No single business is impacted more directly by oil than airlines. But the ability to gather and use data may ultimately be as much of a determinant on the aviation industry’s economic health and on which brands thrive, survive, or fail.
After spending the last few years as the architect behind Yieldr’s content hub, where I built and distributed resources and analysis for aviation professionals, I’m very excited to remain in the industry and join the talented Kambr Media team and help grow this sparkling new platform. As my first content contribution I thought it’d be fitting to explore a topic that examines the then, now and future of the airlines space. What better way to do this than look at the intersection of oil and data as it pertains to airlines.
In true internet fashion, a bold proclamation is made, gains lots of traction, picks up a devoted following and is then adamantly refuted by a counter point of view. This is precisely the case with the claim Data is the New Oil. All one has to do is perform a simple Google Search of the term to see exactly what is meant:
Regardless of what your opinion is on this debate, the impact these resources have on the global economy is irrefutable. And at the very intersection of these two economic power sources lies the commercial aviation industry.
It very well could be that there is not a single industry that has been shaped more by oil -- and more recently, by data – than airlines. As we trudge forward, the collecting and deployment of consumer data will best exemplify the impact these two world currencies have on the industry’s economic landscape.
We will have the ultimate answer to the question as to whether “data is the new oil” much sooner than later. Therefore, let’s dig into the history and attempt to forecast the future of the aviation space through the lenses of oil and data.
Since its inception, the success of commercial aviation has always hinged upon fluctuating oil prices. According to IATA, in 2019 total fuel cost is forecast to be $200 billion, accounting for around 24.2 percent of operating expenses at $65 per barrel. Below is a breakdown of fuel costs in relation to net profits from 2005 to 2019.
Generally speaking, when oil prices rise, fuels costs increase as a percentage of airline revenue.
It’s no surprise that oil prices and airlines profits have always been tethered at the hip. Historically, there has been an inverse relationship between fuel costs as a percentage of revenue and operating margin. The below graph illustrates this trend from 1979-2017.
“Oil prices drive jet fuel prices and the airline industry's fuel cost. Not surprisingly, there is a close relationship between Brent prices in real terms and fuel costs as a percentage of revenue in the airline industry,” according to a report from CAPA.
“However, the relationship is not exact, since a number of factors introduce distortions. These include fuel hedging, which smooths out and delays the impact of price fluctuations, currency movements, and long-term improvements in the fuel efficiency of aircraft engines and airline operational processes.”
Behind only labor costs, jet fuel is the second biggest expense for airlines. But unlike labor, airlines have far less control over the cost of fuel. One of the few tactics airlines can deploy is fuel hedging. A fuel hedge contract is a futures contract that grants an airline a fixed or capped cost in order to counter against volatile and uncertain prices.
This is an important figure when it comes to airline forecasting, pricing and planning. For instance, an airline which has a futures contract can price their seats competitively and undercut the competition during times of fuel price hikes.
On the flipside, hedging can have nasty side effects. If oil prices drop, an airline can miss out on million in cost savings, resulting in an overpayment for jet fuel.
Another primary way in which airlines are limiting the impact of oil prices on their operations is by adopting newer more fuel-efficient aircraft more quickly. According to IATA, each new generation of aircraft is on average 20 percent more fuel-efficient than the model it replaces. Models such as the A321neo and the A220 have been filling up backorders as they promise to increase savings and reduce fuel burn, while having the ability to operate profitably in thin, underserved markets.
According to Forbes, Airbus aspires to produce up to 60 A320neo series jets per month in mid-2019, while Boeing plans to make 57 737MAXs per month by the same time. Meanwhile, backorders keep piling up. Boeing has 4,615 outstanding orders to fulfill for its 737 series, while Airbus needs to produce 6,126 A320 jets. *Note these 737 projections were made prior to the aircraft’s software issues.
This is all happening while older models are being phased out and retired. For example, the world's largest passenger plane the A380 will be phased out of production in 2021, being passed over by airlines in favor of smaller, more efficient vessels.
While new aircraft are being adopted at a rapid pace, alternative energy sources and biofuels are much more of a slow burn. Although beneficial for the environment and reducing carbon emissions, the biggest challenge the aviation sector faces is that biofuels are actually about three times more expensive compared to jet fuel. Couple this with biofuel scarcity, and you arrive at a very dim (or at least) slow growth future for alternative fuels.
It's been 11 years since Virgin Atlantic flew a Boeing 747 partly powered by biofuel for the first time between London and Amsterdam. More than a decade later, biofuels account for less than 1 percent of the 1.5bn barrels of fuel burned each year by commercial airlines.
The biggest problem is sustainable aviation fuel (SAF) is produced at only one dedicated production refinery in the world. Based on an estimate from The International Civil Aviation Organization, 140 new commercial production facilities are needed each year between now and 2050 to move the industry towards cleaner fuels.
The International Energy Agency's Sustainable Development Scenario anticipates biofuels reaching around 10 percent of aviation fuel demand by 2030, and nearly 20 percent by 2040. Even after decades forward, fossil fuels will occupy an enormous portion of the market, and depending on who you ask, these projections could be viewed as quite ambitious. The complete breakdown of their projections are comprised in the following graph.
Similar to biofuels, electric aircraft development and production is beginning to pick up steam. However, if biofuels are a slow burn, electric aviation is a flickering candle. There are numerous projects in progress to get small electric aircraft up and running such as Harbour Air a regional seaplane airline based in Vancouver and Solar Impulse, which flew around the world without fuel, but we are still a long way away from producing electric batteries powerful and light enough to bring electric commercial aviation to scale.
