Friday, February 06, 2009

Future airline business models

With so much turmoil in the airline industry at the moment one obviously questions in what direction the industry is heading. The belief that I hold is that the industry is slowly converging and that the distinct groups that the media discusses, low-cost carriers, full-service carriers, and regional carriers, are slowly coagulating into a single group. Maybe similar to something the industry looked like prior to deregulation. These future business models will be built on the best parts from each group, maybe things such as strong online presence taken from LCCs, GDS distribution tactics from FSCs, flying your own brand and others' brands a la regionals (is Aer Lingus' and United Airlines' tie-up an omen of this?). This begs the question though, how does one know which elements to imitate (see a previous post here on how airlines change their business models).

My successfully defended PhD dissertation examined this topic. I have uploaded a presentation that explains the basics of the method and given some of the results. There are too many results to list as they are very specific, but you can see more and download the entire thesis publication here. The underlying method that was used is called Boolean algebra, which is based on the work by George Boole. It allows one to identify combinations that consistently lead to a specific outcome. In other words, which combination of business model elements always lead to a positive operating margin. The method is primarily used in political science studies, but I have extrapolated the method to business model studies and the airline industry. See the presentation for more information (the PPT file got some horizontal lines in them during the upload, sorry for the quality).

The results show that there are more than just one successful LCC business model. We can see that GDS presence is a success factor, however it should be through a 3rd-party to ensure low-cost. In addition, we see that this distribution tactic should be coupled with on-lining, through-fares, or an FFP. This would indicate that LCCs in the future may expand their network by "connecting the dots." This should be done in a simple and efficient manner. Finally, we see that some LCCs can be successful with a non-standardized fleet and short stage lengths or no FFP. You can see more results in the dissertation, including what kind of business model would be successful if an LCC and FSC combined, as well as, what innovative business model change can be implemented.

The data is based on 2006 information because that was the most current information at the time of the analyses (late 2007). However, I will begin to work in more detail with the method and the data set. In the meantime I hope that it gives some inspiration to a greater understanding of the airline industry.

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