Deepair, a startup that creates infrastructure that enables airlines to create and adopt micro-alliances, notes that multiple airlines, particularly in Europe, have been embracing this model. Each airline thus has the ability to be a retailer as well as a supplier and cross-sell each other’s content while staying true to their original brand, without needing to be part of an alliance. Combined with dynamic pricing tools for different products, airlines expect that such micro-alliances can allow for a gradual return to normal operations and avoid a price war once schedules begin to operate at pre-COVID frequencies.

References

1. Airlines for America, 2021, “Tracking the impacts of COVID-19,” Jan. 9, https://www.airlines.org/dataset/impact-of-covid19-data-updates/#.
2. https://thepointsguy.com/guide/airline-social-distancing-policies/
3. https://www.delta.com/us/en/travel-update-center/coronavirus-travel-faqs
4. Stomph, Sander, 2020, vice president at KLM Royal Dutch Airlines, keynote speaker, AGIFORS 60th Annual Symposium, Oct. 20-23.
5. Garrow, L. and Lurkin, V., 2021, “How COVID-19 is impacting and reshaping the airline industry,” Journal of Revenue and Pricing Management, in press, https://doi.org/10.1057/s41272-020-00271-1.
6. Belobaba, Peter, 2020, director of the MIT/PODS Revenue Management Research Consortium and professor at MIT, panelist in the revenue management panel: “COVID 19: A chance to reset revenue management practices?” AGIFORS 60th Annual Symposium, Oct. 20-23.
7. Cleaz-Savoyen, Richard, 2020, director, Revenue Optimization at Air Canada, panelist in the revenue management panel: “COVID-19: A chance to reset revenue management practices?” AGIFORS 60th Annual Symposium, Oct. 20-23.
8. Lange, Robert, 2020, senior vice president at Airbus, keynote speaker, AGIFORS 60th Annual Symposium, Oct. 20-23.
9. Garrow, L. A., 2020, “The first 100 days: How airlines responded to COVID-19,” Avionics International, August/September, http://interactive.aviationtoday.com/avionicsmagazine/august-september-2020/the-first-100-days-how-airlines-responded-to-the-covid-19-crisis/.
10. https://www.futuretravelexperience.com/2020/07/jetblue-pilots-uv-cleaning-system-for-aircraft-interior/
11. https://www.bizjournals.com/chicago/news/2020/08/06/united-airlines-to-clean-its-cockpits-using-ultra.html
12. https://www.kxan.com/news/coronavirus/austin-based-company-shows-off-new-covid-19-disinfecting-technology-for-commercial-buildings/
13. Ruhlin, Eric, 2020, managing director of Revenue Decision Support at United Airlines, panelist in the revenue management panel: “COVID‑19: A chance to reset revenue management practices?” AGIFORS 60th Annual Symposium, Oct. 20-23.
14. https://www.iata.org/en/iata-repository/publications/economic-reports/outlook-for-airlines-cash-burn/
15. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/deep-dive-amid-pandemic-airlines-forge-new-survival-metric-8211-daily-cash-burn-60377219
16. https://www.iata.org/en/pressroom/pr/2020-10-27-02/