beyond the low cost carrier model

P R O P R I E TA R Y I N F O R M AT I O N

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BLUE PAPER


BEYOND THE LCC MODELTHE BLUE OCEAN STRATEGY APPLIED TO THE AIRLINE INDUSTRY

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© 2014 1BlueHorizon Group - www.1bluehorizon.com 01BHG | Beyond the Low Cost Carrier Model Al l r ights reserved

March 2014

The ‘ idea factory ’ th ink ing ahead st rategies www.1bluehorizon.com

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Pricing

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Foreword to think ‘1BlueHorizon’…

� ‘How does a Billionaire become a Millionaire? He starts an Airline…’ is not just an old and famous

joke within the Aviation industry, it need to be considered very carefully by anybody thinking to

create an airline…

� Crisis in the airline industry led to the emergence of LCC´s (Low Cost Carriers) – The crisis has

not been caused, but deepened by terrorist attacks on September 11, 2001. Originally, the root

cause was the decline of the historically unequalled high yield level in the late 90s and, in parallel,

considerable cost increase…

� If almost everybody is talking about Low Cost Carrier it is probably because it is law fairs.

Unfortunately for common people low cost is also associate to poor quality and safety. Of course


Unfortunately for common people low cost is also associate to poor quality and safety. Of course

it is not true…

� I’ve heard a number of times that this business model sounds a little simplistic… Maybe that’s

true at face value, but executing and carrying out such an approach requires great discipline,

consistent communication with the employees base and an inspirational leadership model…

� Summarized, what the heck does low-cost mean? From my opinion the LCC Model is more a spirit on how we are able to develop uncontested market space using different recipes from a ‘Low Cost Carrier Cookbook’: Welcome ‘Beyond the Low Cost Carrier model’ by thinking ‘1BlueHorizon’…


1 B l u e H o r i z o n creation concept is an evolution of the ‘Blue Ocean’ Strategy from INSEAD dedicated to Aviation and related businesses

Blue Ocean StrategyRed Ocean Strategy

Make the Value / Cost Trade-off

Align the whole system of a player’s activities with its strategic choice of differentiation OR low cost

Break the Value / Cost Trade-off Throughout Value Innovation

Align the whole system of a player’s activities with its strategic choice of differentiation AND low cost


Compete in Existing Market Space

Beat the Competition

Exploit Existing Demand

Create Uncontested Market Space

Make the Competition Irrelevant

Create and Capture New Demand

Source: The Blue Ocean Strategy (INSEAD 2005) from Professors W. Chan Kim and Renee Mauborgne - http://www.insead.edu/home


Rather than competing with the confines of existing markets, the approach suggests developing uncontested market space - making the competition irrelevant

� Value innovation is a strategic move that allows a market player to create a blue ocean and helps companies make giant leaps in the value provided to customers through the simultaneous pursuit of differentiation and low cost

� In blue oceans, demand is created rather than fought over

� There are two ways to create blue oceans: to launch completely new industries or to create a blue ocean from within a red ocean when players expand the boundaries of an existing industry

Create and Capture New

Break the Value / Cost Trade-off Throughout Value

Innovation

Align Players System with Strategic Choice



� Competing in overcrowded industries does not sustain high performance

� The real opportunity is to create blue oceans of uncontested market space

� By focusing on competition and “competitive advantage”, players will ignore the two lucrative aspects of strategy: To find and develop blue oceans and to exploit and protect blue oceans

� In blue oceans, demand is created rather than fought over

Create Uncontested Market Space

Make the Competition Irrelevant

Create and Capture New Demand


Value creation is a strategic ‘move’ that allows a market player to create a ‘Blue Ocean’, and can be archived through the ‘four actions framework’

Definition

�Value innovation helps companies make giant leaps in the value provided to customers through the simultaneous pursuit of differentiation and low cost

�Value innovation offers buyers a huge leap in value, and that will give rise to new markets

Create a new value leap

that crosses

Reduce

Which Factors / Costs should be reduced

well below the industry’s standard

Eliminate

What of the

Factors that the

Create

Which Factors

should be


Source::The Blue Ocean Strategy (INSEAD 2005) from Professors W. Chan Kim and Renee Mauborgne - http://www.insead.edu/home

give rise to new markets

�Value innovation balances costs of delivering the value proposition with what the buyer values, to resolve the trade-off dilemma

� In Value Innovation, instead of compromising the value wanted by the customer because of the high costs associated with delivering it, costs are eliminated or reduced

that crosses conventional

marketsegmentation

Raise

Which Factors should be raised well

above the industry’s standard

Factors that the

industry takes for

granted should be

Eliminated?

should be

created that the

industry has

never offered?


