The state of aviation – some financial considerations


So much has been written about the strength of the aviation space following the pandemic, writes Randy McKinney, president, Elevate Aviation Group.

The aviation industry has shown rapid growth in demand, to levels beyond the pre-pandemic markers for flights, per hour, per segment and total spend. The fast shift to private flying in particular and its multi-year growth trend, were fuelled by a mix of factors including perceived safety when compared with higher density or more crowded options and convenience against the void of some commercial routes and frequencies.

By 2022, all aviation providers were seeing extraordinary demand. Couple this boom in demand with rising inflation and cost creep in nearly every expense category and the industry started facing extreme pressure to compete at higher service fee levels, higher cost for talent and even material supply. The still suffering aviation parts supply chain issue is worth a deeper dive on its own. To keep up with the competitive race, revenue had to rise to keep up with the inflating cost and per ‘x’ pressures.  For the most part these inflated prices were met by the consumer, as the demand was pacing with, or outpacing supply.

No other work group has garnered the attention pilots have through this period and they have certainly fuelled a sharp upward price point for their commitment. The training, discipline, and professionalism repeatedly brought to bear by this group in general has no doubt led to the ability of our industry to thrive with growth; and doing so with incredibly high levels of safe and consistent performance. With less of a public light on the rest of the field, the balance of these aviation professionals is fuelling the success as well.

From flight attendants, customer service, sales, maintenance, parts suppliers and line support of many varieties, to administrative roles with traditional HR, Finance, IT, Marketing, and legal professionals, and to the many supporting roles that include a vast array of professionals in ground transportation, meal preparation, airport operations, ATC, and many more. It is very easy to view the necessity of success on the front line of the operation but know that a truly safe and capable operation must be healthy in all these areas.

This takes a dedicated and focused team, flush with resources and committed to deliver against a ‘normal’ day and against the endless variability that impacts this business. I am always disheartened when I read or hear a pointed comment devaluing the industry or even more specifically private aviation. The upside value proposition is simply extraordinary, and this is principally centred on the quality careers (at all levels) afforded to so many in this industry; all made possible by the dedication of these very same people.

The highly cyclical nature of this business does, unfortunately, create instability. The many highs and lows can force quick demands on cuts or changes in strategy

The highly cyclical nature of this business does, unfortunately, create instability. The many highs and lows can force quick demands on cuts or changes in strategy. The slightest declines in demand or revenue almost immediately trigger these shifts, as too often the ‘good’ times in this business are met with demands to spend more on OpEx versus saving profits for investing in future and long-term strength. Sometimes Capex moves are made, but there again too many have over committed or over borrowed, assuming the good times will last.

Unfortunately, for professionals and investors alike, destabilising measures are often the only practical or quick hit areas of impact during the early stages of a downward cycle. These include internal pressures against human resources, development expenditures and service initiatives. Pressure gets applied to business partners and the greater ecosystem, but everyone else is often feeling the same revenue decline against its recent spending increase commitments (often ‘permanent’ in nature). On the other end of the business, the marketing and sales teams begin to contemplate or offer clients options that are not optimal for the growth and aspirational plans of the business, rather more survival or survive the moment efforts.

Speaking of CapEx and OpEx decision making, this industry does require high levels of capital expenditure. This is to keep up with the constant improvements in technology, flight capability, reliability, and environmental improvements. Likewise, operational expenses are on a steady increase for labour, training, consumables, client experience related costs and any of the COGS categories.

In most cases debt or equity is being leveraged to manage aviation businesses, and the high debt utilisation becomes a significant strain that presents itself even with the slightest downturn in demand. The entire ecosystem of labour, services, material expenses and so on, does not turn down as sharply or as quickly as demand can. Some companies are able to cut costs and leverage pathways to generate sufficient revenue offsets; often cannibalising from competitors that are not able or willing to adjust on the same levels. For many, servicing debt becomes a key focus, and the team’s strategy and accountability begin to dial in on this focus. The companies that maintained financial strength can stay the course and serve their clients from a steady platform; and may also be primed to capture talent, clients, or even new acquisitions.

