Airline strategies and business models2016 Airline Planning Workshop

Objectives

• Connect market segments and passenger expectations

• Connect potential airline business models with passenger expectations

• Connect deregulation and potential airline business models

• Connect partnering strategies and alliances with both deregulation and airline business models

• Connect cargo strategy impact on airline success

RegulatoryEnvironment

Technology

Airline and IndustryStrategies

PassengerExpectations

The passenger is at the center

Passenger market is segmented

Business30% Travel

40-50% Revenue

Personal70% Travel

50-60% Revenue

Short-Haul65% Travel

Long-Haul35% Travel

Long-haul business

Long-haul personal

Short-haul business

Short-haul personal

Business30% Travel

40-50% Revenue

Personal70% Travel

50-60% Revenue

Short-Haul65% Travel

Long-Haul35% Travel

Long-haul business

Long-haul personal

Short-haul business

Short-haul personal

Table exercise/discussion questions

1. What are two key passenger expectations for your market segment?

2. How are these passenger expectations changing?

Passenger expectations vary

Business30% Travel

40-50% Revenue

Personal70% Travel

50-60% Revenue

Short-Haul65% Travel

Long-Haul35% Travel

• Low price sensitivity • Time sensitive – on-time and many

frequencies• Non-stop; point-to-point• High service levels• Premium end-to-end experience• Latest tech in cabin• High comfort• Lie-flat seat• Key airports• FFP integrated with Alliance/partners

• Price sensitive• Low time sensitivity • On-time performance• Some cost for changes• Leisure destinations• Wi-Fi connectivity• Entertainment choices at low or no cost• Unbundling is OK• Upgrades from FFP

• Price sensitive (a degree)• Extremely time sensitive – frequencies,

on-time• Flexibility to make changes• Primary airports• Latest technology in cabin• Bin space• Bundled offerings• Preferred seating• FFP• Expect some self-service (airports, etc)

• Highly price sensitive• Time sensitive to a degree• Still looking for point-to-point (but price stronger)• Minimal service levels• On-time reliability still important• Unbundling is OK

LIBERALIZATIONBUSINESS MODELS

MERGERS, ACQUISITIONS

Business models and strategies

History of regulation in commercial aviation

• International air transportation is mostly negotiated between two countries (bilateral)– Under the framework first

introduced in the 1944 Chicago Convention

• Increasing liberal agreements over the past decades, beginning in the 1970s

• Open Skies deals are the most liberal• Chicago Convention framework is still

being used today• Ownership of airlines remains to be

nationally based

Freedoms of the Air

Freedoms of the Air

Deregulation

• Reduce government control of commercial side of airline industry

– Privatization of government owned airlines

– Airlines set own fares

• Increased competition in the aviation industry

– Emergence of hub and spoke– Access to new routes

• Reduced barriers to entry for new airlines/business models

• Most ownership rules still in place

Liberalization within a country (deregulation)Impacts of deregulation within the U.S.

Southwest Airlines in 1971 – “Texas

Triangle”

DAL

SAT HOU

Southwest Airlines in 2015 – Largest LCC

Deregulation allowed Southwest to grow into the World’s largest LCC

Deregulation amongst a group of countriesLiberalization within the EU

• Source: OAG / Innovata

0

2000

4000

6000

8000

10000

12000

1985 1990 1995 2000 2005 2010 2015

ASM

s (m

illio

ns)

7.4% 7.2% 9.6% 6.4% 5.4% 4.6%

5 year CAGRs

1987Any European carrierCould fly scheduled

Service to anyEuropean Market

1997Any European carrier

Can offer serviceOn intra-European routes

• Bilateral– Negotiated between two sovereign nations– Specified type of traffic allowed (traffic freedoms)– May specify: airlines, airports, capacity, frequency & fares– Typically includes a “nationality” clause– Reciprocity– Any changes have to be approved by both governments

• Open skies– Typically no traffic restrictions other than domestic (Cabotage)– No limitations on airline designations, points served, service levels (frequencies &

seats), nor fares– Changes in services do not have to be approved by both governments– What remains:

• “Nationality” clause• Reciprocity

Liberalization between two countries

A typical bilateral (except Open Skies)

Typical Example:

