Airline Business Models

Volume is good but fundamentals are essential

2012-01-27T04:55:00.000-08:00

when perusing commentary on the airline industry there is a lot of talk about passenger figures (see the previous post, for example). However, less common is the talk about yields. And even less common than that is to see discussion about the right yield and use of assets. Too many people give off the impression that airline executives are wearing blindfolds and recklessly handing out seats at ridiculously low prices to anyone and everyone. Low prices are part of the game and a worthwhile tool to stimulate demand, but the real art is the ability to maximize those ticket prices and ensure that your assets are being used effectively. If a route is flying with a high load factor and high yields should it be cut? Well, an argument could be that it should be cut if those high yield passengers will stay in the system by taking another departure on your airline or are willing to go to another airport to fly with your airline. That way the asset can be used more effectively on another route. The point is that observers of the industry need to look beyond the passengers numbers but to consider the yield and asset utilization. Nobody said this was going to be easy.

European airlines carry 7% more passengers in 2011

2012-01-20T03:22:00.000-08:00

The AEA has announced their preliminary figures for 2011 traffic and they are indicating a good year, at least compared to 2010. Of course, 2010 was a year fraught with events that challenged European aviation, but now the positive message of the day is passenger growth! See the announcement here.

There is only one problem here: at what price? Too many people are blindly focused on passenger figures. "How many seats are filled?" "How many people did you carry?" "What was your load factor?" In essence, who cares! Passenger figures are only side to the calculation. It's price that we should really care about. It's the easiest thing in the world to fill airplane seats; it's another thing to fill airplane seats AND make a profit! This goes for any business. Who cares how many iPods Apple sells! I want to know how many iPods were sold at what price. The announcement says nothing about the yield that the airlines were getting. If European airlines were filling their seats at a loss then that's bad business.

Nordic aviation is alive but sluggish

2012-01-18T04:15:00.000-08:00

This week I had the opportunity to attend two very interesting seminars related to aviation in the Nordic region. The first was related to the aviation commission that was appointed by the Danish Ministry of Transport, and the commission's progress. The commission is investigating the entire environment surrounding aviation in the country and how it can be improved to foster growth and innovation in the industry. It was an interesting seminar that involved several stakeholders, such as airports, airlines, tourism organizations, government, charter operators, etc. The second seminar was an evening with the Chairman of the Board of SAS, Fritz Schur. This was a relaxed evening discussing the transformation of an airline from a monopoly to a competitive fighter.

The aviation commission seminar saw an economist and an SAS representative agreeing that Copenhagen has more routes than its size and location justify. There about a dozen routes too many at the airport, which are only justified due to the network strategy of various airlines, particularly SAS. Therefore, it is imperative that the airport collaborate with its airlines to stem the dwindling transfer passenger figures. An airline's or airport's route structure is similar to a ball of twine. If you pull at a single string it slowly comes out, but reveals another string to be pulled on and eventually all you are left with are hundreds of independent strings jumbled on the table with no cohesion. If the airport levies fees or charges or implements processes or restrictions on airlines that stymy growth in transfer passenger it may spell the end for numerous routes. Of course, point to point routes can be justified, however there just are not too many that can be supported out of the catchment area of Copenhagen/Southern Sweden. In addition, point to point routes are often flown by low cost carriers, and they are lean business machines. If a route is contributing a deficit to the bottom line it will soon be axed. Finally, one important regulation was named that is a thorn in airlines' sides: denied boarding regulation. Unfortunately, politicians, who travel extensively, have been incompetent when formulating this piece of regulation. This was no more evident than during the ash cloud crisis in 2010. The fact that airlines are responsible for compensating passengers during events out of their control is unbelievable. In addition, the regulation does not different between purpose of travel. Thomas Cook was present and told that if their largest aircraft, with a cabin factor in the high 90s, is significantly delayed it costs them upwards of 600,000 USD. However, a 4 delay to your 2 week Greek holiday is not as big a deal as a 4 hour delay to your M&A meeting in London. Yes these two are treated equally by regulations. Other interesting topics discussed were:
- the establishment of bypass routes from airports that traditionally have played a feeder role to Copenhagen
- the fund that provides marketing finance to airlines to establish new routes
- the lack of public financial support for pilot training, unlike nearly all other educations in the country. In addition, to the difficulties in recruiting mechanics to general aviation

The seminar with the SAS Chairman of the Board was a great insight into how organizations that were previous monopolies have to transform themselves into competitive entities. The discussion touched upon how inefficiencies and incompetence are allowed to fester in organizations that have no real competition. How the lack of understanding of the seriousness of the situation among airline employees challenges real progress (e.g. the strike of Sabena pilots for more pay hours before bankruptcy was declared). How the militant attitude and dialogue among unions and management don't allow them to find a common ground. Naturally, it is important to realize that the Chairman represents one side of the coin, however I think much of what he said is valid. Some interesting facts include:
- Average annual hours flown at SAS is 604
- Total average cost for an SAS pilot is 300,000 USD
- SAS continues to fly personnel from Norway and Sweden to crew inter-continental flights out of Copenhagen; the transit time is part of the duty time. This in and of itself is not a problem, but the fact that the airline is required to staff its flights in such a manner is the problem. That crews are not simply assigned to a base and how they get to work is their hassle
- The Chairman is supportive of an eventual sale or merger with another carrier, and although Lufthansa is an obvious choice, a carrier outside the EU may be a reality
- He foresees that within half a decade there may be non-EU flight and cabin crew working; this is a reality in some parts of the world today
- The "flags of convenience" used for crew hiring in the industry means that an airline such as SAS can never be competitive against its low cost competitors

All of these issues are relevant and deserve the attention of employee groups, management and stakeholders to make the airline more competitive and prepared for the future.

Merry Christmas Sir...you ate too much this holiday so you owe us $7 more before boarding

2012-01-12T12:15:00.000-08:00

It's a New Year and that means many us (including myself) have been gorging ourselves during the holidays. We may have put on a few extra pounds, but that's okay. Those strict baggage restrictions only apply to your suitcase and not to your waist. Well, now a former Qantas economist is saying that should stop.

Basically, all flight operations require a weight (mass) and balance calculation. The aircraft weight influences performance, such as takeoff, landing, cruise, etc. It has an impact on fuel burn; the more the plane weighs the more fuel it burns. This is why it costs airlines money to fly fuel around. Therefore, they put the minimum necessary but within safety limits (don't worry, the flight crew are looking at the numbers too and don't want to leave without enough go-go juice). Other things weigh down the aircraft, such as the plane itself, baggage, catering, cargo, and of course, the passengers. Aviation authorities have established standard weights (about 95 kg in the EU) for passengers (also children and infants) and includes their carry on luggage. Some are even differentiated between summer and winter since we tend to wear more clothing during the winter. These weights are reviewed sometimes and adjusted to more accurately reflect the average weight of passengers. This makes calculations easier, although if the staff note that they are flying a sumo team around rather than "average" passengers they can make weight adjustments to more accurately reflect reality. Well, it seems as if this economist thinks too many people have become larger and that they are having a negative impact on profit.

Now, the economist does note that weighing passengers is not procedurally likely (although, it is routinely done when flying with passengers in smaller aircraft), he does say, "“As the obesity crisis worsens, however, and the price of jet fuel continues to spiral upward, such user-pay charge may be something the airlines can't ignore for too much longer."

