MANAGEMENT

Chapter 2: Airline Strategies and Business Models

1 Outline

 Airline Strategies and Business Models  Regulatory Environment  The Chicago Convention  A typical bilateral agreement  Open Skies  The Traffic Freedoms  Passenger Market Segmentation  The LCC Business Model  Global Network Carriers Business Model  Non- Global (Regional) Network Carriers Business Model  Charter- Leisue Carrier Business Model  Pattern of Airline Cooperation  Alliances  Air Cargo business models 2 The passenger should always be at the center

Regulations

Airline Strategies and Business Plan

Passenger

Technology 3 Regulatory Environment

 International air transportation is mostly negotiated between two countries (bilateral)

 Under the framework first introduced in the 1944 Chicago Convention

 Chicago Convention framework is still being used

 Increasing liberal agreements over last twenty years

 Open Skies deals are the most liberal

 Ownership remains national bases

4 The Chicago Convention

 The Chicago Convention of 1944 has two principal functions:

 I. The Chicago Convention is a source of International Air Law. (Articles 1-42)

 II. The Chicago Convention is the Constitution of An International Organization (Articles 43-96) – ICAO

 ICAO-International Civil Organization

5 The Chicago Convention

6 A typical bilateral agreement(except Open Skies)

 Negotiations are between two sovereign nations

 Type of traffic allowed - traffic freedoms are specified

 May specify: , airports, capacity, frequencies and fares

 Typically includes a “nationality” clause  nationality : The status of belonging to a particular nation.

 Reciprocity  Reciprocity : The practice of exchanging things with others for mutual benefit, especially privileges granted by one country or organization to another.

 Any changes have to be approved by both governments 7 Open Skies • Agreement can be bilateral, multi-lateral, or by joint political entity (e.g., EU) • Typically no traffic restrictions other than domestic (Cabotage)

• Cabotage: air of passengers and goods within the same national territory

• No limitations on airline designations, points served, frequencies and seats • No limitations on fares. • Changes in services do not have to be approvement by both governments

• Remain the same 8 • “Nationality” and “Reciprocity” Open Skies

 The EU–US Open Skies Agreement : is an open skies air transport agreement between the European Union (EU) and the United States (US).

 The agreement allows any airline of the European Union and any airline of the United States to fly between any point in the European Union and any point in the United States.

 Both EU and US airlines are allowed to fly on to a further destination in another country after their initial stop ( Fifth Freedom rights). Because the EU is not treated as a single territory for the purposes of the agreement, this means in practice that US airlines can fly between two points in the EU as long as that flight is the continuation of a flight that started in the US (e.g. New York - London - Berlin).

 The initial agreement : on 30 April 2007.

 became effective 30 March 2008. 9  Phase two was signed in June 2010 The Traffic Freedoms

 First Freedom- Over flying The privilege to fly over a treaty partner’s territory (B) without landing.

10 The Traffic Freedoms

 Second Freedom-Technical stops

 The privilege to make a technical landing in a treaty parnter’s territory (B) without picking up or letting off revenue traffic.

11 The Traffic Freedoms

 Third Freedom- (Transporting revenue )  The privilege to carry revenue traffic from the carrier’s national territory (A) to a treaty partner’s territory (B).

12 The Traffic Freedoms

 Fourth Freedom - (Transporting revenue back)  The privilege to carry revenue traffic from a treaty partner’s territory (B) to the carrier’s national territory.

13 The Traffic Freedoms

 Fifth Freedom - (Tag-on or beyond rights)  The privilege to carry revenue traffic between two or more treaty partner nations (B to C) on flights operating out of or into a carrier’s national territory.

14 The Traffic Freedoms

 Sixth Freedom - (between two countries through home country)  The privilege to carry revenue traffic between two or more treaty partner nations (B to C) on flights operating out of or into a carrier’s national territory. (A).

15 The Traffic Freedoms

 Seventh Freedom - (stand-alone beyond rights)  Revenue traffic flown between the territories of two nations (B To C) by a carrier operting entirely outside its own territory (A).

16 The Traffic Freedoms

 Eight Freedom –(consecutive cabotages )  The privilege to carry a treaty partner’s domestic revenue traffic (City 1 to City 2) in Country B on flights operating out of or into a carrier’s national territory. (A).

Cabotage is the transport of goods or passengers between two 17 points in the same country by a vessel or an aircraft registered in another country The Traffic Freedoms

 Nineth Freedom –(stand alone cabotage)  The privilege to carry a treaty partner’s domestic revenue traffic (City 1 to City 2) in Country B . No country A origination or landing required.