Furthermore, six other strategic ‘moves’ are required to re-establish market boundaries and create ‘Blue Oceans’ - The Six Paths Framework

Red Ocean Strategy (Head to Head Competition)

� Focuses on rivals within its industry

� Focuses on competitive position within strategic group

Blue Ocean Strategy

� Looks across alternative industries

� Looks across strategic groups within industry

Industry

Strategic Group

Conventional Boundaries of Competition



� Focuses on buyer serving the buyer group

� Focuses on maximizing the value of product and service offerings within the bounds of its industry

� Focuses on improving price performance within the functional –emotional orientation of the industry

� Focuses on adapting to external trends as they occur

� Redefines the industry buyer group

� Looks across complementary product and services offerings

� Rethinks the functional – emotional orientation of the industry

� Participates in shaping external trends over time

Buyer Group

Scope of Product or Service Offering

Functional –Emotional Orientation

Time


Rather than competing with the confines of existing markets, the Low Cost Carrier (LCC) approach suggests developing uncontested market space

� Crisis has not been caused, but deepened by terrorist attacks on September 11, 2001. Originally,

the root cause was the decline of the historically unequalled high yield level in the late 90s and, in

parallel, considerable cost increase

� For the ‘classic’ network carriers, the critical situation has also deteriorated due to the current

boom of low cost carriers (LCCs), the only players in the market to gain money despite the crisis

� LCCs capitalize on their simple and efficient business model and their extremely lean cost

structure (up to 60% lower unit costs in comparison with network carriers)

� Wherever LCCs have entered the markets successfully, they gain considerable market share, stir


� Wherever LCCs have entered the markets successfully, they gain considerable market share, stir

additional demand and cause a declining yield level. In theory, LCCs can attack 70% of all

domestic/continental traffic markets

� Southwest Airlines traces its roots to the March 15, 1967 incorporation of Air Southwest Co.. On

March 29, 1971, Air Southwest Co. changed its name to Southwest Airlines Co.. The rest of 1971

and 1972 saw operating losses. Southwest entered a terrible marketplace that a Porter five

forces analysis would have said was a blood bath…

Undoubtedly Southwest Airlines was the LCC forerunner in the airline industry

Source: 1BlueHorizon Group | Management Consulting Analysis – The Low Cost Carrier (LCC) model is born


The strategy canvas of the ‘Short Haul’ airline industry: The criteria / rules / boundaries of the airline industry are listed along the x-axis

High

Relative offering

level


Source: 1BlueHorizon Group | Management Consulting Analysis – Low Cost Carriers Value Curve

Low

•Price

•Meals

•Lounges

•Seatingchoices

•Hub

Connectivity

•FriendlyService

•Speed

•Frequent

departures

Low Cost Carriers Other Airlines Car


Actually, the airline industry growth is mainly driven by price-sensitive as well as new air passengers not able to afford in the past air tickets

40%

“Poached price-sensitive Passengers”

"Additional Travelers"

20%

“New Air Passengers“ Business/

Weekend-trips

- Flight plan

- Flexibility

- Service

- Miles program

Package tour

- Convenience

- All incl. price

- Local service

offering

Full Service(FSC)

Charter

Holiday trips(flight only)

Businessflights1)

Leisure/Visit


� Strong LCC-growth results from origin of LCC passengers

– Price-sensitive passengers poached from other airlines

– Demand stimulation towards additional travellers due to introduction of new routes (mainly secondary airports)

– Demand stimulation towards new air passengers having chosen another medium of transport before

� Price-related passenger poaching from other airlines is driven by overlap in customer segments

Travelers"

Price-sensitive Leisure/

Business flights

- Price

- Destinations

- Minimum comfort

Low Cost(LCC)

(flight only)flights1)

Source: 1BlueHorizon Group | Management Consulting Analysis


The budget carrier emergence was clearly (one) 1 B l u e H o r i z o n creation to survive and/or to develop uncontested market space…

� The first low cost carrier is generally considered to be the American company Southwest Airlines which launched in 1971, with the then revolutionary concept that you could lower the cost of ticket prices by eliminating some of the extras and therefore save

� Ryanair Ltd. (FR) is an Irish low-cost airline established in 1985 (by Christopher Ryan, Liam Lonergan) with is head office in Dublin Airport and its primary operational bases at Dublin Airport and London Stansted Airport.


eliminating some of the extras and therefore save passengers money

� (1)Southwest is the largest airline in the United States, based in Dallas (Texas), mainly for domestic passengers carried who operates more than 3,300 flights a day and utilizing a fleet of 88 B717 and 613 B737 aircrafts.

