CDI Global

Update on the Business of Aviation – Fall 2021

Of all the industries affected by the COVID pandemic in the early day, aviation was hit the hardest. The COVID pandemic lockdown created a large disruption to the commercial aviation business. The number of flights and passengers plummeted. Airlines furloughed much of their staff and barely survived through maintaining cargo operations.

As the lockdowns were eased, personal travel for vacations and family purposes, returned at a good pace. Today, travel for personal reasons has returned to near normal levels, while international travel remains limited and business travel is light. While flights are full, airlines are still missing their most profitable passengers.

In time, we believe that international travel will slowly return for vacation and family purposes.

However, concerns over the ever-changing government regulations for COVID will restrict interest in international flying for years to come.

In addition, we think commercial travel for business, both domestically and internationally, will require even more years to recover to prior levels for two core reasons:

  1. Video calls have become the new normal and will continue to replace many business trips
  2. Companies continue to fear liability exposure from an employee catching COVID while traveling on company business

Growth of Hub and Spoke Model is Approaching its Limit

For decades the focus of aviation growth has been on the largest commercial airports. Hubs continually added runways and passenger concourses.  Passenger growth at the hubs surged. Some hubs focus on connections. At Charlotte Douglas Airport, for example, 80% of the arriving passengers quickly board another plane and depart. The same happens in Rome Fiumicino Airport, the busiest airport in Italy, with 50M passengers each year, and a connecting passenger share of 74%.

The abundance and frequency of connections makes it possible to travel to a wide variety of destinations, but it requires changing planes in crowded and large airports.  While the hub and spoke model provides many options, making the connection across a packed facility can be challenging and exposes the traveler to thousands of people.

Aviation Growth Has Begun a Shift to Smaller Airports

There are two significant trends driving passenger traffic to smaller commercial and private aviation airports. The first trend is an ever-increasing number of people flying private jets due to their concern over COVID safety.

Demand for travel by private jet jumped when the pandemic lockdowns were reduced and has continued to grow. There are now a record number of travelers on shared service providers like Net-Jets. Demand has grown to the point that scheduling flights at the preferred time has become more difficult. Service levels are falling, and complaints are rising. With the jets more heavily utilized, maintenance and repairs are rising, further reducing availability. Private flying is approaching capacity. 

We believe that this pressure on private jet capacity will become even worse once business travel returns.  Due to safety concerns and time constraints, we believe that businesses will move more flyers to private jets rather than requiring their executives to transit a hub. While providers will buy more jets and hire more pilots, demand will exceed supply for the foreseeable future.

The second trend driving traffic to smaller airports is that low fare airlines are increasingly offering point-to-point flights from smaller airports to compete with the hub and spoke models of the larger airlines.

Made possible by the efficiencies provided by new aircraft, which seat 50-150 passengers, several new airlines are operating from smaller regional airports. In the U.S., these new airlines include, Avelo, Breeze, and JSX. Also in the U.S., ultra-low-cost Allegiant and Frontier operate some flights from private aviation airports. These airlines typically offer several flights a week from a small airport to another smaller destination – a different model than the daily flights to a hub structure offered by the major airlines.

Another example is the airport of Lugano Agno in Switzerland. From its previous role of entry point of South Switzerland, it has transitioned to a point-to-point airport for 10-20 seaters to leisure seasonal destinations.  This strategy that has paid off over the past two summers, due to the desire for more space, secluded experience, and flexibility driven by the COVID19 concerns.

Importantly, the small airports provide a calmer and more personal private jet experience – with a small terminal and less uncomfortable security experience. Parking and drop-off/pick-up are easy compared to all the activity of a larger airport.

The same strategy has been put in place for long-haul flights, after the not so successful story of the Airbus A380, with quite young airframes now being stored or scrapped. Europe’s largest carriers, Lufthansa and Air France/KLM after extensive analysis, have decided to move toward operating smaller, more efficient aircrafts, such as the Boeing 787 and the Airbus A350, that allow them to fly long haul point-to-point destinations.

In Europe, on the short and medium haul, low-cost carriers are playing an important role, serving the point-to-point market more efficiently than Flag carriers, that play a role only on connecting passengers on long haul flights via their hubs.

Challenges Facing FBO’s

With this growth in activity at smaller and private airports, FBO’s are under pressure to continue to provide the high level of service that their customers demand. More daily flights put every service provided by the FBO under pressure. Hiring, training, and retaining good workers for fueling, catering, maintenance & repair, ground handling and passenger services has become increasingly challenging.  

Additionally, small commercial jets have different requirements than executive jets, requiring different equipment and skills.  After many years of stability, the growth in demand is straining the FBOs and all other service providers at the smaller airports.

Significant Consolidation Opportunities

Despite much acquisition activity over the past ten years, the FBO industry remains highly fragmented.  Of the approximately 3,000 FBO locations in the US, the biggest three FBO’s operate only about 300 – just 10% in total even after a significant acquisition spree. The FBO structure across Europe is similarly fragmented. Like most industries, consolidating FBOs bring some cost and operational efficiencies. The vast majority of FBOs are still owned by individuals.

Former Alitalia FBO, called Alitalia Handling, for example, will be put up for sale through a public bid this Fall.  With its track record and global presence, it could be an interesting add-on opportunity for the large international ground handlers

We believe that, as these owner/operator approach retirement age, they will begin considering a sale transaction. The ongoing growth opportunities combined with the operating benefits of scale, will incent buyers to continue to consolidate.  

The knowledgeable Aerospace and Defense team at CDI Global is ready to help.

By: William Surman & Federico Maria Alberto Caligaris 

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