airlines in 21st century

Air Transport in the 21st Century

Colin Lewis

Airline Industry Strategies

Independent Alliances Code Sharing

Economy Premium Economy

Business class

First

Routes andRoute Structure

Structure

Fares

Customers

Product

Wide-body Narrow body

Regional Jet TurbopropAircraft type

Scheduled Flights

Chartered Flights Air Freight

Business Travelers

Leisure VFR

Short Haul Long Haul

Hub and Spoke Point to Point

Intra-Industry RivalryRivals: FR, EI, BE, BMI, RE,

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Internal audit

• Travel Agents • Corporate

travellers• Government• Leisure Travelers• Charter

• Alternate Travel Services• Road• Boats• Car

• Videoconferencing

• Aircraft Manufacturers• Aircraft Leasing Companies• Food Service Companies• Fuel Companies• Airports• Local Transportation Service • Google

• Foreign Carriers• Regional Carrier Start ups

Porter 5 forces

Airline Profitability

• Airlines (try to) manipulate three main variables:

• Cost, calculated as total operating expenses divided by available seat miles (ASM)

• Yield, calculated as total operating revenues divided by the number of revenue passenger miles (RPM)

• Load Factor, calculated as the ratio between RPMs and ASMs, which measures capacity utilisation.

Profitability = [yield X load factor] - cost

First flight by Orville Wright, December 17, 1903

Airline Industry Financial Viability?

“If I had been at Kitty Hawk when Orville Wright took off, I would have shot him down as a public spirited act for the benefit of future capitalists”

Warren Buffett

Today

• For 2008, global airline losses $5bn

• For 2009, global airline losses circa $4.1bn

• Passenger traffic is to decline by 3%

“We face the worst revenue environment in 50 years”

IATA CEO.

Open Skies = Closed Skies

• EU and US have the most deregulated domestic aviation markets in the world.

• Open skies

• Nationality restrictions

• ‘Flag’ carrier

• Example: Air France

The Market

Customers balance time v price

• Time is a multiple of convenience factors:

o Timetables

o Closeness of the airport to home and to destination

o Ease of travel through, to and from airports

o Ease of travel through the airport

• Price willing to pay varies on ability to pay and reason for travel.

o Corporates decide on timetables

o Leisure &VFR travellers decide on airport ease of access and time of day

o More flexible travellers decide on cheapest price and are willing to be spend time and effort to get it

• Short haul flights are commoditized – long haul still premium

Pricing

Theory vs Practice

Simple Concepts

• Relatively fixed seat capacity

• High fixed costs

• Combination of elastic and inelastic market segments

VS

Reality

• Oligopoly

• Strategy is generally dominated by mechanics

• Pricing process is often unclear to airline management

Question for you?

What is a good price to pay for a

Dublin – London flight?

Distribution

Many Distribution Points

Call Centre

GDS

Website

OTA

FFP

Corporate

Tour Operators

Partners

End Customer

AirlineCapacity

Online Misconceptions

• Online sales account for 26% of tickets globally.

• USA online sales is around 50-60%.

• EU 36%

• E.g. KLM ??

Why?

• GDS power

• Reach

• Yield

• Corporates

Where does the Airline

Industry go from here ?

Legacy vs Low Cost

Network Model imposes higher costs:

• Two-class cabin

• Connecting passengers and bags

• More ground staff

• Slower turn-rounds

• More expensive airports

• Higher Staffing levels

• Out-dated work rules

• More expensive distribution (e.g. agents and GDSs)

• Mixed fleets

Legacy Options?

• Match LCC costs - but difficult to close gap

• Transform themselves into LCC

o i.e. Independence Air, US Air/America West

• Spin off a low-cost subsidiary, e.g. Jetstar, (Qantas) or Tiger (SIA), =>few succeed – Buzz , Go, Snowflake, Song

• Refocus on long-haul markets and reduce/outsource short-haul

• Mix the best of both e.g. Frontier airlines

Shape of things to come – Southwest?

•Largest carrier in 90 of SW's top 100 markets

•77% share of intra-Texas traffic

•71% share of intra-California traffic

Future?

• 3-5 Long-haul Network dominators per regiono Except for middle east!

• Low-cost Service Providerso Low cost (2 to 3 majors)o Charters (2 to 3 majors in Europe)

• Niche Carrierso Regional or national o Cargo