The struggle to survive: In search of a viable airline revenue model
Airline deregulation pioneer and former senior airline executive, Michael Levine, provides an absorbing analysis of key issues confronting the airline strategist today.
This article is taken from the Nov-2010 edition of Airline Leader. Click here to view and subscribe to the full publication.
The airline business seems to lurch from crisis to crisis, separated by periods of prosperity. Historically, airlines survived the crises by leaning on government to protect them from competitors and, in much of the world, to guarantee their existence. Even in the US, the self-described temple of “creative destruction”, the government arranged graceful exits through arranged mergers rather than bankruptcy reorganisation or liquidation. This protected creditors and made sure that capital remained available to airlines through bad times and good, even as historically marginal business models remained in place. When prosperity returned, airlines spruced themselves up, bought a new round of equipment, and continued much as before, secure in the knowledge that their grip on their corner of the market couldn’t be taken from them and protected from the imperative to search for and seize opportunities as they revealed themselves.
Business cycles have remained but the game has changed
In most of the world, governments have become increasingly unwilling or unable to make financial commitments to keep airlines afloat and unwilling or unable to protect them from those contending for their customers and ready to replace them if they faltered. Liberalisation has intensified cyclical and secular pressures on each firm to rethink its business to find reliable sources of revenue and to reduce costs to levels that are sustainable without outside assistance. Airlines that can’t do so find themselves in liquidation or are sold off and reorganised at distress prices that impose large capital losses. This is producing a wave of consolidation driven, on the one hand, by the search for viable sources of revenue, and on the other, by fire-sale attempts to liquidate contractual commitments to capital and labour.
At this moment we are just emerging from an unparalleled convergence of short-term stress and long-term evolution. The stress has eased somewhat, but the pressures to evolve continue unabated. Stress will return at some point sooner or later (we all hope later) because the airline business is very sensitive to business cycles and business cycles haven’t been abolished.
In addition, stress will be intensified by some combination of energy prices and efforts to address environmental concerns and global warming. Changes in government policies will continue to have a major impact on the industry, even in its liberalised form. Finally, the industry continues to suffer from herd-like management behaviour reinforced by financial markets, turning decisions and actions from firm-specific to industry-wide, amplifying their impact. Escape from the herd becomes imperative.
I am not a macro-economist, but I feel confident in asserting that nobody understands the current financial environment terribly well, although governments and financial players try to induce confidence by pretending that they have the situation under some control. They are enabled by academics who individually assert with confidence propositions that when taken together contradict one another. Risks abound.
Even though much of the developing world seems to be insulated from the distress experienced by mature economies, we don’t know the longer term implications for air transport of decapitalising the entire middle class of several of the largest consumer markets in the world (such as the US, UK, Japan and Spain) and engendering fear of consumption even in those economies less distressed (for example, Germany). It’s hard to escape the notion that these trends will affect air transport for sometime to come, notwithstanding the remarkable performance of the BRIC countries and Asian and Latin American markets more broadly. As OECD countries struggle to recover, pressures on the airline business to evolve continue unabated.
In this environment, the search for viable revenue models has become critical in the OECD markets and is driving unprecedented structural change. The spectacular reduction in demand and the inevitable further reduction in capacity that accompanied it urgently raised questions of industry consolidation. It has also driven the search for promising new business models such as LCCs and quasi-charters even as it continues to reveal the limitations of those models.
While growth, albeit from a substantially reduced base, has resumed in those markets and as growth continues at high rates in BRIC and APEC markets, it’s clear that the industry trend toward consolidation has not abated. That’s partly because surviving the collapse in demand and the contraction in output that accompanied it has driven a search for cost reduction and created the need to salvage whatever business value is left in failing firms, and partly because the “new normal” involves a need to find sources of revenue less vulnerable to other firms similarly seeking new sources of revenue.
What counts as 'normal' in this new world?
For clarity and focus, it’s important to understand what normality means: In normal businesses, businesses that don’t have wings, things are not always good. Not everybody makes money. There are ups and downs, sometimes extreme. The best-managed firms make money in good years and don’t have their existence threatened in bad years. The worst-managed companies may make money when the tide floats all boats, but as the tide goes out (and sometimes even at high tide) may be forced to reorganise or disappear. The biggest firms are not always the best and are not immune to failure. Even firms in markets that seem to offer some protection from the worst storms, for example emerging economies, sooner or later confront fundamental demands to find sustainable revenues and sustainable costs in the face of increasing competition.
