airline business design segmentation oliver wyman

C O N F I D E N T I A L | www.oliverwyman.com

Aviation, Aerospace and Defense

Airline Business Design Segmentation

April 2010

1\Airline Business Design 20100422.ppt© Oliver Wyman www.oliverwyman.com

Confidentiality

The confidentiality of our clients’ plans and data is critical. Oliver Wyman rigorously applies organizational separation of teams working for competitors as well as several other rules to protect the confidentiality of all client information.

Similarly, our industry is very competitive and we view our approaches and insights as proprietary. Therefore, we look to our clients to protect Oliver Wyman's interests in our presentations, methodologies, and analytical techniques. Under no circumstances should this material be shared with any third party, including competitors, without the written consent of Oliver Wyman.


OrganizationalSystems

StrategicControl

ValueCapture

Scope of Activities

Value Proposition

Business Design ApproachVarious airline business models are evaluated using Oliver Wyman’s proprietary Value-Driven Business Design approach.

• Who are the airline’s customers and what characteristics do they embody?

• What are the key needs of the customer?• Who is not a customer of the airline?

• How will the airline earn a profit from the value created?• What is the revenue model (ancillary sales, low cost,

revenue premium, value-added expenditure, etc.)?• Who will pay for these services (individual, corporate, etc.)?

• Which activities will the airline perform itself and which will be outsourced to partners?

• Will the airline own or lease critical assets?• What is the impact to customer-facing activities?

• How will the airline protect its value capture model from competitors? Why can’t another carrier emulate it?

• How will the carrier sustain the business design?• Why do customers need the airline’s services?

• What can the airline do for its selected customers?• How is the airline’s offering different, unique and compelling

compared to that of competitor carriers?• How is the value proposition cohesively tied together?

Cus

tom

erS

elec

tion

Val

ueC

aptu

reS

trat

egic

Con

trol

Sco

pe o

fA

ctiv

itie

sV

alue

Pro

posi

tion

Org

.S

yste

ms

CustomerSelection

• What type of organization and culture will succeed?• What is the airline’s channel to market?• How will business units be structured and what function will

they serve?


Business Design DifferentiationCarriers differentiate their product across the six business design areas

Regional and CharterNetwork

• Broad vertical integration covering airline operations, MRO, reservations, loyalty program, and training

• Premium pricing and high share of wallet from key geographies and business segments

• Extensive freq flyer program with alliance tie-in

• Multiple products with presence in most major business markets

• Broad product offering appealing to widest possible range of passenger preferences

• Extensive distribution network with ownership participation in GDS

• Corporate contracting

• Broad geo-focus with emphasis on managing organized labor, customer loyalty programs and cost control

• Geo-Focused Network• Intercontinental Network• Global Luxury Connector

Value Based

Composition

• Regional: Operations only relying on partner for other services

• Charter: All inclusive tour marketing

• Regional: Convenience of home town service with network interface

• Charter: Affordable vacation fun

• Independent Regional: Home town service• Network Regional: Capacity Purchase

Agreements• Charter: All inclusive, affordable vacation

• Independent Regional tie in with broader network carrier

• Network Regional Mainline “lite”• Charter focused on leisure travel

• Regional: dependant upon affiliation• Charter: Wholesaler affiliation

• Independent Regional: community focused with ultra low overhead

• Network extender: Operational efficiency with ultra low overhead

• Charter: Tour development

• Independent Regional • Network extender• Charter

• Virtual airline focused on airline operations

• Most non-customer facing functions outsourced

• Maximize utilization with high frequency and quick turns

• Limited global participation• One size fits all service offering• Safe, reliable, affordable

• Target price sensitive, predominately leisure travelers

• Market simulative

• Predominately single distribution channel controlling inventory availability

• Growth oriented focus on niche exploitation

• Low overhead org structure with a focus on culture

• Ultra Low Cost• Traditional Low Cost• Modern Low Cost

Cus

tom

erS

elec

tion

Val

ueP

ropo

siti

onV

alue

Cap

ture

Sco

pe o

fA

ctiv

itie

sS

trat

egic

Con

trol

Org

.S

yste

ms


Business Design GroupingWe can identify business design groupings by plotting the choices airlines make across the six business design parameters

