At the beginning of 2020 air navigation experts in Europe expected to see continued traffic growth, further straining the capacity of European airspace. Preparations were made to distribute the expected traffic to alleviate the pressure on key hotspots. In an unexpected turn of events, as COVID-19 spread across the globe, IFR movements in April were 88% [1] lower than in April of 2019, while the chargeable service units dropped by 87% [2].
This drop in service units placed Air Navigation Service Providers (ANSPs) under an immense financial pressure, not only lowering their revenue, but also affecting their cashflow. This was further exacerbated when four months of airline payments were deferred to the end of 2020 and into 2021. As a result, ANSPs have had to temporarily reduce capacity in line with demand and costs as much as possible – just as all other actors in the aviation industry have done. The crisis the industry currently faces is in stark contrast to the issues ANSPs faced throughout the previous regulatory reference period (RP2, 2015-2019). In those years, traffic growth far outstripped expectations, resulting in staff shortages, which in turn created large air traffic flow management (ATFM) delays, especially in peak summer periods. ANSPs were pushed to accelerate recruitment and seek operational innovation to ease the capacity crunch.
Demand responsiveness and financial resilience
While the situation seen throughout RP2 is entirely different to the issues facing ANSPs now, there is one common denominator: they both require an ability to respond to demand as flexibly as possible, while maintaining the financial resilience of the company. Financial resilience can be defined as “the ability to cope financially when faced with a sudden fall in income or unavoidable rise in expenditure”[3]. The fundament of ensuring this resilience is being able to adjust costs during periods of low traffic. “Cost base elasticity” takes this a step further, capturing the ability to adjust costs in line with demand, whether it increases or drops. In the short term ANSPs are by necessity focused on ensuring financial resilience. In the long term however, it will be beneficial to shift the focus to a more holistic view on cost base elasticity. This elasticity can be achieved through internal, organisational decisions, or by structural changes imposed by regulatory or market reforms. It is this elasticity that I will focus on, as this is the main aspect that is within the control of the organisation.
Making your organisation ‘elastic’
Organisations can take a series of actions to increase their financial resilience and improve cost elasticity. Opportunities exist across all of the key cost base elements.
