Future Airline Business Models

The airline industry and its behavior Airlines display heterogeneity in their business models, which affects their financial success 1

The airline industry and its behavior Airlines display heterogeneity in their business models, which affects their financial success Business model heterogeneity is based on innovative and imitative behavior displayed by airlines 1 2

The airline industry and its behavior Airlines display heterogeneity in their business models, which affects their financial success Business model heterogeneity is based on innovative and imitative behavior displayed by airlines If airlines are innovative and imitative, what business model elements should be changed 1 3 2

Airlines and their business models are merely puzzles Airline business models are comprised of elements … and have an outcome $

Airlines and their business models are merely puzzles Airline business models are comprised of elements Airlines are imitative and innovative … and have an outcome $

Airlines and their business models are merely puzzles Airline business models are comprised of elements Airlines are imitative and innovative Algebra can determine the unique combinations of business model elements … and have an outcome $

Airlines and their business models are merely puzzles Airline business models are comprised of elements Airlines are innovative and imitative Algebra can determine the unique combinations of business model elements … and have an outcome $ … that leads to a predetermined outcome $

A British mathematician from 1830 helps to analyze the airline industry Boolean algebra Boolean algebra is the algebra of logic or the algebra of sets Principle is the identification of patterns of causation

A British mathematician from 1830 helps to analyze the airline industry Boolean algebra Qualitative comparative approach Boolean algebra is the algebra of logic or the algebra of sets Principle is the identification of patterns of causation QCA is a method that identifies commonalities across cases that share a similar outcome using Boolean algebra

A British mathematician from 1830 helps to analyze the airline industry Boolean algebra Qualitative comparative approach Multi-value QCA Boolean algebra is the algebra of logic or the algebra of sets Principle is the identification of patterns of causation QCA is a method that identifies commonalities across cases that share a similar outcome using Boolean algebra Multi-value QCA allows a researcher to incorporate more richness in sets

QCA: An example Arranged a party for a class of 11 students 8 students were not invited (0) 3 students were invited (1) Both invited and non-invited students were described using 3 conditions (smart, athletic, and wears glasses)

QCA: An example Arranged a party for a class of 11 students 8 students were not invited (0) 3 students were invited (1) Both invited and non-invited students were described using 3 conditions (smart, athletic, and wears glasses) Cases Smart Athletic Wears glasses Invited A B C 1 0 0 0 0 2 0 0 1 0 3 0 1 0 0 4 0 1 1 0 5 0 1 0 0 6 1 0 0 1 7 1 0 1 0 8 1 1 0 1 9 1 1 1 1 10 1 0 1 0 11 0 1 1 0

QCA: An example The combinations of independent variables that leads to not being invited is: 0 = a + bC In other words Those not invited are either not smart, or not athletic and wear glasses Cases Smart Athletic Wears glasses Invited A B C 1 0 0 0 0 2 0 0 1 0 3 0 1 0 0 4 0 1 1 0 5 0 1 0 0 6 1 0 0 1 7 1 0 1 0 8 1 1 0 1 9 1 1 1 1 10 1 0 1 0 11 0 1 1 0

QCA: An example The combinations of independent variables that leads to not being invited is: 0 = a + bC In other words Those not invited are either not smart, or not athletic and wear glasses Those invited are smart and do not wear glasses, or are smart and athletic 1 = Ac + AB Cases Smart Athletic Wears glasses Invited A B C 1 0 0 0 0 2 0 0 1 0 3 0 1 0 0 4 0 1 1 0 5 0 1 0 0 6 1 0 0 1 7 1 0 1 0 8 1 1 0 1 9 1 1 1 1 10 1 0 1 0 11 0 1 1 0

QCA: An example The combinations of independent variables that leads to not being invited is: 0 = a + bC In other words Those not invited are either not smart, or not athletic and wear glasses Those invited are smart and do not wear glasses, or are smart and athletic 1 = Ac + AB These conditions were dichotomous Multi-value QCA allows a researcher to introduce fuzziness into the conditions Cases Smart Athletic Wears glasses Invited A B C 1 0 0 0 0 2 0 0 1 0 3 0 1 0 0 4 0 1 1 0 5 0 1 0 0 6 1 0 0 1 7 1 0 1 0 8 1 1 0 1 9 1 1 1 1 10 1 0 1 0 11 0 1 1 0

MVQCA incorporates fuzziness Binary; dichotomous Multi-value; trichotomous, etc. 0 0 1 1 2

MVQCA incorporates fuzziness Binary; dichotomous Multi-value; trichotomous, etc. 0 (not smart) 0 (not smart) 1 (smart) 1 (somewhat smart) 2 (smart)

MVQCA and the airline business model Operational Offering Distribution Network Service

Interline

Online

Thru-fare

Restrictions

Alliance

Codeshare

CLP

CLT

GDS

In-flight classes

Lounges

FFP

Primary a/p service

FSI

Feed share

Stage length

Revenue & costs

Operating profit

A number of analyses are performed to describe the airline industry FSC LCC REGIONAL 4 1 5 2 3 6 10 7 8 13 9 11 12 Strategic group Leading firms Innovation analyses Imitation analyses:

An LCC innovation truth table Each letter represents a business model element (e.g. FFP or fleet composition) This is the outcome, or dependent variable. In this case it is operating margin. 2’s are high margin, 1’s are low, and 0’s are negative

An LCC innovation truth table Here are the unique combinations of business model elements for LCCs that consistently result in a high operating margin

Pure LCCs may innovate their business models in the following ways

Pure LCCs are those with a high operating margin (outcome)

16 business model elements are used (conditions)

The combinations that result in an operating margin greater than 8% are:

A capacity production to primary airports of less than 55%

GDS presence via a 3 rd party and passenger onlining

GDS presence via a 3 rd party and through-fare ticketing

GDS presence via a 3 rd party and a frequent flyer program

No GDS presence and a non-standardized fleet and no frequent flyer program

No GDS presence and a non-standardized fleet and a stage length less than 740 NM

Pure LCCs should innovate their business model in one of the six ways suggested above These combinations consistently result in a high operating margin

A number of analyses are performed to describe the airline industry FSC LCC REGIONAL 4 1 5 2 3 6 10 7 8 13 9 11 12 Strategic group Leading firms Innovation analyses Imitation analyses:

As FSCs and LCCs converge the following business models may appear

FSCs and LCCs that imitate are non-pure; their operating margins are between 0 and the maximum (outcome)

16 business model elements are used (conditions)

The combinations that result in an operating margin greater than 0% and less than 16% are:

GDS presence via a third-party OR

A triple class configuration OR

Membership of one of the three major alliances AND an ASK percentage flown by partner carriers less than 13% OR

A frequent flyer program AND no interline agreements OR

A frequent flyer program AND restriction-less travel OR

A frequent flyer program AND no code-share agreements OR…

As non-pure LCCs and non-pure FSCs converge their business models should be imitated in one of the six ways suggested above These combinations consistently result in a positive operating margin

The remaining analyses follow a similar pattern FSC LCC REGIONAL 4 1 5 2 3 6 10 7 8 13 9 11 12 Strategic group Leading firms Innovation analyses Imitation analyses: