airline business modelsfsncs, lccs, ulccs and charter carriers
TRANSCRIPT
Realizing the vision together
Airline Business ModelsFSNCs, LCCs, ULCCs and Charter Carriers
Istanbul Technical University
Air Transportation Management, M.Sc. Program
Aviation Economics and Financial Analysis
Module 8
November 12, 2014
Realizing the vision together
Outline
2
Economic characteristics of
•FSNCs
•LCCs
•ULCCs
•Charter
Cost structure of the different carrier types
Market impact of LCCs/FSNCs
FSNCs versus LCCs
Future of LCCs/FSNCs
19 November 2013
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Evolution
Before deregulation
•Full service network carriers
•Significant number of charter carriers
•No low cost models
•No price competition (same price on a given route)
•Full-quality service
•Point-to-point route networks
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Evolution – cont.
After deregulation
•Proliferation of LCC models
•Hybrid carriers
•Industry consolidation (mergers and acquisitions)
•Alliances and joint ventures
•Service debundling
•Hub-and-spoke route systems
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Hub and spoke route network
Hub and spoke - route network structure by which a carrier utilizes an airport to route a broad range of Origin & Destination markets.
•Hub = Central node or airport
•Spoke = Nonstop routes radiating out from the hub connecting with various other markets
•E-D, A-B, C-B etc. O&D market is routed via hub; market cannot sustain frequent nonstop service
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Realizing the vision togetherSource: OAG, July 12-18, 2010
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TK @ IST OA @ IST ALL @ SAW
Departures
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LH OA
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Time of Day (Local)
Hub Wave Pattern at CDG (AF)
AF OA
Arrivals
Departures
Arrivals
Hub Structures
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Hubs and traffic density
Linear Route
•Each route supports 1 flight/day
•Average traffic density
Hub Route
•Each route supports 2 flights/day
•Average traffic density
•2 flights/day per route
•Same or more total traffic as linear
1 YYC 1
1
YVRYYZ
2 YYC 2
YVR YYZ
Vancouver (YVR), Calgary (YYC), Toronto (YYZ)
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Types of hubs
Simple hubs – little or no coordination between in- and outbound flights. Spokes scheduled independently.
•Complex hubs - flights are co-ordinated to arrive in “banks” (allow more and fast connections between flights but poor utilization outside banks and minimal interline traffic).
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OutboundInbound
Inbound Bank Duration (BDI)
MCTOutbound Bank Duration (BDO)
Total Bank Duration (BDT)
Typical bank duration lasts between 1.5 hours and four hours
● Bank Duration (BDT) = Inbound Bank (BDI) + MCT + Outbound Bank (BDO)
● Extended banks (> 4 hours) produce many hits, but most are poorer quality (i.e. MCT minimization) QSI factors
● “Fast” connections (utilization-driven)
– sacrifice breadth of connectivity
● “Many” connections (volume-driven)
● sacrifice efficiency, i.e. minimize MCTs
Bank Structure
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Types of hubs
Directional
•all arrivals from east, all departures to west
•E-W or N-S aligned spokes due to market, regulatory conditions
•geographic constraints (i.e. Canada, CX)
Multiple (Omnidirectional)
•Reflective of mature hub development
•Broad domestic geographic network (i.e. U.S.)
• Geographic location with multiple International Destinations (e.g. THY and IST)
•Characteristic of all major U.S. carriers
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● DL’s DTW hub is bi-directional (east-west) and has a 9-wave pattern
● Bi-directional hubs typically have 6+ waves in their daily hub structure
● This type of structure is most commonly found in U.S. hubs
● EK’s DXB hub is omni-directional and has a 3-wave pattern
● Omni-directional hubs are more commonly found in European, Gulf and Asian hub patterns and typically have 3-7 waves per day
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Hub Wave Pattern at DTW (DL)
DL OA
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Deliverable #4 – Hub Design AnalysisExamples of Directional and Omni Hubs
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Types of hubs – cont.
12
International
•International & domestic networks co-ordinated
•Carriers primary international gateway for that region
•i.e. YVR (AC), SFO (UA), MIA (AA), IST (THY)
•i.e. HKG (CX), AMS (KL) - though no domestic networks
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Hub Wave Pattern at FRA by Region (LH)
Domestic Africa Caribbean/Central/South America Europe Far East Middle East North America Oceania South Asia
Arrivals
Departures
Hub Wave Pattern at FRA (LH) – by Region
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Time penalties of hubs
14
Three additional trip time components compared to nonstop flight:
•30 minutes for additional ascent/descent (stop) at hub airport
•Extra cruise time (depending on the angle)
•Connection time (30-60 minutes between flights)
Extra trip time offset by better total time for traveler:
•Total time = trip time + waiting time
•Wait time = Time from Desired Departure to Actual Departure
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Overview of the hub design principles
Design process schedule is a generator of alternatives, and selection of the best fit. Ideally, this is a combination of different optimization tools
Selecting the Best Hub Structure Requires DefiningAlternative competing hub structures and selection of the best structure that leads to the optimal outputs
Peer Hub Bank Time Comparison
AF @ CDG LH @ FRA EK @ DXB
BDI 1.50 3.75 3.17
BDO 1.57 3.88 3.50
MCT 1.00 0.75 0.75
BDT 4.07 8.38 7.42
# Banks 7 4 3
Source: OAG, July 12-18, 2010
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Time penalties comparison
16
Linear:
•2 flights per day nonstop, 8 hours apart.