• Total 18 frequencies per day

allocated to specific route groups

• No gauge restrictions

• Fare: no restrictions

• Must be Chinese controlled airlines

U.S. airlines benefit from Open Skies

Source: OAG June 2007/2008

LHR

ATL

DEN

DFWDTW

IAH

LAX

MSP

ORD

PHX

RDU

SEA

SFO

BOS

BWI

EWR

IAD JFK

PHL

MIA

New service

More service

Same service

U.S. airlines dramatically boosted service to Heathrow after U.S.-EU Open Skies

• Is structured like bilateral or open skies agreement

• Still negotiated between governments

• Examples of multilaterals• Creating common aviation areas

– ASEAN– EU Single Aviation Market

• Regional bilateral agreements– US – EU open skies– MALIAT (Kona) agreement

MultilateralsAgreements between multiple countries

Why is liberalization important?Continued liberalization adds to growth

Source: IATA, Oxford Economics

LIBERALIZATIONBUSINESS MODELS

MERGERS, ACQUISITIONS

Business models and strategies

Low cost carriers have changed the industry

Business30% Travel

40-50% Revenue

Personal70% Travel

50-60% Revenue

Short-Haul65% Travel

Long-Haul35% Travel

LCCs

LCC business model has gone worldwide

Source: Diio/Innovata 2015

OceaniaFlights/week: 2,730km/flight: 1,660

SE AsiaFlights/week: 20,930km/flight: 1,160

NE Asia & ChinaFlights/week: 14,400km/flight: 1,100

SW AsiaFlights/week: 7,450km/flight: 1,080

Middle EastFlights/week: 3,820km/flight: 1,560

Europe & CISFlights/week: 42,720km/flight: 1,190

Latin AmericaFlights/week: 14,400km/flight: 1,010

AfricaFlights/week: 1,310km/flight: 1,050

North AmericaFlights/week: 41,000km/flight: 1,440

Today LCC’s operating in most regions

| 22

54%

50%

36%

33%

29%

28%

26%

16%

12%

9%

9%

1%

SE Asia

S Asia

Europe

Lat America

N America

World

Oceania

NE Asia

Middle East

Africa

China

Former CIS

Source: Diio/Innovata 2015, jets only

Only Selected Regions Have Low LCC Penetration2015 LCC market share - measured in annual seats(by airline domicile)

23

LCC business model evolving

LCC’s strategizing to meet the needs of their customers

• ULCC

• Low fares

• Ancillary revenue

• Secondary airports

• No connections / point to point

• Once aircraft type / high utilization

• Hybrid LCC

• Premium cabin

• Seat assignments

• Frequent flyer

• Code-sharing

• Connecting flights / major hubs

• Long-haul flying

• Additional aircraft types

LCC unit cost advantage is critical

19.0

13.312.4

10.99.7

0

2

4

6

8

10

12

14

16

18

20

Avg. of USmajor network

carriers

Southwest JetBlue Allegiant Spirit

Unit costs in US cents/ASM, 2014

Source: US DOT Form 41Stage length adjusted to system average

LCCs must achieve at least 20-40% lower costthan network carriers

Low costs and fares stimulate growth

Local traffic and average yields before and after LCC entry

Source: Sabre ADI, 2009-2011

0

150,000

300,000

450,000

600,000

750,000

Denver (DEN) Chicago (MDW) St. Louis (STL)

Before SWA After SWA

22¢27¢

48¢

30¢

42¢

An

nu

al O

&D

Pas

sen

gers

75¢

60¢

45¢

30¢

15¢

16¢

Passenger revenue• A la Cart

– Buy onboard– Checked bags– Seat assignments– Early Boarding– WiFi

• Fare / Product Bundle– Early boarding, seat, bags

Other sources of revenue• Commission –Based

– Hotels, rental cars, travel insurance• Frequent Flyer Programs

– Sale of miles/points• Advertising

$23,000$24,000$25,000

Airlines focusing on ancillary revenuesTop 10 airlines ancillary revenue (US$)

Top 10 airlines ancillary revenue(% of Total Revenue)

2014

2014

Source: The CarTrawler Yearbook of Ancillary Revenue / IdeaWorks Company

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000

0%

10%

20%

30%

40%

Medium-Haul LCCs

Medium-haul LCCs

OAK-ARN(8581km)

LAX-CPH(9022km)

OSL-BKK(8666km)

ARN-BKK(8290km)

MCO-VCP (6787km)

RUH-MNL (7770km)

JED-KUL (7060km)

KWI-MNL (7596km) NRT-OOL

(7236km)

MEL-HNL(8869km)

SIN-SYD(6290km)

Source: OAG 2015 – for wide-body service from Norwegian, AirAsia X (incl. Thai, Indonesia), Jetstar, Cebu Pacific, Scoot, Azul, Pal Express, HNA Capital, Jin Air