This is an interesting note of airline operations. If economists (albeit retired ones) are concerned about the weight of their passengers squashing profits then there are more fundamental principles that are flawed at the airline. There's the age old story of former American Airlines CEO, Robert Crandell, removing an olive from salads and saving the airline $400,000 annually (http://readingeagle.com/article.aspx?id=208842). This is money that can be used more efficiently elsewhere, but I hope it isn't what saved the airline from bankruptcy (at least for a few decades). If air travel has gotten to the point that everything small item needs to be added to the bill maybe it should go both ways. My recent trans-Atlantic crossing was in a seat that would not recline. Maybe I should be entitled to $10 as a refund. Airlines could have an a la carte menu for passengers when demanding refunds:
No reclining seat
IFE not available
Late pushback
Late arrival
Delayed baggage
Bumpy taxi
Cabin attendant failed to smile
Couldn't open the hermetically sealed plastic bag containing the headphones

Again the airline industry is on the defensive

2011-11-21T02:12:00.000-08:00

It seems as if the environmental debate in the airline industry won't die down. Several years ago, around the time of the Stern Review publication, the airline industry fought to defend its environmental track record. Several industry actors and commentators admitted that the industry was caught on its heels and was not proactive in the debate; it was constantly on the defensive. You would think that the airline industry had learned its lesson...but it appears not to be.

The emissions trading scheme (ETS) has been on the table for nearly half a decade and some airlines (e.g. British Airways) were part of a test in 2008. For several years now the EU has been warning about including aviation in the ETS as a way to combat the environmental affects of aviation. Now, 2 months before implementation, the airline industry, in the form of airlines and trade groups, are starting to voice their concerns. Why have they not spoken up louder before now? Again it seems as if the airline industry had hoped that governments or squabbling would ensure that the ETS for aviation was not implemented. Instead, the scheme is going forward and at the last minute the airlines are crying foul. The industry should start to be proactive, as it is in other areas (e.g. safety), rather than reactive when it comes to political issues.

A new year...a new tax...but same old story

2011-09-26T12:28:00.000-07:00

1 year
365 days
8760 hours

This is approximately the time since my last post on my blog. That is just too long, but a job as an assistant professor with family and social commitments requires priorities. Unfortunately, the blog was relegated to way down the list. However, I hope to increase my rate of posting in the future…at least it probably can’t any worse.

A lot has happened during my absence. Overall, the industry has been suffering from the affects of a global recession and depressed economies. Lately, there has been some positive development, but there is concern that the upward trend is slowing. There has been consolidation all over the globe; Southwest’s acquisition of AirTran has been particularly interesting, if for nothing more than confirming that business models are not chiseled in stone but dynamic models. The developments in Asia with incumbent and fresh low-cost airlines finding common ground through joint ventures, off-shoots, new airlines, etc. is making for interesting reading. In Europe there are repercussions from the economic situation (e.g. Air Berlin and its shake up) and expansion in particular regions (e.g. FlyBe’s entrance into the Nordic region). However, this isn’t a post with a summary of the past year’s events, but a commentary on the political influence in the industry. In this little Scandinavian country there has been an election and the incoming government has announced their passion for an aviation environmental tax of 75 DKK ($14 or €10 as of writing) per departure. This tax has been here before; it was removed a number of years ago and subsequently there has been a positive growth in passenger development, especially on domestic routes.

This proposal does not differentiate itself particularly. It is an equal tax on per passenger ticket per departure from a Danish airport. So, a round trip on a domestic trip will experience an increase of 150 DKK. This can be a large portion of the ticket price, especially when prices can be found as low as 500 DKK round trip. Now it has to be recognized that the proposers of this tax admit that the ambition is to reduce the number of air passengers due to environmental concerns. At least the government recognizes that the tax will reduce the number of travelers. However, they have failed to take into account a number of factors. There is no study researching which transport mode air travelers will chose instead. If a large portion of them jump into their car the environmental affect will certainly go the other way. The train, on the other hand, is a better environmental choice. However, the train is less flexible and requires a higher time-cost. At the same time, a reduction in air travelers will most likely lead to fewer flights, which is an environmental benefit. However, fewer flights mean a need for fewer employees in airlines, airports, suppliers, secondary industries, and tertiary industries. So, the politicians can balance the environmental affects and an increase in state finances on one hand versus fewer employed in the travel industry with the social costs that accompany increased unemployment. One can doubt whether these aspects have been considered. Of course, there are additional aspects. The reduction in flights from outlying areas will reduce their access to the greater world. This reduction means that businesses are unable to sell and attract resources as easily as before. Denmark already has a problem with depopulation and financial struggles in rural areas. This policy will only exacerbate these problems. The costs associated with such a policy far outweigh the benefits, experienced by Ireland and Holland, until they removed similar environmental taxes.

Update (27.9.2011): If politicians just need a reminder of the relationship between the number of frequencies at an airport and employment they need to look no further than Jutland in Denmark. Norwegian, battling for a prominent position in the skies over Scandinavia, just announced that it was going to close the route from Copenhagen to Karup on the 30th of October. Subsequently, the airport announced that it was going to layoff employees at the airport since it was going to be overstaffed after Norwegian ceased operations. A tax will lead to increased ticket prices, which will lead to fewer passengers, which will lead to fewer frequencies (which is good for the environment), which will most likely lead to a reduction in people employed in the airline industry, which will eventually trickle throughout the value chain.

Now, it is commendable that politicians recognize the importance of the environment. However, is aviation really the place to start? The industry accounts for single-digit impact on the environment compared to fields, such as, agriculture, housing, energy, etc. Why not start with the low-hanging fruit rather than punish an industry that is only now crawling out of a financial hole? But what if politicians insist on a tax on the industry? Well, why not actually put some effort into it and reward those airlines that have a lower environmental impact? Why should an airline that strives to reduce its green impact be impacted equally as a notorious polluter? I don’t think this means that airlines will stop striving for green credentials. Remember, a green profile often means fewer emissions, usually from a lower fuel burn, which means less money being burned up in the turbine. Finally, if politicians insist on charging all airlines the same tax, where is this money going? Is it going to improve the industry? Research and development, maybe? Not one has expressed this as a goal; the funds will go into a general fund and improve the transportation infrastructure for other modes. However, I hope the politicians remember the impact of the Icelandic ash cloud in 2010. Airplanes are simply necessary for various types of travel. I am a supporter of the environment, and I do believe in the carrot and stick, however, I disagree with haphazard suggestions of taxes and fees. Implementation of this tax will have repercussions throughout the travel industry, which should not surprise the government if they think about things.

Visualization

2010-10-12T05:34:00.000-07:00

Came across a funny view of the world of travel. Click here for some drawings showing an alternative view of the travel experience.

It's a nice, take-it-slow perspective that I think we can all relate to on a long-haul flight.

