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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