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

1. Air Transport in the 21st Century
Colin Lewis

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. 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. 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. First flight by Orville Wright, December 17, 1903

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. 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. 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

10. 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

12. 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

13. Question for you?
What is a good price to pay for a
Dublin – London flight?

15. Many Distribution Points
Call Centre
GDS
Website
OTA
FFP
Corporate
Tour Operators
Partners
End
Customer
Airline
Capacity

16. Online Misconceptions
• Online sales account for 26% of tickets
globally.
• USA online sales is around 50-60%.
• EU 36%
• E.g. KLM ??

17. Why?
• GDS power
• Reach
• Yield
• Corporates

19. 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

20. 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

21. 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

22. 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