average wait = 4 hours
Hub:
•4 flights per day, but via hub
•2 hours apart
average wait = 1 hour
+ 0.5 h ascent/descent
+ 0.5 h extra cruise
+ 0.5 h connection
total wait & incremental flight time = 2.5 hours
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Demand effects
N cities in a hub network N (N-1) / 2 potential city pairs
Supporting a hub - total traffic needed to support an additional flight can be small
eg Airline has 200 destinations connecting to hub 1 passenger per
destination could fill an aircraft
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Demand effects – cont.
18
“Hubbing” keeps more traffic on-line (less interline)
Feeder links can be important - hubs led to the rise of extensive “commuter” or “regionals” aligned, contracted with or subsidiaries of major air carriers (e.g. AC Jazz)
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Hub choice factors
Competition
Weather
•especially for cargo hubs
Geographic location
Distance from the airline’s other hubs
Local O&D market
Airport congestion
•groundside & air traffic
•access to gates & facilities
•room for future growth
•community support
•Restrictions (e.g. night operations)
No of City Pairs within 40% circuitry
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Criteria for evaluating hubs
Evaluation Criteria Minimum
Requirement
Intl O&D demand >1.5 million annual
pax in 2008
Dom O&D demand >1.5 million annual
pax in 2008
Good circuity for 6th
Freedom markets
>30 of top markets
<130% circuity
Potential for strong
presence
achieves ranking in
top 2 by seat share
Apt capacity for
hubbing
>40 gates available
simultaneously
Primary Hubs
Evaluation
CriteriaMinimum
Requirement
Regional O&D
demand
>1 million annual pax in
2008
Dom O&D
demand
>1 million annual pax in
2008
Good circuity for
regional markets
>20 of top regional
markets <130% circuity
Good circuity for
domestic markets
>20 of top domestic
markets <130% circuity
Apt capacity for
hubbing
>20 gates available
simultaneously
Secondary Hubs
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Apply criteria to hubs in India: Example
= Meets criteria
Only BOM and DEL satisfy all of the criteria to be a Primary Hub
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DEL
BOM
MAA
HYD
BLR
DXBDOH
AUH
Delhi is geographically positioned to provide direct routings to the
greatest number of 6th Freedom markets, when compared to major
hubs like Dubai and Singapore
4744
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DEL DXB AUH DOH CCU BOM HYD MAA BLR SIN
Number of 6th Freedom Markets between East Asia & Oceania and Europe with <130% Circuity1,2
DEL is also better located than other major Indian airports to connect Asia & Oceania with Europe
CCU
Europe
East Asia &
Oceania
SIN
Source: Industry DataNotes: 1/ Analyzed Top 100 6th Freedom O&Ds between East Asia/Oceania and Europe; 2/ 130% circuitry means that the total flown distance between two cities via the hub is 30% greater than the nonstop distance
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A key source of fragility is increased competition from low cost carriers
Industry Challenges
•Low cost carriers have redefined the airline product
•One-way versus return trips
•Point-to-point versus hub-and-spoke route system
•Less connectivity
•One type of aircraft
•Quicker to adjust capacity
•Focus on what adds value, remove the rest
•Many have achieved high, consistent profitability
• Low Cost Carriers have redefined the industry and its economics.
• Air Canada has launched a new low cost model with their leisure focused Rouge.
• WestJet has launched a new regional service, Encore.
2319 November 2013
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Next Generation
Airline Business Model
The Internet effect
•Industries Profoundly Impacted by Internet Companies:
•Music
•Video
•Newspapers
•Book publishing & retail
•Traditional Phone Companies
•Big Box Electronics
•Income tax preparation
•Travel Agents
•Aviation
• Google purchased travel software company ITA Software Inc
• ITA powers Orbitz, Kayak, Cheap Tickets, AA, UA, Virgin, ANA and others
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Internet creates new interline products
Google/Social Media/Visa Int’l:
Re-packaging Airline Product?
Internet companies have potential to repackage airline products:
•Kayak “hacker fares” create connections not available from carriers;
•Google invested in airline res system;
•Could develop platform to enter business directly;
•Could offer value added packages for trip fulfillment:
•Would you pay $125 for guarantee that you will get to your destination today?
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Automated kiosks are playing a greater role
Automation
•90% of domestic AC passengers use kiosk, mobile check-in or automated bag-tag process
•WestJet has approximately 85% of passengers check-in online or a kiosk
•Ryanair charges fee if kiosk is not used
•Amsterdam airport - fully automated bag drop function
August 2011, Amsterdam Bag-Drop
Automation & Check-In:
•Mobile check-in and boarding passes have nearly replaced the traditional check-in process.
•Canada was a pioneer in self bag-tag.
