Airline Business Design Segmentation Oliver Wyman

Aviation, Aerospace and Defense
April 2010
Airline Business Design Segmentation
C O N F I D E N T I A L | www.oliverwyman.com
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\Airline Business Design 20100422.ppt
Org.
Systems
Strategic
Control
Scope of
Activities
Value
Capture
Value
Proposition
Customer
Selection
Business Design Approach

Various airline business models are evaluated using Oliver Wymans proprietary ValueDriven Business Design approach.
Who are the airlines customers and what characteristics do

they embody?
What are the key needs of the customer?
Who is not a customer of the airline?
Customer
Selection
What can the airline do for its selected customers?

How is the airlines offering different, unique and compelling
compared to that of competitor carriers?
How is the value proposition cohesively tied together?
How will the airline earn a profit from the value created?
What is the revenue model (ancillary sales, low cost,
revenue premium, value-added expenditure, etc.)?
Who will pay for these services (individual, corporate, etc.)?
Which activities will the airline perform itself and which will
be outsourced to partners?
Will the airline own or lease critical assets?
What is the impact to customer-facing activities?
Value Proposition
Organizational
Systems
How will the airline protect its value capture model from
competitors? Why cant another carrier emulate it?
How will the carrier sustain the business design?
Why do customers need the airlines services?
What type of organization and culture will succeed?
What is the airlines channel to market?
How will business units be structured and what function will
they serve?
Value
Capture
Strategic
Control
Scope of
Activities
Business Design Differentiation

Carriers differentiate their product across the six business design areas
Network
Regional and Charter
Geo-Focused Network
Ultra Low Cost
Independent Regional
Intercontinental Network
Traditional Low Cost
Network extender
Global Luxury Connector
Modern Low Cost
Charter
Broad product offering appealing to

widest possible range of passenger
preferences
Target price sensitive,

predominately leisure travelers
Market simulative
Independent Regional tie in with

broader network carrier
Network Regional Mainline lite
Charter focused on leisure travel
Extensive freq flyer program with

alliance tie-in
Limited global participation
Independent Regional: Home town service
Multiple products with presence in

most major business markets
One size fits all service offering
Network Regional: Capacity Purchase

Agreements
Safe, reliable, affordable
Charter: All inclusive, affordable vacation
Maximize utilization with high

frequency and quick turns
Regional: Convenience of home

town service with network interface
Charter: Affordable vacation fun
Strategic Scope of
Control Activities
Premium pricing and high share of

wallet from key geographies and
business segments
Broad vertical integration covering
airline operations, MRO,
reservations, loyalty program, and
training
Virtual airline focused on airline

operations
Extensive distribution network with

ownership participation in GDS
Predominately single distribution

channel controlling inventory
availability
Regional: dependant upon affiliation
Org.
Systems
Value
Capture
Value
Customer
Proposition Selection
Composition
Value Based
Broad geo-focus with emphasis on

managing organized labor, customer
loyalty programs and cost control
Growth oriented focus on niche

exploitation
Independent Regional: community focused

with ultra low overhead
Corporate contracting
Most non-customer facing functions

outsourced
Low overhead org structure with a

focus on culture
Regional: Operations only relying

on partner for other services
Charter: All inclusive tour marketing
Charter: Wholesaler affiliation
Network extender: Operational efficiency

with ultra low overhead
Charter: Tour development
Business Design Grouping

We can identify business design groupings by plotting the choices airlines make across
the six business design parameters
Mostly premiumfocused
Mostly VFR and

leisure market
Travel Purpose
Customer
Selection
Leisure
Business
Customers primarily
from home market
Customer Origin
Customers primarily
from intl. markets
Local
Foreign
Pricing targets yield
premiums, not market share
Pricing drives incremental

customer demand
Price Sensitivity
Stimulative
No-frills product focused on
seat sales; other offerings
generate ancillary revenue
Product Quality
Premium
Premium product focused on
holistic customer experience
Seat Only
Luxury
One size fits all offering for

all customer segments
Value
Proposition
Product Offerings
Market Breadth
Single Product
Network services primarily a

single geographic sub-region
(e.g. a province or state)
Regional
No market share
concentration in any region
Multi Products
Network covers a meaningful
number of intl. routes
Domestic
International
Truly global network without

significant regional concentration
Global
Franchise presence in
multiple geographies
Single Region
Prominence
Point-to-point
Mid-Haul
Hub & Spoke
Multi Region
Prominence
Mixed-Haul
Hub & Spoke
Extender
Network primarily extends the
reach of other partner
carriers into smaller markets
Network covers most of a

large domestic market
Dominance in at least one

major region (e.g. AA in Latin
America)
Not Prominent
in any Region
Market Franchise
Network Type
Multiple product lines for

different customer segments
Long-Haul Hub & Spoke

Network focuses on point-topoint service
Connect long-haul / intl.

