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Friday Read: The Mile High Club declines

Published:  05 June, 2020

The aviation sector has long been one of the global economy's most vital employers. It's not simply the millions of personnel contracted by airlines; the International Air Transport Association (IATA) observes that the industry is at the core of a value chain that supports some 65.5 million jobs worldwide.

“Each of the 2.7 million airline jobs supports 24 more jobs in the economy,” it claims.

Airlines are also enthusiastic consumers of alcohol – according to onboard technology company GuestLogix, US flyers spend more money on drink than any other in-flight purchase in short haul economy class. Of course, business and first-class passengers get that privilege for 'free', having paid astronomical sums for their reclining seat.

Emirates has reportedly spent over $690 million on wine since 2006; their cellar is said to have a capacity of around 3.8 million bottles. Before coronavirus, British Airways (BA) spent approximately £31m per annum on alcohol, with around £26m covering wine and Champagne. Around £13m of that budget was spent on economy provisions, the remainder on premium cabins. Meanwhile, Qantas claims to be the third-largest purchaser of Aussie wine.

And, until recently, all this in-flight consumption was a very lucrative money-spinner for wineries.

“To be blunt, our sales to the aviation sector have temporarily halted,” says Bibendum's CEO Michael Saunders.

“Before Covid-19 changed the global reality, sales to airlines were an important part of our overall turnover. They started to become really important about 10 years ago - the sector has recently become more keen to acquire larger volumes in bulk. It's impossible to say at this point how quickly – if at all – the travel industry will recover, but I think a recovery in 2020 is looking optimistic.”

According to Flightradar24.com, in April 2020 there were an average of 69,586 total flights per day, a 62% decrease from April 2019. May looked slightly better: the total number of flights tracked last month was down 52% compared to 2019. But no one is under any illusion that the sector will recover quickly – many of the flights tracked are cargo routes. IATA predicts that airline passenger revenues will drop by $314 billion in 2020, a 55% decline compared to 2019.

“The industry’s outlook grows darker by the day. The scale of the crisis makes a sharp V-shaped recovery unlikely. We could see more than half of passenger revenues disappear, and without urgent relief, many airlines will not survive to lead the economic recovery,” said Alexandre de Juniac in April, IATA’s director general and CEO.

This could create a massive problem for certain distributors and wine brands, which may not be able to 'plug the gap' created by airlines drastically reducing their alcohol spend, in addition to the loss of hospitality sector income and tourism/cellar door sales.

“Aviation was a sizeable market for us and one in growth (pre Covid-19), with sales across a number of airline groups in first class, business and economy,” says Rollo Gabb, MD of Stellenbosch winery Journey's End.

“Our customers made annual reserves and then drew down on them as required during the course of a year. Certain airlines provide annual reserves – generally for high volume, economy-class products. At business and first-class levels, wines are generally booked for a specific period during the year and drawn down accordingly for that. But we expect our sales to airlines to decline in the short- to-medium term,” Gabb explained.

That may be wishful thinking. Even IATA's gloomy forecast assumes that travel restrictions will be significantly relaxed by July 2020, which is far from certain. It's a hugely sensitive issue, which is hardly surprising when airlines are having to deal with redundancies and falling revenues.

The vast majority of suppliers and companies contacted refused to comment. This terse reply cam from Taiwan's flagship airline: “To maintain confidentiality between EVA Air and our suppliers, we cannot provide information about our wine and liquor purchases.”

The industry is remaining tight-lipped about future plans for procurement. Therefore it's very difficult at this stage to make any definitive predictions regarding the rate and level of recovery.

Several European nations are gradually easing lockdown measures and the number of flights has risen since April. But a global recession is obviously going to reduce discretionary spending and travel will undoubtedly suffer. We may well see a massive industry restructuring, with airlines either disappearing, being nationalised, or being bought out by larger companies. Moreover, as former UK Prime Minister Tony Blair noted in a recent BBC Newsnight interview, it's a question of living with Covid-19, rather than returning to the former status quo.

Downsizing

Airlines are already starting to adapt their behaviour in this regard. Prior to the pandemic, many firms had changed their strategy for economy purchasing and were pouring 75cl wine bottles as opposed to the former industry standard of 187ml. This proved to be more efficient in both expenditure and wastage.

However, more recently companies such as Emirates, Etihad and TAP have reverted to 187ml to avoid potential cross contamination, following other safety measures introduced since Covid-19 appeared. The question is – what will happen next?

Former British Airways employee Kelly Stevenson can offer some insight. Stevenson worked as a wine and beverage manager for the airline for several years and now runs her own consultancy business.

“Things may have been amended in light of Covid-19, but BA's alcohol strategy was in place through to 2021. Most of the wines were either in stock or under contract. However, since March very little wine would have been served at 35,000 feet or poured in the lounges so the reserves will now last much longer than originally forecast,” says Stevenson.

“When I was wine manager at BA, I would taste regularly blind every three months and tender out to brokers and consider direct sales, dependent on the best source for any particular wine. I believe the desired future strategy is to buy in large volume parcels, to last longer, requiring less frequent tenders and tasting events. I believe the overall ambition is to buy direct to align with cost-saving strategy.”

This will present a new set of challenges for the industry. Presuming they survive, airlines such as British Airways and Iberia rely on business/first class revenue to enable the long haul model to be sustainable. Passengers pay big bucks and understandably expect 5-star treatment. Yet even prior to Covid-19, disgruntled customers were taking to social media to complain about BA's underwhelming wine quality. A further cut in the alcohol offering may be the final straw. It's certainly a difficult balancing act, as the industry clearly needs to drastically cut overheads. But what kind of reductions will flyers accept?

In an FT article published in 2019, Jancis Robinson MW noted: “The dire state of BA's budget can be judged from a recent discussion on Flyertalk.com. The Villa Maria Sauvignon Blanc then on offer in BA first class was spotted in Morrisons at £5 a bottle, two for £9. Even more recently an Argentine Malbec that retails for $10 was served in first class. All submissions in a recent first class tender for wines over €6 a bottle from the cellar door were rejected. (The budget for forward buying of claret used to be €25.).”

Of course, in light of the devastation wrought by coronavirus, it now seems churlish to complain about falling claret standards at high altitude. It may be the case that first class passengers overlook any drop in wine quality, buoyed by their sheer delight at being able to travel. Or perhaps - and this is more likely - they'll return to the world of luxury travel with fierce expectations after the lockdown malaise.

In 2019, BA served its high-paying customers Laurent-Perrier's Grand Siècle. If they decide to substitute it for Tesco Cava, then they could have a mid-flight revolt on their hands.

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