When these downward cycles start, we should all be very thankful that so much progress has been codified in safety, training, process, technology, layers of accountability and oversight to manage safe flight operations. Particularly with airlines, part 135 operations, and management companies.

This industry focus and never-ending push for perfection has become a bedrock

This industry focus and never-ending push for perfection has become a bedrock. It is the first thing achieved before offering a flight and it is the absolute last thing protected/not up for consideration, literally behind closing the business before ever electing or allowing an unsafe operation. This commitment protects the lives of those both working in or relying on aviation, and this can never change, even for one flight. This knowledge protects against the deep fear of safety sacrifices when a downturn leads to cost cutting and unsustainable economic decisions. But it leaves the door wide open for client services sacrifices, operational challenges, career impacts and financial strain and instability for investors and or clients.

Efforts such as desperate gimmicks, cheap flights, overlooking sub-market commitments from clients and reduced investment in infrastructure or labour, all lead to these above-mentioned and inevitable pain points. These often get covered as positive news, disguising underlying concerns as an excellent deal or sale of some sort; and they certainly don’t garner the attention, possible concern as a red flag, or investigative analysis that could be helpful in identifying these possible concerns.

The willingness to cut deals or fly at price points that are not reflective of sustainable and appropriate rates leads to a false impression of the market. It might funnel much needed revenue to companies in desperate need of cash to cover debt services, but it doesn’t lead to sustained stability. Likewise large companies are often willing to absorb or hold onto clients with sub-market terms in charter and management, but again when the market turns down, this further strains the health of the company in the micro and the macro of the aviation system.

This is also the worst time to approach a client in an effort to correct terms to market rates, as many competitors may be desperate to just have the revenue and will open their arms to the sub-market deal, perpetuating the inevitable service or financial instability. A true client focus includes having the courage and knowledge to drive compatible and sustainable rates across an entire portfolio. Offering strength in both the good times and the rocky ones creates a value proposition that should ultimately be admired by clients, employees and investors alike (especially in the downturns). This of course remains a tricky balancing act in order to protect a business’s competitive position, but an emphasis has to remain on protecting a viable and sustainable environment.

Creating financial strength is creating stability and stability breeds success. Success that is driven by the attraction of talent, like-minded clients and an ability to make the absolute best financial decisions without undue constraints. This also affords better buying power, investment in systems, training, technology etc. Also, the improvements should be felt with service delivery, operational excellence, and yes safety.  The team should be focused on the mission and the clients should be the top priority, while remaining free of distractions such as pending financially driven changes.

The commercial aviation industry is thriving at the moment, but its fixed costs are rapidly rising. High load factors and strong ticket prices are providing sufficient returns, I just hope that appropriate ‘rainy day’ investments are being made. The private aviation industry is still in a position of strength and growth when compared with the pre pandemic market. However, several quarters of single-digit retraction in demand have already exposed some less than optimal situations. The news headlines of late are highlighting serious cash flow problems with some of the largest organisations, discounted services or strategy changes, and even a few companies ceasing operations. This kind of instability from a mild market adjustment should be concerning to all parties. It is a lesson aviation has taught many times, and one that should continue to inform strategic and fiscal responsibility for the long-term stability of this vital industry.

Whether it is a few hundred hard-earned dollars buying an airline seat in DFW, an aspiring student pilot ordering fuel for a training flight at JZI, or a private jet owner in SLC entrusting their sizable operating securities and asset to a management firm; every dollar coming in feeds the aviation environment and it needs to feed a competitive, healthy, and sustainable one for all involved. The leaders, regulators, and professionals in this industry must remain focused on our sustainability and economic success. It is critical for the safety, reliability and health of the aviation ecosystem. Likewise, we all should appreciate the extensive life changing value proposition of aviation, its complexity, and the never-ending demand to have all parties focused on safe, reliable, and well executed flights; every single one of them.

 Randy McKinney, president, Elevate Aviation Group.

Pictured above is a facility operated by Elevate subsidiary Keystone MRO.

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