traffic to short and mid-haul
domestic points
Connect long-haul / intl.

traffic to other long-haul
points

First, Business,
Premium Economy
and Economy
Economy Cabin
In-flight
Value
Capture
One class
Online redemption
with no reciprocity
Loyalty Program
Limited
None
Scope of
Activities
Air Transportation Only
Outsource all but most basic

line checks
MRO Activities
Internet primary point of
contact, res services
outsourced
Broad Vertical Integration

Extensive MRO capability
with global customer base
Limited
Distribution Channel
Global
Complete control above and

below the wing
The Virtual Airline, outsource

as much as possible
Airline Operations
Extensive
Seamlessly global
Strictly on-line, no inter-line
Alliance Affiliation
Multiple cabins
Global redemption
across alliance
network
In-house profit center

Res locations functioning as
profit unit call centers
Online
Multiple channels

Control of limited
gates, slots, routes
No barriers to entry
Regulatory
Strategic
Control
Open Market Entry

Ability to outlast
competition
Used to create price

premium
Cost Structure
Low
Brand Awareness
Minimal
Flat
Meet perceived demand
Management Focus
Customer-centric
Pyramid
Optimize operational
parameters
Operations-centric
Vertical integration
across value chain
The Virtual Airline
Management of
Non-core activities
Significant
Command and control
Individual decision makers
Hierarchical Structure
High
Gets first call due to
perception of global service
Gets first call due to perception

of universal low fares
Org.
Systems
Exclsve routes, gates, slots
Outsource
Internal
Within the business designs there are clear sub-sets

With this approach, there are nine business designs that describe the majority of the
worlds passenger airlines.
Geo-Focused Network
Concentrate operations in one
geographic region
High frequency
Limited flights to other areas
May join alliances or codeshare
Intercontinental
Network
Global Luxury
Connector
Network Extender
Independent
Cover entire domestic market
Significant global reach
Hub-and-spoke network
sometimes with multiple hubs
Luxury service and product
Primarily extends reach of

partner carriers into smaller
markets
Long-haul with one primary hub

and select 5th Freedom routes
Operate under co-brand, code

share, or pro-rate agreements
Capitalize on hub location to

capture 6th Freedom flows
Occasionally subsidiary of
larger carrier
Routes to multiple global

markets
Participate in global alliances
Alternative to non-stop service
Ultra Value
Traditional Value
Modern Value
Aggressively stimulative pricing
Point-to-point service
Point-to-point and network
Seat-only product; charge

extra for other services (e.g.
checked bags)
High frequency
Target a mix of business and

leisure travelers
Leisure customer focus

Serve secondary airports
Target leisure and pricesensitive business travelers

Serve secondary and primary
airports
On-board product frills superior

to competitors Economy Class
(e.g. LiveTV, XM Radio, Pitch)
Often serve primary airports
Charter
Focus on unscheduled service
with some scheduled operations
Significant reliance on tour
operators selling vacation
packages
Target customers often agnostic
to branding of airline component
of vacation package product
Business Design Mapping

Network Carriers
Value Carriers
Other Types
Leisure
Biz
Leisure
Biz
Leisure
Biz
Local
Foreign
Local
Foreign
Local
Foreign
Stim
Premium
Stim
Premium
Stim
Premium
Seat
Only
Luxury
Seat
Only
Luxury
Seat
Only
Luxury
Single
Product
Multi
Products
Single
Product
Global
Regional
>1
Region
No
Regions
Long
H&S
Extender
Customer
Selection
Travel Purpose
Customer Origin
Price Sensitivity
Value Proposition
Product Quality
Multi
Single
Products Product
Multi
Products
Product Offerings
Regional
Dmstc
Intl
Dmstc
Global
Regional
>1
Region
No
Regions
Long
H&S
Extender
Intl
Dmstc
Intl
Global
Market Breadth
No
Regions
1 Region
1 Region
>1
Region
1 Region
Market Franchise
Extender
P2P
Short/Mid
H&S
Mixed
H&S
P2P
Short/Mid
H&S
Mixed
H&S
P2P
Short/Mid
H&S
Mixed
H&S
Long
H&S
Network Type
Geo-Focused Network
Network Extender
Ultra Low Cost