Airlines want to talk to you

2010-08-30T12:13:00.000-07:00

Social media is the new communication carrier. It is the 21st century direct mail, but it allows users to let their voice be heard too. The technology has been seeping out from under the carpet of the cubicles of technology geeks and into the mainstream, and one of the most conservative industries has also adopted it: the airline industry. I did some research into how airlines are utilizing social media and was surprised to discover that:
1. most airlines have failed to realize that social media is also for less official messages
2. a lot of airlines are prolific advertisers on social media platforms, but they are poor at channeling traffic into sales
3. Twitter and Facebook appear to be great tools for disseminating time sensitive information
4. a lot of airlines have discovered that social media exists, but there are also a lot that are not present
5. not surprisingly, a lot of "younger" upstarts are more prone to use social media, but some "dinosaurs" are pretty good at it too
6. airlines need to find a balance of their use; I am a fan or follower of nearly every airline out there and I am drowning in information

This research is an exploration into how social media is used in the industry, and was presented at the Air Transport Research Conference in Porto this year. Here is the presentation that I gave.

Airline use of social media

View more presentations from hvassk.

Going the extra mile in Mile High City

2010-05-25T05:11:00.000-07:00

A service company proves its worth when something goes wrong. If service is a commodity and similar across all competitors, it's not until a service failure that I know if I have chosen the right company.
If all cell phone providers give me coverage all over and do not mess up my billing then I happy to go with any one of the providers (and I will most likely go with the cheapest), but I will only know the value I get for my money when something goes wrong. Can I get a hold of a service representative when I need to; are they accommodating; do they fix problems as promised? This is the same for airlines.
When I fly I look at price, time, airport, etc. However, if all those parameters are nearly the same I am often impartial to one airline over the other. And 9 out of 10 times I get to my destination with no problem, but if something goes wrong I am sure I will discover the value of my purchase. For example, how you were treated during the ash-cloud disruption in Europe depends on your airline of choice: British Airways versus Ryanair gave different experiences.
I came across a great little story about a typical weather delay for 3 Southwest Airlines planes. A common story too. Bad weather over the destination requires some time hold, followed by a diversion. The planes have to sit for a few hours at their diversion, but the airline buys pizza and gives drinks to all the passengers. This is turning a bad situation into the best situation considering the circumstances. If only airlines gave their operational crews more authority to makes these kinds of decisions I think flying might be more bearable. Most people want to do kind things, and flight crews want to give good service, however company restrictions can sometimes limit this kind of service. I applaud companies and leaders that give their employees the freedom to act to meet customer expectations (within reason); if it is out of bounds of company policy then managers should use the case as a learning tool to explain what acceptable boundaries are. Delegating responsibility breeds responsibility.

LCC or hybrid

2010-05-12T00:25:00.000-07:00

Well, it appears as if JetBlue is at it again. This time the LCC has inked a codeshare deal with South African Airways which will allow passengers to check in all the way to their final destination, including their luggage. This is an interesting development for the traditionally low cost carrier as it has similar arrangements in place with Aer Lingus, Lufthansa (minority owner of JetBlue), and American Airlines.

JetBlue appears to have created an open source IT system, if you will allow me to call it that, which allows easier integration with potential partners. This contrasts with the recent decision by Southwest and WestJet to part ways after a much-hyped partnership across the border. Part of the reasoning was the necessary costs to integrate the IT systems of the two North American airlines.

Is this the future development of the airline industry? My research has shown that a form of alliances are a viable option for LCCs, and possibly also for LCCs that are emulating their full-service brethren. Today we have 3 major alliances, however this does not mean that new entities can appear. The 3 major alliances do strive to offer global, seamless travel, however these come at a cost. Airlines have to integrate IT systems, coordinate back-office functions and operational aspects, and ensure commonality with the alliance. This may be a new area for LCCs to attack. It may not be necessary to establish formal alliances that are resource-heavy, but more flexible, open architecture based alliances that are more virtual in nature. One day it may be possible for passengers to travel across the globe on a handful of LCCs and one ticket, but not in a formal alliance structure that is resource and cost heavy.

It will be interesting to see how JetBlue will continue to advance these partnerships, and what impact it will have on JetBlue and other carriers. Hopefully, the tie-up with SAA will be a success, and JetBlue will hopefully experience a boost in traffic that want to go to the Southern hemisphere to see some soccer/football this summer.

Next stop...charges for bathroom visits

2010-04-06T09:37:00.000-07:00

Many of you have undoubtedly read about Ryanair's remarks about one day charging for bathroom visits, well it seems that North American carrier, Spirit, has added a charge before Ryanair. No...not to use the potty but for bringing your carry on luggage into the cabin. That's right...that backpack with a book, laptop, and wind breaker may end up costing you.

It appears that the carrier has drastically reduced some fares to a mere 1 cent (plus taxes, fees, etc.) and will charge for carry on (see here). This is not something that I have seen before, however with the stampede towards unbundling it surprises me it has not happened sooner.

Now, many readers may be in an uproar about such behavior by an airline, however as Kahn noted in the previous post, deregulation promotes such innovation. Spirit is free to attempt any revenue strategies it sees fit, and charging for carry on may be a wise move. It may drive more traffic into the cabin with the low fares, and people may simply pay extra for that carry on. Plus, in a wise move, you can pre-order the carry-on fee, which is cheaper compared to doing it at the gate. One experience an airline had with allowing passengers to pre-pay for luggage was that many pre-paid for the extra weight, but they never actually needed it.

From an operational perspective it may reduce overstuffed cabins and overhead bins and ease boarding. Imagine if the carrier can eek out 1 more hour of utilization. That would more than pay off for the revenue loss in the lowered ticket prices. However, I can't help but get pictures of sun-seeking passengers wearing a webbing vest or winter coat with all sorts of crap stuffed into the pockets. An iPad here, a sweater there, a toothbrush (no toothpaste though 'cause that's a liquid!), underwear and cell phone somewhere in there too!

Regulate...deregulate...reregulate

2010-03-23T08:36:00.000-07:00

The airline industry is inherently global yet often overly protected at a national level. The airline industry is considered deregulated, yet the "de" implies that there is no regulation, while a more appropriate term would be less regulated (of course, from an economist point of view the "de" is suitable). Here is an interesting opinion piece by Alfred Kahn discussing the benefits of deregulation in the industry, click here (A. Kahn is offered considered the godfather of deregulation).

The goal of deregulation of any industry is to introduce or increase competition to the market to stimulate price reductions, efficiency, and innovation. Alone the fall in cost of air travel has been a blessing to the traveling public (you can see here that the price of air travel has gone up since 1978 but not nearly as much as the CPI or other items). So, there has been a decrease in the cost of flying for the public, which has naturally meant more passengers. This has lead to frustration at times, yet overall, the public is able to fly for less expense. Kahn goes on to talk about unbundling of services and how this is a reflection of deregulation at work. I think the concept of bundled vs. unbundled products works either way as long as they are accepted by the public and they work. If an airline offers unbundled products they better make sure they are simple to understand and to use (and pay for!).

The challenge is now that there are some calls for reregulation. Planes are crowded, there are delays, the system doesn't work. I think what's wrong is the system! The NAS in the US is in shambles and is not geared for the growth at hand, and probably wasn't geared for the growth for the last 2 decades. The government deregulated the industry on the basis that lower prices will benefit consumers, yet failed to prepare for the oncoming growth. Once the NAS', in North America, Asia, and Europe, are upgraded and the system is still pressured maybe one can consider reregulation, but that's a very conditional consider.

