Post on 19-Aug-2015
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