Disruptors in aviation

Lauren Eldershaw
By Lauren Eldershaw February 8, 2019 14:31

Disruptors in aviation

In a recent FT article, Meg Whitman – the tech executive, ex HP CEO – said that all businesses need to think, “who’s coming to kill me?” Likewise, Lisa Bodell, writing in Forbes, has pioneered a technique called ‘Kill the Company’, which proactively identifies threats to a business to reveal its greatest vulnerabilities. It is sage advice that aviation companies would do well to heed.

Digital is challenging most industries and forcing legacy business to re-evaluate their tried and tested business strategies. Banks, for example, have been under pressure from digital/online services for many years but are only now acting to stem those threats by acquiring start-ups or forming incubators or accelerators to develop their own digital service providers in house. Airlines too are under threat from the push to digital. Putting aside the exogeneous pressures – oil price, labour costs, geopolitical and macroeconomic issues – the airline model, which has already changed significantly over the past two decades thanks to the low-cost revolution, may now be facing a greater threat from a new brand of start-ups. This is being played out today in the cargo space.

Amazon is now the growing force with its burgeoning Amazon Air brand that has the potential to severely damage competitors (mainly UPS and Fedex). In its annual report, Amazon stated for the first time that it viewed shipping companies as competitors. UPS CEO, David Abney, also stated for the first time that it views Amazon as a competitive threat. With more than 10% (estimates range upwards to 21%) of its revenues coming from Amazon, UPS has a greater exposure to the retailer than Fedex, which has an estimated 7% of revenues from Amazon. (The US Postal Service currently is its largest provider of shipping services).

With its last quarterly shipping bill topping $9bn, Amazon’s drive to create its own shipping network makes sense for the online retailer. This strategy has already been played out in the aviation space – Amazon has expanded its partnership with Air Transport Services Group (ATSG) to extend leases for twenty 767 aircraft ATSG currently provides to Amazon, and to extend the operating Amazon Air network agreement, which also gives Amazon warrants to expand its equity stake.

When the expanded deal was announced in January, Dave Clark, senior vice president of worldwide operations at Amazon, said that the company was building and expanding its Amazon Air network. Those expansion plans are only going to accelerate. Already 767 aircraft are in high demand due to Amazon’s strategy, which has led Cowen & Co analysts to opine that the company may opt for 777Fs for international routes and converted A321P2F aircraft for US domestic purposes. That view is endorsed by Steve Rimmer, chief executive of Altavair, which has launched its new partnership with KKR with the news of a cargo mandate for 777F and 747Fs. Speaking to Airline Economics in the latest issue (click here https://secure.viewer.zmags.com/publication/586431e7), Rimmer recognises the importance for leasing companies to be aware of the disruption playing out in the cargo space: “Questioning what Amazon is doing in the airfreight space is absolutely right because if anybody is going to disrupt the traditional air cargo market, it is them.” Altavair and KKR do not have a sole focus on cargo aircraft but given the market dynamics, airfreight is high on their target list since the market is currently underserved by lessors.

Outside of cargo, airlines are facing a new threat from other digital companies seeking to create their own transportation services. Airbnb is one such threat. Although the company has not publicly stated that it is seeking to create its own airline, the fact that it hired ex-Virgin America chief, Fred Reid, to lead its new transportation division, led to countless column inches being devoted to this subject in mainline and aviation media. Airbnb head Brian Chesky has provided many hints that the company is seeking to expand on its services into transportation of its guest – with one tweet asking what makes a perfect flying experience, which again led to much media speculation. The more cynical aviation observers suggest such plans are nothing more than an expansion into the package holiday market, which has its own challenges running airlines – Thomas Cook is having its own issues at the moment making its airline profitable. But Airbnb has revitalised the holiday model and there are those that are more positive that it could bring such disruption to the airline industry also.

Disruption doesn’t have to happen with a big bang, it can, and of is, incremental and can impact businesses that have not prepared to be killed.

Lauren Eldershaw
By Lauren Eldershaw February 8, 2019 14:31