I am a proponent of deregulation/less regulation, although an interesting read against deregulation is Airline Deregulation and Laissez-Faire Mythology by Dempsey and Goetz.

Accomodating passengers

2010-02-16T06:14:00.000-08:00

It appears that the size of individuals is growing. See here for an animation of obesity levels in the US, and here for a BBC article on conditions in the EU. Our infrastructure is matched to accommodate the average size of people, however it appears as if the average is increasing, which strains the infrastructure. See for example here, here, or here. This story is just as relevant when it comes to air travel, and the recent incident with director Kevin Smith will most likely increase in occurrence. Kevin was asked to deplane a flight on Southwest that he was on standby for because he got the last remaining seat, while he held 2 seats for a later flight. Southwest has a policy requiring customers of size to purchase 2 tickets, 1 of which will be refunded if there is an empty seat in the cabin when the door closes.

I got curious to know the policy of other airlines. I discovered that there is inconsistency on this matter. I did come across this general overview. Actually, it was pretty hard to find an airline's policy on this matter in general. Airlines such as Delta, SAS, JetBlue, Lufthansa, easyJet, British Airways did not have any guidelines on this specific matter, although there were for customers requiring assistance (e.g. visual or hearing impaired). Here are some other airlines' policies though:
Southwest
American Airlines
Virgin America

I only checked a handful of carriers, but I found it challenging to get a clear picture of what the guidelines are on some airlines.

As far as the incident with Kevin Smith goes it is a tough call. There are statements that he fits in the seat with the armrests down, and does not require a seat belt extender. So, it would appear that he adheres to the guidelines of the airline. However, he states that he often buys 2 tickets because he enjoys the extra room and can afford it, however I do not believe that. Picture it this way, if Kevin has 2 seats, and there is a single empty seat in the cabin and a standby passenger they will give that seat to the standby. Airlines that use the standby or overbooking principle are not in the habit of allowing seats to go empty. Southwest obviously uses the standby principle as Kevin benefited from it himself.

The sad thing is that these types of confrontations will most likely increase in the future, and they are as uncomfortable and challenging to the passenger as well as the crew.

Let's start the year off with annoying our competitor!

2010-01-28T06:58:00.000-08:00

It has been a long time since my last post. Teaching and other duties has stolen my time, however my intention is to be more active in 2010. Gotta try to keep those New Year's resolutions.

So, a Danish-based airline, Cimber-Sterling is in a fierce battle with another Scandinavian carrier, Norwegian. Norwegian increased their presence in Denmark once Sterling went bankrupt, with Cimber eventually acquiring the brand (note the airline's name now). These two carriers, along with SAS, and to a smaller extent Transavia, are battling it out on various routes.

Cimber-Sterling has been serving the domestic route, Copenhagen-Karup (click here for some geography), for some time. Norwegian recently decided that it wanted to enter this market and to drum up some interest for their presence they sold tickets for 1 DKK (approximately 19 US cents or 13 Euro cents), which included all taxes and fees. Cimber-Sterling was soon going to have a growing competitor on its route and some employees decided to annoy Norwegian. So, how did they do that? They bought a few tickets for 1 DKK and gave the passengers funny or famous names. They had no intention of using the tickets purchased. The problem is they didn't just buy a few, they bought a lot. One pilot admitted to buying 458 tickets. For an article on the event see here.

Supporters of Norwegian say that this is smart marketing and is a good investment. While Cimber-Sterling supporters say that Norwegian is dumping prices and using unfair tactics.

So, I am soliciting comments to such an event. What do the readers think? Is it proper for an airline to sell tickets below cost, or for free for that matter, to drum up interest? Is it proper for a company to annoy a competitor buy purchasing their below-cost product to limit potential customers?

The story isn't finished because Cimber-Sterling has promised to report results from its independent investigation. Norwegian offered the 1 DKK sale again, but it resulted in so many false bookings...again, that they have decided to merely sell tickets at a higher price.

All you can fly for a month!

2009-08-13T00:29:00.000-07:00

Summer is coming to an end. Most airlines are experiencing heavy declines in passenger numbers. Slashing prices is one way to attract bottoms into those seats, but competitors are doing the same. It's a downward spiral...except for the airline with the rock-bottom unit costs.

Time to try something innovative; something new; something that will get headlines and the Internet (like me) to write about it. Well, JetBlue has done just that. For $599 one can fly anywhere they want in the contiguous US for one month. Now that's a great deal...if you have the time. A real quick check shows that if I want to fly from Long Beach, CA to Boston, MA on a random day, one-way, in September I'd have to pay around $100-$250. If I'm going to do that trip a few times that month maybe it'd be a good deal to purchase the All You Can Jet deal.

I think a few people will buy this pass and not fly for the purchase amount. Today, many people have the money to travel, but not the time. However, a deal for $599 sounds great so people buy it, thinking they can save money, but then it turns out that they don't have the time. JetBlue can risk a backlash if there are simply no seats available for those who have purchased a pass. However, the whole point with this is get people on board and get them flying. July 2009 had a load factor of 86.1% which is nearly full. That usually indicates that off-peak flying has empty seats, but during peak times there are good loads (remember, this says nothing about ticket prices). So, this is a great way to garner attention about JetBlue, get people flying and talking about the product, and a great, fun, short-lived innovation in the industry. Of course, it may dilute yields some, but that's the trade off.

Woe the airline that convinces itself that an LCC is not a competitor

2009-05-28T06:12:00.000-07:00

Southwest will begin service to Milwaukee in the fall. Milwaukee hometown airline, Midwest Airlines, says that its focus on the business segment will insulate it from Southwest as it has a different customer base. This is basic management theory. 2 companies may be in the same industry and market, but if they target different customer segments then they will not get in each others way. However, the airline industry does not have such distinct customer segments; they are diffuse and overlapping. Therefore, Midwest's belief that Southwest only targets leisure travel and discretionary income may come back to haunt them. It is dangerous to assume that a competitor is focusing specifically on a different customer segment than one's own. Southwest has a strong business travel focus at a competitive price with a wide-reaching network. Midwest may also have a strong business focus with different products than Southwest's. Time will only tell who can win attractive market share and profit.

Southwest's virtual linkup with Volaris

2009-04-28T00:09:00.000-07:00

Southwest and Volaris will eventually codeshare, however to pass the time Southwest has implemented an online link to Volaris's website. This is the same as that offered to customers wishing to travel to Canada using WestJet. Click here.

Now this is just a simple link to a separate booking. No bags will be transferred, the passenger has to make sure of meeting the departure time, etc. This is the same as if I had booked two separate tickets using both Southwest and Volaris. The link-up though is the first step in a closer relationship. If yield or revenue drops then it's nice to have more passengers in the system, and the Volaris/West Jet tie-ups allow Southwest to extend its reach with little investment. No/few staff are required, no additional planes are needed, international experience is not necessary, however passengers will enter into the system. However, the complexity of the business model will increase. Southwest has to make sure that it offers attractive connection possibilities to those flying with WestJet or Volaris. Southwest does though have experience with its own networking and connections as the carrier already offers onlining.

Too bad there is all the media hype surrounding swine flu.

Too little time

2009-04-23T01:15:00.000-07:00

I am a fan of technology but if one wants to communicate effectively it is imperative that time is set aside to make use of this technology. Unfortunately, I have been pressed at my new job back in academia, so I have been unable to post as often as I would like.