One of the few entities with a clear roadmap is EasyJet. The low-cost airline aims to have a fleet of short haul electric airplanes by 2030. Speaking from Amsterdam's Schiphol airport last October, EasyJet chief executive Johan Lundgren said, “from the two-seater aircraft, which is already flying, to the nine-seater, which will fly next year, electric flying is becoming a reality and we can now foresee a future that is not exclusively dependent on jet fuel.”
"The target range of the electric plane is around 500 kilometers, which, within our current route portfolio, would mean a route like Amsterdam to London could become the first electric 'flyway.'"
Even in a best-case scenario, we are likely still several decades away from electric aircraft making any significant impact in current oil consumption habits. Couple that with the slow adoption of biofuels and it appears oil isn’t going anywhere anytime soon.
Since there is no clear replacement insight, airlines will have to continue to find ways to reduce consumption and run as efficiently as possible to limit operating dependencies on fossil fuels.
This is where we find the intersection of data and oil. One of the best ways to run efficiently is by making smart use out of data. Areas such as route planning, revenue management, CRM initiatives and forecasting hold the key.
Before we look ahead, it’s imperative to first examine the past. Although data is today’s darling, it too has a rich history within the aviation space. Many of the foundational revenue management principles were developed in the 1970s. Experimentation began on fenced pricing, creating a different offer to a customer based on a series of data points based on forecast projections.
Airlines, for the first time, had the ability to improve load factor by selling seats on underperforming flights that would otherwise remain empty. This marked the ushering in of the boom of data collection and quantitative analysis.
By 1972 Ken Littlewood, of what’s now known as British Airways, unofficially kicked off the practice of revenue management by incorporating a rule that accepted discounted fares if their revenue value exceeded the expected revenue of future full fare bookings.
The next big turning point in revenue management occurred with the deregulation of the airways. In 1978 the Airline Deregulation Act was passed, removing U.S. federal government control over such areas as fares, routes, and market entry of new airlines. This introduced a free market in the commercial airline industry, leading to an increase in the number of flights, a decrease in fares and an increase in the number of passengers and miles flown.
Immediately following deregulation, the practice of revenue management truly hit its stride, showing the significant impact it has on an airlines bottom line. Robert Crandall of American Airlines coined what was known at the time as yield management, heralding it as “the single most important technical development in transportation management since we entered deregulation.”
With this new era of intelligence and insights also has come with it the challenges of navigating complex and large troves of data. In other words, “what the hell do you do with it?”
"Data without insights is entertainment. Insights without action is trivia,” says Stefan Karisch Director of Analytics at Boeing.
This is where we find our next intersection point. Just as crude oil needs to be refined, data needs to be processed and purified before it can ultimately provide the fuel to any kind of analysis or activation.
This premise is equal parts daunting and promising. On one hand is the supreme challenge of untangling the complexity. On the other, this illustrates the significant opportunity ahead, as we’re only scratching the surface when it comes to what we can do with data.
For example, McKinsey estimates that airlines could reap a 5-10 percent improvement in total revenue by leveraging advanced technology and analytics. Meanwhile, Oliver Wyman estimates new connectivity and advanced analytics can save airlines between 2 and 2.5 percent on total global operating costs, equating to the range of $5-6 billion annually.
In order to illustrate the sheer volume of data available to airlines, let’s zero in on just one component. The newest generation of aircraft generate more than 30 times the amount of data the previous generation produced.
By 2026, annual data generation should reach 98 billion gigabytes, according to Oliver Wyman. The newest generation aircraft by then will be generate between five and eight terabytes per flight, up to 80 times what older planes today generate. Again, this is only one source from which airlines derive data!
And not only is opportunity itself there, but so is the understanding of it. According to a poll carried out by Accenture and published by the financial times, the aviation sector had the highest percentage (over 60 percent) of respondents that considered big data analytics to be a top priority.
Airlines have literally put their money where their mouths are. They’ve backed up all their talk about data with big spending on tech. According to a 2017 estimate from SITA, airlines and airports spent $33 billion on IT. In a separate poll,the investment specifically into data-related tech was validated. Big data and predictive analysis took the lion’s share of technological investment, coming in at 47percent.
Given both the opportunity at hand and the investment into technology and data-related initiatives, it's apparent that data will continue to take on a more prominent role within the commercial aviation industry and become an even more valuable commodity.
In the end, does the airline industry agree with the proclamation that data is the new oil?
To answer simply, no.
But such a topic warrants a more intricate response. If the proposition is suggesting that oil is being knocked off its pedestal, that doesn’t appear to be the case for the foreseeable future. While alternative energy sources are entering the market, they are doing so slowly so it’ll be a very long time before a significant portion of the market is seized.
And if the proclamation is suggesting that data is some sort of new entrant into the ecosystem, that is also not true. Just as oil has played a significant role in commercial aviation, so has data. They’ve been coexisting in parallel for many decades already.
Where the claim takes on more weight is in the future and looking at where the two sources are trending. Oil’s stranglehold on the industry is trending downward (albeit slowly), while data’s significance is on the rise as new technologies and practices arise.
Perhaps that’s a milquetoast response. However, oil is still oil and data is still data. While we look for a passing of the guard of sorts, it very well may be that the tale of oil and data is more of a parallel story with the occasional point of intersection. In the future this narrative could look very different, but as it stands now, each global currency is as it always was.