Typologies of Business Models in the Airline Industry
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UNIVERSITY OF LJUBLJANA SCHOOL OF ECONOMICS AND BUSINESS MASTER’S THESIS TYPOLOGIES OF BUSINESS MODELS IN THE AIRLINE INDUSTRY Ljubljana, October 2020 MATTHEW JOHN MEJAČ AUTHORSHIP STATEMENT The undersigned Matthew John Mejač a student at the University of Ljubljana, School of Economics and Business, (hereafter: SEB LU), author of this written final work of studies with the title “Typologies of Business Models in the Airline Industry”, prepared under supervision of Professor Maks Tajnikar. DECLARE 1. this written final work of studies to be based on the results of my own research; 2. the printed form of this written final work of studies to be identical to its electronic form; 3. the text of this written final work of studies to be language-edited and technically in adherence with the SEB LU’s Technical Guidelines for Written Works, which means that I cited and / or quoted works and opinions of other authors in this written final work of studies in accordance with the SEB LU’s Technical Guidelines for Written Works; 4. to be aware of the fact that plagiarism (in written or graphical form) is a criminal offence and can be prosecuted in accordance with the Criminal Code of the Republic of Slovenia; 5. to be aware of the consequences a proven plagiarism charge based on the this written final work could have for my status at the SEB LU in accordance with the relevant SEB LU Rules; 6. to have obtained all the necessary permits to use the data and works of other authors which are (in written or graphical form) referred to in this written final work of studies and to have clearly marked them; 7. to have acted in accordance with ethical principles during the preparation of this written final work of studies and to have, where necessary, obtained permission of the Ethics Committee; 8. my consent to use the electronic form of this written final work of studies for the detection of content similarity with other written works, using similarity detection software that is connected with the SEB LU Study Information System; 9. to transfer to the University of Ljubljana free of charge, non-exclusively, geographically and time-wise unlimited the right of saving this written final work of studies in the electronic form, the right of its reproduction, as well as the right of making this written final work of studies available to the public on the World Wide Web via the Repository of the University of Ljubljana; 10. my consent to publication of my personal data that are included in this written final work of studies and in this declaration, when this written final work of studies is published. Ljubljana, ________________________ Author’s signature: _________________________ (Month in words / Day / Year, e. g. June 1st, 2012 TABLE OF CONTENTS INTRODUCTION ............................................................................................................... 1 1 AVIATION BACKGROUND INFORMATION ...................................................... 4 1.1 Aviation Industry Information and History ....................................................... 4 1.2 Background of Aviation in Slovenia .................................................................. 15 1.2.1 Slovenian Airports ......................................................................................... 15 1.2.2 Adria Airways ............................................................................................... 17 2 THEORETICAL BUSINESS MODELS AND TYPOLOGIES ............................ 20 2.1 Importance of Business Models ......................................................................... 20 2.2 Business Model Typologies ................................................................................ 21 2.2.1 Product/Service Based Business Models ....................................................... 21 2.2.1.1 Network Effect Business Model .............................................................. 22 2.2.1.2 Premium/Ultimate Luxury Business Model............................................ 23 2.2.1.3 Loyalty Business Model .......................................................................... 24 2.2.1.4 Add-On/Nickel and Dime Business Model ............................................. 26 2.2.1.5 Ingredient Branding Business Model ..................................................... 28 2.2.1.6 Solution Provider Business Model ......................................................... 30 2.2.1.7 No Frills Business Model ....................................................................... 32 2.2.2 Sales Based Business Models ........................................................................ 33 2.2.2.1 Disintermediation/Direct Selling Business Model ................................. 34 2.2.2.2 Affiliation Business Model ..................................................................... 35 2.2.2.3 Cash Machine Business Model .............................................................. 36 2.2.2.4 E-Commerce Business Model................................................................. 38 2.2.2.5 Cross-selling Business Model ................................................................ 39 2.2.2.6 Digitalization Business Model ............................................................... 41 3 AVIATION BUSINESS MODELS AND THEIR DETERMINANTS ................. 43 3.1 Legacy/Network Airlines .................................................................................... 43 3.2 Low Cost Airlines ................................................................................................ 46 3.3 ACMI Carriers .................................................................................................... 49 3.4 Summary of Airline Business Models’ Most Important Determinants ......... 51 i 4 POTENTIAL FUTURE BUSINESS MODELS FOR THE AVIATION INDUSTRY ........................................................................................................................ 52 4.1 Dual Business Model .......................................................................................... 53 4.2 Blue Ocean Strategy/Aikido Business Model ................................................... 54 4.3 Long Tail Business Model .................................................................................. 55 4.4 Bundling/Solution Provider 2.0 Business Model ............................................. 56 5 POTENTIAL FUTURE AIR CONNECTIVITY FOR SLOVENIA .................... 57 CONCLUSION .................................................................................................................. 60 REFERENCE LIST .......................................................................................................... 61 APPENDICES ................................................................................................................... 71 LIST OF FIGURES Figure 1: The Supply Effect of Airline Deregulation in 1978 .............................................. 5 Figure 2: United Air Lines’ Route Map from 1940 .............................................................. 7 Figure 3: United Airlines’ Route Map from 1966 ................................................................. 9 Figure 4: United Airlines’ Route Map from 1985 ............................................................... 11 Figure 5: A Generalization of a Point to Point Network (left) and a Hub and Spoke Network (right) ................................................................................................... 12 Figure 6: Airports in Slovenia ............................................................................................. 15 Figure 7: Ljubljana Airport’s Traffic Figures from 1964 to 2019 ...................................... 16 Figure 8: Adria’s Scheduled Destinations .......................................................................... 19 Figure 9: An Example Showing Different Fare Groupings’ with Included and Add-on Services for a Swiss International Air Lines Flight within Europe .................... 28 Figure 10: An Example of the Different Travel Products/services that can be Booked Along with a Flight on Ryanair’s Website ....................................................... 32 LIST OF TABLES Table 1: An Analysis of Cash Conversion Cycles among Selected Airlines ...................... 38 Table 2: The Three Most Important Building Blocks by Airline Business Model Type .... 52 ii LIST OF APPENDICES Appendix 1: Povzetek (Summary in Slovene language) ....................................................... 1 iii INTRODUCTION The airline industry and the economies that they serve are inherently tied together; as economies grow, so does the aviation industry as a result of increased business passenger traffic, increased tourism passenger traffic, and increased cargo traffic. Most advanced economies cannot compete in the global economy without the presence of air traffic connecting that economy to the rest of the world; likewise the airline industry, cannot survive without a growing economy to fuel the air traffic that is necessary for the existence and/or growth of airlines. A recent report by ICAO (the International Civil Aviation Organization is a United Nations agency headquartered in Montreal, Canada that sets standards and regulations for aviation around the world) in 2017 which is titled Aviation Benefits (as summarized in the article “Report Launched On Economic Benefits Of Air Transport”, 2017) explains “…that aviation is essential to the economic and social development of cities, countries, and regions everywhere…”.