Kevin O’TooleKevin O’TooleEDITOR EDITOR
AIRLINE BUSINESSAIRLINE BUSINESS
Air Transport and Tourism: Synergies and ParallelismsAir Transport and Tourism: Synergies and Parallelisms
University of SurreyUniversity of Surrey
Airline strategy: Airline strategy: The long viewThe long view
National champions
National marketsHeavy regulationLow competitionHigh growth rates 2xGDP
Market conditions
National champions
Dominant market shareRegulatory support/accessAbsorb/kill local competitorsMatch world standardsControl supply chain……control pricing
Strategies for success
National champions
National political constraintsComplexity/bureaucracyInflexibility on costLack of differentiationAll things to all men…within a
national boundary
The legacy
Global players
DeregulationGlobal economyFierce competition/market disciplinesMaturing markets – growth 1xGDPInternet democracy – smart buyers
The new market conditions
Global players
Global reachCustomer not product focusProfit driven not cost ledSegmented brandsDifferentiated productsCost flexibility
Strategies for success
The problem today is…
The industry as a whole has not sufficiently adapted to face those changed market conditions…
…it has often not been free to……BUT if airlines are not ready to
meet these challenges others will
Market collision
Global retailers/arrangers
Supply chainmanagers
Production/capacity suppliers
Global reach
Strong brand
Customer base
Many products
Economies of scale
Systems expertise
High utilisation
Economies of scale
Production expertise
Flexibility
Travel agencies
Online sites
Finance houses
etc
GDS
System providers
etc
Airlines
Hotels
Car hire
etc
Can the model adapt?
Regulation – safety, security, bilaterals, competition etc etc etc
People – large & unionised workforceAssets – heavy metal!
Built-in inflexibility
Can the model adapt?
Vertical integration: retail + logistics + production
Owns all parts of the chain….
….and pays for themResult: Low margins and high risk
A smokestack industry!
Can the model adapt?
Asset heavy
Balance sheet ratios 01/02
$ billion sales ratio norm
Revenues 238 x1 x1
Fixed assets 191 x1.2 x3-4
All assets 310 X0.8 X1.5
Source: Bridging the GAAP 4-02
Can the model adapt?
Service industry levels of people cost:employs 1.5-2 million worldwide
revenue/cost $200k per employee
ExpensiveHeavily unionised
Workforce heavy
A marginal business
Top 150 airline groups 5 year record
2001 2000 1999 1998 1997
Revenues -5.2% 8.2% 7.0% 2.0% 3.0%
Op margin -2.0% 4.2% 5.3% 6.8% 7.2%
Net margin -4.2% 1.1% 3.0% 3.1% 3.2%
Source: Airline Business World Airline Rankings
Source: Bridging the GAAP 4-02
Operating margin by region
-10
-8
-6
-4
-2
0
2
4
6
8
10
92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02
North America EuropeAsia Pacific Average of all
Top 150 Airline Groups by typeType Revenues Groups Operating results
$ million 2001 2000Major 218,000 34 -6,654 12,789Flag-carrier 31,654 44 -577 162All cargo 25,257 9 618 1,199Independent 17,347 29 -50 927Low cost 9,272 10 988 1,288Leisure 6,911 13 -52 1Regional 4,330 11 5 232Grand Total 312,770 150 -5,721 16,598
Source: Airline Business World Airline Rankings
New models
Tackle costsOutsource what is not essentialBuild flexibility into capacity etcNew deals with partners eg power-
by-the hourNew deals with unions
The response
New models
Tackle fixed costsGain global scale
Economies of scaleMove beyond national boundariesMarket mobility
The response
New models
Tackle fixed costsGain global scaleIncrease offer
Match offer to customer valueExploit new distribution channelsCRMIncrease the offer
The response
62%
55%
33%
32%
25%
24%
16%
12%
20%
28%
21%
17%
19%
37%
21%
23%
Schedule information onarrivals and departures
Frequent flyer services /redemptions
Hotel booking sales
Excursions/ tour /package holiday sales
Corporate client sales
Car hire sales
Partner airline seats
'Call me back' facility
Currently offer
Plan to offer innext 2 years
Online services for customers(Base: All respondents)
New models
Choose where to sit in the chainAsset light service business….orPeople light production business
Don’t spend or depend on the wrong assets
Learn from other retail/production models
The longer term
New models
European charterFour integrated travel groups…led by retail packaging…flying is incidental/adaptable
CargoFew express integrators…and going further eg Deutsche PostBelly cargo becomes a commodity
Examples