Leisure Business

Extender

Seat Only Luxury

Regional Global

Stimulative Premium

Single Product Multi Products

Not Prominentin any Region

Multi Region Prominence

Local Foreign

Point-to-pointMid-Haul

Hub & Spoke

Domestic International

Single Region Prominence

Mixed-HaulHub & Spoke

Long-Haul Hub & Spoke

ValueProposition

CustomerSelection

Mostly VFR and leisure market

Travel Purpose

Customer Origin

Price Sensitivity

Product Quality

Product Offerings

Market Breadth

Market Franchise

Network Type

Mostly premium-focused

Customers primarily from home market

Customers primarily from intl. markets

Pricing drives incremental customer demand

Pricing targets yield premiums, not market share

‘No-frills’ product focused on seat sales; other offerings generate ancillary revenue

Premium product focused on holistic customer experience

‘One size fits all’ offering for all customer segments

Multiple product lines for different customer segments

Network services primarily a single geographic sub-region

(e.g. a province or state)

Network covers most of a large domestic market

Truly global network without significant regional concentration

No market share concentration in any region

Franchise presence in multiple geographies

Dominance in at least one major region (e.g. AA in Latin

America)

Network primarily extends the reach of other partner

carriers into smaller markets

Network focuses on point-to-point service

Connect long-haul / intl. traffic to short and mid-haul

domestic points

Connect long-haul / intl. traffic to other long-haul

points

Network covers a meaningful number of intl. routes



One class Multiple cabins

Air Transportation Only Broad Vertical Integration

Online Multiple channels

None Global

Limited In-house profit center

Limited Extensive

Scope of Activities

Value Capture

Economy Cabin

In-flight

Loyalty Program

Alliance Affiliation

Airline Operations

MRO Activities

Distribution Channel

First, Business, Premium Economy

and Economy

Online redemption with no reciprocity

Global redemption across alliance

network

Strictly on-line, no inter-line Seamlessly global

The “Virtual” Airline, outsource as much as possible

Complete control above and below the wing

Outsource all but most basic line checks

Extensive MRO capability with global customer base

Internet primary point of contact, res services

outsourced

Res locations functioning as profit unit call centers



Open Market Entry Exclsve routes, gates, slots

Flat Pyramid

Outsource Internal

Minimal Significant

Customer-centric Operations-centric

Low High

Org. Systems

Strategic Control

No barriers to entry

Regulatory

Cost Structure

Brand Awareness

Hierarchical Structure

Management Focus

Management of Non-core activities

Control of limited gates, slots, routes

Ability to outlast competition

Used to create price premium

Gets first call due to perception of universal low fares

Gets first call due to perception of global service

Individual decision makers Command and control

Meet perceived demand Optimize operational parameters

The Virtual Airline Vertical integration across value chain


Within the business designs there are clear sub-setsWith this approach, there are nine business designs that describe the majority of the world’s passenger airlines.

Geo-Focused Network Intercontinental Network

Ultra Value

Global Luxury Connector

Modern ValueTraditional Value

Concentrate operations in one geographic region

High frequency

Limited flights to other areas

May join alliances or codeshare

Significant global reach

Luxury service and product

Long-haul with one primary hub and select 5th Freedom routes

Capitalize on hub location to capture 6th Freedom flows

Alternative to non-stop service

Cover entire domestic market

Hub-and-spoke network sometimes with multiple hubs

Routes to multiple global markets

Participate in global alliances

Aggressively stimulative pricing

“Seat-only” product; charge extra for other services (e.g. checked bags)

Leisure customer focus

Serve secondary airports

Point-to-point and network

Target a mix of business and leisure travelers

On-board product frills superior to competitors’ Economy Class (e.g. LiveTV, XM Radio, Pitch)

Often serve primary airports

Point-to-point service

High frequency

Target leisure and price-sensitive business travelers

Serve secondary and primary airports

Charter

Focus on unscheduled service with some scheduled operations

Significant reliance on tour operators selling vacation packages

Target customers often agnostic to branding of airline component of vacation package product