18 The Traffic Freedoms

Freedom Description Example

The right to fly over a foreign A flight from Istanbul to Munchien , flown by 1st country without landing. Turkish Airlines, flying over the Hungary. The right to refuel or carry out maintenance in a foreign A flight from London/Heatrow to New York , flown 2nd country without embarking or by a British airline, refueling at an Irish airport. disembarking passengers or cargo. The right to fly from one's own A flight from to Japan, flown by a 3rd country to another country. New Zealand airline.

The right to fly from another A flight from Chile to Brazil, flown by a Brazilian 4th country to one's own. airline.

A flight from Dubai, United Arab Emirates, to The right to fly between Auckland, New Zealand, with a stop in Sydney, two foreign countries on a 5th Australia, flown by Emirates. Passengers and cargo flight originating or ending may travel between Auckland and Sydney, without in one's own country. 19 continuing to Dubai. The Traffic Freedoms Freedom Description Example A flight from New Zealand to the United States, flown The right to fly from a foreign by an airline based in France, with a stop in French country to another while Polynesia (a part of France). This can also be a flight by 6th stopping in one's own country an American airline flying under the 5th freedom, for non-technical reasons. allowing codeshare by the French airline which uses the 6th freedom. The right to fly between two places in a foreign country A flight between two airports in the United States, modified while stopping in one's own flown by an airline based in Canada, with a full stop in 6th country for non-technical Canada. reasons. The right to fly between two foreign countries, where the A flight between Poland and Israel, flown by a Hungarian 7th flights do not touch one's own airline. country. A flight operated by a French airline between San The right to fly inside a foreign Francisco and Paris, with a full stop in Newark. 8th country, continuing to one's Passengers and cargo may board or disembark the flight own country. in Newark, with no intention to board the flight to Paris. The right to fly within a foreign A flight flown between Auckland and Christchurch by an 9th country without continuing to Australian airline. 20 one's own country. Passenger market segmentation

Long- Haul 35%Travel

Long- Haul Long- Haul Personal Business Business Personal 30%Travel 70%Travel 40-50% 50-60% Revenue Revenue

Short- Haul Short- Haul Business Personal

Short -Haul 21 65%Travel LCC Business Model

Long- Haul 35%Travel

Business Personal 30%Travel 70%Travel 40-50% 50-60% Revenue Revenue LCC

Short -Haul 22 65%Travel The LCC “Business Model” LCCs strategies to reduce unit costs:  • Single aircraft type or family of aircraft  • Point-to-point traffic vs. hub network structure,  • Relatively short-haul  • Use secondary , remote airport  • No connecting tickets - point-to-point tickets only to local passengers  • Single cabin service, no “ premium” classes on board  • No seat assignment (in advance and/or at the airport)  • Reduced “frills” and seating space on board  • No frequent flyer loyalty programs  • No distribution through Global Distribution Systems (GDS)  • Mainly internet sales  • No labor unions, low wage rates 23 LCC unit cost advantage is critical

Cost per available seat kilometre (CASK) versus average trip length: world airlines

24

Source: CAPA CASK Database (CAPA - Centre for Aviation) LCC unit cost advantage is critical Cost per ASK, CASK, (US cent) and average trip length for selected European legacy and low-cost carriers

25

Source: CAPA CASK Database (CAPA - Centre for Aviation) LCC websites are powerful tools  Majority of LCC reservations are via the websites  The main advantages;  Cost benefits:  – No commissions  - No GDS (General Distrubition Systems ) fees  Revenue benefits:  – Up-selling opportunities  - Fees for letting other companies use the website  Relationship benefits:  – Millions of visitors 26  – Direct, on-going customer contact LCCs in 1990

Source:1990 OAG data OAG is an air travel intelligence company that provides accurate airline schedules, route analysis, aviation analytics, flight 27 tracking, flight data. LCC business model has become worldwide

28 LCC’s are operating in most regions nowadays Today very few large LCCs actually fit LCC

“business model” items.

Spirit

AirAsia

Jetstar

WizzAir

Ryanair

Jetblue

EasyJet Pegasus

LCC Attribute Southwest Norwegian Norwegian Point to Point ; no connection

Single aircraft type

No sales through GDS

Secondary Airport No frequent flier programme Following

No frills Away from

No long-haul Not 29 following The LCC -Business Model  Over time, some deviations from the typical LCC business model have emerged.

 Fewer airlines are now sticking to a purely low cost model with point-to-point routes and seat-only business over the internet.

 Today we are seeing more hybrid models which, in addition to offering low cost, are also beginning to offer networks and connecting flights.