Airline Wide-body A/P

AirAsia X A330

Azul A330

HNA Capital A330

Cebu Pacific A330

Jetstar 787-8, A330

Jin Air 777-200

Norwegian 787-8

PAL Express A330

Scoot 777-200, 787-8/-9

CPH-HGH(8283km)

Network business model

Business30% Travel

40-50% Revenue

Personal70% Travel

50-60% Revenue

Short-Haul65% Travel

Long-Haul35% Travel

Focus on multiple passenger segments

Global network carriers are large

Rank Airline RPK(billions)

1 American Airlines 350.7

2 United Airlines 330.9

3 Delta Air Lines 326.6

4 Emirates 230.9

5 Air France-KLM 229.3

6 Lufthansa Group 214.6

7 IAG 202.6

8 Southwest Airlines :LCC 173.9

9 China Southern Airlines 166.6

10 Air China 154.7

Top airlines by RPKs - 2014

Source: ICAO, IATA, airline annual reports, Boeing analysis

RPKs Share

GlobalNetwork

Top 9:34%

Common characteristics

• Large complex fleets• Major hub operations• Domestic and Int’l markets• Bilaterally controlled environment• Long haul & short haul routes• Broad range of service levels

– First class, airport lounges, onboard meals and IFE

– Economy, buy on board, ancillary fees

• Alliance membership

Serving multiple segments increases complexity

Differentiation for different market segments

Airport

PED boarding pass Automated boarding Lounges

On board First Business Premium Economy Economy

Value analysis: revenue benefits vs associated costs

Hubs increase reach and create value

City A

City B Hub

City D

City C

City E

City F

Hub example: 3 airplanes; 15 city pairs*

• The ideal airline network creates value to customers

• Hubs make valuable travel options

• Hubs are cost effective

*City A to 6 other cities + City B to 5 other cities + City C to 4 other cities = 15 city pairs

Example Hub: London (LHR) to Athens (ATH)

ATH

LHR

DUBMAN

EDI

MIA

LAX

SFO

YVR

ORDYYZ BOS

JFK

IAD

PHL

Other 10

45

10

10

9

8

76

6

654

3

3

2

LOCAL PAX 45

CONNECTING PAX 89

134 TOTAL PAX

Collect traffic at one point to create volume for non-stop service

Network carriers use marketing arrangementsfor revenue & cost benefits

Marketing arrangements do not imply ownership & control

Low

Interlining

Code Sharing

FFP and Lounge Access

Direct coordinationof network andscheduling

Joint planning, pricing,and selling (revenue, cost and benefit sharing)

High

Limited cooperation on specific routes

Expanded cooperation to develop joint

network

Anti-trust immunized

joint venture

Own Partner Total

134

Example: Qantas had 134 airport pairs in 2014 flying their own metal

― Own metal ― Partner metalNetwork (2015)

<Airport-pairs>

Source: OAG 2015

Qantas’s airport pairs 4X with code sharing

― Own metal ― Partner metalNetwork (2015)

Own Partner Total

134 396 530

<Airport-pairs>

Source: OAG 2015

Star Alliance oneworld SkyTeam Major UnalignedU.S./Canada

Europe

Asia Pacific

Other

Airline alliances now provides over 60% of world capacity

Codeshare flights by ATI JV have increased

• SOURCE: OAG/Innovata August

Alliance

OtherCodeshares

NoCodeshares

Cross-Alliance

2010 2015

ATIJV

130 billions ASKs (weekly) 169 billions ASKs (weekly)

Cross-Alliance

ATI JV

Alliance

OtherCodeshares

5%

24%

17%

52%

1%

15%

26%

15%

1%

N ATL, TPAC & Europe-JapanN ATL only

No Codeshares

43%

Contrasting anti-trust immunity (ATI) vs non-ATI joint ventures

Airlines joint ventures granted ATI are able to operate as metal neutral

U.S. requires open-skies to be in place, other governments don’t

Within ATI, some are granted immunity globally, while some are limited to specific markets (i.e. North Atlantic)

Non-ATI joint ventures• Can participate in the alliances’ networks and some marketing

programs• Cannot discuss price, route allocation, etc.

Gulf 3 success: one stop to everywhere

• 6th Freedom business model but with differentiation

• Prime location• Supportive governments• Efficient operation• Strong brands• Utilizing 8000NM aircraft

: Emirates: Qatar: Etihad

2015

2005

Source: OAG 2015 & 2015

An 8 hour flight is within reach of…~15% of the World’s Population >80% of the World’s Population

Emirates business model is strategically located to serve more than 80% of the world’s population within an 8 hour flight of Dubai

www.gcmap.com : Range circles at 4,000 mi

Non-global Network Carriers face challenges

Business30% Travel

40-50% Revenue

Personal70% Travel

50-60% Revenue

Short-Haul65% Travel

Long-Haul35% Travel

Global Network

Non-global Network

How do non-global network carriers differ from global network carriers?