However, I have now added a Twitter account to my arsenal. You can follow my rantings at AirlineBizModel.

Customer experience to a whole new level

2009-03-23T07:11:00.000-07:00

While the previous post was related to customer empowerment, here is one about customer experience.

A bad experience on a flight is one that leaves a lasting negative impression. An average flight is one that passengers do not remember. I would actually consider these good. Air travel is not an element of the journey in the sense that passengers are sitting in the plane because it a means of transportation. Passengers are on a cruise ship because it is a part of the journey, while in the plane it is just something to get through before the vacation or meeting begins. A boring flight is a good flight...especially from a pilot's perspective. However, once a while there are those good or great flights. The ones that leave a lasting positive impression. Below is a link to a video of a flight attendant that manages to turn those bland, mandatory safety announcements into a participatory event that passengers may not forget for a long time.

An interesting note is that many are aware of Southwest's style, however there are some airlines that feel its relaxed atmosphere is a turn off to some business travelers. It all depends on the type of experience that airlines wish to exude. Of utmost importance is consistency. Southwest is consistent in its customer experience delivery of fun and relaxed. Naturally, a flight attendant announcement with a humorous comment is not going to turn away all business travelers, however the concept applies to website design, agent interaction, baggage delivery, etc.

Customer empowerment to a whole new level

2009-03-13T00:36:00.000-07:00

Don't we all just love those companies that draw us in and ask us for our honest opinion? What about those companies that ask us to help them excel and be the best in category? They certainly make us feel empowered.

Well, it seems that Ryanair is taking it in a direction that has not been seen before. Customers have the chance of winning €1,000 if they submit the best new discretionary fee that the airline can impose on passengers! So, the airline is asking the public what they feel is another way of lowering ticket fares and making up the difference in a fee. You can read more about the scheme here.

€1,000 is certainly money that people can use...especially in these financially-strapped times. I am certain that people will submit viable suggestions that may actually be implemented. However, they must remember that if they fly Ryanair they may be victim to their own success. It is empowerment...but at the same time it may hurt my pocket book.

Future airline business models

2009-02-06T00:13:00.000-08:00

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).

Future Airline Business Models

View more presentations from hvassk.

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.

Segregation is slowly disappearing in the airline industry

2009-02-05T01:50:00.000-08:00

It wasn't too long ago that large network carriers looked down upon those pesky low-cost carriers and wouldn't give them the time of day. This arrogant attitude by FSCs changed as those LCCs began to encroach on their territory and profit; it changed to one of panic. Those network carriers attempted to imitate the LCC business model but failed to really study what made a successful low-cost airline. Those high-cost carriers wrapped in LCC clothing have disappeared (Shuttle by United, TED, Song, Continental Lite, etc...). Now, it appears that these two groups have reached a consensus that both are here to stay and that it is possible to cooperate, which benefits both parties.

In the past I have spoken about how the business models of LCCs, FSCs, and regionals are converging. This will mean that we will see more and more cooperation between the different types of carriers, just as the announcement by WestJet of Canada and Air France/KLM of, well, France and the Netherlands. These "two" (two in quotations because I see Air France/KLM as one carrier, but they are still cruising around in two liveries) will enter into a code-share agreement by then end of this year or early 2010. In addition, they will look into interline agreements and FFP tie-up, technology permitting. This appears to be a strategic attempt by both carriers to capitalize on a partner's advantages. WestJet has a strong foothold in the Canadian market, which is an attractive feed to Air France/KLM who are up against Air Canada in trans-Atlantic flights. WestJet, on the other hand, can potentially get more traffic due to passengers wanting to fly to Europe. The challenge brand-wise is ensuring that passengers who hop off in Canada and transfer to a WestJet flight don't expect AF/KLM first-class service. This has always been one fear of entering into agreements between FSCs and LCCs. However, if they make this transparent to the passenger it should be acceptable. In addition, many LCCs actually have a more attractive short-haul product compared to the short-haul product on FSCs. Technology will also play an important role here. Integration of IT systems that allow a seamless and low-cost experience to the customer is vital. A tie-up that is challenged technologically and has added expense goes against the entire concept of the agreement.

This will be interesting to watch and if others will follow suit in other parts of the world. In addition, the agreement and WestJet and Southwest may have just gotten a whole lot more interesting.

Another year...another crisis

2009-01-23T01:56:00.000-08:00

2009 promises to be an exciting year for aviation, unfortunately this is based on a weakening of the fundamentals that have aided past growth in the industry. On the one hand, we are seeing restrictions to financing that many airlines so desperately need, along with cyclical hiring cycles that puts a strain on HR departments and employee motivation. However, we are also witnessing an increasing decline in oil prices, which is benefiting some carriers and punishing others that are strongly hedged, as well as, capacity reductions that will hopefully help to keep prices up at healthy levels. In other words, some negative undertones and others that are positive. We will witness some airlines struggle to survive, but survive they will, while others that are better positioned will be able to capitalize on the demise of others. This is certainly not the first crisis for the industry, and most definitely not the last. Darwin's biological observations are still applicable to the business world.

Some things we may see in the coming 12 months:

- Route closures that lack strong fundamental economics; those point-to-point routes that don't capitalize on transfer traffic will be axed, and many routes that rely on price-stimulated traffic will drop off schedules

- Strengthening of business traveler-focused LCCs; cost-conscious business travelers will migrate to LCCs if possible, which will off-set the loss of those leisure passengers

- High-cost, low-fare airlines will wither away; just because those ticket prices are low doesn't mean that it's a low-cost carrier (maybe to the passengers but not to the company), and acquisitions, mergers, or 1-for-1 expansion is not likely as overcapacity plagues the market

- Increased lay-offs which will hamper industry growth during the next up-cycle; those laid off workers will find work elsewhere and will be hard pressed to justify returning to such a cyclical industry; those that are experienced won't be around to train the next generation

- Consolidation talks will most likely quiet down, which will be grounded in lack of financing and the need for carriers to get their own house in order; a new administration in the US will see the topic of cross-border mergers take a back seat

Remember, airlines have trimmed a great deal, if not all, of their fat away and they are going to have to become creative and innovative when it comes to further reductions. Many airlines have slashed pay and benefits, and increased productivity to the maximum, so future cost savings will have to be found in other line-items than payroll expenses.

Low fare airline congress

2008-11-13T12:10:00.000-08:00

The airline industry has been in a state of turmoil…well, for a really long time. It has been a while since my last post. Sorry. I had a doctoral dissertation to defend and have started a new job. A lot has happened in the meantime and I’ll see if there are a few comments that can help the readers.

Managed to attend the Low Cost Carrier Congress in London a few weeks ago. Very interesting. I heard Herb Keller of Southwest-fame speak, which was inspirational. His dedication to the LCC business model and its societal benefits is infectious, plus he has a great sense of humor. There were the usual guests, such as Ryanair, easyJet, JetBlue, AirAsia, etc.