 Since 2008, AirBaltic has made a transformation from a point-to-point low-cost carrier to a hybrid network LCC. The airline has turned its Riga ‘North Hub’ into a transit point for travellerS.

Airlines Departing the traditional low-cost carrier business model which emphasizes point-to-point routes instead of transfers at hubs, Vueling Airlines will start connecting passengers through its base at Barcelona El Prat Airport 2010.

 Transavia is also a hybrid LCC.

 Norwegian and Air Asia X are long-haul LCCs.

 Longhaul LCC AirAsia X offers premium flatbed angle flat seats at the front of its widebody aircraft.

 Norwegian startes offering lounge access at seven airports , including Gatwick,30 JFK and LAX — where it uses the Oneworld lounge. The LCC -Business Model  Most low-cost carriers, such as Ryanair and EasyJet in Europe, Tigerair in Australia, Southwest Airlines in the US, do not offer any premium classes of service.  Some, however, have options above a standard coach seat:  AirAsia charges a premium for passengers to sit in front of the aircraft or the exit seats which also offer more legroom as well as board first. These are called Hot Seats.  JetBlue offers Even More Space for between $20 and $90 extra per segment. These are the first 9 rows on the A320 and the bulkhead and emergency row on the E-190. EML includes priority boarding and priority security screening but no other benefits.  Spirit Airlines has Big Front Seats in the first row of all their aircraft. The seats were part of Spirit's former First Class offering, Spirit Plus, but now offer no benefits other than bigger seat pitch and a31 2 by 2, rather than 3 by 3 seat arrangement. Another Trend in LCC world- Medium-Haul LCCs

Asia Pacific is center of Medium-haul LCCs 32 Global Network Carriers Business Model Global Network Airlines focus on multiple passenger segments Long- Haul 35%Travel

Global Network Carrier Business Personal 30%Travel 70%Travel 40-50% 50-60% Revenue Revenue

Short -Haul 33 65%Travel Global network airlines Top 10 airlines- Scheduled Passengers- Kilometers Flown – 2018- RPK RPK Share- 2018

24%

TOP 8 GLOBAL AIRLINES DIĞER 76%

34 Total RPK (millions ) 8,329,776 Top 8 global network airlines 1,979,177 Inspite of the rapid growth in LCCs, Global network carriers are still big

RPK Share- 2013 RPK Share- 2018

24% 34%

66% 76%

TOP 9 GLOBAL AIRLINES TOP 8 GLOBAL AIRLINES DIĞER DIĞER

35 Common characteristics with Global Network Carriers

 • Focus on and serve multiple passenger segments  • Large and complex fleets  • Major hub operations  • Hub and spoke network  • Domestic and International markets  • Long- haul, medium and short haul routes  • Broad range of service levels ❖ First class, business class service ❖ airport lounges ❖ onboard meals and inflight entertainment, flight magazine ❖ ancillary revenue 36  • Allience membership Hub and Spoke Network Hubs increase reach of Network airlines

City A City D

City E City B Hub

City C City F

Collecting traffic at Hub to create volume Hub and spoke network model are best to serve small markets37 The responses of global carriers to low cost competition  Cost reduction  Adopt low cost features In addition to offering a traditional bundled product, unbundling and charging extra for everything apart from the seat  Low cost subsidiary a common alternative to a full transformation into a low cost operator is for the legacy airline to establish (or buy) an LCC subsidiary. A subsidiary, is a company that is owned or controlled by another company, which is called the parent company or holding company .

 They offer customers a cheaper or more basic service in38 order to keep and gain more customers. The responses of global carriers to low cost competition  Rouge is low-cost airline and subsidiary of Air Canada.  Eurowings is ’s LCC,  Airways are the low cost version of .  ' Go, KLM's Buzz, SAS' Snowflake, United's Ted, Air Canada's Tango and Delta's Song  Airlines set up Scoot and Tigerair  ANA has two LCC subsidiaries, Peach and Vanilla Air

 Air India has Air India Express, and HNA Group, 39 The responses of global carriers to low cost competition  Partnership with LCC some legacy airlines are also forming commercial partnerships with low cost carriers codeshares within airline groups, such as between Vueling and Iberia and British Airways, between Eurowings and Lufthansa, or between Scoot and Singapore Airlines. codeshares between LCCs and legacy airlines with no equity relationship, such as between Pegasus Airlines and Alitalia or KLM, and between Transavia and Delta JetBlue has 17 codeshare partners, including , Emirates, JAL, Turkish Airlines, Etihad, Qatar 40 Airways and Singapore Airlines. Non- Global (Regional) Network Carriers Business Model Long- Haul 35%Travel

