How GCC airlines can emerge stronger from the COVID-19 crisis

With airlines reeling from the impact of the COVID-19 pandemic, we here at Strategy& have applied our decades of combined experience working with the GCC aviation sector to determine how this crisis has affected the industry and to offer some concrete actions for relief. With a steady hand on the wheel now, airlines can use this period as a catalyst for change, and emerge from it stronger than ever.

There is considerable turbulence in the airline industry because of the COVID-19 crisis, with a sudden drop in demand and a change in customer habits. We estimate that GCC airlines could lose up to 17% of total revenues if the crisis lasts one fiscal quarter, and up to 34% of total revenues if it drags on for two quarters, a reduction of 40% to 100% of their baseline earnings estimate. Moreover, most airlines worldwide entered the crisis operating with approximately two months of liquidity, according to IATA estimate. A cash crunch looms as bookings decline and refund requests from passengers mount. We see a silver lining, however. If airlines begin now to focus on preserving their cash flow, revamping their operations, and transforming their business to meet their customers’ changing needs, these steps can have a meaningful impact on their performance once the demand for air travel resumes.

To achieve this position, GCC airlines should take action in six areas:

1. Increase liquidity through cash-preservation measures, including deferring payment to suppliers not critical for continuing operations, claiming tax refunds, delaying non-essential operating expenses and capital expenditures, refinancing, and sales and lease back of some assets.

2. Reduce fixed costs such as salaries (by judicious restructuring), leases, trade commissions and incentives, credit card fees, and airport charges (by renegotiating terms), and fuel costs (by hedging future fuel requirements to take advantage of the recent drop in crude prices).

3. Adjust the route network to focus on those routes with the highest overall revenue and greatest point-to-point traffic. Analyzing routes while demand is low ensures a more productive network once growth returns.

4. Recalibrate the fleet using smaller aircraft on less popular routes, and conduct any needed maintenance and major upgrades on grounded aircraft while demand is low.

5. Prepare for a sales rebound post-crisis: strengthen trade partnerships and offer increased loyalty benefits to customers, trade partners, and corporate travel departments. Strengthen digital booking, check-in, and boarding processes to accommodate ongoing adherence to social distancing habits.

6. Make a clear case for government support, with accurate, detailed information on the impact of the crisis on airlines’ bottom line and examples of proactive management to date.

By taking steps to preserve cash and rethink how they will operate, both during the crisis and afterward, GCC airlines can emerge stronger. Let us hear what you think about the situation. We are here to help.

This article is authored by Alessandro Borgogna, Senior Executive Advisor at Strategy& Middle East, Marwan Bejjani and Camil Tahan, Partners at Strategy& Middle East, and Vivek Madan, Manager at Strategy& Middle East.