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Regulatory
Environment
Airline and
Industry
Strategies
Passenger
Expectations
Technology
Passenger market is segmented
Long-Haul
35% Travel
Long-haul Long-haul
business personal
Business Personal
30% Travel 70% Travel
40-50% 50-60% Revenue
Revenue Short-haul Short-haul
business personal
Short-Haul
65% Travel
Table exercise/discussion questions
1. What are two key passenger expectations for your market segment?
2. How are these passenger expectations changing?
Long-Haul
35% Travel
Long-haul Long-haul
Business business personal Personal
30% Travel 70% Travel
40-50% Revenue Short-haul Short-haul 50-60% Revenue
business personal
Short-Haul
65% Travel
Passenger expectations vary
Long-Haul
35% Travel
• Low price sensitivity • Price sensitive
• Time sensitive – on-time and many • Low time sensitivity
frequencies • On-time performance
• Non-stop; point-to-point • Some cost for changes
• High service levels • Leisure destinations
• Premium end-to-end experience • Wi-Fi connectivity
• Latest tech in cabin • Entertainment choices at low or no cost
• High comfort • Unbundling is OK
Business • Lie-flat seat • Upgrades from FFP
• Key airports Personal
30% Travel • FFP integrated with Alliance/partners 70% Travel
40-50% 50-60% Revenue
Revenue • Price sensitive (a degree) • Highly price sensitive
• Extremely time sensitive – frequencies, • Time sensitive to a degree
on-time • Still looking for point-to-point (but price stronger)
• Flexibility to make changes • Minimal service levels
• Primary airports • On-time reliability still important
• Latest technology in cabin • Unbundling is OK
• Bin space
• Bundled offerings
• Preferred seating
• FFP
• Expect some self-service (airports, etc)
Short-Haul
65% Travel
Business models and
strategies LIBERALIZATION
BUSINESS MODELS
MERGERS,
ACQUISITIONS
History of regulation in commercial
aviation
• International air transportation is
mostly negotiated between two
countries (bilateral)
– Under the framework first
introduced in the 1944 Chicago
Convention
• Increasing liberal agreements over the
past decades, beginning in the 1970s
• Open Skies deals are the most liberal
• Chicago Convention framework is still
being used today
• Ownership of airlines remains to be
nationally based
Freedoms of the Air
Freedoms of the Air
Deregulation
DAL
SAT HOU
10000
8000
ASMs (millions)
1987
6000 Any European carrier
Could fly scheduled
Service to any
European Market
4000
2000
0
1985 1990 1995 2000 2005 2010 2015
7.4% 7.2% 9.6% 6.4% 5.4% 4.6%
Typical Example:
• Total 18 frequencies per day
allocated to specific route groups
• No gauge restrictions
• Fare: no restrictions
• Must be Chinese controlled airlines
U.S. airlines benefit from Open Skies
U.S. airlines dramatically boosted service to Heathrow after U.S.-EU Open Skies
SEA
LHR
SFO
LAX
DEN MSP
PHX
ORD
DTW
DFW EWR BOS
PHL
IAD JFK
IAH RDU BWI
ATL
New service
More service
Same service
MIA
Long-Haul
35% Travel
Business Personal
30% Travel 70% Travel
40-50% 50-60% Revenue
LCCs
Revenue
Short-Haul
65% Travel
LCC business model has gone worldwide
Today LCC’s operating in most regions
SE Asia
Flights/week: 20,930
km/flight: 1,160
Africa
Latin America
Flights/week: 1,310 SW Asia
Flights/week: 14,400
km/flight: 1,050 Flights/week: 7,450
km/flight: 1,010
km/flight: 1,080
Oceania
Flights/week: 2,730
km/flight: 1,660
Source: Diio/Innovata 2015
Only Selected Regions Have Low LCC Penetration
2015 LCC market share - measured in annual seats
(by airline domicile)
SE Asia 54%
S Asia 50%
Europe 36%
N America 29%
World 28%
Oceania 26%
NE Asia 16%
Africa 9%
China 9%
Former CIS 1%
• ULCC
• Low fares
• Ancillary revenue
• Secondary airports
• No connections / point to point
• Once aircraft type / high utilization
• Hybrid LCC
• Premium cabin
• Seat assignments
• Frequent flyer
• Code-sharing
• Connecting flights / major hubs
• Long-haul flying
• Additional aircraft types
LCC’s strategizing to meet the needs of their customers
23
LCC unit cost advantage is critical
6
4
2
0
Avg. of US Southwest JetBlue Allegiant Spirit
major network LCCs must achieve at least 20-40% lower cost
carriers than network carriers
Source: US DOT Form 41
Stage length adjusted to system average
Low costs and fares stimulate growth
600,000 60¢
48¢
300,000 30¢
22¢ 30¢
27¢
150,000 15¢
16¢
0
Denver (DEN) Chicago (MDW) St. Louis (STL)
Source: Sabre ADI, 2009-2011