• Lower fleet complexity

• Typically just one key hub

• Can be domestic only or both domestic and international

• Long-haul might just be Transcon

• Business travel remains key

• Partnering levels vary

Charter Carriers evolving

Business30% Travel

40-50% Revenue

Personal70% Travel

50-60% Revenue

Short-Haul65% Travel

Long-Haul35% Travel

Global Network

Charter

LCC

Business Personal

Short-Haul

Long-Haul

Non-global Network Charter

Global Network

Class exercise

Global Network Carrier Non-global Network Carrier LCC

1 2 3

For the segments shown below:

• What is the top challenge in capturing these passengers?

• What strategies/tactics might be used?

BusinessShort-Haul

BusinessLong-Haul

BusinessShort-Haul

Air Cargo

Competitive advantage:High value/time sensitive goods

1%of world trade

TONNAGEis carried by

Air Cargo

35%of world trade VALUE

is carried by Air Cargo

0% 20% 40% 60% 80% 100%

Note: Does not include trans-border tonnage that was transported by truck, rail or fixed installations such as pipelines or conveyors

Source: IATA

Total air cargo industry revenue by business model

Express carriers38%

Combination carriers

41%

All cargo11%

Passenger belly only

10%

World air cargo revenue

$92.6 billion

Expresscarriers

$35.1B

Combinationcarriers

$38.3B

Passengerbelly only

$9.5B

All cargo $9.7B

Sources: Air Transport Intelligence, U.S. DOT F41, Boeing estimates, and airline reports. (2012 Data)

Freighters, directly or indirectly, contribute to 90% of total air cargo industry revenue

60-7050-60

10

150

Equivalentfreighterflights

Totalfreighterflights

Freighterflights

80% Asia North America Cargo Carried on Main-deck

Paxflights

150 Converting lower hold capacity to equivalent freighter flights

Source: Innovata, DOT T-100, 2013, Boeing Analysis

Will passenger aircraft belly capacity make freight aircraft obsolete? No!

Case study: daily flights, Asia to/from North America

Issues limiting pax belly:• Range and

payload capability

• Passenger load factor

• Regulations• Weight,

volume, hazmat and dimensional

• Handling location and ramp proximity

LIBERALIZATIONBUSINESS MODELS

MERGERS & ACQUISITIONS

Business models and strategies

Mergers, acquisitions and consolidations

Airline mergers

• Mergers can provide multiple benefits

– Rationalization of costs (including capacity discipline)

– Expand market access and global reach

– Ability to compete with competitor mergers

• Recent major carrier mergers have been important to remain competitive

• Cross-border mergers can be highly creative in working with foreign ownership restrictions

Examples

Airlines are making equity investments, buying stakes in other airlines

40% 21.2%24%

49%

33.3%

29%49%For multiple reasons:

• To gain access to restricted markets

• To gain needed network feed

• To overcome alliance weakness

• To gain valuable airport slots

Note: Darwin Airline was renamed to

49% 2.98%Up to 48.7%

10%

Examples

48%

MyCargo

48% UNK

Airlines are creating subsidiaries for many purposes

• Expanding across borders into new markets –example: Southeast Asia

• Implementing different business model at subsidiary – example: new LCC or medium-haul LCC

• Short-haul feed for Global Network carrier – example: HOP! at Air France

Example: Southeast Asia

Key Takeaways

• Customers (passengers) need to be at the center of your plan

• Passenger expectations differ by segment

– Which passengers are you trying to capture?

• Deregulation enables innovation and is a key market trend

• Airline business models are not “black and white”

– What is your airline’s business model?

• Airlines are working together in many different formats

• Don’t forget about opportunities from Air Cargo!

MonteCristoAir Case Study Connection

• What is MonteCristoAir’s current strategy?

• Given the key factors MonteCristoAir is facing, does their strategy need updating?

• What are the key regulatory issues facing them?

• What is their current business model?

• How should they adapt their business model to fit their environment?

• What partnering level is right for MonteCristoAir?

• Should air cargo be part of their operations?

Copyright © 2015 Boeing. All rights reserved. BOEING PROPRIETARY 58

Copyright © 2015 Boeing. All rights reserved. BOEING PROPRIETARY 59