Peter Davies article in Flight Global,, on how the cost implications of pandemic-hit balance sheets and meeting environmental goals means management teams needs to embrace longer term thinking than their business plans show today
Click here to read the full article on Flight Global:
Why airline leaders must plan beyond the short-term pressures | Opinion | Flight Global
As a young CEO I was taught an invaluable lesson by my airline group chairman when presenting the annual budget. I have applied it ever since.
I was told that my presentation was to be no longer than 20 minutes. I would be by myself. I would not be interrupted, and I was to show only three slides: profit and loss, cash flow statement and balance sheet – in that order. I was expected to demonstrate my strategy and tactics via a rolling budget for the immediate year, updated to year five.
My presentation was indeed 20 minutes, I did explain the context of the tactics within the overall strategy and relate that to the numbers. What followed was an intense, almost inquisition, into the numbers for a further two hours. Scrutiny at its highest level.
The only comparison I have had to that was presenting the Air Malta business case to the European Commission in Brussels to seek approval for state aid in 2010, a very intensive 3-hour session where I have to say the inquisitors were exceptionally knowledgeable, focussed, and persistent in ensuring that the business case we were arguing stood up to such scrutiny. It did and we obtained approval – as did my budget presentation.
I raise these examples as I am somewhat perplexed at how airlines are managing in today’s very difficult trading conditions. I have written, as have others, that in the past 18 months ingenious short term liquidity decisions have had to be actioned to survive but perhaps at the expense of the long-term impact of servicing the resultant debt.
Our industry, airlines at least, is not renowned for making great margins. One suspects that when we are back to some form of normality, airlines will return to the pursuit of out gunning the competition with capacity and chasing yield – at a time when the cost of servicing the short liquidity debt will become a significant burden.
Those C level executives responsible for financial management and the consultants that purport to provide insight and expensive guidance will, I believe, take the view that shuffling the balance sheet around saving cost by the usual hackneyed remedies and creating cash through yield “improvement” will save the day.
We’ve all seen the reports – I’ve seen hundreds over the years – shape this, change that, reorganise, rebrand, seek new cash – mix it all up – here’s the recipe – and everything will be fine. Trouble is translating a recipe created by a top chef, or any chef, into the kitchen and producing an edible dish that replicates the creator’s intent requires than more than simply reading the recipe. You have to know what to do with the recipe. Goodness, you actually have to cook something for yourself.
So, I question today’s recipe for the future of the airline industry. Of course it will survive, of course passengers will flock back, and of course we will pursue a greener route. But do we really know at what expense? I have yet to hear from anyone what impact will be seen on the balance sheets of companies in three to five years’ time. More accurately, I have – I’ve seen the crystal balls being espoused by the usual suspects about – shape this, change that etc etc.
Neither have I seen any financial model that indicates the cost consequences of adopting a greener global aviation policy. It must happen of course – and it will – but at what cost? How does it shape my balance sheet, in the coming years? It seems foolish to me to join the bandwagon and go marching in if you are not aware of the cost implications of implementing those policies.
If I was presenting to the same chairman today as I did many years ago, my strategy and subsequent tactics would have to be comprehensive, conclusive, and reasonable to reflect the conundrum that today’s problems present. These are almost unprecedented in terms of impact on the balance sheet – servicing debt, cash flow meandering, the cost of greener initiatives and a potentially fickle buying public.
But equally, what an opportunity. A chance for a new birth reflecting a business plan with a balance sheet that is conscious of the financial consequences of the changing environment; is insightful of technology and refined processes; and reflects a concentration of the customer needs, both internal and external.
About the author: Peter Davies is chief executive and founder of Airline Management Group. He has held a number senior management positions at airlines, including serving as chief executive of Brussels Airlines, Caribbean Airlines and Air Malta, and most recently, as chief restructuring officer of South African Airways.
Click here to read the full article on Flight Global:
Why airline leaders must plan beyond the short-term pressures | Opinion | Flight Global