University of Groningen Technology Operations and Management Master's Thesis Aviation in a Pandemic: the Profitability Approac
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Aviation in a Pandemic: The profitability approach for an airline's operation in a pandemic context - University of Groningen Technology Operations and Management Master’s Thesis Written by: Barran Haunan Supervisor: dr. N.B. Szirbik Co-assesor: dr. ir. D.J. van der Zee March 2, 2021 Contents Abstract .................................................................................................................................................. 2 1. Introduction ................................................................................................................................... 3 2. Theoretical background ............................................................................................................... 8 2.1 Revenue Framework ............................................................................................................. 9 2.2 Cost Framework .................................................................................................................. 10 2.3 Revenue and Cost Conditions during the Pandemic ....................................................... 11 3. Methodology .................................................................................................................................... 14 3.1 Selecting case study as the main research design ................................................................... 14 3.2 Design Science Research ........................................................................................................... 15 3.3 Subject Selection: Garuda Indonesia ...................................................................................... 16 3.4 Data collection and Instruments .............................................................................................. 17 3.5 Data Analysis ............................................................................................................................. 18 4. Analysis and Findings ..................................................................................................................... 21 4.1 Interview .................................................................................................................................... 25 4.2 Expansion of the functional architecture .......................................................................... 29 4.3.1 Medium term profitability decisions ......................................................................... 33 4.3.2 Long term profitability decisions ...................................................................................... 35 4.3.3 Critical aspect derived from interview ............................................................................. 38 5.3.4 Critical aspect derived from functional architecture...................................................... 38 5. Discussion..................................................................................................................................... 39 6. Conclusions, limitations of this research, future work ............................................................ 41 References ............................................................................................................................................ 43 Appendix - Control airline operations during pandemic model ..................................................... 46 1 Abstract The Covid-19 pandemic deeply affects the ability for airlines all across the world to operate profitably, as strict travel restrictions led to massive grounding of aircrafts for the majority of airline as well as drastic reduction in passenger traffic, which in turn causes a sharp decline in revenues for airline. When combined with the still high operating costs, airlines all across the world are facing tremendous losses and some ceases operation entirely due to the financial strain. However, as the pandemic continued, the industry began to recover and airlines began to slowly operate their fleet while simultaneously coming with new solutions to tackle the drop in passenger traffic. Looking at this trend, and looking at the case study of Garuda Indonesia, the national airline of Indonesia, as the base of this research, this paper would expand the airline operations model based on the work of [29], specifically on how the operational activity would be affected based on profitability factors. The critical findings of the research involve on where the ability to adapt quickly and find new ways to generate revenue become especially important in this pandemic situation. 2 1. Introduction The year 2020 has the seen the world been struck by the COVID-19 pandemic or better known as the coronavirus. The virus which originated from Wuhan, China has spread across the world causing widespread panic among the countries of the world as the new disease took its toll on the world population and with the lack of an effective vaccine. As a result, many countries have imposed strict policies in order curb the spread of the virus, such as mandatory mask wearing, maintaining physical distancing and limiting the number of people in public spaces. A lot of countries have also enacted lockdown protocols with restaurants and bars, shops, schools and gyms closed, and its citizens required, or at least strongly encouraged, to stay home to avoid catching or spreading COVID-19. With such strict restrictions on movements, many economic sectors have been hit due to the reduction of economic activity. One such sectors is the aviation industry, with an estimated loss of $113 billion according to the International Air Transport Association (IATA) [2]. A large factor in this loss is due to the drop the number of passengers utilizing air travel worldwide, partly due to the lockdown and partly due the loss of confidence of people using air travel, which impacted on the passenger numbers and passenger revenues for airlines worldwide as seen in Fig 1 below. Fig 1, Source: IATA, Financial impact of Covid-19, 5 March 2020 3 Furthermore, due to the strict COVID protocol governments have enacted all over the world in order to combat the virus, airline has to follow additional procedures in order to be able to carry passengers, such as physical distancing between passengers inside the cabin. This effectively reduces the number of passengers an aircraft can carry as not all of the seats can be occupied which in turn reduces the ticketing revenue for airlines even further, a condition which was explained by the CEO of Qatar Airways, Akbar Al Baker [20]. “After this pandemic, and the usefulness of doing conference calls, video calls, working from home, this will reduce business traffic which is really the bread and butter of our industry.” “One thing I can tell you, you will pay more to travel. How much more depends on what the government regulation says on the number of passengers I can put in my airplanes” As the demand for air travel sharply decreased as countries began to close their borders and revenue loss increased from the lack of passengers, many airlines are forced to ground their fleet. With an estimated 62% of the world’s planes being grounded, accounting for more than 16,000 aircraft [3]. The sudden surge of such large-scale grounding of aircrafts brings its own challenges to airlines, as aircrafts needs plenty of work and attention while in storage, from maintenance of hydraulics and flight-control systems to protection from the various external causes such insects, wildlife, weather and etc. The maintenance not only for the exterior but up to the interior of the aircraft. Then there’s humidity, which can corrode parts and damage interiors. Even for the aircrafts that are being parked, it has to be loaded with enough fuel to keep them stable from rocking due the wind as well as to ensure the fuel tanks are well lubricated, a situation quoted by Anand Bhaskar, chief executive officer of New Delhi-based Air Works, a plane repair and maintenance company as a “logistical nightmare’[3]. “Nobody thought this magnitude of preservation would need to be done,” “Parking space is a problem. These are logistics nightmares which we’re trying to work around.” 4 Another glimpse of the situation is given by Ton Dortmans, KLM head of engineering and maintenance, where the airline has grounded 166 out of 204 aircraft in its fleet [11]. “Every seven days, someone would climb into the plane and run the engines for 15 minutes to keep them functional. The air conditioning was switched on to keep the humidity at bay. “And the tyres – well, it’s the same as a car. If you keep a car parked for more than a month, you get flat tires,” Dortmans said.” So, a tug pulled the plane forward and back every month, to keep the wheels and axles in shape.” The grounding of the fleet for most airlines also meant a lot of pilots have also been grounded, with many have not been inside the cockpit of an actual aircraft for months. This is a problem for airlines since by regulation a pilot must comply with certain qualifications in order to maintain their pilot license, which involves flying a minimum number of hours and perform three take-offs and three landings every 90 days to stay “current” – to still be allowed to pilot a plane [11]. This is to be proven difficult for pilots, as while it is possible for pilots to maintain their license from the use of a flight simulator, it is currently difficult for pilots to access the simulators due to the lockdowns. Furthermore, even when there is a revival in scheduled flights, the pilots, just like the