Management’s most important job is to craft a revenue strategy that allows success (success can never be guaranteed) and then a cost strategy to implement it efficiently. A well-managed firm with a good strategy can read the market as and when it changes and can efficiently adapt its strategy and tactics to those changes as required to prosper, or at least survive. Firms that select or are doomed by their history to an unsustainable strategic posture or which cannot adapt to changing conditions will fail.
None of this overview is meant to slight the need for routine operational competence and cost control. They are a necessary condition. In a liberalised market, if you don’t have those, you die anyway no matter what your strategy is. But wherever it occurs and as it occurs, continuing market evolution forces airlines to search for viable business models – a process that may involve structural change for some and result in the disappearance of others.
The search for viable business models is an important part of the explanation for the emergence of very large networks supported by global alliances, participation in which seems necessary for both large network airlines and small regional airlines. This has promoted network coordination (the ultimate in which is consolidation) that has created and exacerbated competition concerns. It has also created a scramble for participation, including a game of musical chairs as airlines merge and switch affiliations and alliances change. Both revenue and costs create pressures for and constraints on consolidation. None of these pressures is short-term. Let’s consider them one at a time.
The first is the fundamental industry change produced by taking the airline world from a protected, nation-centered market toward an open, single one. In Latin America, three firms (TACA, TAM and LAN) increasingly operate more or less without nationality. Similar developments have taken place in Asia (AirAsia and Jetstar for example) and in Europe (where national identity is more pronounced but the networks, such as the Lufthansa Group, are even bigger). Even the US, which has resisted the trend, now finds all of its largest airlines participating in joint ventures with “foreign” partners. These changes have been going on for a decade.
The move to expanded networks reflects the fact that the business travellers that underpin the convenience-oriented premium segment of the market are increasingly affected by the globalising expansion of trade and markets. These customers buy their tickets in an increasing number of places and business takes them to an increasing number of destinations. Extended networks allow them to economise on transaction and contracting costs as they satisfy their expanded demand and airlines can lower their unit costs of reaching these customers by having a broader “product line” over which to spread the costs of marketing and transacting.
Price-oriented discretionary travellers are less demanding with respect to customising service to their needs even as they demand the lowest possible prices. Large networks create imperatives and opportunities to serve them because there is a minimum efficient size of aircraft required to serve the expanding universe of markets, while premium loads vary and almost never fill aircraft of minimum efficient size. This means that in many markets, “by-product” seats are created that network airlines can sell to discretionary customers at prices that can compete effectively with airlines created specifically to serve them at the lowest possible cost. The more markets of varying size are served by a network, the more of these seats are made available. This symbiosis reinforces network advantage.
The ability to sell low-cost by-product seats along with seats sold to convenience travellers supports the ability of networks to expand their frequency and reach. Internalising these benefits requires coordination to expand network extent. This coordination often comes in the form of consolidation, although paradoxically consolidation is limited by its own disadvantages.
The choice between consolidation and coordination is often affected both by government policy and by operational and labour considerations. Getting that choice right is one of the great challenges facing current airline managements.
Government policies have an obvious impact
In international markets, although bilaterals are beginning to be replaced by multilateral agreements, most international markets are governed by bilaterals that still require nationality. These “owned and controlled” clauses affect the ability of a single firm to enter seventh-freedom markets. Even when bilateral freedom can be achieved, local law or policy such as that governing airlines in the US requires that those with access to local markets be owned and controlled by nationals.
The labour considerations are subtler. A very large network gives labour the power to impose enormous costs by shutting a business down. Replacement through alternative routings of disrupted service can be impossible and the healthy constraint on labour of identifiable generalised competition can be greatly weakened. This diminishes both management bargaining power and the ability of labour union leaders to deliver reasonable contracts under the internal political conditions that dominate most unions.
Separating revenue generation from production can allow an entity to reap the benefits of large network size while preserving the manageability and cost control that can be achieved in smaller “factories”. The optimal extent of this division of function cannot be determined in the abstract. It can be affected further by government policies or laws that may require preserving some local marketing effort and branding even as the smaller entity is fully coordinated with the larger network. It is an interesting fact that in Europe, consolidation is occurring with the preservation of coordinated separate firms (for example the Air France/KLM, Lufthansa and BA/Iberia groups), while in the US (partly because the antitrust laws allow mergers but not price and output coordination) it is taking the form of the creation of large single firms.
