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When profits drop, airlines must always have a critical look at the network.
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But shrinking an airline to profit does not have too much successful precedent.
To the contrary; there is a long list of airlines that have increased their problems with the wrong network cuts.
This is because from the top-level down, everybody starts looking for those routes or flights that are causing the losses.
The route-approach is based on some fundamental misunderstandings.
One misunderstanding is that an airline’s economy merely depends on picking the right routes; it’s a little more complicated than that.
The picture is further blurred by the way airlines traditionally break down their results to Route Profit & Losses. The title suggests that this figure tells us just how much a route or a flight contributes to company profits (or losses).
That’s the second misunderstanding.
In fact, Route P&L’s provide very poor guidance for airlines trying to curb losses.
Rarely does canceling a flight with a negative P&L improve company results with that amount. Often even the opposite is true.
This is because, where production cuts hardly fail to reduce revenues, most costs do not simply dissolve in the same swipe.
Think of that midday flight; the aircraft & crew will still be needed for the morning and evening flights, so those costs will just remain as they are.
The opposite also happens; that the P&L conceals inefficiencies in the ‘best’ flights.
This is not just a theoretical matter. Airlines in trouble tend to make their situation worse by steering on these instruments.
This is because the costs that do not dissolve, will end up being allocated to the remaining flights. Thus, more flights will turn negative.
Persisting in the same logic will trigger even more cancellations, sending the company into a vicious negative spiral from which recovery becomes harder and harder.
Of course the first priority is to stay away from the red zone. But the skies are bumpy and it’s good to be prepared.
Everything hinges on correct understanding of an airline’s economics.
For starters, using the right math sounds a lot more trivial than it is. The figures should be clear about which losses can be fixed via the network, and which can not.
This recognition is crucial information for management in an urgent situation.
Sometimes more difficult or unpopular measures are inevitable and the core of the challenge is to keep the revenues alive.