Auckland, New Zealand
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Types of airline
business models
Legacy or full-service network carriers
Low cost carriers (LCCs)
Ultra low cost carriers (ULCCs)
Charter carriers
Regional carriers
Hybrid carriers
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Legacy carriers
Legacy carriers (or FSNCs)
•Wide range of pre-flight and onboard services
•Multiple seat classes
•Hub-and-spoke route systems
Still account for a large share of passenger traffic
•Larger market share in international routes
•Smaller in domestic markets (loss to LCCs)
Ownership (private, majority or minority stake owned by the government, multi-country)
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Major airlines by the number of
passengers carried
Source: IATA, January 2013
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Major international
cargo carriers
Source: IATA, June 2011
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Profit vs Compensation
Source: Dallas News (04/2011)
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Low cost carriers (LCCs)
“No, we shouldn’t give you a bloody cup of coffee. We only charge 19 euros for the ticket”
Michael O’Leary, President of Ryanair
“When someone comes to me with a cost saving idea, I don’t immediately jump up and say yes. I ask: what’s the effect on the customer?”
Herb Kelleher, former CEO Southwest Airlines
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Low cost carriers have contributed to profit erosion of majors
LCCs
LCC differ from legacy carriers:
•Do not offer ‘frills’
•Have point-to-point route systems as opposed to ‘hubs’
•Use simple fleet composition, typically one type of aircraft
•Non-unionized labour
US-based Southwest Airlines is a notable example of success with over 40 consecutive years of profitability
Ryanair is the most profitable passenger airline in Europe
Canada’s LCC WestJetwas modeled on Southwest
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LCC business model
Major expansion of LCCs in the US, Canada, Europe, Australia, Asia and Latin America.
Traditional LCC business model:
•one type of aircraft
•‘no frills’ product
•charge for ‘ancillaries’
•price sensitive travellers
•high density routes
•high aircraft utilization
•secondary airports
•point-to-point route systems
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LCC design
• Product design (simplicity)
•Single class
•Higher density seating
•No assigned seating (e.g., Southwest)
•‘cheap and cheerful’
• Process design (simplicity)
•Use of secondary airports
•Minimum turn-around time
•High aircraft utilization
•No connections, interlining
•Short to medium haul routes (up to 750 miles)
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With a banked schedule, minimum connect times drive
turnaround times – not ground operations
Ground Operations – Required Time for a Turnaround
( Carriers – 737-300)
41-46
min
Extend jetway and
open door
(1 min) Deplane
(10 min)
(10-15 min)
(13 min)
Prearrival(2 min)
Equipment
Set Up
(2 Min)
Weight and
Balance
(2 min)
Ram
p (
Outs
ide)
Insid
e
Cater(15 min)
Clean cabin
Boarding
33-43
min
Ground
power A/C
bin door
(3 min)Unload/load bags and cargo
(20-30 min)
Departure
Dispatch
(4 min)
Close door
and jetway
(1 min)
Close cargo
door
(1 min)
Arrival
Fuel
(10-15 min)
Opportunities To Compress Ground Operations’ Turnaround Times
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Fuel
(6-11 min)
But, with a continuous schedule, ground operations drives
turnaround time, and thus airplane/crew utilization
21-31
min
Extend jetway and
open door
(<1 min) Deplane
(6 min) (2-5 min)
(9-13 min)
Prearrival(2-7 min)
Equipment
Set Up
(1-2 Min)
Weight and
Balance
(1-2 min)
Ram
p (
Outs
ide)
Insid
e
Cater(13-16 min)Cleaning
Boarding
23-32
min
Ground
power A/C
bin door
(<2 min)
Unload/load bags and cargo
(18-21 min) Departure
Close door
and jetway
(<1 min)
Close cargo
door
(<1 min)
Arrival
The LCCs Have Engineered Rapid Turnaround Processes emulated on short haul routes by network carriers
Ground Operations – Required Time for a Turnaround
( Southwest – 737-300)
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Differences between legacy and low cost models
HUB & SPOKE CARRIER LOW-COST CARRIER
Model Convenient connecting travel via hub Efficient point-to-point (P2P) travel
Scheduling
Synchronized banks:
– enable rapid connections
– lower utilization of flight
equipment/crews
– uneven workload for ground crews
Continuous flow uses flight and ground resources
efficiently (minimal down time and level-loading)
TurnaroundsLengthy (65 min), due to the minimum
connect times for passengers and bags
Minimized (25 – 30 min) -- key to high utilization of
flight resources
Baggage
Handling– Schedule creates uneven work load
– Two parallel baggage-handling systems
– Schedule creates level work load
– Simpler baggage-handling system
Passenger
Handling
– Schedule creates uneven work load
– Intense re-work to maximize service to
preferred pax (e.g., re-seating)
– Schedule creates level work load
– Simpler process provides adequate customer
service
FuelBanked schedule creates hub congestion
that consumes extra fuel
Continuous schedule minimizes congestion,
reducing fuel consumption
Objective Heavy use of high-cost channels (GDS) Heavy use of low-cost channels (direct)
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LCC cost advantage
Source: CAPA Centre for Aviation (2010)
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Mid 2000@s US LCCs had still a cost advantage of up to 37%
over US network carriers
Source: IATA Airline Cost Performance Economics Briefing, March 2007.
