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Transcription:

Airline Network Structures Dr. Peter Belobaba Istanbul Technical University Air Transportation Management M.Sc. Program Network, Fleet and Schedule Strategic Planning Module 13: 30 March 2016

Lecture Outline Evolution of Airline Network Strategies From point-to-point to hub/spoke to global hub-to-hub Hub Economics and Network Structure Hub/spoke vs. point-to-point Revenue power and load consolidation Operational advantages and incremental costs Hub Network Impacts on Route Planning Incremental revenue logic for new routes Hub growth by adding cities Recent Trends: Hub Strengthening International Alliance Hub Networks 2

Evolving Network Strategies From linear to hub construction to hub-to-hub flying From regional/country dominance to a continental footprint to an inter-continental focus Intra-country networks supporting intra-continental and inter-continental growth International expansion contributed to improved revenue for the intra-country operations 3 04 de marzo de 2016 3

The Evolution of Networks and Competition COMPETITION Pre-Deregulation Route vs. Route 1980s-1990s Hub vs. Hub 21 st Century Network vs. Network Point-to-Point 5 City Pairs Hub Operation 55 City Pairs Network Operation 231 City Pairs STRUCTURE www.airlines.org 4 04 de marzo de 2016 4

Hub Economics and Network Structure Hub/spoke network structures allow airlines to serve many O-D markets with fewer flight departures. Consider a hub network with 20 flights in and 20 flights out of a single connecting bank at a hub: Each flight serves 21 O-D markets (1 local + 20 connecting) Total of 440 O-D markets served with only 40 flight legs and as few as 20 aircraft flying through the hub Consolidation of loads into and out of the hub allows connecting service to be provided to low demand O-D markets that cannot support non-stop flights Several connecting departures per day in these markets may be more convenient for travelers than 1 daily non-stop flight ( Total Trip Time is lower, when schedule displacement time included) 5

Example: Competitive Hub Networks 1 9 2 5 10 12 3 6 4 8 7 11 H1(41) 22 38 23 28 32 24 34 40 29 33 37 26 31 21 27 35 14 16 17 15 18 13 H2(42) 36 19 20 30 25 39 Traffic Flows 6

The Revenue Power of Hub Networks Large hub networks result in market share advantages that translate into increased revenue: Potential for greater departure frequency for many O-D markets, meaning more convenient schedules and higher market shares On-line seamless connections improve passenger convenience, compared to inter-line connections Greater frequent flyer program earning and reward options for passengers given larger network coverage Market dominance of local markets in/out of hub may lead to pricing and revenue advantages Over 50% of Network Legacy Carriers revenue comes from passengers connecting at hubs 7

Example: Local vs. Connecting Passengers BOS-IAH Flight by Day of Week 150 100 Final Bookings Local (IAH) Connecting 50 0 MON TUE WED THU FRI SAT SUN 8

Local Demand at Worldwide Hub Cities PEK HND LHR CAN CGK LAX PVG CDG HKG SIN JFK BKK SHA KUL ICN DXB SFO SZX BCN LAS SYD CTU AMS LGW ORD FRA Originating Local Industry O&D Passengers/Day Source: IATA Pax-IS includes all carriers Courtesy: M. Brewer 0 20000 40000 60000 80000 100000 120000 9

US Network Airlines Rely on Connections Passengers/Day Source: USDOT DB1B, YE 3 rd Qtr 2013 Connect Local 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - UA: 59% CNX IAH ORD DEN EWR IAD SFO 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - US: 69% CNX CLT PHX PHL DCA 35,000 30,000 25,000 DL: 65% CNX 25,000 20,000 AA: 55% CNX 20,000 15,000 15,000 10,000 10,000 5,000 5,000 - ATL DTW MSP SLC - DFW MIA ORD LAX Courtesy: M. Brewer 10

Operational Advantages of Hubs Consolidation of airline operations at a large hub airport has operational advantages: Fewer aircraft and crew bases required, meaning reduced crew and aircraft maintenance expenses Fewer locations where passengers or bags misconnect Large volume of operations at the hub can result in economies of scale in aircraft maintenance, catering facilities, etc. Scheduled connecting banks allow for: Simplified (if less flexible) aircraft and crew scheduling Greater opportunities for swapping of aircraft in response to delays, cancellations and irregular operations Planning for aircraft swaps in response to changing demand ( Demand Driven Dispatch ) 11

Incremental Costs of Hub Networks Hub operations also raise the potential of reduced aircraft and crew utilization: Reduced flexibility in scheduling of departures, rotations due to fixed connecting bank timing at hubs Increased ground times at hubs, to accommodate connections Greater turn-around times at spoke cities, waiting for a given departure time to meet next connecting bank Congestion and delay costs at the hub airport: Connecting banks create extreme staffing peaks Peaks of scheduled operations above and beyond runway capacity Weather delays at a hub will affect the airline s entire network 12

U.S. Example: Over 90% of US domestic flights are to/from hub airports including most LCCs! 100% 90% % Domestic Flight Segments with Designated Hub as Origin and/or Destination 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: MIT Airline Productivity Study (2011) 13 Airline Economics 04 de marzo de 2016 13

Chicago Hub Network: Which Airline? 14

Emirates Route Network The three Gulf Carriers have very similar route networks, focused on providing mid/long haul international connecting service 15

Etihad Airways Route Network 16

Qatar Airways Route Network 17

Turkish Airlines Route Network TK also offers long haul connecting service like the three Gulf Carriers, but also offers short haul flights to Europe 18

Total Available Seats by Airline from 2005-2014 All four carriers (including Turkish) have experienced rapid growth Emirates flies almost twice the number of seats as the next closest airline Turkish Airlines has grown the most in % terms over the last 5 years % Seat Growth Past 5 years Past 10 years Emirates 50% 209% Etihad 76% 970% Qatar 66% 280% Turkish 87% 312% 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 EK EY QR TK 19