� The baton was picked up in the UK by Ryanair, in 1990, still the biggest contender in the field. Ryanair is often viewed as the lowest of the low cost, both for its cheap prices, its service and the fact that many airports are quite some distance from the town they claim to land in.

The LCC is a model for airlines with different recipes that lead to success…

and London Stansted Airport.

� Making losses, by 1991, Ryanair was in need of restructuring. Michael O'Leary was charged with the task of making the airline profitable. He quickly decided that the key to low fares was to implement quick turn-around times for aircraft, "no frills" and no business class, as well as operating a single model of aircraft (went public in 1997).

� Ryanair operates over 290 Boeing 737-800 aircraft. The airline has been characterized by rapid expansion as a result of the deregulation of the aviation industry in Europe in 1997.

Note: (1)In May 2011 the airline acquired Orlando-based AirTran Airways, with a single AOC since March 1st 2012 and full integration of the carriers taking place over several years.Source: Companies websites, 1BlueHorizon Group | Management Consulting Research & Analysis


The low cost carriers(1) are following different operational model – different LCC recipes(2) from the ‘1BlueHorizon Cookbook’(2)

Lessons learnedAirline industry

case study

� Only an up front specified market segment is addressed (-> targeted value proposition)

Principally doable for the legacy Air Carrier?

�

�

�

� LCCs need to achieve significant cost differences along all cost categories (at 40% of incumbent)

� Wherever LCCs enter markets successfully, they gain considerable market share and create additional demand


Note: (1)Also known as low cost airlines or no-frills, discount or budget carriers(2) ‘LCC recipes’ are available upon request from ‘1BlueHorizon Cookbook’

Source: 1BlueHorizon Group | Management Consulting Framework

�

�

�

�

considerable market share and create additional demand

� With superior cost position, extreme pricing is possible which is hardly to be beaten through incumbents

� Market volume and market share are increased by penetration and usage increase

� Successful models have often been developed from scratch –downsizing existing models is questionable


Looking briefly at the economics of European carriers, the LCCs benefits from big cost differences (up to 60% lower unit costs than network carriers)

Adjusted Cost Difference

� Productivity gain through higher utilization in LCC Business Model� Different tariffs/work rules (e.g. performance-based remuneration)� Reduced service concept (e.g. minimum crew complement, check-in process)

Labor Costs

33%

� Innovative direct sales (e.g. internet bookings, call centers, no travel agents/commissions)

� Lower GDS charges

Sales &Reservations

15%

� Young homogeneous fleet� Aggressive negotiation of maintenance contractsMaintenance 13%

Share of Total Costs


Note: (1)ASM = Available Seat MileSource: 1BlueHorizon Group | Management Consulting – Overview of the share of total costs 2012

Difference

(8.41 C/ASM(1))

(European carriers)

� Aggressive negotiation of maintenance contracts� Subcontracting

Maintenance 13%

� Dense airport schedule/rapid gate turnaround and no-frills service concept� Partly favorable contracts at secondary airports

GroundHandling

12%

� Reduced charges due to less value added by the airport� Secondary airports

Landing Fees

9%

� Fuel: Purchasing and fleet efficiency� Ownership Costs: Financing Conditions� Onboard Services: No frills service concept

Others 18%


Beyond the Low Cost Carrier model: definitely the LCC spirit can be used in an infinite number of ways to support 1 B l u e H o r i z o n creation

� The Low Cost Carrier business model as ‘ 1 B l u e H o r i z o n ’ outcome give us four

questions to which we can start thinking about during the airline business plan development process to create uncontested market space (niches):

� Which of the factors that the Aviation & Aerospace

industry takes for granted should be eliminated?

� Which factors should be reduced well below the Aviation

& Aerospace industry's standard (safety & security


excluded)?

� Which factors should be raised well above the Aviation

& Aerospace industry's standard?

� Which factors should be created that the Aviation

& Aerospace industry has never offered?