Operating Cost per ASK 1/
6.83
4.43
5.96
5.07
7.32
5.555.27
4.36
6.89
5.555.27
4.36
0
1
2
3
4
5
6
7
8
Network Airlines JetBlue AirTran Southwest
Co
st
pe
r A
SK
(U
S$
ce
nts
)
Unadjusted
Stage-Length Adjusted
Seat Adjusted
1/ CY 2005.2/ American, Delta, United.
2/
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LCCs cost advantage
Source: O’Connell (2008)
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0.4
1.1
0.4
4.3
1.1
0
7.3
0
1
2
3
4
5
6
7
8
Network
Airline
Labor Aircraft and
Fuel
Infrastructure Product,
Distribution,
Overhead
Seat Density
Adjustment
Southwest
US
$ c
en
ts p
er
AS
K
Southwest achieves 75% of its cost advantage through fuel
hedging and product, distribution, and overhead cost savings
Source: IATA Airline Cost Performance Economics Briefing, March 2007.
1/ CY 2005.2/ American, Delta, United.
1 /
2/
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0.3
0.5
0.4
5.6
0.40.1
7.3
0
1
2
3
4
5
6
7
8
Network
Airline
Labor Aircraft and
Fuel
Infrastructure Product,
Distribution,
Overhead
Seat Density
Adjustment
JetBlue
US
$ c
en
ts p
er
AS
K
JetBlue’s cost savings are more evenly
spread across all cost centers
Source: IATA Airline Cost Performance Economics Briefing, March 2007.
1/ CY 2005.
2/ American, Delta, United.
1 /
2/
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0.8
2.0
1.2
6.5
0.8
0.3
11.6
0
2
4
6
8
10
12
Network
Airline
Labor Aircraft and
Fuel
Infrastructure Product,
Distribution,
Overhead
Seat Density
Adjustment
EasyJet
€ c
en
ts p
er
AS
K
EasyJet has far less of a gap in infrastructure costs as it
operates at more major airports than Ryanair
Source: IATA Airline Cost Performance Economics Briefing, March 2007.
1/ CY 2005.2/ Air France, British Airways, Lufthansa.
1 /
2/
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LCCs profit margin
Source: The Economist (2012)
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Economic Impact of LCCs
Large airfare reduction [Hof, Dresner & Windle (2004), Morrison & Winston (2003), Kim & Singal (1993), Borenstein (1990, 1992)]
•Network carriers reduced average airfares by 35-40%
Huge expansion of stimulated demand as well as passengers attracted from adjacent airports thus dramatic increase in travelers at LCC airports
Network carriers’ hub premiums decreased significantly when one or more LCCs are present at the hub
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North America
Flights per week: 35,027
Miles/Flight: 688
2005-06 capacity = +8%
Latin America
Flights per week: 3,238
Miles/Flight: 601
2005-06 capacity = +45%
Oceania
Flights per week: 5,727
Miles/Flight: 675
Middle East & Africa
Flights per week: 988
Miles/Flight: 1,063
2005-06 capacity = +37%
Far East
Flights per week: 6,941
Miles/Flight: 469
2005-06 capacity = +45%
Europe
Flights per week: 23,767
Miles/Flight: 650
2005-06 capacity = +26%
LCC expansion globally is a continued driving
source of growth
LCC routes in end 90’s LCC routes mid 2000’s
Europe
Flights per week: 4,040
Miles/Flight: 609
2005-06 capacity = +26%
North America
Flights per week: 26, 151
Miles/Flight: 710
2005-06 capacity = +8%
Sources: OAG,
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Current status of LCCs
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LCCs in North America
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Southwest Airlines
1971 1983 2013
Source: Southwest Airlines
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Impact on fares before and
after Southwest entry
In top 10 Philadelphia markets
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Impact on traffic before and
after Southwest entry
In top 10 Philadelphia markets
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LCCs in Europe
Trends:
•Increased LCC penetration
•LCC subsidies (lower airport landing fees)
•Ryanair allegedly benefited from 660 million EURO in subsidies
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LCCs in Asia
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LCCs quickly gain
domestic market share in Asia
Source: CAPA as quoted by Airline Leader (2012)
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Ultra Low Cost Carriers (ULCCs)
The difference between LCCs and ULCCs is relative
•tend to incorporate the majority of LCC features
•rely on traffic stimulation more than market steal
•max number of a la carte services
•do not offer ‘frills’ if they add to costs
Marketing tool of self-promotion
•(“Ryan Air – Europe’s only ULCC”)
József Váradi distinguishes between ULCCs, a category in which he places Wizz Air, and LLCCs, lazy-low-cost carriers, that have lost their original focus and are "diverting from the basic fundamentals of being really low-cost".
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ULCCs
ULCCs differ from LCCs :
Rely on traffic stimulation more than market steal
High proportions of ancillary revenues
Do not offer ‘frills’, even if they enhance revenues, if the frill adds to costs.
