ABU DHABI, UAE–What makes the difference between success and failure in the airline industry? During his keynote address at the first World Financial Symposium in Abu Dhabi today, John E. Luth, the founding partner, Chairman and Chief Executive Officer of Seabury Group, a leading global advisory and professional services firm, spoke to an audience of airline financial executives about the importance of good decision-making in driving sustainable profit improvements and delivering top performance.
Reflecting on the global airline industry over the past 25 years, Luth described major trends in airline profitability inferring that “carriers that consistently make good decisions and adapt their structures and business models to the market needs” produce sustained profitability.
Top industry performers “maximize leverage to procure services and goods on exceptional terms, adopt different product/pricing approaches to match their local markets, employ the network, fleet and revenue management optimization tools, and continually study their customers and competitors to right size their service offerings and product delivery costs.”
Referencing global consolidation trend as one of the solutions to achieving sustainable profit improvements, Luth explained that in the case of the U.S., “consolidation was not driven by a need to gain profitability, but rather U.S. carriers first restructured their operations and balance sheets before pursuing mergers and then have used consolidation to solidify and grow their return on invested capital (ROIC).” Airline executives are now embracing ROIC versus their firm’s weighted average cost of capital (WACC) as the best way to measure sustainability of their businesses.
Running an airline and delivering an appropriate ROIC to shareholders faces many internal and external challenges. “Airline financial executives also have to operate systems that are not developed to address the complexities unique to the airline industry. For example, without a state-of-the-art flight profitability system, an airline is ‘virtually flying blind’.”
Luth said that the role of Chief Financial Officers (CFOs) is “growing in complexity at an unbelievable rate” and that successful CFOs “provide clarity to decision makers by communicating actionable information and analyses, ensure corporate liquidity, and enforce capital discipline for their airlines.”
Furthermore, many airlines today have the opportunity to acquire software tools and external support for hundreds of comprehensive fleet scenarios using 20-year cash flows for each new aircraft delivered and being replaced. “I could never have dreamed of such systems and achieving this standard of excellence twenty-five years ago when I first joined this industry. These systems put into practice far higher standards of capital discipline than the industry has seen before.”
Luth described the four critical challenges that airline financial executives, working with IATA, have identified as priorities for CFOs of airlines: addressing the “Regulatory Environment” that an airline may be facing; rebalancing the value chain in favor of the airlines; moving the industry forward with even deeper personalization of product offerings; and adapting ever more efficient end-to-end processes.
Given these challenges, Luth underscored that businesses are becoming ever more valuable and profit-focused. “It may sound trite to say this, but your problems are also our problems. Seabury Group and many of the other partners here in the audience exist to help each of you to improve your businesses.”
In summarizing his keynote address, Luth said, “While in Seabury’s first 20 years of existence we are most often thought of as helping the airline industry to undertake necessary restructuring, we used that time period to make the investments in software tools, data products and people that will be focused on facilitating operational improvements utilizing technology to assist in decision-making over the coming decades.”