Thursday, October 12, 2006

Aviation business models defined

Business models within industries are sometimes challenging to identify and categorize, and the airline industry is no exception to this rule. Many scholars and journalists attempt to create simplified classifications of the airline industry, which ignores its complexity. Hopefully, this blog will provide some clarification.

There are three types of airlines in the world: passenger, cargo, and a combination of the two. A passenger airline is Ryanair, while a cargo airline is FedEx, and a combination is Northwest Airlines. Pure passenger airlines are not as common because there is money to be made in moving cargo. Many low-cost carriers (more on those later) are pure passenger airlines, which is a conscious decision to avoid extra expense and complication. Cargo airlines are simply that; they only move cargo around. Combination airlines are very common and they move both passengers and cargo, which may consist of mail or freight from shipping companies or freight forwarders.

Most readers are more familiar with passenger and combination airlines, even though they may not be aware that their clothes are sitting in the same cargo hold as their Christmas package being sent from grandma. So, we will focus on these two types of airlines and lump them together under the nomenclature passenger airlines. We will use this term since it is the one most are familiar with.

Passenger airline can be further segmented according to scheduled and non-scheduled. Non-scheduled passenger airlines are, for example, Condor. Scheduled passenger airlines are Emirates or Aloha. The common passenger airline business models are as follows:
  • Network carriers (they also go by other names: legacy carriers, flag carriers, incumbents, hub-and-spoke carriers) such as British Airways
  • Low-cost carriers (they too have other names: point-to-point carriers, new entrant carriers, value for money carriers, low-fare airlines) such as Air Asia
  • Regional carriers (this is a common term for both airlines that operate in a specific region or those that provide feed traffic to larger, network carriers, but I will provide another term for these particular carriers) such as Air Greenland
  • Small Jet Providers (this is term coined by consultants at The Boyd Group to describe those carriers that lease capacity to larger airlines, which many call regional carriers; this term has worn out its usefulness since small jet providers now operate aircraft that can fly more than half the continental US) such as SkyWest
  • Charter carriers (this category is relatively small in the US and much larger in Europe; they commonly offer both integrated, comprehensive package deals or seat-only sales to popular tourist destinations) such as Condor
  • Business aviation (this is a category some scholars include in their analyses of airline business models, however I do not consider this business model segment with the realm of the airline industry, I merely include it here to ensure you that I have considered its implications; the value proposition and target market of this segment does not warrant a threat towards airlines and should be considered a separate business model, on par with passenger, cargo, and combination carriers) such as NetJets

Most literature discusses four business models for passenger airlines (remember, this is both pure passenger and combination airlines), however I have added a fifth category, the small jet providers (remember, I do not consider business aviation in this category, it was merely mentioned to discuss its relevance). Regional is a term that was carried over from the historical US classification of airlines according to annual revenue (source:

  • Major airlines: > $1 billion in revenue
  • National airlines: $100 million - $1 billion in revenue
  • Regional/commuter airlines: < $100 million in revenue

These classifications are little outdated as the large US "regional" carriers have revenue in excess of $1 billion and operate aircraft that are much larger than those previously; you can hardly deem an Embraer 195 a "puddle jumper." With the introduction of small jets (Bombardier and Embraer) and the technological advances in these aircraft, regional airlines have now grown into large companies that operate hundreds of aircraft and no longer fly to destinations a short hop from a large airport. Small jet providers operate with a unique business model of capacity purchase agreements (CPAs) that essentially is a capacity and crew lease to a larger airline on a long-term basis. This is similar to a wet-lease, however the partnership is more integrated and long-term.

Within these 5 business model categories there are many sub-categories. It is not appropriate to assume that all airlines within one category have the same business model. Many low-cost carriers actually operate a hub-and-spoke model (for example, Frontier and Air Tran) while some resemble to a greater extent a point-to-point operation (Ryanair). Some network carriers have begun to adopt aspects of the low-cost model (SAS with the removal of ticket restrictions and now offering one-way fares). A small jet provider (Independence Air) transitioned from a CPA agreement to a low-cost carrier with a hub-and-spoke network; this model eventually failed but it is an example of a business model transition. There are many more detailed examples, however I hope that you get the gist of the airline business model classifications and the dangers of attaching rigid aspects to each that are inappropriate.

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