ULCCs have power to shift passenger travel and airport usage patterns to much greater degree than traditional LCCs.
The ULCC business model is based strictly around low fares, which requires low costs.
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Ancillary services are an important
source of revenue for ULCCs
Ancillary revenue = revenue from non-ticket sources
Charging for everything: blankets, entertainment, beverages, food, priority boarding, credit card handling fee (!) etc.
Becoming a major source of revenue for LC, LCC and ULCC – 43.8% increase world wide to $32.5b in 2011
United $1,527m, Qantas $783m, Ryanair $663m, Air Canada $534m (2009)
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ULCCs and ancillary revenue
Source: tnooz (2010)
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ULCC at a glance:
Allegiant Air
•Founded in 1997
•Based in Las Vegas (focus cities in Florida and Phoenix)
•A travel company (hotels, car rentals, show tickets distribution)
•Route network has minimal overlap with LCCs
•Profitable (EBITDA 16.4% in 2011)
•Low debt ratio
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Allegiant’s focus is on leisure markets
Route map as of February 2012
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Allegiant’s business model
Fleet
•51 MD-80
•1 B757-200 (5 more on order)
Costs
•Low aircraft ownership costs
•Simple IT systems (no connecting flights)
•Uses low cost airports
•No dedicated counters at airports
Product
•No frills service at a low price
•Canadian traffic at US airports (e.g. Bellingham and Plattsburgh)
•$133 BLI-LAS versus $274 YVR-LAS with Air Canada
19 November 2013 62
Realizing the vision together
ULCCs
Europe
• Ryanair, Wizz Air, Aer Lingus
•(Michael O’Leary “Ryanair is the only ULCC”)
North America
•Spirit Airlines, Allegiant Air
Canada
•no ULCCs presently
•Rouge will not be ULCC according to AC’s CEO.
•“Is it ultra-low cost à la other low-cost carriers elsewhere in the world? You know, that was not necessarily achievable within the context of our unionized environment.”
19 November 2013 63
Realizing the vision together
2.2
2.4
1.2
4.1
1.2
0.5
11.6
0
2
4
6
8
10
12
Network
Airline
Labor Aircraft and
Fuel
Infrastructure Product,
Distribution,
Overhead
Seat Density
Adjustment
Ryanair
€ c
en
ts p
er
AS
K
A newer fleet explains part of Ryanair’s cost gap, but the
largest gap still exists for product and distribution costs
Source: IATA Airline Cost Performance Economics Briefing, March 2007.
1/ CY 2005.2/ Air France, British Airways, Lufthansa.
1 /
2/
Realizing the vision together
Ryanair – pursuit to reduce its operational costs
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
2000 2001 2002 2003 2004 2005
CA
SM
(€)
Other
Landing and handling
Route charges
Aircraft rental
Distribution
Maintenance
Personnel
Depreciation and
amortisation
Cut down maintenance costs
Cut down personnel costs
Cut down distribution costs
Cut down landing and handling
Source: Ryanair
Realizing the vision together
Ancillary revenues significantly contributes to
revenues and profitability of low cost carriers
Ancillary revenues as a proportion of total revenue
Source: Centre for Asia Pacific Aviation
● Ancillary services can bring substantial revenues
● But to generate them requires complex marketing and sales effort
● Passengers want to save with LCCs, instead of spending
Realizing the vision together
Regional carriers
Beech
•19 seats 1.5-2 hours
Dash 8
•37-74 seats 2+ hours
CRJ/ERJ
•50-90 seats 3 hours
Embraer
•70-180 seats 4 hours
19 November 2013 67
Realizing the vision together
Charter carriers
Canada & Europe: important industry players
U.S. & Asia: not common
Seasonal niche opportunities (35% of summer Europe are Charters)
Commonly 1- 4 freq/wk. Maximize aircraft utilization
Varies significantly from year to year
Often affiliated with tour operators (i.e. Canadian Affairs)
Canada: Zoom, Air Transat, Skywings
Europe: Thomas Cook, LTU, MyTravel
19 November 2013 68
Realizing the vision together
Charter carriers in Europe
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Spain Canary
Islands
Greece Turkey Cyprus Egypt Portugal
(Excl
Madeira)
Italy France Tunisia Bulgaria
Passen
gers
(000s)
Figures in red indicate typical
sector length in kilometers
1,862
9981,859
1,868
4,110
3,468
2,956
2,267
3,046
2,5932,203
For each country every bar from left to right represents one year, 1996 to 2006
Number of charter passengers from the UK to top destinations, 1996-2006
Realizing the vision together
The growth in individual (seat only) travel has had a
significant impact on the traditional charter market
30 33 34 36 39 36 33 34 36 38 37 36 36 36 33 30 29
43 4348 46
51 59 6775
8189
101 107 105115
131148
162
0
50
100
150
200
1990 1992 1994 1996 1998 2000 2002 2004 2006
Passen
gers
(m
illio
ns)
Scheduled
Non-scheduled
Source: DGAC Spain
Passengers at Spanish airports (1990-2006)
● In Spain the charter market peaked in 1994 and has declined by 25% in 12 years
● In the same period the total market has trebled, with scheduled carriers growing four fold.