North America Seats by Airline from 2005-2014 Capacity to North America has grown rapidly among the four carriers, particularly in the past 5 years, where overall capacity has grown 127% Destinations in North America Dec. 2014 Airline # of Dest EK 10 EY 6 QR 8 TK 8 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 TK QR EY EK 20

Average O-D Passengers on TK BOS-IST October 2015 (> 1.0 pax/day) 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 IST TIA TLV SJJ ATH SKG ESB FCO KIV SOF PRN MXP KGL VIE NBO SKP IKA BJV ADB CAI BEG DTW-IST GVA JED DAC FRA ADA BUD VKO OTP TXL TIA FRU MHD DLM AYT Source: Amadeus Travel Intelligence (2016) 21

Hub Impacts on Route Planning New routes to smaller spoke cities become much easier to justify in an established hub network: An airline needs only 1 or 2 passengers per flight to each of 30+ connecting destinations to make a 100-seat aircraft profitable However, such incremental analysis leads to a tendency to overlook potential displacement of other traffic on connecting legs Same incremental logic makes it more difficult to stop service to a potentially unprofitable destination, which provides connecting traffic support to other flights Difficult to justify a new non-stop service to by-pass the hub, as it might steal traffic from hub flights: However, large number of departures in a connecting market can allow airline to build market share and perhaps introduce a nonstop flight supported by many connecting opportunities 22

Hub Growth by Adding Cities City 1 City 2 1 O-D Market Cities 1-10 Cities 11-20 120 O-D Markets + 2 Cities 143 O-D Markets + 2 More Cities 168 O-D Markets 23

Recent Trends: Hub Strengthening Despite forecasts of more non-stop flights, a trend toward bigger and stronger hubs has re-emerged: Largest US and European airlines have cut virtually all flights that do not originate or terminate at their hubs Several smaller, weaker US hubs have been shut down Factors that continue to reinforce hub growth: Liberalized bilateral agreements have allowed airlines to fly even low-density international routes from their hubs (e.g., CVG-MUC) Small regional jets are being used to increase frequency of flights to small spoke cities, not to over-fly the hub with non-stops Airline alliances focus on linkages between major hub networks Hub operations will continue to be important, given their fundamental economics. 24

Airline Alliances and Network Coverage Strategic alliances between two airlines take the economic logic of hub networks one step further: Partner airlines can expand their network coverage without increasing their own flights and operating costs Leads to further consolidation of loads, as two or more airlines now contribute passengers to a single alliance flight Marketing power of larger networks is reinforced--more destinations, seamless connections, frequent flyer benefits Additional cost savings are possible in alliance airlines due to combined flights, airport check-in and club operations, integrated purchasing and information systems 25

International Alliance Networks International alliances link their networks through hub-to-hub flights Global Strategic Alliance -- Strongly connected domestic networks linked together through highdensity flights between international hubs Aircraft Airline I Hubs Airline I Aircraft Airline II & Airline I Hubs Airline II Aircraft Airline II Network Airline I Network Airline II 26

United s Washington - Frankfurt Percent local is only 17% as two major Star Alliance Hubs are connected Passengers/Day Source: IATA O&D Orig Dest Pax Orig Dest Pax Orig Dest Pax IAD FRA 69.26 IAD VCE 2.35 IAD TUN 1.52 IAD BCN 6.26 IAD AMM 2.32 IAD AMS 1.52 IAD IST 4.77 IAD LIS 2.29 IAD HAM 1.48 IAD ABV 4.65 IAD NCE 2.29 CLT FRA 1.48 ORF BAH 4.16 IAD OTP 2.19 IAD LYS 1.45 CLE FRA 4.16 IAD BLR 2.16 IND FRA 1.45 IAD ADD 4.10 IAD VKO 2.13 IAD MAD 1.39 IAD PRG 3.97 IAD TIP 2.10 IAD KWI 1.39 IAD TXL 3.97 IAD WAW 2.06 IAD LOS 1.32 IAD RUH 3.61 IAD DEL 1.90 IAD BSL 1.29 IAD CAI 3.55 IAD FLR 1.90 SAN BAH 1.29 IAD KBP 3.35 ABQ AMM 1.87 SAN FRA 1.26 RDU FRA 3.29 FAY VCE 1.87 IAD CDG 1.23 IAD BUD 3.19 FAY FRA 1.81 TPA FRA 1.23 IAD BEY 3.06 ORF FRA 1.68 IAD STR 1.19 IAD GVA 3.00 IAD ATH 1.68 IAD MAA 1.19 IAD ACC 2.74 DEN FRA 1.65 MCI FRA 1.16 IAD ALA 2.71 IAD LED 1.61 CMH FRA 1.16 IAD DME 2.65 IAD GYD 1.58 IAD JED 1.13 IAD EBL 2.42 PIT FRA 1.58 IAD DXB 1.10 LAS FRA 2.39 IAD VIE 1.55 IAD ADA 1.10 Courtesy: M. Brewer 27

Strategic Partnerships Both Within and Outside Alliance Structures Gulf Carrier + Hybrid Carrier: Hugely important for growth to large markets with no huge alliance connection JFK/BOS. Provides feed into large JetBlue markets like MCO Intra-Alliance Partnership transcending JV: Growth between Canada and Turkey but facilitating feed into Africa and Asia Partly political in nature to increase frequencies between countries Inter-Alliance Partnerships: Better for local market ties and increased access to China through Dragonair for booming NZ-China market Better access to Europe based on hub times than SIN Equity Partnerships: Allows a carrier to guide decision make in a noncompetitive manner Sometimes helps carriers obtain increased access into a particular region 28