Primarily extends reach of partner carriers into smaller markets

Operate under co-brand, code share, or pro-rate agreements

Occasionally subsidiary of larger carrier

Network Extender

Independent


Business Design Mapping

Travel Purpose

Customer Origin

Price Sensitivity

Product Quality

Product Offerings

Market Breadth

Market Franchise

Network Type

Ultra Low Cost

Traditional Low Cost

Modern Low Cost

Geo-Focused Network

Intercontinental Network


Biz

Luxury

Global

Premium

Multi Products

>1 Region

Foreign

Long H&S

Leisure

Extender

Seat Only

Regional

Stim

Single Product

No Regions

Local

P2PShort/Mid

H&S

Dmstc Int’l

1 Region

Mixed H&S

Val

ue P

ropo

siti

onC

usto

mer

Sel

ecti

on

Biz

Luxury

Global

Premium

Multi Products

>1 Region

Foreign

Long H&S

Leisure

Extender

Seat Only

Regional

Stim

Single Product

No Regions

Local

P2PShort/Mid

H&S

Dmstc Int’l

1 Region

Mixed H&S

Biz

Luxury

Global

Premium

Multi Products

>1 Region

Foreign

Long H&S

Leisure

Extender

Seat Only

Regional

Stim

Single Product

No Regions

Local

P2PShort/Mid

H&S

Dmstc Int’l

1 Region

Mixed H&S

Value CarriersNetwork Carriers Other Types

Network Extender

Independent Regional

Charter



In-flight

Loyalty Program


Airline Operations

MRO Activities


Ultra Low Cost


Modern Low Cost

Geo-Focused Network



Multiple Cabins

In-house profit

center

Global

Broad Vertical

Integration

Multiple Channels

Extensive

One Class

Limited

None

Air Trans Only

Online

Limited


Network Extender


Charter

Val

ue

Cap

ture

Sco

pe o

f A

ctiv

itie

s

One Class

Limited

None

Air Trans Only

Online

Limited

One Class

Limited

None

Air Trans Only

Online

Limited

Multiple Cabins

In-house profit

center

Global

Broad Vertical

Integration

Multiple Channels

Extensive

Multiple Cabins

In-house profit

center

Global

Broad Vertical

Integration

Multiple Channels

Extensive



Regulatory

Cost Structure

Brand Awareness


Management Focus

Mgmt of Non-Core

Ultra Low Cost


Modern Low Cost

Geo-Focused Network



Exclusive routes,

gates, slots

Operations-centric

Significant

Pyramid

Internal

High

Open Market Entry

Customer-centric

Minimal

Flat

Outsource

Low


Network Extender


Charter

Open Market Entry

Customer-centric

Minimal

Flat

Outsource

Low

Open Market Entry

Customer-centric

Minimal

Flat

Outsource

Low

Exclusive routes, gates, slots

Operations-centric

Significant

Pyramid

Internal

High

Exclusive routes,

gates, slots

Operations-centric

Significantly

Pyramid

Internal

High

Org

aniz

atio

nal

Sys

tem

s

Str

ateg

ic

Con

trol


Specialized


Travel Purpose

Customer Origin

Price Sensitivity

Product Quality

Product Offerings

Market Breadth

Market Franchise

Network Type

Freight

Express

Val

ue P

ropo

siti

onC

usto

mer

Sel

ecti

on

Biz

Tracking Support

Global

Premium

Multi Products

>1 Region

Foreign

Long H&S

Leisure

Extender

Transport only

Regional

Stim

Single Product

No Regions

Local

P2PShort/Mid

H&S

Dmstc Int’l

1 Region

Mixed H&S

Cargo



In-flight

Loyalty Program


Airline Operations

MRO Activities


Freight

Express

Specialized

Multiple Cargo Types

In-house profit

center

Global

Broad Vertical

Integration

Multiple Channels

Extensive

One Type of Cargo

Limited

None

Air Trans Only

Online

Limited

Cargo

Val

ue

Cap

ture

Sco

pe o

f A

ctiv

itie

s



Regulatory

Cost Structure

Brand Awareness


Management Focus

Mgmt of Non-Core

Freight

Express

Specialized

Exclusive routes,

gates, slots

Operations-centric

Significant

Pyramid

Internal

High

Open Market Entry

Customer-centric

Minimal

Flat

Outsource

Low

Cargo

Org

aniz

atio

nal

Sys

tem

s

Str

ateg

ic

Con

trol

airline business design segmentation oliver wyman

Documents

business design areasregional

business units

airline operations

design differentiationcarriers

airlines customers

oliver wymans interests

airlines services

airlines channel