JetBlue had an interesting note about their EBay scheme. When airlines sell their inventory on the Internet they often get a lower yield, or ticket price, than if they sell in via a GDS. A simple explanation is that Internet users are often leisure travelers and they are price sensitive. Well, JetBlue decided to sell some seats via the auction site EBay. The ticket prices started at rock-bottom and were bid up by passengers. Not surprisingly, the exercise brought it lower fares for their seats than usual; about 50% on average. However, the event gave the airline great publicity, nearly $200 million worth in advertising exposure, according to one source. That’s great. One comment by another LCC I read said that JetBlue’s decision was not helping the industry and that their company was trying to bring the price up rather than down. Here is someone who clearly doesn’t understand the positive effects that such an event can have. Be careful you don’t get stuck in the traditional, old-fashioned way of doing things. Somebody more innovative will come up from nowhere, and while you sneer at them, they’ll be getting more and more successful. Sounds like the classic tale of the full-service industry versus the low-cost industry.

Who serves who?

2008-08-13T14:58:00.000-07:00

First we had airline owned travel agencies...then the CRS was invented. The CRSs were eventually divested by airlines....then along came the Internet. At first airlines wanted to use the Internet to regain control of their distribution, however they realized that third-parties were too valuable and had to find a compromise. Now it appears as if the status quo is over.

The third-party, Kayak.com, has removed American Airlines from their inventory as a result of a dispute where Kayak was sending AA customers to purchase their tickets. This makes one wonder: who serves who? Is Kayak dependent upon AA, or is it the othe way around? If this behavior continues it only solidifies the notion that the industry is a commodity. If passengers continue to patron Kayak for their low fares and loose AA as an option, it only proves that airlines have a real battle to boost their brand. Although many can name the largest and most successful airlines, we know that price is nearly always the determing factor when choosing a carrier. If strengthening a brand is so vital then distribution is one of the key elements, since it is the link to the end consumer.

Now the next element that needs to be strengthened is the service once the customer has purchased a ticket.

Get them coming and going

2008-08-13T14:42:00.000-07:00

It appears as if JetBlue is relegated to milking passengers for every last nickle and dime as they have recently announced that they will charge $7 for blankets and pillows. Media reports state that David Neeleman was considering this move as far back as 2006, however waited until the fuel crisis really drove the carrier to such desperate measures. The carrier is hoping to generate additional ancilliary revenue from the sales. However, one has to question whether selling such a secondary product such as pillows and blankets is a real cash cow. Without any real research I am doubtful that many passengers will purchase the kit, and rather opt to endure the flight blanket and pillow-less. Airlines should attempt to locate real products or services that customers wish to purchase, such as JetBlue's decision to charge $5 for first run movies. Airline management needs to reestablish their thinking from a mere transport provider to that of a service provider. Airlines should attempt to retain experienced people from FMCG industries to complement airline-specific positions.

First Dallas then Dryden...Canada

2008-07-07T12:39:00.000-07:00

Gary Kelly of Southwest has stated that the grandfather of LCCs will be announcing a codeshare with a yet-to-be-announced carrier to Canada. WestJet is the first carrier that comes to mind. The LCC business model is predicated on using low-fares to both entice new travelers and steal disloyal passengers from competitors. However, as those markets dry up (there are only so many origin and destination markets that can fill a 737 and still provide a financial return) those LCCs are forced to move into the territory of full-service carriers or find new markets. Southwest has had a presence at various primary airports, Denver and San Francisco, just to name a few, where the airline battled with more traditional carriers. However, it now appears as if international expansion is on the drawing board (click here). Southwest did have a codeshare in place with ATA to Hawaii, however that arrangement fell through with the carrier's demise. Now Canada is a market that Southwest is looking at. Asia and Europe are also mentioned, however a time frame is not given and at the rate that this industry develops it's hard to say how things will develop.

Once there were 3 little business class-only airlines

2008-06-13T23:08:00.000-07:00

Once upon a time there were three business class-only airlines. They were called MaxJet, Eos, and SilverJet. These airlines were heralded as a new, exciting, and innovative business model. They offered premium service at prices lower than those lethargic legacy carriers. However, this story doesn't have a fairytale ending. MaxJet ruined Christmas for a lot of people, Eos failed in spring 2008, along with a slew of other airlines. SilverJet, the late comer to the group, was soon alone, but they too ran into trouble. The airline soon was issuing profit warnings and press statements seemed like a trampoline: the airline's flying...the airline's grounded...the airline's flying. There were stories that investment would pour in from an investor in the Middle East, but that money never arrived. SilverJet was grounded in May 2008 but in early June 2008 there was news that an investment company was interested in acquiring the company, and that it would be flying within a few weeks. But alas, just two days after that announcement the news is now that that won't happen either and the staff is laid off. At the least the journalists have had a lot of work to do.
Premium class-only airlines are not a bad model, per se. However, all these carriers lacked economies of scale and an attractive underlying network. The presence of economies of scale among airlines is a hotly debated topic among economists. The broad acceptance is that there are limited economies of scale, especially because the airline is so labor-intensive. And labor is such a high expenditure. Airlines are not factories where you can just produce more widgets. Most airlines maximize the use of their assets and if they want to expand must acquire more planes. More planes means more staff...and staff is expensive. Some authors argue that economies of scale exist until airlines reach approximately 10 aircraft or so, then they begin to dwindle. Of course, the larger the airline the better bargaining power with suppliers (e.g. advertisers, manufacturers, etc.), however those high-priced crews push up the expenses when buying a new plane. Fuel though is now the biggest culprit. These airlines also lacked an attractive network. They were operating in one of the largest markets in the world, London to New York, and some of them were operating some other routes and planning to open even others. However, onward movement of passengers is important to many, and this may have helped the airline. This concept though would have added complexity, costs, and may have meant no airline at all. The success of Lufthansa's premium class-only and Air France/KLM's concept show that they are viable business models, but maybe only integrated with a large network carrier. Lufthansa can capture that passenger that lives in a small hamlet ending in -dorf, fly him through Düsseldorf to hop on that business-class flight to New York. Those other carriers lacked that option.
If the price of fuel ever drops to a more realistic level or society is able to happily absorb permanent increases (highly unlikely) then we may see similar ventures. In the meantime, it looks this type of carrier will be grounded for a while.

Struggling at a premium

2008-05-28T14:09:00.000-07:00

It appears as if the industry has spread its wrath on those premium carriers peddling their capacity on a the trans-Atlantic route. MaxJet didn't get any Christmas presents with its bankruptcy filing on Christmas Eve, Eos filed in late April of this year, and now SilverJet is struggling to stay afloat. These carriers certainly weren't lacking in neither their service offering nor execution, according to the reviews I have seen. However, there was only one thing missing: profitability. Although some of the carriers were reporting fair load factors one must always, always remember that load factors do not equal profit (i.e. give your seats away for free and you'll see a great load factor...and a bunch of angry employees asking for their salary). The challenge with the all-business class market is that these carriers are up against established brands with decent pricing. In May of this year there were approximately 8 500 seats crossing the Atlantic from London to New York. Less than 15% of this was produced by a pure premium class carrier. The rest were divived among 5 name-brand airlines. SilverJet is struggling against carriers such as Virgin, BA, Continental, and Delta. These carriers all have their established networks and onward travel, which are appealing elements for travelers. This is not to imply that the incumbents can not learn from their now or soon-to-be defunct premium competitors. It will be interesting to see how BA and their Open Skies concept fare on this market. Lufthansa has had success with the concept, however they have outsourced the operation to Private Air. Possibly these carriers should have investigated a form of tie-up.