Consolidation can also encounter commercial limits
The infrastructure necessary to control a large multiproduct network is far more extensive and expensive than that required to operate a specialised single-product firm. And network aircraft configuration is constrained by the need to flow a fleet across a wide variety of markets, a constraint escaped only by creating subfleets, which dilutes the ability to control network costs. A more specialised firm can optimise seating density to minimise costs or to balance costs and revenues over a much more limited range of options.
Underlying all this strategic choice is a fundamental fact about the airline industry. Route density determines the size of the aircraft an airline can use and the frequency with which it can fly a given route. An airline must fly an airplane of a size that allows competitive unit costs in the market it serves. The airline must also find enough passengers who will sit together in it at fares that will pay the total cost of running it. This fundamental fact seems to have been lost on many managements over the years and it is frequently lost on governments.
A network solves the route density problem by using its hubs to consolidate passengers with common origins or common destinations. It is therefore not limited to point-to-point service patronised by local customers. The customers on a particular flight may be only temporarily going to the same intermediate point, about to get off the plane and get onto another plane to go to some other place with other people who are going to that place.
Network airlines are nothing more or less than factories to manufacture route density. They assemble passengers in groups large enough to fill an airplane of efficient size. They take them to some place where they can mix with other people going on to some other place in enough numbers to fill another airplane and then take them there. And they choose customers willing to pay a combination of prices that covers total costs. The trick is to gather them and transport them together.
A firm can organise to do this at very large size through a mega-network with multiple hubs; it can try to do it at medium size – with perhaps one or two hubs; it can make agreements with other airlines to mix its passengers with theirs; or it can try to be a regional partner to someone else’s hub. But all these strategies represent ways to organise a production line in a factory that produces route density. It shouldn’t be a surprise that after many experiments with the concept, not every factory is operationally or economically sustainable.
For example, the factory may simply not be large enough to sustain enough routes and enough trips with enough passengers per flight to allow the use of aircraft with competitive conomics operating with enough frequency to be competitive in the marketplace. Or the size and complexity of the network may create management and labour problems that prevent achieving competitive costs.
On the other hand, we should be clear: these mega-hubs face major cost challenges. Their complexity and operating difficulties are enormous. A network airline must have aircraft on the ground simultaneously to allow passengers to transfer. It incurs very significant costs in the form of gates, gate staffing, aircraft utilisation and crew utilisation. The more convenient the network makes things for passengers, the greater its revenue advantage vis-à-vis competitors, but the higher those costs become. The ballet that running a hub requires is so intricate and interdependent that if one member of the dance company trips, the other dancers trip over them, causing major disruption,especially to connecting passengers.
One might wonder at this point why economies of scale are not identified as a major positive factor in consolidation and survival. This is because, contrary to some received wisdom, size does not confer production economies of scale in the airline industry. There are unrelenting pressures for cost minimisation, but they don’t depend on fleet size or company size after a certain point is reached (perhaps 25-50 aircraft). It is possible to outsource most production activities that exhibit scale, like major maintenance, IT, even aircraft acquisition (assuming the credit is good and the business model is sound), and achieve costs in a 50-aircraft airline that are as low as can be achieved by the largest airlines.
There are economies of scope in attracting revenue, and these are discussed extensively here. And economies can be achieved in smaller airlines in overhead and worker morale. The key is to find a viable strategy that allows the use of marketing and structural advantages to maintain a revenue niche.
The result is that it is impossible to achieve specialist CASM in a large network carrier.
Networks come with revenue constraints as well as possibilities
The single most important factor, more important than any other, is the availability of a significant quantity of traffic which originates or is destined to the central point in the factory (“hub O&D” traffic). Why? Because a customer at all but the smallest spoke usually has a choice of the products of several or many factories. What is produced for spoke passengers is attractive in some ways but inferior in some other respects. It’s superior in the sense that she gets multiple departure times and a choice of routings to get where she wants to go, but it’s inferior in that no matter what the pleasures are of the casino at Dubai or the erotica stores at Frankfurt, to experience them she is forced to make a stop and an aircraft change that she would generally prefer not to make.
Going to the time and trouble of getting off an airplane and getting on another airplane and taking the risk of a missed connection or lost baggage is something that most people don’t want to do if they can avoid it. On the other hand, in all but the densest markets, not enough people want to go to the same place at any given time to be able to fly them there directly at acceptable cost, so they must be somehow aggregated with others wanting to make the same trip.
