Download - 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