Research takes time

2008-05-05T06:00:00.000-07:00

Nearly 8 weeks have passed since the last post on my blog. In 8 weeks a lot can happen, especially in this industry. My excuse is that I had to put the finishing touches on my PhD research and complete the 300 page dissertation.
The results will be slowly posted on this site. Rather than inundating readers with a barrage of new information I hope to post findings with discussions, and hopefully a debate and commentary will follow.
All the latest news-hitting headlines these past few weeks is old news, but one interesting tidbit I read about is Silverjet mobile. Silverjet, one of the last few standing business class-only airlines, based in the UK, has launched a mobile service for passengers. This feature stands out among others because it really allows passengers to manage their flight from their mobile devices. Check-in via mobiles is available from various carriers, but Silverjet allows passengers to actually book flights, select seats, and choose meals. This type of function will most likely eventually find its way into nearly all airlines as passengers feel increasingly at ease with self-service. As airlines push more and more passengers into self-service lanes this opens up the potential for carriers to provide focus on those passengers who may not be able to use such features. The elderly or handicapped spring to mind. Self-service innovations help to drive down costs and increase efficiency at airlines, however it does also open up opportunities for airlines to shower attention on those who are not able to service themselves. It is interesting that an all-business class airline, such as Silverjet, implements a self-service innovation. Luxury may not always entail a human touch. As a frequent traveler and early technology adopter I am more than happy if I am able to service myself, especially since it often feels faster and more convenient. One pet peeve is that it would be beneficial if airlines, handling companies, and security measure can one day mesh to allow a self-service baggage drop. Standing in line the other day at an airport I could not help but overhear the conversation of those in front, who had checked in at the CUSS in the airport only to end up in a 25 minute line to drop off a bag. The agent was working as fast as possible, however sometimes a human touch may lead to a slowdown.
Silverjet mobile may also bring the airline closer with its customers. It is wrong to assume that a passenger's flight ends when stepping out of the cabin on the jetway. In a passenger's mind a flight may end once the baggage is collected or once out of the airport. Some may argue that a flight is over when a passenger has forgotten about it; in other words, if a passenger has an awful experience and is fuming over their last flight then it's still not over. The airline may still have an opportunity to express empathy over a bad experience. Once the passenger has forgotten the awful experience then the airline's delayed remorse may be too little, too late. With mobile technology an airline may be able to integrate its operations with its customer relations and be sure to send that customer off with a smile, even on the way out of the baggage claim or from the airport.

2 pretty 2 fly?

2008-03-04T04:35:00.000-08:00

Looks like Southwest is at it again. They are now accused of having two young women arrested who, as the victims state, were too pretty to fly with the airline. For more see here.

This post is not about the actual incident but rather how Southwest has responded. The LCC has a a page on YouTube (here) and there is a video with a spokesperson from the airline addressing the issue of reporting the two young women on their flight. This is an excellent way for an airline, or any company for that matter, to get their message across clearly and inexpensively. In addition, the page on YouTube by Southwest is created by their "blog". This is a very integrated communication strategy by the carrier. This is repeated by Delta Air Lines with their YouTube page (here). On a final note, maybe Southwest should consider installing some video cameras in their cabin to justify their actions the next time a pretty girl is a victim due to her looks.

Is price the only deciding factor?

2008-03-04T04:16:00.000-08:00

The airline industry is elastic. The product is perceived as a near-commodity by a large portion of the customer base. Many passengers are not loyal to an airline, but rather to their frequent flyer miles. Some passengers hardly even know the airline they are flying with, the type of aircraft, and probably don't even care. People are flying to go somewhere and not to actually fly. This is the air travel experience, not the cruise travel experience. When people book a ticket using a search engine, such as Travelocity or Expedia, they are presented with options ranked according to price and can usually be sorted according to other factors such as total travel time, connections, etc. Now a new website will launch soon which will incorporate subjective criteria in the search process. The website, InsideTrip, has 3 factors that are used in the booking process: speed, comfort, and ease. Within each factor there are 4 rankings. So, InsideTrip will basically use 12 criteria when searching for flight options for passengers. This is an interesting idea because there are passengers who do want to fly on a larger aircraft, there are passengers who want to consider on-time performance in their decision, there are passengers who value the lost luggage metrics. These are what many airlines use as selling points aimed at their customers, however that message is diluted among all the other messages that float around. Now InsideTrip will incorporate these metrics in a trip search.

My only comment is that passengers may find this worthwhile, however since it is a highly elastic product and market they may still select the lowest fare...as long as the airline gets them there near the time they would like to arrive. Is flying with Alaska, who may have a great baggage handling record, really worth $100 more than United? Many passengers may think yes, but United doesn't loose my luggage every time so I'll stick with United and save that $100 for the cab ride into downtown. Considering that InsideTrip is linked into Orbitz the site will only present users with more ranking criteria than Orbitz then they might as well use InsideTrip.

Aer Lingus and JetBlue: No codeshare but still an agreement

2008-02-28T06:22:00.000-08:00

More detailed information is seeping out regarding the partnership between Aer Lingus and JetBlue. Tickets will be put on sale in April but only on the Aer Lingus site. JetBlue visitors will be redirected to the Aer Lingus website. Currently, the system is only arranged for flights from Dublin or Shannon to JFK, but will most likely be expanded to include Boston, Orlando, and continental Europe. The interesting note is that the carriers will not exchange codes and there are no interline agreements, the carriers are compensated as a straight swap for the fares. Ticket prices will merely be the sum of the individual legs, while there will be baggage transfer. The carriers state that this will not be a problem since they are neighbors in New York. One interesting note is that JetBlue has announced that it expects to partner with up to 10 carriers! These will most likely be foreign airlines serving JFK, and may include current Star, Oneworld, Skyteam, or independents. The same holds true for Aer Lingus on the other end. The software has been developed and is ready to accept new members.

The experience economy capitalizing on aviation

2008-02-28T00:46:00.000-08:00

Nearly a decade ago a new service concept, the experience economy, was coined by Pine and Gilmore (click here for the book). The gist of this concept is that service firms benefit by creating memorable experiences for customers, in other words mass customization. The notion is that this helps firms in distinguishing themselves from the competition and creates a potentially inimitable trait. This is an important feature in aviation as research has shown that airlines are quick to copy each other and through the creation of (positive) experiences passengers are more likely to view an airline's product (time in a seat) as differentiated rather than a commodity.

However, this post is not aimed at airlines specifically but rather at how other industries, some not even directly related, are using the experience of aviation to differentiate themselves. Neyes, a Danish bag shop, has recently installed in its store on Strøget (the walking street) an overhead compartment, a baggage carousel, and a baggage trolley for customers who wish to test-drive their suitcases, travel bags, and trolleys. This move gave the store a Retail Design Award, but also gives its customers a distinct shopping experience. Who won't forget buying their black travel bag at Neyes when they could feel the ergonomics of putting it in the overhead bin? I hope they have some sacks of sand handy so I can simulate lifting the bag in real life. We might as well stay in Copenhagen as a new nightclub is opening, Night Flight, which will bring guests to a new destination every Saturday night. Staff will wear flight attendant uniforms and serve drinks from trolleys. Great incorporation of an aviation experience into a night club. This is ideal because the club is able to change the theme regularly, the danger of incorporating experiences into a service is the inability to change it before it becomes dull and "old news".

