OPINION: Four Strategies to Help Airlines Manage and Mitigate Supply Risks

While it may be an understatement to say that the airline industry is exposed to volatility, it is fair to say that the latter half of the last decade was a time of relative plenty. The COVID-19 pandemic and its cataclysmic impact on demand swiftly reversed that. But now, as demand recovers, the after-effects of the pandemic and a confluence of macro factors create the next major headwind for the world’s airlines: supply challenges.

These supply challenges run the gambit. They include major, long-lead items like suspended or delayed aircraft deliveries and a now substantial pilot shortage that has been acutely felt in the US. The industry also faces more tactical, albeit slightly less painful, challenges when it comes to hiring airport workers, securing outsourced heavy maintenance slots, and keeping spare parts inventories appropriately stocked.

Some issues are familiar, and some even predictable—like the latest upward spiral in oil prices—while others appear unexpectedly in the form of a cardstock shortage that has disrupted the process of printing boarding passes, and even a shortage of galley carts. These supply issues represent a risk that is both material and far-reaching—all at a time when demand seems primed to return and radical capacity growth is part of virtually every carrier’s plan in 2022.

The first-order impact will be on the price of inputs—such as oil, labor, and aircraft lease rates—which translates into cost for the airline and a combination of higher airfare (to the extent passengers will pay) and profit pressure (to the extent passengers won’t pay). But the magnitude of these issues goes beyond price, manifesting in true shortages and stockouts. Take jet fuel, for example. Last summer, airports in the Western US experienced an unfortunate combination of leisure-demand fueled growth, low fuel inventories, and a shortage of tanker truck drivers. Not only did the price of jet fuel spike, but some airports in places like Montana, Wyoming, and Utah ran out of fuel completely. Airlines were forced to start tankering (where inbound flights carry enough fuel for the return leg).

But this was not possible everywhere, and in places that it wasn’t, airlines were forced to cancel flights despite a robust revenue environment. One can observe this effect in a more systemic way, illustrated by gaps in regional pilot supply; in a Senate testimony in December 2021, United Airlines stated that, with their partners, they parked nearly 100 regional jets due to a lack of pilots. We also expect to see the impact of lengthy delays in aircraft deliveries this summer when most carriers are flying peak schedules and high trans-Atlantic capacity puts widebodies in the spotlight. In the end, it will be shortfalls in capacity that drive the greatest impact in the form of lost revenue and lost strategic opportunity—not direct cost pressures.

It is tempting to point out that these structural factors are impacting other industries—from grocery retail to auto manufacturing. Traditional forecasting and risk management tools have been rendered obsolete by the confluence of post-pandemic macro forces. But airlines can take positive action to manage and mitigate these risks. Based on extensive research and learnings from client engagements, Boston Consulting Group has identified four strategies for airlines to consider:

 

Share Risk

There is always strength in numbers. In this context, that can take several forms. The first is deeper, gainsharing partnerships with suppliers to jointly fund and protect supply. Another example is the recent proliferation of pilot training programs and financial incentives between US major airlines and their regional partners.

Secondly, carriers, vendors, and even third parties can build robust secondary markets that allow airlines to trade things more efficiently like heavy maintenance slots or expand parts-pooling programs.

Finally, and in its most extreme form, airlines could look to acquire key suppliers, such as Delta’s ownership stake in a refinery, or expand in-house capabilities for things like heavy maintenance or uniform production. Other industries have proven these strategies effective: US pharmaceutical companies maintain a jointly funded stockpile of essential drug ingredients, and third-party solutions have emerged in ocean shipping to better match supply and demand for containers.

 

Radical Transparency

Today, supply chains are better described as supply webs. With so many interconnected elements, increased transparency is an important tool to improve planning and avoid surprises. Airlines should be more proactive and detailed in sharing fleet and capacity plans to help vendors manage potential bottlenecks.

In return, suppliers should voluntarily share their production schedules, confidence in their own supply chains, and early warnings of potential issues. The current silicon chip shortage is a powerful example—the auto industry is suffering most intensely, but that is not a result of their own production volatility.

Rather, the challenge is the result of vendor production issues and increased demand from other sources that have put F-150s in competition with PlayStation 5s for scarce components.

 

Automated Recommendations

Sophisticated planning and forecasting has been a mainstay of supply chain management for years. AI and big data now afford airlines the opportunity to take this to the next level in both scope and scale.

Computers can help analyze millions of data points and predict problems before they arise—such as sensing supply and demand imbalances early, instantly translating a raw material price spike into a vendor production issue, or recognizing where alternate supply sources are a better alternative.

Increased Flexibility From Within

Whether it be temporary adjustments to labor contracts to permit more agile scheduling, or tighter lead times for functions like network planning and maintenance, increased flexibility can help minimize the effects of supply shocks to boost airline resiliency.

By applying these levers and maintaining a keen eye on critical path sourcing across the business, airlines can manage and mitigate the impacts of systemic supply challenges. Airlines that can do this more effectively than their peers will be rewarded with the capacity to capture pent-up demand that others cannot and, in turn, make strategic gains in share and advantaged access to scarce resources in the years ahead.

 

Adam Gordon is a Managing Director and Partner at Boston Consulting Group (BCG) and leads the firm’s Airline practice, globally. For over a decade, Adam has advised airlines on shaping high-impact commercial strategies and achieving operational excellence with a balanced focus on cost, reliability, and customer experience. Prior to joining BCG, Adam worked in a leadership role at Qantas Airways, primarily focusing on alliances strategy, loyalty and operational reliability. Currently, he is based in Toronto.

The post OPINION: Four Strategies to Help Airlines Manage and Mitigate Supply Risks appeared first on Aviation Today.

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