Airline Strategies and Business Models Alex Philip & Bruce Tecklenburg

Transcription

1 Airline Strategies and Business Models Alex Philip & Bruce Tecklenburg Istanbul Technical University Air Transportation Management M.Sc. Program Fundamentals of Airline Management Module 4: 13 October 2015

2 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 2

3 The passenger is at the center Regulatory Environment Airline and Industry Strategies Technology Passenger Expectations

4 Passenger market is segmented Long-Haul 35% Travel Business 30% Travel 40-50% Revenue Long-haul business Short-haul business Long-haul personal Short-haul personal Personal 70% Travel 50-60% Revenue Short-Haul 65% Travel 4

5 Table exercise/discussion questions 1. What are three key passenger expectations for your market segment? 2. How are these passenger expectations changing? Long-Haul 35% Travel Business 30% Travel 40-50% Revenue Long-haul business Short-haul business Long-haul personal Short-haul personal Personal 70% Travel 50-60% Revenue Short-Haul 65% Travel 5

6 Market forecast drivers and considerations Market liberalization Airplane capabilities Environment High speed rail Fuel price Emerging markets Airline strategies & business models Infrastructure Economic growth Current Market Outlook 6

7 The passenger is at the center Regulatory Environment Airline and Industry Strategies Technology Passenger Expectations

8 History International air transportation is mostly negotiated between two countries (bilateral) Under the framework first introduced in the 1944 Chicago Convention Increasing liberal agreements over last twenty years Open Skies deals are the most liberal Chicago Convention framework is still being used Ownership remains to be nationally based Copyright 2015 Boeing. All rights reserved.

9 A typical bilateral (except Open Skies) 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 Typical Example: Total 18 frequencies per day allocated to specific route groups No gauge restrictions Fare: no restrictions Must be Chinese controlled airlines 9

10 Open Skies Agreement What s different: Agreement can be bilateral, multilateral, or by joint political entity (e.g., EU) 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 10

11 Current model Open-Skies agreement Reference: 11

12 Traffic rights 12

13 Traffic rights (a) the right to fly across its territory without landing - First Freedom (b) the right to make stops in its territory for non-traffic purposes - Second Freedom (i) for airlines of the United States, from points behind the United States via the United States and intermediate points to any point or points in [country] and beyond; [and for all-cargo service, between [country] and any point any or point points or or points - Third - Seventh - Sixth Fifth & Fourth Freedom Freedoms 4 Nothing in this article shall be deemed to confer on the airline or airlines of one Party the rights to take on board, in the territory of the other Party, passengers, baggage, cargo, or mail carried for compensation and destined for another point in the territory of that other Party. - No Cabotage (Eighth & Ninth Freedoms) 13

14 Freedoms of the Air 14

15 Open Skies can stimulate growth even in mature markets Australia New Zealand Trans-Tasman Open Skies Agreement ,500,000 Analysis of Growth in Major Markets vs. Non Major Markets Australian Bureau of Transport and Regional Economics 600,000 4,000, ,000 Total Passengers - Major Markets 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 CAGR for Major Markets 7.10% CAGR for Non Major Markets % 400, , , ,000 Total Passengers - Non Major Markets Perth Trans-Tasman Nonstop Services April 2006 Cairns Brisbane Gold Coast Adelaide Sydney Melbourne Queenstown Auckland Hamilton Palmerston Wellington Christchurch Dunedin Major Markets Non Major Markets Source: Australian Bureau of Transport and Regional Economics, International City Pair Data Major Markets includes all routings between main New Zealand markets (Auckland, Christchurch, Wellington) and Australian markets (Sydney, Melbourne, Brisbane) 15

16 U.S. / U.K. airlines benefit from Open Skies U.S. airlines dramatically boosted service to Heathrow after U.S.-EU Open Skies SEA SFO LHR LAX PHX DEN MSP ORD DFW IAH DTW IAD ATL RDU EWR PHL JFK BWI BOS New service More service MIA Same service Source: OAG June 2007/

17 US-EU Open Skies transformed market landscape Trans-Atlantic traffic share of ATI JVs now 75% Traffic share measured by ASK 17

18 Ownership 18

19 But Ownership Restrictions Remain a. Substantial ownership and effective control of that airline are vested in the other Party, nationals of that Party, or both 19