● Much of the scheduled growth since 2002 has been with Low Cost Carriers
Realizing the vision together
Example Decline of UK charter airlines
Non-scheduled passengers carried by key UK airlines
Source: UK CAA
4,416 4,092 3,791 3,303 3,137 2,794 2,654
6,234 7,210 7,4366,935 6,378
3,857 3,568
5,7466,037 5,261
4,9264,853
4,686 4,656
8,0537,905
8,017
7,9718,199
8,070 8,069
5,5525,235 5,693
6,0415,797
5,7305,284
7151,076 1,455
1,8712,339
2,590 3,194
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2000 2001 2002 2003 2004 2005 2006
Passen
gers
(000s)
XL Airw ays
First Choice
Thomsonfly
Thomas Cook
My Travel
Monarch
Drop of around 3000 pax
Realizing the vision together
Circa 100 charter airlines in Europe, with over half of all charter
aircraft operated by carriers from the UK, Germany or Turkey (2008)
Number of aircraft over 50 seats operated by charter carriers
Note: Europe includes EU27, plus Croatia, Iceland Norway, Switzerland and Turkey
1
2
2
3
4
46
7
10
10
11
11
13
13
15
21
23
2639
46
48
71
103
128
204
0 50 100 150 200 250
Hungary
Latvia
Lithuania
Finland
Greece
Poland
Cyprus
Czech
Austria
Portugal
Denmark
Romania
CroatiaSwitzerland
Belgium
Bulgaria
Sweden
Iceland
Italy
France
Netherlands
Spain
Turkey
Germany
UK
Note this data includes vertically integrated fleets as well as independent charter carriers
Realizing the vision together
Growth of seat-only market to try to compensate
decline of the traditional package tour market
Scheduled passengers carried by key UK airlines
Source: UK CAA
432 621 758
1,323
1,890
2,558
3,134988
1,095
528157
250 217457
1,436 1,549
820
1,709813
287
263
266 233
85
0
1,000
2,000
3,000
4,000
5,000
6,000
2000 2001 2002 2003 2004 2005 2006
Passen
gers
(000s)
XL Airw ays
First Choice
Thomsonfly
Thomas Cook
My Travel
Monarch
Growth of around 4000 pax
Realizing the vision together
Unit costs of charter carriers
Adjusted unit cost (@ 800 km, eurocent)
3.5
3.6
4.9
4.9
4.9
5.0
5.1
5.3
5.3
5.5
5.5
5.7
6.0
6.1
6.7
6.7
6.9
7.7
8.5
0 2 4 6 8 10
Ryanair - 2007
Ryanair - 2006
First Choice - 2006
TCUK - 2006
Eurocypria - 2006
Eurocypria - 2007
Monarch - 2006
Air Berlin - 2006
XL Airw ays UK - 2006
MyTravel Airw ays - 2006
Astraeus - 2006
easyJet - 2007
Transavia - 2006
easyJet - 2006
Jet2 - 2006
Thomsonfly - 2006
Cyprus Airw ays - 2007
Cyprus Airw ays - 2006
Aegean Airlines - 2006
0 2 4 6 8 10
Handling Charge Per Passenger €, 2006/07
€ 7.2
€ 8.0
€ 10.5
€ 10.6
€ 10.7
€ 11.7
€ 12.0
€ 13.3
€ 14.5
€ 18.9
€ 27.8
€ 30.1
€ 6.7
€ 7.8
€ 0 € 5 € 10 € 15 € 20 € 25 € 30 € 35
Cyprus Airw ays
Flyglobespan
Eurocypria Airlines
Jet2.com
Thomas Cook
MyTravel
Thomson Fly
Monarch
XL Airw ays
BMI Group
First Choice
Astraeus
Virgin Atlantic
British Airw ays
Average Cost Per Pilot in € 2006/07
80.7
0 20 40 60 80 100 120 140 160
Tarom - 2006
JAT - 2006
Sky Wings - 2007
Croatia - 2006
Astra Airlines - 2007
EuroAir - 2007
Hellenic Imperial - 2007LOT - 2006
Malev - 2006
Eurocypria - 2007
CSA - 2006
Turkish - 2006
BMI - 2007easyJet - 2007
XL Airways UK - 2007
Monarch - 2007
Thomsonfly - 2007
First Choice - 2007
Austrian - 2006
British Airways - 2007
Cost in € 000s
Realizing the vision together
●Profitability of Charter Carriers
20%
20%
10%
7%
4%
12%
12%
3%
4%
9%
3%
1%
0%
10%
2%
-2%
-3%
-7%
-8%
14%
20%
9%
6%
3%
12%
9%
-4%
3%
9%
3%
1%
1%
6%
0%
-2%
-3%
-5%
-7%
-10% -5% 0% 5% 10% 15% 20% 25%
Ryanair - 2007
Ryanair - 2006
easyJet - 2007
easyJet - 2006
Air Berlin - 2006
Thomsonfly - 2006
First Choice - 2006
Monarch - 2006
Transavia - 2006
TCUK - 2006
MyTravel Airw ays - 2006
XL Airw ays UK - 2006
Jet2 - 2006
Aegean Airlines - 2006
Cyprus Airw ays - 2007
Cyprus Airw ays - 2006
Eurocypria - 2007
Eurocypria - 2006
Astraeus - 2006
Operating margin Net profit margin
0.2%
-6.6% -6.5%
0.7% 0.5%
1.8%
0.1%
7.2%
2.6%
1.0%1.8% 1.6%
1.9%
1.1%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
2004 2005 2006 2007Net
Marg
in
Astreus Monarch
XL Airways Futura
Charter operators must extract higher prices in the market to survive.