Modern Low Cost
Charter

One
Class
Network Carriers
Multiple
Cabins
One
Class
Value Carriers
Multiple
Cabins
One
Class
Other Types
Value
Capture
In-flight
Extensive
Limited
Limited
Extensive
Limited
Extensive
Loyalty Program
Global
None
None
Global
None
Global
Broad
Vertical
Integration
Scope of Activities
Air Trans
Only
Broad
Vertical
Integration
Air Trans
Only
Broad
Vertical
Integration
Air Trans
Only
Airline Operations
In-house
profit
center
Limited
In-house
profit
center
Limited
MRO Activities
Multiple
Channels
Online
Multiple
Channels
Online
In-house
profit
center
Limited
Multiple
Channels
Online
Geo-Focused Network
Multiple
Cabins
Network Extender
Ultra Low Cost

Modern Low Cost
Charter

Open Market
Entry
Network Carriers
Exclusive
routes,
Open Market
gates, slots
Entry
Value Carriers Exclusive routes,Open Market

gates, slots
Other Types
Entry
Strategic
Control
Regulatory
High
Low
High
Low
Exclusive
routes,
gates, slots
Low
High
Cost Structure
Significant
Minimal
Minimal
Significant
Minimal
Significantly
Brand Awareness
Pyramid
Flat
Flat
Pyramid
Flat
Pyramid
Organizational
Systems
Operationscentric
Customercentric
Customercentric
Operationscentric
Customercentric
Operationscentric
Management Focus
Internal
Outsource
Outsource
Internal
Mgmt of Non-Core
Geo-Focused Network
Outsource
Internal
Network Extender
Ultra Low Cost

Modern Low Cost
Charter
10

Cargo
Leisure
Biz
Local
Foreign
Stim
Premium
Transport
only
Tracking
Support
Single
Product
Multi
Products
Customer
Selection
Travel Purpose
Customer Origin
Price Sensitivity
Value Proposition
Product Quality
Product Offerings
Regional
Dmstc
Intl
Global
Market Breadth
No
Regions
>1
Region
1 Region
Market Franchise
Extender
P2P
Short/Mid
H&S
Mixed
H&S
Long
H&S
Network Type
Freight
Express
Specialized
11

One
Type of
Cargo
Multiple
Cargo
Types
Cargo
Value
Capture
In-flight
Extensive
Limited
Loyalty Program
Global
None
Broad
Vertical
Integration
Scope of Activities
Air Trans
Only
Airline Operations
In-house
profit
center
Limited
MRO Activities
Multiple
Channels
Online
Freight
Express
Specialized
12

Cargo
Open Market
Entry
Exclusive
routes,
gates, slots
Strategic
Control
Regulatory
High
Low
Cost Structure
Significant
Minimal
Brand Awareness
Pyramid
Flat
Organizational
Systems
Operationscentric
Customercentric
Management Focus
Internal
Outsource
Mgmt of Non-Core
Freight
Express
Specialized
13
14

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Aviation, Aerospace and Defense

Airline Business Design Segmentation

Oliver Wyman  www.oliverwyman.com

\Airline Business Design 20100422.ppt

Business Design Approach

Who are the airlines customers and what characteristics do

What can the airline do for its selected customers?

Oliver Wyman  www.oliverwyman.com

\Airline Business Design 20100422.ppt

Business Design Differentiation

Regional and Charter

Ultra Low Cost

Traditional Low Cost

Global Luxury Connector

Modern Low Cost

Broad product offering appealing to

Target price sensitive,

Independent Regional tie in with

Extensive freq flyer program with

Limited global participation

Independent Regional: Home town service

Multiple products with presence in

One size fits all service offering

Network Regional: Capacity Purchase

Safe, reliable, affordable

Charter: All inclusive, affordable vacation

Maximize utilization with high

Regional: Convenience of home

Premium pricing and high share of

Virtual airline focused on airline

Extensive distribution network with

Predominately single distribution

Regional: dependant upon affiliation

Broad geo-focus with emphasis on

Growth oriented focus on niche

Independent Regional: community focused

Oliver Wyman  www.oliverwyman.com

Most non-customer facing functions

Low overhead org structure with a

Regional: Operations only relying

Charter: Wholesaler affiliation

Network extender: Operational efficiency

\Airline Business Design 20100422.ppt

Business Design Grouping

Mostly VFR and

Pricing drives incremental

One size fits all offering for

Network services primarily a

Truly global network without

Oliver Wyman  www.oliverwyman.com

Network covers most of a

Dominance in at least one

Multiple product lines for

Long-Haul Hub & Spoke

Connect long-haul / intl.

Connect long-haul / intl.

\Airline Business Design 20100422.ppt

Business Design Grouping

Air Transportation Only

Outsource all but most basic

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Broad Vertical Integration

Complete control above and

The Virtual Airline, outsource

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