20 Airlines are pursuing more crossborder ownership arrangements Chicago Convention introduced sovereignty concept but left to each nation to define criteria for national carriers Uncommon to see restrictions allowing above 49% foreign ownership Recent cross-border investments have focused on consolidation of network airlines and LCCs Air France/KLM, IAG, Latam for example JetStar, Air Asia, Lion Air, Tiger, Indigo Partners Various legal structures have been used to meet national ownership and control requirements 20

21 Many factors drive strategic plans Regulatory Environmen t Airline and Industry Strategies Airline Business Models Long-Haul Business Personal Passenger Expectations Short-Haul Technology 21

22 Low cost carriers have changed the industry Long-Haul 35% Travel Business 30% Travel 40-50% Revenue LCCs Personal 70% Travel 50-60% Revenue Short-Haul 65% Travel 22

23 Southwest was designed to serve short-haul markets Capitalized on underserved short-haul markets Business shuttle focus Low fare traffic stimulation Southwest Airlines in 1971 Texas Triangle DAL SAT HOU 23

24 Southwest proved short-haul has large potential Southwest Airlines in 2015 Largest LCC Top ten airports (in order): Chicago Midway Las Vegas Baltimore Denver Phoenix Orlando Houston Hobby Los Angeles Atlanta Dallas Love 95 destinations 637 routes 26,193 flights a week Source: OAG June

25 Traditional LCC business model characteristics Network/Schedule Simplified network (P2P) Secondary airports; multiple bases Relatively short-haul Fare/Product Mix One-cabin class No seat assignments Basic service (reduced frills) Ancillary revenues No frequent flier program Operations Common fleet High utilization Avoidance of global distribution system Low labor / avoid unions Stand-alone airline (no subsidiaries) Traditional LCC business model highly successful, but evolving 2525

26 LCC unit cost advantage is critical Unit costs in US cents/asm, Avg. of US major network carriers 13.7 LCCs must achieve at least 20-40% lower cost than network carriers Southwest JetBlue Allegiant Spirit Source: US DOT Form 41 Stage length adjusted to system average 26

27 Annual O&D Passengers Low costs and fares stimulate growth Local traffic and average yields in three Minneapolis markets before and after LCC entry 750, Before SWA After SWA 600, , , , Source: Sabre ADI, Denver (DEN) Chicago (MDW) St. Louis (STL) 27

28 LCC websites are powerful tools Majority of reservations are via the websites Cost benefits: No commissions No GDS fees Revenue benefits: Up-selling opportunities Fees for letting other companies use the website Relationship benefits: Millions of visitors Direct, on-going customer contact 28

29 LCC business model origin 1990: U.S. LCCs growing/emerging in E.U. LCCs in 1990 Source: Aug 1990 OAG 29

30 LCC business model has gone worldwide Today LCC s operating in most regions North America Flights/week: 39,450 km/flight: 1,400 Europe & CIS Flights/week: 39,500 km/flight: 1,190 Middle East Flights/week: 3,250 km/flight: 1,600 NE Asia & China Flights/week: 11,900 km/flight: 1,040 Latin America Flights/week: 13,400 km/flight: 980 Africa Flights/week: 960 km/flight: 1,080 S Asia Flights/week: 7,150 km/flight: 1,060 SE Asia Flights/week: 19,740 km/flight: 1,160 Source: 2014 Diio/Innovata Oceania Flights/week: 2,640 km/flight: 1,640 30

31 Only Selected Regions Have Low LCC Penetration 2014 LCC market share - measured in annual seats (by airline domicile) SE Asia S Asia Europe Lat America N America World Oceania NE Asia Middle East Africa China Former CIS 12% 9% 9% 1% 16% 29% 28% 26% 36% 33% 50% 54% Source: Diio/Innovata 2015, jets only 31 31

32 Ryanair easyjet Norwegian Wizz Air Southwest JetBlue Spirit AirAsia JetStar Diversifying LCC business model LCC Attribute Point-to-point; no connections Single airplane type No sales through GDS Secondary/tertiary airports No frequent flier program No frills* No long haul * Premium seats/check-in/boarding, lounges - Following LCC characteristic - Evolving away from - Not following 32