Global Network Carrier Business Personal 30%Travel 70%Travel Non- Global 40-50% 50-60% Network Revenue Revenue Carrier

Short -Haul 41 65%Travel Characteristics of Non- Global Carrier

 • Typically lower fleet complexity  • Typically just one key hub  • Can be domestic only or both domestic and international  • Some Long-haul such Transcon  • Business travel  • Partnering levels vary

42 Charter- Leisure Carrier Business Model

Long- Haul 35%Travel

Global Network Carrier Business Personal 70%Travel 30%Travel charter 40-50% 50-60% Revenue Revenue

Short -Haul 43 65%Travel Charachteristics of Charters- Leisure Carrier

 • Targets leisure travelers  • Often inclusive tour packages  • Seasonal markets  • High load factors and utilization rates  • Indirect competition with LCCs

44 Airline Business Models

Long- Haul 35%Travel

Business Personal 30%Travel 70%Travel 40-50% 50-60% Revenue Revenue

Short -Haul 45 65%Travel Pattern of Airline Cooperation

HIGH Merger-like integration

Revenue, cost and Expanded cooperations to benefit sharing joint develop joint network venture Direct coordination (incl.prices, Limited cooperation on routes, scheduling, facilities) specific routes Code Sharing FFP and Lounge Access LOW Interlining

46 Interlining  Interline agreements are the most basic kinds of agreements

 Interlining, interline ticketing , interline booking, is a voluntary commercial agreement between individual airlines to handle passengers traveling on itineraries that require multiple flights on multiple airlines.

 Such agreements allow passengers to change from one flight on one airline to another flight on another airline without having to gather their bags or check-in again.

 Airlines can also promise free rebooking if the connection is lost due to a delay.

 MITA Multilateral Interline Traffic Agreement – this agreement, to which a very large number of airlines are party, forms the basis under which airlines are able to issue tickets for travel on itineraries involving the services of other carriers.

47 Code Sharing  Code sharing is a partnership between two airlines that allows an airline to place its two-letter identification code on the flight schedules of another airline.

 There are two types of airline in code-share agreement

 operating airline- operates the flight.

 marketing airline – gives the flight its own airline code although it is operated by another.

 For example Lufthansa operated flight LH4725 from London to Frankfurt is also marked by United Airlines as UA909.

 Advantages of code sharing form airlines’ side:

 Code sharing allows airline( marketing airlines ) to sell tickets to destinations they do not fly to.

 These agreements allow airlines to offer numerous flights without additional equipment, resources, and costs.

 Advantages of code sharing form passengers’ side:

 provides passengers with a wide choice of flights.

48  It also makes booking, checking in, luggage handling, and traveling more convenient. Being a member of an Alliance

• Expand network • Enhance revenue • Reduce costs • Better use of resources • Combined airport lounge access, priority

boarding and other benefits 49 • Combined the frequent flyer programme -FFP Airline Alliance

“An alliance of the “The Way The Earth Connects.” “Caring more about you .” world’s leading airlines working as one.” - was founded in - was founded in - was founded in 1997. 1999. June 2000. - total passenger - As of October - approximately count of 728 2017, it was 730 million people million a year as of carrying 527.9 each year. April in 2017. million passengers - a total of 19 - a total of 26 per year . member airlines.50 member airlines. - a total of 13 member airlines. Alliance membership-2020

No membership to any alliance

51

26 members 13 members 19 members Deeper partnering and ownership strategies

 • Subsidiaries- Subsidiary is a company which the holding company or parent company owns more than 50% voting shares or a "majority of share ownership.

 Example : Parent company : Qantas (100%) Subsidary : Jetstar Parent company : Singapore Airlines Subsidary : Scoot, SilkAir

 Subsidiaries- Purposes

 Broadening customer base

 Offering multiple brands

 Diversifying airline business activities

 Serving customers in different regions

 Often required by foreign ownership limits that prevent full 52 consolidation Deeper partnering and ownership strategies  An acquisition refers to the takeover of one entity by another.  Austrian Airlines , Swiss Air, Brussels Airlines, Eurowings (LCC) are wholly owned by Lufthansa.

 Acquisitions – Purposes  Why an airline invest in other airline ?

