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Survival? Check. But Industry Revival Still Elusive

Participants in the final weekly industry call of 2020 revisited some of the most difficult times of the year for the aviation industry, and put forth some of their expectations for next year. The Survival And Revival call, hosted by the Airport Restaurant & Retail Association (ARRA), included a panel representing airlines, airports and concessionaires.

“There are a lot of accolades that need to go out to our entire community,” said Greg Aretakis, president, Midwest Express Airlines, noting the harsh hit the entire system took when the COVID-19 pandemic hit in March of 2020, and the quick response from the aviation industry. “We went from a very uncertain environment to a pretty predictable environment, to the point where the airport and airline environment may have been one of the safest environments of all environments throughout our economy. And that was a huge step that we took without a whole lot of guidance.”

Aretakis said the lack of demand clarity threw the industry for a loop. “For the airline industry, who lives on booking data and reliability and cancellation rates and load factors, that all went out the window when we went from traffic that was nearly as good as 2019 in one month to 4 percent of 2019 in the next month,” he said. “And that struggle really continues to this day.”

Nicholas Crews, president and CEO of Crews Hospitality, recalled the unprecedented nature of the situation. “We quickly realized that there was no blueprint on how to handle a traffic drop such as this,” he said. “In talking with our team, we just realized we had to constantly observe, orient, assess and react, and loop that process over and over as things started unfolding.

“Sometimes that meant moving quickly and asking for forgiveness rather than approval with certain actions that we were taking, such as reduction of hours of operation, closing of locations, transitioning to cashless, reduction of brand royalties, and unfortunately, the reduction of our team members through furloughs and layoffs,” Crews added.

For airports, the first step was to secure government financial assistances, recalled Matt Cornelius, executive vice president for Airports Council International – North America (ACI-NA). That goal was achieved early on with about $10 billion in aid to airports, but “the need was far more,” he said.

“It’s clear airport operators are balancing a lot of different demands, most notably [addressing] debt, figuring out how to make sure that they can stay afloat and satisfy all their requirements financially, and also plan for the future,” Cornelius said, noting that airports need to secure their financial future not just for the near-term future but for several years forward.

Aretakis also noted the government’s support of airlines, which allowed carriers to regroup and shift their flying to meet customer demands. Point-to-point flying and flights to leisure destinations become more important during the pandemic, he noted.

As the end of the year looms, the industry is still “in a very dire place,” Cornelius said. “Traffic has been recovering but it’s so uneven And just when we start to make strides another spike happens.”

Crews noted the challenges of closed locations and reduced hours, and the difficulty planning when the demand outlook is so uncertain. He predicted a “long road of a lot of adjustments and hard conversations with concessionaires, with their brand partners and with airports [as all parties] try to reevaluate the business model and the risk allocation.”

One positive to come out of a situation that continues to be challenging at best is better interactions among the three parts of the industry – airlines, airports and concessionaires. Crews said communication was “a little slow” in the early days of the pandemic but has improved significantly since then. “I think that we have begun to work more collaboratively together, which is a silver lining that I’m excited about going forward, so that we can continue to push this passenger experience from a concessionaire standpoint and adapt to what will eventually be our new normal,” he said.

But Andrew Weddig, principal at AWeddigConsulting, suggested the industry still lacks cohesion. “Unfortunately what I saw from my vantage point in the concessions industry was everyone working independently to seek their own survivals…,” he said.

“My opinion is that we don’t really have an ecosystem,” Weddig continued, while acknowledging that many in the industry feel differently. Referencing a three-legged stool, with each branch of the industry representing one leg, Weddig said: “Although the three legs … are interrelated, they have wildly varying degrees of interdependence which obviously means our survivals or anyone’s survival here can be somewhat at the expense of other parties in the whole equation. Our relationships are … a bit of a zero-sum game, but we all do have a complete reliance together on an external element, somebody outside of this environment or outside the aviation system, which is a decision by somebody, our passengers, to travel by air.”

Weddig continued: “The cash that flows from those decisions that are outside of our industry are what sustain our industry,” he said. “How can we converge on something to create and solve the problem I just identified, which is a common goal where it’s not a zero-sum game, where we have an interest in securing that revenue stream, not from each other, as it’s currently structured, but from external sources?”

He suggested an “external public backstop” to help secure revenues for all three branches of the industry. “This whole pandemic has shown us that the internal backstops … are not robust enough for a pandemic situation,” Weddig said. “I think there is an opportunity for coming together and working collaboratively, to secure a backstop where our interests converge. Otherwise we’ll just continue to work across purposes for our own survivals.”

Both Aretakis and Cornelius acknowledged that initially each segment of the industry was simply trying to survive, but they point to areas of improvement since then. Cornelius noted that airports and airlines have worked together in the past on issues of shared concern. This time, he said, ”it took a little bit of time to iron out the relationships and the communication. But I think we made tremendous strides together and hopefully that that will bear fruit.”

Looking ahead, everyone in the industry is wondering when traffic will return and how the industry can spur a more speedy passenger traffic recovery. Currently, leisure traffic has shown some signs of life but business travel is still lagging far behind.

“We have to convince people that you’re not more likely to catch COVID on an airplane or in an airport than you are going to pick up your carry-out or grabbing groceries in the store,” Cornelius said. He noted that quarantines, which are still required in some cities, are “an anathema to travel.”

Weddig cautioned that recovery, even to an optimistic 70 percent of 2019 traffic by the end of 2021, remains a “dangerous zone” for concessionaires. Such conditions will have impacts on planning going forward.

“Concessions programs can open to a degree at a 40 percent to 30 percent recovery, but they would be still losing money, which then makes it difficult for concessionaires to start making strategic decisions about responding to RFPs,” Weddig noted. “Frankly, next year is going to be premature for RFPs because no one will know where the future goes yet. No one is going to be willing to invest scarce capital into a business that is going to start losing money, right from the get-go.”