According to an article yesterday in Flight Global, roughly 57% of the 192 respondents from 90 airlines who participated in a survey by Sabre Airline Solutions said that fuel price fluctuations is their top priority in the near term while 52% identified revenue and yield management as their major focus.
Of course, Sabre sells revenue management solutions – but I don’t doubt these numbers – revenue management is and should be a critical focus.
Like many businesses in the current recession, airlines are starting to see that cost cutting can only go so far and that top line revenue needs to grow as well. As Sabre Airlines Solutions VP marketing Gordon Locke says:
While the focus on profitability is obviously not new, "it is arriving at profitability in a different way". The last survey of this type conducted by Sabre in 2007 showed a primary focus on cost reduction and cost management, with close to 30% of respondents mentioning revenue. "But you had very few mentioning both"
However, in 2009 "sixty-seven percent have an equitable focus on revenue and costs that means they’re getting even more serious about their profit margin"
The article is curious in that it does not mention why airlines are so focused on fuel price volatility – and, more interestingly – why they think they can do anything about it.
The reason volatility is so important is that growing top-line revenue is harder to do than simple cost-cutting. You need to plan and invest in a business-plan that would go out 12-18 months at least. Since fuel expenses make up such a high portion of total expenses, high price volatility makes planning hard to do, forcing the airline to make bets that sometimes work and often don’t.
The truth of the matter is that airlines can’t do much about fluctuations. Hedging is a double-edged sword that can easily come back to haunt airlines that hedge too much. Beyond that, there’s really not much an airline can do.
Many airlines as well as the Air Transport Association have called for “stopping excessive speculation” in op-ed’s, interviews and congressional committees.
Now, Sabre is joining the crowd calling for a plan to “solve the fuel problem”.
The plan consists of 4 points:
I disagree with the first point, but fully agree with the remaining 3 – especially with regards to a strong dollar. However, what must be pretty evident in this discussion is that a) none of these points can be controlled by the airlines, and b) that any significant change in any of these points will likely lead to shifts in supply and demand and therefore – in volatility.
Gad Barnea – CEO – FlyMiwok, Inc.
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