33 Medium-Haul LCCs 33

34 Asia pacific is center of Medium-haul LCCs OSL-BKK (8668km) ARN-BKK (8291km) OAK-ARN (8583km) LAX-CPH (9024km) MCO-VCP (6799km) RUH- MNL (7772km) JED-KUL (7060km) DXB-MNL (6902km) NRT-OOL (7237km) MEL-HNL (8871km) SIN-AKL (8406km) Source: 2014 Diio/Innovata for wide-body service from Norwegian, AirAsia X (incl. Thai, Indonesia), Jetstar, Cebu Pacific, Scoot, Azul, Pal Express

35 Global Network business model Long-Haul 35% Travel Business 30% Travel 40-50% Revenue Personal 70% Travel 50-60% Revenue Short-Haul 65% Travel Focus on multiple passenger segments 35

36 Global network carriers are large RPKs Share Global Network Top 9: 34% Top airlines by RPKs Rank Airline RPK(billions) 1 American Airlines & US Airways United Airlines Delta Air Lines Emirates Air France-KLM Lufthansa Group IAG Southwest Airlines :LCC China Southern Airlines Air China Source: ICAO, IATA, airline annual reports, Boeing analysis 36

37 Common characteristics with Global Network model 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 37

38 Hubs increase reach of Network airlines City A 3 airplanes : 15 city pairs City D City B Hub City E City C City F The connecting hub and spoke network has become the dominant airline business model 38

39 Hubs must create value Example London (LHR) to Athens (ATH) 6 10 DUB MAN EDI LHR 2 Other 10 YVR SFO 8 LAX 7 ORD YYZ 4 6 IAD MIA PHL 3 BOS JFK 6 10 ATH LOCAL PAX 45 CONNECTING PAX TOTAL PAX Collect traffic at one point to create volume for non-stop service 39

40 Networks are best for serving small markets Share of World RPKs 16% 14% 12% 10% 8% 6% 4% 2% Connecting Markets Nonstop Markets 0% <6 <12 <25 <50 <100 <200 <400 <800 < O&D Passengers per Day 98% of all of the World s markets have less than 10 PDEW Source: Boeing Hub Development Analysis 40

41 Gulf 3 success: one stop to everywhere 6 th Freedom business model but with differentiation Prime location Supportive governments Efficient operation Strong brands Enabled by 8000NM aircraft Emirates Qatar Etihad 41

42 An 8 hour flight is within reach of ~15% of the World s Population >80% of the World s Population : Range circles at 4,000 mi Gulf 3 business model is strategically located to serve more than 80% of the world s population within an 8 hour flight of Dubai 42

43 Airport congestion can impede network airline growth Work to maximize convenience and minimize hassles 43

44 Business travel is vital to most network airlines Burning questions Will business travel keep growing? How can airlines prevent business travelers buying down to economy? Long-haul business travelers value comfort, convenience, and reliability, but how much? Short-haul business travelers value convenience and reliability, but are increasingly price sensitive. What will they value in the future? Business traveler expectations can change 44

45 Differentiation for different market segments Airport Boarding pass on mobile devices Automated boarding Lounges On board First Business Premium Economy Economy Value analysis: revenue benefits vs associated costs 45

46 Non-global Network Carriers face challenges Global Network Long-Haul 35% Travel Business 30% Travel 40-50% Revenue Non-global Network Personal 70% Travel 50-60% Revenue Short-Haul 65% Travel 46

47 How do non-global network carriers differ from global network carriers? Typically 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 47

48 Charter Carriers evolving due to LCC competition Global Network Long-Haul 35% Travel Business 30% Travel 40-50% Revenue Charter Personal 70% Travel 50-60% Revenue Short-Haul 65% Travel 48

49 Charter carrier characteristics Targets leisure travelers Often inclusive tour packages Seasonal markets High load factors and utilization rates In direct competition with LCCs 49

50 Class exercise Long-Haul Global Network Business Non-global Network Charter Personal LCC For the segments shown below: Short-Haul What are the challenges in capturing these passengers? What strategies/tactics might be used? Global Network Carrier Non-global Network Carrier LCC Business Long-Haul Business Short-Haul Business Short-Haul 50

51 Airline cooperation takes different forms Limited cooperation on specific routes Expanded cooperation to develop joint network Anti-trust joint venture HIGH LOW 51

52 Billions Code sharing routes have increased at a 7.8% CAGR over the last decade 180 Worldwide weekly ASK Non code sharing Code sharing 57.1% Code sharing 40.9% Code Sharing Over half of worldwide ASKs are code sharing OAG August 52

