global $11 billion$7.5 billion us $9 billion$6.0 billion losses 2001 2002 global scenario

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Global $11 billion $7.5 billion

US $9 billion $6.0 billion

Losses 2001 2002

Global Scenario

                                                           

State of the Airline Industry

Industry-wide revenue down 16.6%

In May, domestic passenger traffic at the five largest airlines fell 10% from a year earlier. Meanwhile, traffic at their five biggest discount rivals increased 11%.

Midway Airlines, Vanguard Airlines and US Air -- have recently filed bankruptcy petitions

Grounded more than 1,000 jetliners, or between 17% and 21% of their fleets

State of the Airline Industry

State of the Airline Industry

                                                                                                                                                                                                                         

Stock Market Blues

The recession

Internet

Intense competition from low-fare carriers

Inflexible operating procedures

Stubbornly high labor costs

Drivers of the Airline Industry

The Recession

                  

Sterling Group, a marketing consulting firm based in New York

80-employee firm spends about $1 million a year on travel.

staffers are required to buy an advance-fare ticket or switch to a low-fare carrier $515 round trip on JetBlue VS. $2463

How Businesses are Flying?

Internettremendous power to hunt down low fares

consumers' freer access to fare-price information

online booking tools tend to herd customers to the lowest-cost flights rather than the fastest ones

planning in advance for a trip and booking a lower fare is becoming the norm for business travelers

bypassing corporate travel offices whose negotiated fares are often no bargain anymore

                           

Intense Competition from Low Fare Carriers

Intense Competition from Low Fare Carriers

Inflexible Operating Procedures

Hub and Spoke systems

concentrate passenger loadsinefficient and costly

Response: Big carriers will keep hubs Accelerate development of "neural systems" use small regional jets to bypass hubs and connect smaller markets

                                           

           

The Hub System for Delta at Atlanta

Stubbornly High Costs

Labor Costs account for more than 40.8% of revenues in 2001 (up sharply from 34.9% in 2000)

LABOR COSTS Issue: New labor contracts, based on late '90s profits, are inflating cost structure at a time of deep losses.

Outlook: Some carriers will seek concessions or try to hold the line in new talks. To have any hope of succeeding, managements must convince unions their recovery plans spread the pain

reduce its current capacity by 9% by November

eliminate 7,000 jobs and save the company about $1.1 billion a year

phase out its entire fleet of 74 Fokker 100-seat airplanes.

speed up retirement of nine wide-body Boeing 767-300 jets

eliminate first-class service to add more business-class and coach seats

eliminate hot meals and offer bag lunches on most domestic flights

reduce fuel consumption by carrying less water and reserve jet fuel

eliminate paper tickets within the next 18 months

speed up its deployment of self-service check-in kiosks

                                                                                                                                                                        

plans to increase capacity by 20 percent from last year

managed a profit of $5.1 million last quarter

since Sept 11

added service to 7 cities and 24 routes grabbed five gates from US Airways at

BWI taken delivery of 9 Boeing 717's this year 11 more to come by December

newer ways to provide full service to passengers and still wring costs out of the operation and match fares with discounters

Challenge

maximizing efficiency instead of revenue

Focus

Is American Doing the Right Thing???

What have you done to get your passengers to want to get on your airline more?"

Discount Carriers Full-Service CarriersPractical Perk-oriented

Point-to Point Hub and Spoke

One Airplane Model 6-14 different types

Planes fly 9 hours Planes fly 6 hours

Labor 25-30 of Revs Labor exceeds 40% of Revs

40% online tickets 5-10% of tickets online

Younger fleets Older fleets

Quicker Turnaround TimeIdle Planes

Strategies

Is Niche Marketing Possible??

Marriott and Courtyard by Marriott

Cable channels with MTV, VH1 and BET

Running shoes to basketball shoes to mountain biking shoes to tennis shoes

Midwest Express, based in Milwaukee, has always offered first-class service throughout the plane

Lufthansa’s daily flight between Newark, N.J., and Dusseldorf that consists entirely of business class luxuries, with only 48 seats in a Boeing 737-700

Southwest Airlines and other flights geared for business travelers and other passengers used to being pampered

time-share industry

NetJets sells shares in each of its planes to as many as 16 parties for upward of $375,000 a pop, before various fees

If a NetJets owner's plane is busy

the company will send an identical plane or something better to pick him up.

it will turn to the 85 jets it manages for corporate customers.

it will charter a plane from a roster of approved providers

a jet to the customer with just 4-6 hours of notice

operate 250,000 flights this yearup from 200,000 in 2001employs 2,300 pilots in the U.S., Europe and the Middle Eastcorporations, entertainers, athletes, other wealthy individualsWhy????

ConvenienceHassle-free servicePrivacyFlexibilityCustomized service

cannot follow the quixotic flight path of being all things to all passengers and still turn a profit

cannot fly everywherecannot give passengers the fastest travel time possible cannot provide amenities that will satisfy

everyone offer niche products, with flights targeted to specific demographics

a possible two-tiered future for short- and medium-haul air travel, in which airlines sharply split their

products

ticket pricing simplified so that passengers know exactly what they are getting for what they pay

Bottom Line