What can rail learn from aviation in terms of building a financially sustainable business model

Jeff:

We talked earlier about the way in which the aviation industry has had to adapt. What does that actually look like?

Jason:

Aviation has a couple of hallmarks. So fundamentally, it is ferociously competitive between various airlines. Secondly, it’s a high intensity, capital intensive business. Thirdly, it’s regulated as are trains of course, and fourthly, it is very vulnerable to third party issues, whether it be strikes, geopolitics, the price of oil or whatever. I think in that conversation, aviation has had to adapt in a sort of Darwinian fashion.

If you don’t adapt, then you just wither on the vine and die. We’ve seen various companies in this country, the UK, Flybe, Thomas Cook, Monarch and so forth who have all gone. So, it is a survival of the fittest and I think that existential drive means there’s a ferocious ability to continue to reinvent. If you’re looking for maximizing or protecting your revenue streams, you’re developing new sources of revenue.

Further reduction of operation cost is just your bread and butter. You’re always moving your fixed cost to variable costs. And I would say lastly, the operational and economic agility and resilience of the aviation business is a cornerstone issue. So, with those four or five traits, that’s your stock way of operating to try and maintain yourself a business compared to your competitors.

And it’s an everyday conversation for decision makers in aviation and airlines.

Jeff:

You talk there about the changes that the industry has seen, and unfortunately certain airlines that we’ve lost along the way, for example Monarch, Thomas Cook and Flybe, but also there’s been a few disruptors into the market as well. Perhaps you’d give us a bit of an overview of their business model?

Jason:

Yes, of course. So, the ones I think you’re alluding to are the household names such as easyJet, Ryanair, Wizz and there are a couple of others, and they are what we would call challenger brands who have disrupted the market. The way that they sell the tickets, the way that they operate their airplanes. They’ve both taken competition from what we call the legacy carriers, the full-service carriers, ones that you would also recognize such as previous national carriers, Air France, British Airways, Alitalia, Lufthansa, but they’ve also grown the market as well.

So, they’ve taken people from trains and we’ve taken people from road because the pricing is now within their grasp. And the key thing is pricing here. One of the most elastic items in this is the price of an airline seat. If I change price of an airline seat, almost instantaneously I have a change in demand and the low-cost carriers would be able to leverage that to their ability.

So, they are cost leaders, cost control leaders and they become price leaders. They lower that price out of reach of the legacy carriers then they will stimulate demand and that’s the name of the game. That has challenged the status quo and a few of the sacred cows that exist in the legacy market. And because of that, we’ve seen the flourishing of just these carriers and they’ve also introduced ideas on style and operating efficiencies that the legacy market has had to follow and have had to adopt otherwise they would die.

So, you now see a lot more operational efficiency in full-service carriers, particularly in the low cost narrowbody markets. So British Airways is rapidly trying to catch up in terms of operational efficiencies, reducing salaries, reducing benefits, lowering their labour costs. You see that in many of the airlines now, they’re trying to restructure so that they can be as agile and as nimble as the low- cost carriers.

And the benefit of that is not only does it chew into the market, it’s a little bit like the Japanese auto manufacturers in the fifties coming into the US market where they outdid a lot of the US manufacturers and that’s like a business school case study. The same thing is happening in aviation, particularly in the US and then of course in Europe.

These low-cost carriers have changed the way that we operate both digitally and also economically, and that is to the complete benefit of the shareholder and the customer. I go back to my earlier point it costs the same today as it did 30 years ago to fly from London to New York, and that’s come about because of fierce competition and efficiencies that have had to be driven to stay in business because the challenger brands, in the early days Virgin Atlantic and prior to that Freddie Laker and nowadays easyJet and Wizz have come into the market and they have forced change on the sector.

And that is a good thing. That gives the customer much more service, much more quality in operation, and it also gives a better price. And it’s a very good thing for a sector.

Jeff:

I know in the past we’ve both discussed ancillary revenue, additional revenue that the airlines seek through other opportunities. Can you give us a bit of a blend of what that would look like in an effort to try and help the rail industry consider a slightly different business model.

Jason:

In the aviation sector, in the aviation business, you know what your costs are, you plan them for a long time, you’ve negotiated them for a long time. The costs are generally what they are, they’re in contract and they’re pretty steady. The trick is revenue. Nobody really understands where the revenue is. Will it arrive, will it come in the volume that you need?

That’s why you have to always understand that there are different ways of finding the revenue, such as ancillary revenues. A well-known airline to us all, we’re all being consumers or passengers of an airline like this, for example, will cover its costs on ticket pricing. So, it will pay all its bills on ticket pricing, but then the profit will come from ancillary revenues.

I mean by that, such as luggage or baggage charges or indeed just quicker access through the airport to get onto the airplane, a better boarding process for which you pay for the privilege. Those aspects are where the profit comes from. And if you were to read an annual report of a leading airline in this sector, you’ll see that that’s where the money comes from, where the profit comes from.

That’s the benefit of the shareholders. And it’s also to the benefit of the passengers, because actually that money, that choice that you make, whether I get a better baggage conversation or better boarding conversation, is a choice. I still pay the same ticket price, but the airline becomes profitable if I elect to then get a better boarding experience. But I don’t have to, and I still pay the same price for the ticket.

Now, if rail could adapt to those ideas, such as better services before you get on the train, so extend the value chain to pre-boarding, post-boarding, whatever it is, and also perhaps rail catering. I’m told the catering on board the trains doesn’t necessarily make money. Find methods or ways to extract value out of your customer, who’s very loyal to you. Your customers fly with you because they are loyal to you and repeat because they are loyal to you.

If you had the same conversation with your train customers, there are ways to extract value from them, which they will willingly give. So, there’s got to be better ways of doing it. I’m not conversant with rail as well as I am with aviation, so I wouldn’t begin to tell you how to do that. But I would say that through good leadership and enterprising style, the culture of the rail business that wants to win will find those ways and will use them to the advantage of their shareholders and customers.