53 Example: Qantas had 134 airport pairs in 2014 flying their own metal Network (2014) Own metal Partner metal OAG Aug,2014 <Airport-pairs> Own Partner Total 134

54 Qantas s airport pairs 4X with code sharing Network (2014) Own metal Partner metal OAG Aug,2014 <Airport-pairs> Own Partner Total

55 Turkish Network Network (Sep 2015) Own metal Partner metal Innovata Sep 2015 <Airport-pairs> Own Partner Total

56 Turkish with codeshare Network (Sep 2015) Own metal Partner metal Innovata Sep 2015 <Airport-pairs> Own Partner Total

57 Alliances have become a powerful tactic Expand network / enhance revenue / reduce costs 57

58 Alliances are maturing One World Sky Team Star Number of Airlines % 50% % of Global Scheduled ASM 40% 30% 20% 10% 0% Source: OAG, BCA Analysis 58

59 Airline alliances members as of December 2014 U.S./Canada Star Alliance oneworld SkyTeam Major Unaligned Europe Asia Pacific Other 59

60 Deeper partnering and ownership strategies Subsidiaries Acquisitions Mergers 60

61 Airlines are creating subsidiaries for many purposes Broadening customer base Examples Offering multiple brands Serving customers in different regions Often required by foreign ownership limits that prevent full consolidation 50/50 Diversifying airline business activities 61

62 Airlines invest in other airlines for multiple reasons To gain access to restricted markets 49% 33.3% 49% 4% 29% To gain needed network feed 40% 24% 21.2% To overcome alliance weakness To gain valuable airport slots 49% 3.5% 2.98% 10% 5% 29.9% Note: Darwin Airline was renamed to 62

63 Airline mergers Mergers can provide multiple benefits Major mergers 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 63

64 Air Cargo Air Freight Express Mail 64

65 Two major business models Express Carrier/Integrators General Cargo Carrier 1. Panalpina 2. Expeditors 3. DB Schenker 4. Kuehne+Nagel 5. Hellmann Freight forwarders act as intermediaries between airlines and shippers 65

66 Why ship goods by air cargo? Speed Value of Goods Special Handling Trucking Rail Containership Photo courtesy of Cargolux Airlines International, S.A. Air Cargo Photo courtesy of Photo courtesy of 66

67 Competitive advantage High value/time sensitive goods 1% 35% of world trade TONNAGE is carried by Air Cargo of world trade VALUE is carried by Air Cargo 0% 50% 100% Note: Does not include trans-border tonnage that was transported by truck, rail or fixed installations such as pipelines or conveyors Source: IATA 67

68 Fish and Meats Flowers & Plants Fruit & Vegetables Chemicals, Metals, Minerals Apparel & Textiles Mobile Phones Computers & Printers Small Packages Medical Products Automobile & Aviation Products Tools and Machinery Electronic Components Other Misc. Commodities carried into the USA by Air Cargo 6% 5%4% 8% 13% 4% 7% 15% 7% 9% 7% 9% 6% 0% 20% 40% 60% 80% 100% Source: Trade: US air cargo imports by commodity type (2013 data) 68

69 Total air cargo industry revenue by business model World air cargo revenue All cargo 11% Passenger belly only 10% Combination carriers 41% Express carriers 38% Combination carriers Express carriers Passenger belly only All cargo $38.3B $35.1B $9.5B $9.7B $92.6 billion Freighters, directly or indirectly, contribute to 90% of total air cargo industry revenue Sources: Air Transport Intelligence, U.S. DOT F41, Boeing estimates, and airline reports. (2012 Data) 69

70 80% Asia N America Cargo Carried on Maindeck Daily Flights 150 Converting lower hold capacity to equivalent freighter flights logistic/ destination range Pax flights regulations LF 10 Equivalent freighter flights Freighter flights Total freighter flights Source: Innovata, DOT T-100, 2013, Boeing Analysis 70

71 Freighters will remain the leading cargo capacity provider Freighter service advantages over passenger belly Cargo focus and control Timing and routing Capacity (volume, weight, hazmat & dimensional) Handling location and ramp proximity Reliability and predictability 71

72 Key Takeaways A good strategy is critical for success Customers (passengers) need to be at the center of your plan Relentless focus on many external factors The regulatory environment is a key external factor No one airline business model is right No specific partnering level is right Good strategy is also key for air cargo success 72

73 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? 73