Contrast this with the airline’s business proposition for hub O&D customers, especially those motivated by convenience: to them it says: "Look, we are going to take you nonstop to more places than you ever dreamed you could fly to nonstop because we are going to make good economic use of all those people we are paying to get on the plane with you. We may charge you more to do it, but most of you will consider it good value to pay a premium to avoid a stop." So an airline has a natural advantage with respect to its hub O&D traffic. It attracts more of them and can charge them more. They contribute disproportionately to the costs of operating the hub and benefit disproportionately in service convenience.
If an airline’s hub is at a city of 700,000, this natural advantage may not support a competitively sustainable system. But if its hub has a catchment area of 5 million prosperous people who do a fair amount of travel, then it has a business.
If an airline system can combine hubs so it can serve O&D traffic with a combination of direct service and connecting service through the other hub to provide more departure choices, or connect through both hubs to get service to even more obscure places, it will have a further advantage in attracting those people onto its airplanes. Mega-networks with multiple hubs can find a successful niche – not a guaranteed success but at least the possibility of one – because they provide demand-side advantages and supply-side advantages in terms of aircraft economics.
In addition to cost challenges, this large, highly coordinated and delicate operation is very vulnerable to labour disruption. That vulnerability means that a major hub airline incurs labour rates and work rules that tend to be more costly than for airlines that have chosen another business model. In the US, the jury is out on medium-sized hubs run as part of larger networks, but they are very fragile. US airlines have struggled to sustain viable hubs at medium-sized cities, some which have catchment areas of well over a million reasonably prosperous people. Around the world, flag airlines are discovering that hubs based on historic presence in a limited market simply aren’t viable when the market is open to entry.
On the other hand, many hubs that can’t work on a stand-alone basis may work as focus cities in combination with service through affiliated hubs so that, for example, Lufthansa offers a Zurich customer some nonstop service on Swiss plus easy access to other cities through Frankfurt or Munich or United’s hub at Chicago.
The limits on hub networks create an opportunity that has been extensively explored, the low-cost point-to-point airline (LCC). A “pure” LCC saves the costs in gates and aircraft utilisation but it greatly limits the ability to combine flows to enhance route density. It trades revenue for lower costs, the opposite tradeoff to that of the network airline. We have seen spectacular growth in such airlines when they are introduced into a liberalising market that has not yet fully evolved from its history.
An LCC often starts up on very dense routes at very low fares, sometimes using alternative airports to control its costs even more. At first, the availability of direct service at fares very much lower than historic levels creates explosive growth, especially in times of relative prosperity, when travel volumes expand as new customers are drawn into airline travel and previous customers greatly expand their frequency of use. This has often led to the prediction that point-to-point low-cost airlines are the “way of the future” and that network “dinosaurs” are headed for extinction.
At the beginning, it seems that anyone with airplanes and low costs can succeed. But as the market matures, the dinosaurs adapt or die. They lower their costs, they become more adept at selling byproduct seats and they add frequencies in dense markets at low prices on the theory that the incremental costs they incur are covered by the LCC-matching fares. The “dinosaurs” that survive are hardier and they grow bigger and more voracious. And as the limitations on point-to-point airlines become more apparent, many begin to struggle, lose focus and die.
Remember why hubs are created: There just simply aren’t very many markets in the world in which one can operate a stand-alone, high frequency point-to-point service. And in most of those markets, the point-to-point airline will be sharing the route with a network airline that has a hub at one end and doesn’t depend on filling the airplane only with passengers in the local market. So this represents a real constraint—it enables the hub airline to operate more frequencies with full planes. It also produces LCC vulnerability to a kind of fractional entry by a network airline in longer-haul markets, where it puts in a number of trips a day at prime times and funnels the rest of the market’s traffic through an intermediate hub on by-product seats. One way to avoid this problem is to manufacture route density in a different way – by expanding the pool of travellers from which you can draw customers. An airline religiously devoted to low costs can offer fares low enough that the market it serves is much larger than at network fares. This can be done in two ways.
First, the airline can use low fares to increase the catchment area of the airport and expand local demand at the principal airports to levels that will support both itself and the hub airline, which won’t find the fares attractive enough to meet all the demand. AirAsia has used this strategy at Kuala Lumpur and Bangkok.
Alternatively, an airline can fly from some remote and lower-cost airport to another remote airport at a very low price and expect people to undertake a fair amount of trouble to get to and from the airports to their true final destination. Ryanair is probably the best example in the world of the successful execution of this strategy; it has counterparts elsewhere.
But both of these strategies impose limitations on point-to-point airlines. At a certain point, the area is covered. It has already attracted everyone within two hours of the airport. Its costs at the primary airports are high and its fares can go only so low. Or the inaccessibility and limited route options at secondary airports make it difficult to attract business travellers. So it reaches a natural limit of expansion. As JetBlue has discovered in the US, there are only so many routes between primary airports that will support mega-networks plus the low-cost airline.