I sincerely wish that the airline venture will change the trend of air travel…Time will only tell us…

Note: MENA stands for "Middle East & North Africa / EMENA stands for Europe, Middle East & North Africa

‘from R e d to B l u e Horizon’


Non exhaustive

The airline Puzzle (the venture is tough!) ‘Prepare to Takeoff’ (the target)

Launching an airline is very challenging and similar to a puzzle where the success depend on how each pieces fit each other

1BlueHorizon Group | Management Consulting


Illustrative

1BlueHorizon Group | Management Consulting

The project expands in scope, typically seven main streams

Source: © 1BlueHorizon Group | Management Consul ‘Prepare for takeoff’ Framework


AOC Certification Date

BusinessPlan

Commercial Operation

AOC Approval Process1

Aircraft Registration

Human Resources

Infrastructure

Continuous HR Recruitment

Continuous Infrastructure

Pro

jec

t o

wn

er

aim

/ F

ea

sib

ilit

y S

tud

y

3

4

5

6

EnterIntro

Service

Typical comprehensive high level framework for processing of an Air Operator’s Certificate (AOC) including its subordinate permissions

Fin

an

ce &

A

ircra

ft s

ou

rcin

g

2

Air

lin

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an

ag

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t A

dvis

ory

Su

pp

ort

1109


National Civil Aviation Authority / Ministery in charge of transportation

Approved Training Organisation

Infrastructure

Maintenance Organizational Approval

Continuous InfrastructureExpansion

Pro

jec

t o

wn

er

aim

/ F

ea

sib

ilit

y S

tud

y

7

8

6

Fin

an

ce &

A

ircra

ft s

ou

rcin

g

Air

lin

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an

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t A

dvis

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Su

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ort

Source: © 1BlueHorizon Group | Management Consulting Framework - IATA http://www.iata.org/whatwedo/safety/audit/iosa/Pages/index.aspx

The IATA Operational Safety Audit (IOSA) programme is an internationally recognized and accepted evaluation system designed to assess the operational management and control systems of an airline. It should be a prerequisite for any start-up airline willing to access once the European airspace to be build on the IOSA guidelines, and then to be certified IOSA.


Keep in mind a few advises before to open the Airline venture door because even you have the best operational model or an unique market opportunity (niche), only once the operations start you will know the truth…

As within the Aviation & Aerospace industry you will find a

lot of ‘sharks’ looking to make money, be extremely careful

and don’t take everything for granted…

As the Aviation is a very competitive industry, keep

everything confidential and avoid talking about your project

until you are very close to start operations…

I f you are giving the right kind of segmentation strategy

and good execution, there will be enough room in the


and good execution, there will be enough room in the

market for multiple service offering….

The future performance of your project will depend on the

strength of the selected business model and the focus

going forward…

Finally, don’t copy/paste an existing airline. Benchmark

them, learn from them and find out where is a niche, where

is potentially (one) ‘1 B l u e H o r i z o n ‘…

A maxim never to be forgotten before to start an airline venture: ‘How does a Billionaire become a Millionaire? Start an Airline…’


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MANAGEMENT CONSULTING SOLUTIONS PACK


1BlueHorizon Group | Management Consulting Management Consulting: How assisting management to solve a wide range of critical issues…


A s s e t M a n a g e m e n t | M a n a g e m e n t C o n s u l t i n g | I n t e g r a t e d C o m m u n i c a t i o n

We generate 1B l ueHo r i z on ® out of the Rough... www.1bluehorizon.com

March 2014Updated


1BlueHorizon Group | Management Consulting (MC) from business plan to first flight, or through the transformation of becoming more competitiveEvery month 1BlueHorizon Group senior personnel are invited to look at new airline start up projects or to solve a wide range of critical issues within the airline & Aerospace industry by entrepreneurs, investors and Senior management and board members. In our experience, concepts which look great on paper don’t reflect the reality of taking the business to market, the reason why our turnkey solutions have continuously an implementation focus.

HOW WE CAN HELP – GENERETING THRUST TO PROPEL YOUR BUSINESS FURTHER...

If you want a feasibility study, a business plan or a Due Dilligence to assess the case for an airline start-up or existing burning cash and running into trouble, an airport our MRO facility, or are burning cash, we draw on our experience of assisting the airline & Aerospace industry in Africa, Middle East and Europe, to provide focused analysis and results-oriented decision support. Our team members have worked on the airline start-up of MaximusAir, Fly Dubai, MTMKN (all U.A.E.), Silkroad Cargo (Uzbekistan), Wataniya Airways (Kuwait), Blue Airways (Nepal), Saba Airlines (Yemen), JetGreen (Pakistan), Punto Azul (Guinea Equatorial), for various airlines aiming to


Source: © 1BlueHorizon Group | Management Consulting

Saba Airlines (Yemen), JetGreen (Pakistan), Punto Azul (Guinea Equatorial), for various airlines aiming to restructure a poorly performing business or for airports in need of a strategic business review like N’djili International Airport in Kinshasa (RDC) or technical support for Al Najaf International Airport (Iraq).

