Total Aviation: Navigating Market Shocks and Revenue Potential

Two weeks ago, on Friday, the 2nd of August, the markets closed with little suspicion of the turmoil that would take place when trade began the following week. It was a panic caused by the Fed and the delayed changes to interest rates which prompted a massive sell off. Arguably reminiscent of the Black Friday sell off from way back in 1987 on October 19th that year (a date that is so prominent in business that I’m able to recall it from memory without needing to check the internet).

Here is the interesting part. At the end of last week (9th August) the markets had recovered. The week on week change looked like this:

• Dow: (-0.01%)

• S&P: (-0.003%)

• Nasdaq: (-0.02%)

One could question entirely what happened here. Although it is clear to even the most removed observer that times have changed. Smart traders who operate far away from the once hectic floors in the financial centres now check and make trades digitally. Supported by the highly complex algorithms that also take over automatically the markets do find stability pretty quickly.

What is clear is the abundance of technical analysis that is taking place. My preference was always to follow the technical in any market. Although now with the world being the way it is, there is an opportunity to follow the fundamentals more and perhaps predict the medium term swings which are now likely to be more stable if we algorithm-our-way out of these shocks.

Which fundamentals are best to watch? Airlines is almost certainly the place to be for this.

They follow the patterns of global trade and the supply chains that are the output of regulations, intra-government deals and demand. It has long been known that if you wanted to get an early view on what was happening in the world it was best to keep an eye on the performance of the FedEx network. Their global reach and demand showed what was happening and gave an insight into what would come next.

However, airlines are fickle things and have changed a lot. The developed world is mainly led by consumer demand. Over 80% of the US economy is driven by average folks and their buying habits. And as we have evolved into a more digital world these habits have continued to shape how products flow around the world.

When looking at the figures from different airlines, there is a clear disparity in their air cargo businesses.

Generating Revenue In The Air Cargo Business

Emirates have just made an order for 5 more freighters and Qatar already fly 30 of the 777F. US and UK airlines are a much different story. There are no freighters painted in the colours of American, United, Delta, British Airways, Iberia, Aer Lingus or Virgin Atlantic. Yet across these fleets there are 3423 aircraft all with belly capacity. Yet the airline cargo revenues are still small. Around $200m of the total $13.4bn revenue reported from the now embattled American Airlines was cargo. Yet of course American will need to fix its somewhat significant faux pas in its commercial model and contend with the over-capacity presently emerging in the domestic market.

Fleet Sizes as of July 2024

• American Airlines 970

• United Airlines 969

• Delta Airlines 991

• British Airways 297

• Iberia 96

• Aer Lingus 56

• Virgin Atlantic 44

So while these carriers figure out their ticketing options and how to manage the now inevitable decline in airline premium seating trends will put downward pressure onto revenues and will prompt a scramble to shore up the missing revenues. Credit card kick-backs provide a big boost to the bottom line although this does leave me asking the question “why are these major carriers not placing more emphasis on gaining quality revenue from the freight”?

It is a fair question.

In the wonderful game of rugby there is the concept of “Total Rugby” which is surmised as using every inch of the pitch to make as many plays as possible (perhaps make an effort to run from behind the 22 rather than kicking to touch England). The same can be said for these very expensive aircraft. We call this:

“Total Aviation”- Gain as much revenue as possible from every inch of the airplane.

The revenue has to be the right revenue too. There is such a thing as ‘‘toxic revenue’ which comes from the Moloch styled commercial practices borrne from the fear of missing out and participating at all costs.

With so many aircraft back in the sky and delays to new aircraft arriving, now is the time where we see some more cash available to make those changes in customer experience and reshape their business models.

We are looking at lots of cost-out opportunities with some heavy numbers which fall straight back to the bottom line. And plenty of areas of revenue leakage. And that is before we even move towards ‘Total Aviation Playbooks’.

As we navigate the turbulence of today’s global economy, it’s clear that the future of aviation lies not just in the skies, but also in the potential of ‘Total Aviation’, leveraging every inch of the aircraft for revenue generation, and adapting to the digital world with smart, algorithm-driven strategies.