And as Southwest has discovered, you can’t just keep adding service at more and more secondary airports and expect demand to continue to expand. Eventually, there will be an airport within two hours of almost everyone who can be stimulated by low fares to use it. This presents a real obstacle to continued growth, but the possibilities are far from exhausted around the world.
In the end, the route density dilemma presents a severe challenge to the point-to-point low-cost model. JetBlue discovered ultimately that no matter how hip and how fancy and youthful and “in the present tense” its service is, there are only so many city-pairs it can serve carrying mainly point-to-point traffic (JetBlue offers some connections from smaller Northeast cities onward at JFK in New York). To maintain growth, they have now greatly expanded service at Boston (badly located for hub service), expanded service in leisure markets, and are developing relationships with international networks. Pursuing the concept that point-to-point service in leisure markets, including international leisure markets, represents a defensible niche, JetBlue has greatly expanded service to the Caribbean and northern South America. Looking for a new expansion path for point-to-point service, it has also opened an important second base at Boston.
This highlights another important strategic truth: pure leisure travellers, even those with relatively high income, will endure significant inconvenience to save airfares or will even alter their destination plans in response to low fares. A niche for LCCs with limited connectivity and schedules limited by route density is to fly densely configured aircraft in markets with high leisure traffic or leisure traffic potential.
Network airlines may be able to dull the LCC’s price advantage through the availability of seats for the redemption of frequent-flyer miles (the frequent-flyer programme was invented by American Airlines to leverage its large network against competition by LCCs with more limited networks), but the revenues available in these markets at prevailing fares set by LCCs make them relatively unattractive. These markets represent a defensible niche for airlines that specialise in them, but it is difficult to grow an airline to a large size while serving them.
We can only ultimately reach the question of the direction and impact of consolidation by first asking: "What kinds of airlines can survive in the emerging open single market?" Then we must ask: "Are they the same airlines that survived in the previous one?" If the answer to the second question is no, which everyone suspects, we can then get to the question that ultimately drives consolidation: "What changes must take place in the number and kinds of airlines to create firms that can survive in a liberalised market?" The underlying process is more fundamental than the business cycle. The key is to identify roles not based on history, but on sustainable opportunity.
Airlines in the markets that have been liberalised longest are still evolving, but they may offer clues. In those markets, airlines are free to adjust capacity to demand, to evolve their route structures and business models and to offer whatever services they think the market will demand at whatever prices they think the market will support. They’re also free within the limits of competition law to create and spin off subsidiaries and to acquire and sell themselves to others.
As they evolve, they are revealing an important truth: These are not, and will never be, markets in which every airline makes money, except perhaps at the peak of booms, but they are markets in which competently and shrewdly-run airlines can make money in good times and minimise losses or even make a profit in bad times. In this respect, airlines are no longer different, fundamentally, from hotels, restaurant chains, rental car companies or even auto manufacturers. But they are a demonstration that airlines can be and they are a normal business. Not always fun, but normal.
This is true on the upside as well as the downside. When we look at the remarkable results being achieved in Latin American and Asian markets, we see that prosperity is not shared equally. Airlines that are focused on a viable strategy and have costs under control are doing very well. Others are struggling and threatened with disappearing. The rising tide in Asia and Latin America is probably floating more boats than can make headway over the long term. We already see signs of this in India and Argentina, even in China.
What can the markets that have been liberalised the longest tell us about the likely successful business models to emerge elsewhere? Will only the largest firms and networks survive? How many promising niches are there? How many firms will be able to successfully occupy each promising niche? Those are the big questions and they will ultimately drive and limit consolidation and survival.
In the US market, virtually every imaginable variation on airline configuration, size and target market has been tried. Many, of course, have not succeeded. What have we learned? We have learned that critical to the whole process is the problem of route density and customer selection, that is, of how many people you can get into an airplane at the same time going to the same place and which customers you design the business for.
The most dramatic way to rise to this challenge is to be flexible and creative. They teach in the strategy classes in business school that if there is something your customers want and you don’t offer it to them, someone else will. So an advantage of a mega-hub airline is that it can offer to some important cities some non-stop service that bypasses its own major hubs, hoping to capture both the non-stop traffic and a disproportionate amount of the connecting traffic through its hubs.