Our core team and associates have management expertise in strategy, operations revitalization and restructuring, commercial, asset management, finance, maintenance & engineering across over twenty airlines. As example, we can advise on planning an airline start-up and provide an interim team to launch the business – from AOC through fleet acquisition, negotiations support with financiers, required due diligence, branding & marketing, recruitment, pilot training, IT infrastructure etc. – a full turnkey solution.

We are used to generate 1BlueHorizon® out of the Rough...


‘Big Four’Law firm

Management

1BlueHorizon Group | Management Consulting (MC) is providing clients a comprehensive approach, no matter how complex the issues

Innovative – Hands-on Knowleadge transferconsulting


OperationalImprovement

Creating 1 B l u e H o r i z o n ® to solve a wide range of critical issues

BUSINESSDEVELOPMENT

IMPLEMENTATIONProject Management Office

Source: © 1BlueHorizon Group | Management Consulting Business model


� Do you need help starting a new venture?

� Is it time for a Due Diligence as next step?

� Are you in need of a strategic business review?

� Looking for ways to differentiate from competitors?

� Aiming to restructure a poorly performing business?

� Are you in need of a sound Project Management office?

Illus

trativ

eA

via

tio

n

1BlueHorizon Group|MC senior personnel core competencies lie in Airlines, General Aviation, Airports, Aerospace and Defense and are deployed on-sites


� Are you in need of a sound Project Management office?

In today’s Aviation & Aerospace business environment, the margin of error is thin; clients need and expect seasoned advisors. With their respective disciplines,

1BlueHorizon Group senior personnel have experience in various corner of the world.

1BlueHorizon Group |MC is ready to field a team of relevant aviation and aerospace experts whenever and wherever they are needed

Airlines Air Cargo Corporate Jet Airports MRO GCAA

Source: © 1BlueHorizon Group | Management Consulting Industries & Capabilities – Core competencies Aviation


Project Management Office

According to recent studies, 68% of projects do not meet time/cost/scope targets.The PMO strives to introduce

economies of repetition in the execution of your projects and

Providing innovative solutions, hands-on and knowledge transfer are our difference to maximized value creation - continuously ahead of strategies

Operational Improvement

Our understanding of operational improvement is

quite simple: Whereas restructuring is about

stabilizing a company and fixing how it does things,

operational improvement is

Interim ManagementManagement trainer

Finding talent is difficult even at the best of time. Finding

resources to assist for a short-term assignment of a proven

heavyweight interim executive manager to manage a period

1BlueHorizon Group |MC senior personnel assists - ahead of strategies - stakeholders and management of companies in a variety of sectors who are faced with operating challenges, support of a project management office and/or requesting senior executive interim management support.

Ahead of Strategies

If you want a feasibility study or business plan to assess the case or are burning cash and running into trouble as you approach launch or help the executive teams assess the case for entering immunized


execution of your projects and we participate actively

in Strategic project management as facilitator…

1BlueHorizon Group |MCcan help give comfort and control through our hands-on experience to maximize

value creation…

operational improvement is about seeing a company

through the transformation of becoming more competitive.

1BlueHorizon Group |MCworks side by side with you to maximize the potential of

your people…

manager to manage a period of transition, crisis or change within an organization or to take on critical projects or

senior positions for a limited time is even more difficult.

1BlueHorizon Group |MCquickly understand what you need, with interactive

mentoring if more suitable…

… and our clients well recognize this!

case for entering immunized joint ventures…

1BlueHorizon Group |MCsenior personnel helping to

maximize your potential, thinking ahead of

strategies…


Published books and decisive management theories that facilitate critical dialogue and support 1 B l u e H o r i z o n creation

A short selection of inescapable aviation related books


“Baseline”(Philosophy)

“Low Cost Carriers”

“Courier services”“Various”

Airlines’ Turnaround

“Air Transport Management”

Partners network - Aviation

Source: © 1BlueHorizon Group | Management Consulting recommended bibliography (non exhaustive)


Contact: LEONARD FAVREPartner, Managing Director

Email: [email protected]

1 BlueHorizon Group| Ma n a g e m ent Co n s u l t i n g |P.O. Box 34154

Abu Dhabi, United Arab Emirates

M: +971 50 6164 007 (U.A.E.)

M: +41 79 2080 256 (Switzerland)

S: leof007


beyond the low cost carrier model

Business

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i o n foreword

value cost tradeoff

low cost carrier cookbook

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