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Airlines in 21st Century


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What will happen to the airline industry? What is the industry structure? What will happen in the future?

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Airlines in 21st Century

  1. 1. Air Transport in the 21st Century Colin Lewis
  2. 2. Airline Industry Strategies Economy Premium Economy Business class First Independent Alliances Code Sharing Product Customers Fares Routes and Route Structure Structure Wide-body Narrow body Regional Jet Turboprop Aircraft type Scheduled Flights Chartered Flights Air Freight Business Travelers Leisure VFR Short Haul Long Haul Hub and Spoke Point to Point
  3. 3. Porter 5 forces Internal audit Potential New Entrants • Aircraft Manufacturers • Aircraft Leasing Companies • Food Service Companies • Fuel Companies • Airports • Local Transportation Service • Google Intra-Industry Rivalry Rivals: FR, EI, BE, BMI, RE, Bargaining Power of Buyers Bargaining Power of Suppliers Substitute Products and Services •Travel Agents •Corporate travellers •Government •Leisure Travelers •Charter •Alternate Travel Services •Road •Boats •Car •Videoconferencing •Foreign Carriers •Regional Carrier Start ups
  4. 4. Airline Profitability Profitability = [yield X load factor] - cost • 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.
  5. 5. First flight by Orville Wright, December 17, 1903
  6. 6. 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
  7. 7. 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.
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. Question for you? What is a good price to pay for a Dublin – London flight?
  12. 12. Many Distribution Points Call Centre GDS Website OTA FFP Corporate Tour Operators Partners End Customer Airline Capacity
  13. 13. Online Misconceptions • Online sales account for 26% of tickets globally. • USA online sales is around 50-60%. • EU 36% • E.g. KLM ??
  14. 14. Why? • GDS power • Reach • Yield • Corporates
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. Future? • 3-5 Long-haul Network dominators per region o Except for middle east! • Low-cost Service Providers o Low cost (2 to 3 majors) o Charters (2 to 3 majors in Europe) • Niche Carriers o Regional or national o Cargo