Realizing the vision together
Future trends in
airline business models
Hybrid models develop as airlines move away from ‘pure’ legacy or low cost models.
Airline business models are converging towards one another as:
•Legacy carriers face increased pressure to lower costs, cut on ‘frills’, charge for ‘ancillaries’, renegotiate labour contracts, etc.
•Low cost carriers look for new markets and expansion opportunities
19 November 2013 76
Realizing the vision together
2.2
2.4
1.2
4.1
1.2
0.5
11.6
0
2
4
6
8
10
12
Network
Airline
Labor Aircraft and
Fuel
Infrastructure Product,
Distribution,
Overhead
Seat Density
Adjustment
Ryanair
€ c
en
ts p
er
AS
K
A newer fleet explains part of Ryanair’s cost gap, but the
largest gap still exists for product and distribution costs
Source: IATA Airline Cost Performance Economics Briefing, March 2007.
1/ CY 2005.2/ Air France, British Airways, Lufthansa.
1 /
2/
Realizing the vision together
Ryanair – pursuit to reduce its operational costs
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
2000 2001 2002 2003 2004 2005
CA
SM
(€)
Other
Landing and handling
Route charges
Aircraft rental
Distribution
Maintenance
Personnel
Depreciation and
amortisation
Cut down maintenance costs
Cut down personnel costs
Cut down distribution costs
Cut down landing and handling
Source: Ryanair
Realizing the vision together
Are we seeing the evolutionary business model in action
and changing the industry ?
Realizing the vision together
In US legacy carriers started closing the gap from
mid 2000’s
4.4¢
2.4¢2.6¢
2.0¢
0.0¢
0.5¢
1.0¢
1.5¢
2.0¢
2.5¢
3.0¢
3.5¢
4.0¢
4.5¢
5.0¢
2000 2005
Network LCC
Not adjusted for Stage Length
Source: U.S. DOT, Form 41 Domestic Only
Labor Costs per ASM
CY 2000 & CY 2005
Realizing the vision together
US carriers have been successful in reducing their distribution
costs taking advantage of lower cost distribution channels
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Northwest
Southwest
Promotion and Sales Costs as a Percentage of Operating Costs -- Selected US Carriers’ Domestic Sectors
Source: US DOT Form 41 Q2 2006. Includes NW and WN
Continental increased internet sales from 5% of total to nearly 50% of total between 2000 and 2005
– Hawaiian went from around 3% to 50% as well
Airlines have brought their costs down by:
– Redirecting customers to direct channels
● On to websites and away from agents
● B2B
● On line agencies
– Renegotiating contracts with GDS providers
– Increasing e-ticket use
– Significant reduction in ATO
11.2%
13.3%
11.0%
7.1% 7.4% 7.1%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Legacy LCC Hawaiian
1999 YE2Q06
US Airline Distribution Costs as a Share of Operating Revenue 1999 vs. YE2Q06
Realizing the vision together
Emulate lessons from the success of Low Cost Carriers
● Divestiture of business units airline MRO etc and provide focus on that with holding company
● Privatisation, formation of new labour contracts in business friendly environment with hire and fire and performance based compensation
● Delayer and rationalise the business: most airlines can achieve that by leveraging growth
● Intelligent use of front office back office strategies to maintain focus and synergies across back office
● Creation of focused airlines with front office specialisation and back office synergies Network focus on variable contribution and restructuring
– Focus assets on few destinations (concentrate fewer destinations and dominate the city pair
– Eliminate tag flights, two stop one stop routes
– Day of week, time of day and convenience of the schedule
– Hub Optimisation - improve flight connection either side of the banks
– Use of professional modelling tools and develop scheduling skills
Realizing the vision together
Depeaking is reducing costs through squeezing out the embedded
unproductive time within a ‘bank’, while crews wait for baggage to travel
0
50
100
150
200
2505:0
0 A
M
5:3
0 A
M
6:0
0 A
M
6:3
0 A
M
7:0
0 A
M
7:3
0 A
M
8:0
0 A
M
8:3
0 A
M
9:0
0 A
M
9:3
0 A
M
10:0
0 A
M
10:3
0 A
M
11:0
0 A
M
11:3
0 A
M
12:0
0 P
M
12:3
0 P
M
1:0
0 P
M
1:3
0 P
M
2:0
0 P
M
2:3
0 P
M
3:0
0 P
M
3:3
0 P
M
4:0
0 P
M
4:3
0 P
M
5:0
0 P
M
5:3
0 P
M
6:0
0 P
M
6:3
0 P
M
7:0
0 P
M
7:3
0 P
M
8:0
0 P
M
8:3
0 P
M
9:0
0 P
M
9:3
0 P
M
10:0
0 P
M
10:3
0 P
M
11:0
0 P
M
11:3
0 P
M
12:0
0 A
M
12:3
0 A
M
1:0
0 A
M
1:3
0 A
M
Productive Travel And Down Time Within Standard
True workload
Work-load standard
Continuous scheduling eliminates a lot of the underlying complexity
Baggage Handling: Workload vs. Staffing Requirement
(Within A Turnaround)
Realizing the vision together
Adjusted Revenue per ASK
0
1
2
3
4
5
6
7
8
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Re
ve
nu
e p
er
AS
K (
20
05
US
$ c
en
ts)
Network Airlines
Southwest
JetBlue
Rising revenues also helped US network
carriers improve operating profitability
Source: IATA Airline Cost Performance Economics Briefing, March 2007.
-12%-36%
1/ American, Delta, United.
1/
-31%
-27%
Realizing the vision together
Full service carriers have implemented some of LCC’s
practices into their business model to improve efficiency
Aircraft – Crew assignment changes frequently
Aircraft and crew rotate independently
Aircrafts rotate via multiple airports in rotation
Maintenance is conducted at multiple locations
Night-stops at different airports
vs.
CrewChange
HAM MUC
CGN
TXL
FRADUS
TXL
CGN
MUC
HAM
FRA CrewChange
CrewChange
Source lufthansa systems
Traditional Flight Plan Structures Adjusted Structures
Dedicated flight crews
Aircraft and crew rotate together
Point-to-point operation of aircraft
Maintenance is only conducted at home base
100% night-stop rate at home base
Realizing the vision together
Dedicated Hamburg Operations profits from using LCC
Structures
Aspects of Lufthansa Hamburg
Dedicated 737 Fleet
Autonomous MRO Teams with fix Members
Point to point Operation of Aircrafts
Nightstop Rate 100% in Hamburg
Dedicated Flight Crews
Easy and efficient Flight Planning
Easy and reliable Prediction of available Capacity
Optimized Maintenance Planning
Simplified Crew Roster Creation
Effective Reaction on Disturbances
Measurable Benefits
Ground Time at Airports: 30 min avg.
Aircraft Rotation: 5 per day
Air - Ground Ratio: 7:1
Fleet Utilization improved: ***
Source lufthansa systems
Realizing the vision together
Adjusted Revenue per ASK
0
2
4
6
8
10
12
14
16
1998 1999 2000 2001 2002 2003 2004 2005
Re
ve
nu
e p
er
AS
K (
20
05
€ c
en
ts)
Network Airlines
EasyJet
Ryanair
European network airlines are able to achieve a much higher
revenue premium over LCC competitors on short-haul markets
than their counterparts in the US
Source: IATA Airline Cost Performance Economics Briefing, March 2007.
-35%
1/
-53%
1/ Air France, British Airways, Lufthansa.
-38%
-46%
Realizing the vision together
LCCs have targeted longer haul markets for expansion: they operate 65% of their domestic capacity in markets over 500 mi.
LCCs -WN,JetBlue,HP,Airtran,ATA,Frontier
Sources: US DOT O&D Database, via Database Products Hub Supplement Database
46%35%
39.9%
45.1%
14.5%20.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2004
Over 1,500 Miles
500-1,500 Miles
0-500 Miles
LCC Distribution of Traffic By Trip Stage Length U.S. Domestic Markets >75 Passengers Per Day Each WayCY 2000 vs. CY 2004
55% 65%
Realizing the vision together
Low-cost carriers increasingly resemble hub & spoke systems, in
addition to expanding their previously limited international offerings
Percent of
LCC Airport Total Seats
Frontier Denver 49%
JetBlue New York Kennedy 35%
Southwest LAS, PHX, MDW, BWI, HOU 30%
WestJet Calgary/Toronto 37%
AirTran Atlanta 35%
America West Phoenix 34%
LCC International Destinations
Costa Rica
Dominican Republic
Jamaica
Mexico
Aruba
Bahamas
Bermuda
Canada
Sources: US DOT O&D Database
Realizing the vision together
As legacies increasingly erode LCC advantages, LCCs will increasingly hybridize to meet the growing challenge
Southwest Airlines in 2005
Number of Aircraft in Fleet 412
Percent of Markets Under 2 Hrs 76.5%
Avg No. of Daily Flights per Market 4.1
Average Stage Length 584
Code-Share Agreements ATA
Southwest Airlines in 2000
Number of Aircraft in Fleet 326
Percent of Markets Under 2 Hrs 83.9%
Avg No. of Daily Flights per Market 4.4
Average Stage Length 470
Code-Share Agreements None
Realizing the vision together
Future trends in
airline business models – cont.
91
Legacy carriers introduce low cost subsidiaries
•Air Canada – Rouge
•Qantas – Jetstar
•Lufthansa – Germanwings
19 November 2013
Realizing the vision together
Thank You!
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