The lesson some draw from this is that the liberalised world will be so dominated by mega-hub systems that other models simply aren’t viable. Experience demonstrates that this is false. They don’t emphasise enough in business schools that you cannot be all things to all customers. There are advantages to specialisation and to adapting to the needs of defined customer groups.
So some large networks will survive and some will fail. What are the alternative viable strategies and how many firms can we expect to survive using them? Will those firms provide effective competition to mega-networks?
The first and most obvious alternative strategy is the low-cost point-to-point airline. Mega-hubs face disadvantages. As noted, funnelling traffic through hubs imposes cost disadvantages, along with potential labour problems. Forcing passengers to make connections can create demand disadvantages; sometimes hub airlines can overcome them with frequency and sometimes not. These disadvantages create a possible strategy alternative – direct low-cost service, sometimes to or from alternative airports. We have seen spectacular growth in such airlines when they are introduced into a liberalising market that has not yet fully evolved from its history.
But these airlines are limited in their growth possibilities. As has happened in the US, sooner or later they run out of markets that they can operate profitably with point-to-point service. Since financial markets create unrelenting pressure for growth by rewarding it in the share price multiple, we have seen airlines over and over again try to satisfy them, diluting their initial success by modifying their strategy to generate combined traffic flows.
For example, Southwest now operates highly-coordinated “loose hubs” at Baltimore, Houston Hobby, Chicago Midway, Las Vegas and Phoenix. It operates smaller, more loosely-coordinated complexes, at Nashville, Denver, Oakland and elsewhere. And it has just proposed to buy AirTran to operate a hub at Atlanta. AirTran itself represents an LCC that has tried a mixed strategy designed to produce a hub at Atlanta, to provide more concentrated service to spread marketing costs at secondary cities like Milwaukee and that operates a leisure airline as well, all in the interests of growth. Ultimately, as it has grown, it has found that its mini-conglomerate has become vulnerable to labour pressures on its costs, pressure that it has “solved” by selling itself to Southwest, which pays its pilots more.
The second alternative strategy is service to resort markets. LCCs like Sprit, which started to provide point-to-point service from Detroit, have evolved into leisure-market airlines. To deal further with route density issues, Spirit now operates a resort-market hub at Fort Lauderdale that serves a largely leisure local market combined with resort service to the Caribbean and northern South America. It is now seeing more competition from LCCs started with other models that have seen these markets as opportunities for growth. JetBlue, Southwest, AirTran, Frontier and others have all decided that growth into resort markets is more viable than continued growth in relatively mature US markets.
We are seeing the same phenomenon outside the US, as Virgin Blue morphs on the one hand into an airline designed to be more attractive to business customers and on the other into a Pacific leisure market airline. In Europe, Ryanair is discovering the limits to its growth model, while airlines like Air Berlin combine point-to-point intra-European markets with resort markets.
All confront one nagging priority – to continue growing – and they continue to search for a viable model that will let them do so. The challenge to airlines big and small is to reconcile conflicting pressures to grow and to focus. How astutely airlines can identify and exploit sources of strategic advantage that are not simply expressions of current fashions will determine which ones prosper and which ones wither.
Michael E Levine is a former senior airline executive and government official and deregulation pioneer. He previously served at Continental and Northwest as an executive vice president and was president and CEO of New York Air, guiding that post-deregulation airline to its first profit. Mr Levine is now Distinguished Research Scholar and senior lecturer at New York University School of Law. He was named among the ten most influential pioneers in the history of commercial aviation by Airfinance Journal.
KEYS TO A SUSTAINABLE AIRLINE MODEL
- Size confers advantages and disadvantages. Networks can be an effective way to combine flows and economise on marketing costs, but they come with vulnerabilities to labour, operational and political problems. Structures that leave the “factory” more fragmented while the marketing side of the business is integrated may have advantages.
- LCCs can be successful, but they face major challenges in growth. A large LCC tends to be more vulnerable to labour cost pressures and must also compromise its commitment to point-to-point service to grow past the limits that route density places on those airlines.
- In a sort of “Back to the Future” way, passenger obsession with low vacation fares and willingness to sacrifice frequency and regularity of schedule means that leisure and resort markets can offer opportunities for specialist airlines to maintain low costs while confronting route density issues, much as IT airlines discovered in Europe before deregulation and are discovering again.
- No airline model can be successful that doesn’t find a viable solution to the route density challenge.
- The fact that there are few production economies of scale means that size is not everything, indeed not even necessary. An airline that solves the marketing and route density issue can have costs as low, and usually lower, than any mega-network.