Airlines focusing on ancillary revenues
2014
Top 10 airlines ancillary revenue (US$)
$25,000
$24,000
$23,000
$7,000
$6,000
Passenger revenue
$5,000
$4,000
• A la Cart
$3,000 – Buy onboard
$2,000
$1,000
– Checked bags
$0 – Seat assignments
– Early Boarding
– WiFi
• Fare / Product Bundle
Top 10 airlines ancillary revenue – Early boarding, seat, bags
(% of Total Revenue)
2014 Other sources of revenue
40%
• Commission –Based
30% – Hotels, rental cars, travel insurance
20% • Frequent Flyer Programs
– Sale of miles/points
10%
• Advertising
0%
OSL-BKK CPH-HGH
OAK-ARN (8666km) (8283km)
(8581km)
ARN-BKK
(8290km)
KWI-MNL
RUH-MNL (7596km) NRT-OOL
LAX-CPH (7770km) (7236km)
(9022km)
JED-KUL
MCO-VCP (7060km)
(6787km)
MEL-HNL
(8869km)
SIN-SYD
(6290km)
Airline Wide-body A/P
AirAsia X A330
Azul A330
HNA Capital A330
Cebu Pacific A330
Jetstar 787-8, A330
Jin Air 777-200
Norwegian 787-8
PAL Express A330
Scoot 777-200, 787-8/-9 Source: OAG 2015 – for wide-body service from Norwegian, AirAsia X (incl. Thai, Indonesia), Jetstar, Cebu Pacific, Scoot, Azul, Pal
Express, HNA Capital, Jin Air
Network business model
Long-Haul
35% Travel
Business Personal
30% Travel 70% Travel
40-50% 50-60% Revenue
Revenue
Short-Haul
65% Travel
RPKs Share
Airport
PED boarding pass
Automated boarding
Lounges
On board
First
Business
Premium Economy
Economy
City C City F
*City A to 6 other cities + City B to 5 other cities + City C to 4 other cities = 15 city pairs
Example Hub: London (LHR) to Athens (ATH)
10 EDI 2
MAN
6 DUB Other 10
LHR
YVR
3 45
9
YYZ BOS 6
7 ORD
4 PHL JFK
5 SFO 10
6 IAD ATH
LAX
8
LOCAL PAX 45
MIA 3 CONNECTING PAX 89
134 TOTAL PAX
Interlining
<Airport-pairs>
Own Partner Total
134
Source: OAG 2015
Qantas’s airport pairs 4X with code sharing
<Airport-pairs>
Own Partner Total
134 396 530
Source: OAG 2015
Airline alliances now provides over 60%
of world capacity
Europe
Asia Pacific
Other
Codeshare flights by ATI JV
have increased
2010 2015
N ATL, TPAC &
N ATL only Europe-Japan
ATI
JV ATI JV
5% 15%
Alliance
No No
24%
Codeshares Codeshares
52% 43% Alliance
26%
Other 1%
Codeshares Cross-
17% Alliance Other
Codeshares
15%
1%
Cross-
Alliance
130 billions ASKs (weekly) 169 billions ASKs (weekly)
• SOURCE: OAG/Innovata August
Contrasting anti-trust immunity (ATI)
vs non-ATI joint ventures
Airlines joint ventures granted ATI are able to operate as metal
neutral
Within ATI, some are granted immunity globally, while some are
limited to specific markets (i.e. North Atlantic)
: Emirates
: Qatar
: Etihad
Emirates business model is strategically located to serve more than 80% of the
world’s population within an 8 hour flight of Dubai
Non-global Network Carriers
face challenges
Long-Haul
35% Travel
Global Network
Short-Haul
65% Travel
How do non-global network carriers differ
from global network carriers?
Long-Haul
35% Travel
Global Network
Business Personal
30% Travel 70% Travel
Charter
40-50% 50-60% Revenue
Revenue
Short-Haul
65% Travel
Class exercise Long-Haul
Global Network
Short-Haul
Business Business
Short-Haul Short-Haul
Air Cargo
Competitive advantage:
High value/time sensitive goods
1% 35%
of world trade of world trade VALUE
TONNAGE is carried by
is carried by Air Cargo
Air Cargo
Note: Does not include trans-border tonnage that was transported by truck, Source: IATA
rail or fixed installations such as pipelines or conveyors
Total air cargo industry revenue by business model
Combination
$9.7B
carriers All cargo
41%
Passenger $9.5B
belly only
$92.6 billion
Freighters, directly or indirectly, contribute to 90% of total air cargo industry revenue
Sources: Air Transport Intelligence, U.S. DOT F41, Boeing estimates, and airline reports. (2012 Data)
Will passenger aircraft belly capacity make freight aircraft
obsolete? No!
Case study: daily flights, Asia to/from North America
Issues limiting
150
150 Converting lower pax belly:
hold capacity to • Range and
equivalent payload
freighter flights capability
• Passenger
load factor
50-60 60-70 • Regulations
• Weight,
volume,
hazmat and
10 dimensional
• Handling
Pax Equivalent Freighter Total location and
flights freighter flights freighter ramp proximity
flights flights
• To gain access to
33.3%
restricted markets
• To overcome
alliance weakness 49% Up to 48.7% 2.98%
• To gain valuable
airport slots 10%
MyCargo
48% 48% UNK
• Implementing different
business model at
subsidiary – example:
new LCC or medium-haul
LCC