 To gain access to restricted markets  To gain needed network feed  To overcome alliance weakness

 To gain valuable airport slots 53 Deeper partnering and ownership strategies  • Mergers- A merger occurs when two separate entities combine forces to create a new, joint organization.  Examples:  International Airlines Group IAG was formed by the merger of British Airways and Iberia in 2010 . Both carriers continued to operate under separate brand.  merged with KLM Royal Dutch Airlines in 2004, changing the company name Air France KLM , although the two airlines still operate as separate airlines.  In 2012 , LAN (Chile) and TAM( Brazil) merged to form LATAM  US Airways merged into American Airlines in 2013. 54 Deeper partnering and ownership strategies  Mergers can provide multiple benefits Rationalization of costs (including capacity discipline)  Expand market access and global reach  Ability to compete with competitor mergers  Recent major carrier mergers have been important to remain competitive  Cross-border mergers can be highly creative in working with foreign ownership restrictions 55 Air Cargo  Transportation alternatives of the goods ;

 • Air Cargo  •Trucking  •Rail  •Containership

 The reason for shipping goods by air cargo  Speed  Time sensitive goods -perishable  Value of goods 56  Special handling Air Cargo  Different types of Air Cargo Carriers  1- Passenger Carriers:  offer for sale the space in the belly compartment of the airplane which is typically where passenger luggage is stowed.  weight and space limits for cargo traveling  They are convenient one thanks to the many destinations and volume of flights.  such as Southwest Airlines, Alitalia etc.  2- All-Cargo Carriers:  Move air cargo and offer freight services, but do not offer passenger services.  have less weight and dimension limitations due to the wide-body and containerized cargo aircrafts 57 Air Cargo  Different types of Air Freight Carriers  3-Integrated Express Carriers:  move cargo from the door at point A to the door at point B.  pick-up shipment from origin via truck, fly it to it’s destination terminal, then deliver it to the destination via truck.  UPS, FedEx Express, and DHL (though DHL discontinued their domestic pick-up and delivery service in the U.S. as of 2009.)  Use air cargo hubs,  in hubs unload the cargo, sort it by destination, and load it onto the appropriate outbound aircraft  the use of automated sorting , quick turnaround times and extensive delivery capabilities.  4- Combination Aircraft Carriers:  have both passenger and freighter aircrafts in their fleet  such as Lufthansa and Emirates. 58 Top 10 Cargo Airlines 2019 –Scheduled FTK(m)

59 Source: 2019 - IATA WATS Air Cargo

60 Air Cargo Business Model

61 Air Cargo Business Model

Freight forwarders act as intermediaries between airlines and shippers

62 Air Cargo Business Model A freight forwarder is a person or company that organizes shipments for individuals or corporations to get goods from the producer to a customer or final point of distribution. Forwarders contract with a carrier or often multiple carriers to move the goods. A forwarder does not move the goods but acts as an expert in the logistics network. The carriers can use a variety of shipping modes, including ships , airplanes, trucks , and railroads, and often use multiple modes for a single shipment. For example, the freight forwarder may arrange to have cargo moved from a plant to an airport by truck, flown to the destination city and then moved from the airport to a customer's building by another truck. International freight forwarders typically handle international shipments and have also additional expertise in preparing and63 processing customs documentation. Air Cargo Business Model

Freight forwarders act as intermediaries between airlines and shippers

The first 5 Biggest Airfreight forwarders in 2020

1- Kuehne+Nagel- Switzerland 2- DHL Supply Chain&Global Forwarding - Germany 3- DB Schenker – Germany 4- DSV Global – Denmark , Sinotrans Limited- China 5- Expeditors – United States 64 Air Cargo- Less in volume/high in value

65 Source: ICAO- Air Cargo 2017 Acts&Figures Air Cargo business model – Revenue %

Freighters contribute to approx. 90% of total air cargo revenue 66 Airline Business Models Long- Haul

Air Freight

Express Low Value/Non- High Value/Time Time Sensitive Sensitive

67

Short -Haul Top 25 World Airlines – Ranked by Scheduled Freight Tonne–Kilometers Flown(FTK )-2018

20,000

18,000

16,000

14,000

12,000

10,000

8,000 FTK FTK miilions

6,000

4,000

2,000

0

68 Same concepts

 capacity discipline. In the airline industry, the practice of decreasing the number of available seats on weaker routes, often but not always to increase them on more profitable routes. The result of this practice tends to be fuller flights.

 Both terms often refer to the joining of two companies, but there are key differences involved in when to use them. A merger occurs when two separate entities combine forces to create a new, joint organization. Meanwhile, an acquisition refers to the takeover of one entity by another.

 Perishable goods are goods such as fruits, flowers, and vegetables can deteriorate over time and under extreme temperatures and humidity, and must thus be handled with particular care.

69