Lufthansa Systems Blog

Key Industry Challenges - how IT could shape the future of Airlines

Two mountaineers in the Swiss Alps (Photo: iStock/MGTS)
Two mountaineers in the Swiss Alps (Photo: iStock/MGTS)

May 11, 2021

As an integral part of the aviation ecosystem we as Lufthansa Systems would like to introduce this new blog to share our latest views on the current market environment and especially our insights on how innovative technologies could help airlines thrive in the new normal. In this first post, we will dive into the seven most pressing challenges, currently facing the airline industry from our point of view.

As shown in the Boeing illustration below the COVID-19 pandemic in 2020 will be remembered as the single biggest disruptive event in the history of commercial aviation by a large factor. Compared to past crisis like 9/11 or the Global Financial Crisis, this time the scale is unprecedented, and its shadows will be long-lasting.

Figure 1– Aviation proven resilient over and over again - Boeing Commercial Market Outlook 2020-2039, Page 5

 

The international monetary fund labelled the COVID crisis already as “The Great Lockdown” underpinning the historic dimension. The travel and tourism sector is among the most severely impacted industries. Both accounted for 10 percent of global GDP and more than 320 million jobs worldwide¹. It is essentially too big to fail for any country’s economy and has proven resilient in the past.

Consequently, we observed bailouts across the industry backed by government support. As a result a USD200 billion mountain of additional debt accumulated so far correspond to 20-30 years of the entire industry profits². Just the interest payment will exceed most of the annual profits. This will heavily undermine the industry to innovate and make significant investments into its future. Cost and cash management for airlines have always been a key success factor. Now and in the upcoming post-COVID world, it is a survival factor.

It is widely accepted that 2019’s volumes will return on a 5-year scale. It is also likely that the industry growth will return to the original, rising growth path, but it is difficult to estimate at present. Reasons for that are continuous travel restrictions due to progressing mutation of COVID-19, solidified remote business meeting culture, and the pure fact that emerging economies are disproportionately affected having fuelled previous industry growth³.

For any high-fix-costs-leveraged industries such as aviation, generating economies of scale is a prerequisite to being economically sustainable and generating any cost advantages. The question for the industry is now: how to generate scale of economies if demand is highly volatile and growth is vague in the near future?

As a consequence, the industry is currently and for the foreseeable future facing manifold but also contradictory challenges to get back on track and be successfully positioned for the future, among them:

  • get a grip on its costs
  • paying back debt with interest
  • invest in innovation
  • be environmental sustainable
  • implement measures to get to live with the virus

So, in more detail which challenges do we foresee for our industry? Out of the dual perspective of being an airline IT-company, we as the business development team of Lufthansa Systems have synthesized our findings on the current trends into seven Key Industry Challenges. In a second step, we have analyzed and initially formulated accompanying ideas and theses per challenge to which extent automation, IT, and digitalization can contribute as a pain reliever, a gain creator but above all as a game changer for these challenges:

 

All 7 challenges have two key enablers in common: Technology and Culture incl.:

  • Data as value – access to data science and advanced analytical capabilities
  • Cloud environments and infrastructure to access software services promptly
  • Significance of cybersecurity ever rising with digitalization
  • Enhanced digital fitness of workforce
  • Collaboration of previously siloed business and IT teams

That being said, we ultimately believe that future investments into innovation fuelled by information technology are very well invested but only can be undertaken jointly including customer and provider. This is a necessity to split cost and risk as well as build product-market fit solutions with a scale of economy in mind. As Lufthansa Systems being part of one the largest aviation groups worldwide, we have always taken pride in being both: airline experts and IT nerds as Lufthansa Systems is far the only IT-company owned by an airline.

With this in mind, we are already coming to the end of the first blog post. True to our motto "from airliner to airliner", we are committed to helping the industry successfully navigate these challenging times by sharing knowledge and expertise.

Engage in the discussion and share also your perspectives on how IT and digitalization can contribute to a new normal of the industry, feel free to get in touch with us!

Jens Puchta and Mubashir Tariq

We look forward to sharing more in the weeks and months to come. Stay tuned!

 

 

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1) https://www.imf.org/external/pubs/ft/fandd/2020/12/impact-of-the-pandemic-on-tourism-behsudi.htm
2) https://centreforaviation.com/analysis/reports/capa-live-december-2020-finally-a-light-at-the-end-of-a-very-long-tunnel-08-Dec-2020
3) https://centreforaviation.com/analysis/reports/capa-live-vaccines-and-shorter-term-solutions-15-12-20

 

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Jens Puchta
Chief Strategy Owner
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Lufthansa Systems Blog