So, if you're in Copenhagen one weekend why not stop by Neyes and try out and buy a new suitcase at Neyes before stopping by Night Flight. If you really want to create a true aviation experience you can sit next to a screaming kid for a few hours to make it more realistic. Enjoy.

3M - mega merger mania

2008-02-16T08:27:00.000-08:00

The radio waves in the US and the rest of the world are buzzing with talk of merger mania. It's turning into a soap opera. Who is talking to who? Who's courting who? If those two airlines over there merge, who gets to keep their brand? Where will a merged carrier's base be located? These are all the same questions people ask when a couple are getting married. I guess it's no wonder that mergers are referred to as marriages.

The latest word on the street is:

United and Continental are eying each other from across the room
Northwest and Delta have been having intimate discussions behind closed doors
Continental may even be having thoughts about American

The buzz in the back allies is:

Somebody should play matchmaker with Frontier and JetBlue
Southwest may even be on the lookout for a partner

Merger talks come and go; it seems as if every time the industry is coming off a peak the chatter about who is talking to who picks up. The last merger the US industry has seen was American West merging with US Airways, with the former brand being relegated to the history books. The problem with mergers is that they seem great in theory, but concluding them successfully is another story. As soon as the honeymoon filled with analysts, consultants, and bankers is over and the daily routine sets in employees become distraught. It's as if their expectations are never fulfilled. One thing must always be remembered about mergers that make it different from a marriage (...at least most): mergers always have a winner and a loser. With a merger it is impossible to keep everybody happy, and since this is a service industry that relies heavily on human input a merger usually results in unhappy employees and unhappy customers. Many executives forget that the road to happy customers is paved with happy employees. Mergers require enormous amounts of effort and skill. How is the fleet to be integrated? Dissimilar fleets is a greater problem than most analysts will admit. If an Airbus fleet is introduced into a Boeing fleet where are the cost savings going to come from? You still require some Airbus mechanics and some Boeing mechanics, so you can't just fire one employee group. There should be limited network overlap. Northwest brings a strong Asian presence to Delta's network, and vice versa. However, what happens at the regional level? There are a lot of regional carriers that supply those two carriers and there is level of overlap down in the trenches where most executives and analysts forget to look. Process integration in itself is an enormous undertaking. Airlines are highly complex service companies that have created their own in-house processes throughout their history. This isn't just a puzzle where a consultant can optimize one process because any changes can be felt throughout the entire airline. This is an integrated system. This is Chinese pressure points: massage the big toe and you may cause a headache. Finally, what about the employee groups? Unions play an important role in this industry and they are not always content with mergers. Remember, there is always a loser in this partnership. The most visible ones are the front line staff: flight, cabin, and ground crew. This is the face of the airline; the humanization of the firm; the people who take the (few) daily compliments and (tons of) abuse from customers. If these people aren't happy then the customers aren't happy, and what makes these people unhappy? If anyone, anyone at all, even thinks about touching their seniority number. You can take a pilot's wife, house, and child, but you better not take that seniority number. US Airways and America West pilots have not found a solution yet, Sterling and Maersk pilots have not found a satisfying integration yet, what will the pilots at Continental and United do? Even an acquisition has an implication of some justified solution; America West acquired US Airways, therefore America West employee groups should be placed ahead of US Airways employee groups. Theoretically, this may appear fair, but explain that to a 20 year US Airways veteran who is placed junior to a 2 year America West rookie. In theory fair, in practice unjust. There's always a loser. So, when you read about all the benefits of mergers, especially to the consumer, remember to cast a thought to the employees and don't be surprised if you fly with a sour Northwest crew in the future...they may just be the losers in the marriage.

Looks like the "no-frills" low-cost carriers are setting the service standard

2008-01-30T00:34:00.000-08:00

"Low cost carriers treat you like cattle!"
"They have no service!"

Somebody ought to inform JetBlue and Continental about how an LCC is supposed to act. JetBlue has already been quoted as offering a service level that is superior to some full-service carriers, but it seems that Continental is going to copy the competitor in their own backyard. Continental has announced that it will install live television and wireless Internet access on domestic flights beginning in January 2009 (click here). JetBlue must be smirking since Continental has entered into the agreement with LiveTV, which JetBlue purchased in 2002 (see here). I guess the LCC realized that installing live tv on its planes was going to eventually become standard and they might as well make some money on the side from the technology; if you can't patent it you might as well own it. Of course, Continental is already distinguishing itself from JetBlue. It has decided to charge economy passengers $6 for the privilege while JetBlue's service is complimentary.

On a side note, after perusing JetBlue's website the airline has now begun offering fully-refundable fares. These fares allow for free unlimited changes and full-refunds for the fare. In addition, if the passenger is a no-show then the fare is transfered into credit for a future purchase. Looks like JetBlue just added increased flexibility to their fare structure and made the carrier more appealing to the business community. A quick check of the fares shows a low fare ticket from OAK to JFK for $234 while a full-refundable fare for the same flight was listed as $549. Flexibility has its price.

New year and new airlines...almost

2008-01-11T11:47:00.000-08:00

Ring in the new year! It's 2008...8 years after the predicted Y2K meltdown. Not much happened there, but this year has already seen its fair share of action in the airline industry. On Christmas Eve MaxJet filed Chapter 11 bankruptcy. This trans-Atlantic, premium class carrier may have had high load factors (in the 80s), but it should always be stressed that high load factors do not necessarily mean success (sell your seats at way below cost and you'll get high load factors, and lots of bleeding red figures). This carrier was flying from Stansted to New York, Los Angeles, and Las Vegas. Therefore, Project Lauren by British Airways will be an interesting venture. This is the first firm announcement by an EU carrier that will capitalize on the Open Sky agreement between the US and EU. The carrier will operate to New York from either Paris or Brussels later this year with 757s with a 3-class configuration. The caveat is that there will only be a capacity of 82, which makes for a very personal experience. BA's 757s are usually operated with 180 seats, so

This will be an interesting adventure. MaxJet was unsuccessful in one of the most densely saturated markets, granted with a new brand and to a secondary gateway, however Project Lauren will operate with an established brand to entirely new market and with limited connecting possibilities. Open Skies has enabled carriers to operate from any EU location and BA is capitalizing on this opportunity, we'll have to watch and see if they are able to create a truly connected intra-EU market.

The Germans are coming!

2007-12-19T03:07:00.000-08:00

It appears as if Lufthansa has winds in its sails, or more appropriately, a nice tailwind. The German flag carrier has announced that its partnership with NetJets will cease in mid-2008. The agreement between the carrier and the fractional ownership firm was signed in 2005 and proved that there is a market among LH's high yielding passengers for the added flexibility of executive charter. However, the agreement did not take shape according to plan. Rather than feed passengers into Frankfurt, Munich, and Zurich from outlying locations, 70% of passengers were using the agreement for intra-EU flights. This must have been eating into NetJet's own business and LH acknowledged that demand exceeded supply at times. Now the German carrier will establish its own fleet for executive charter. This is an interesting development as it deviates from the carrier's core competence and product. As a group Lufthansa has been active in nearly all forms of air travel, from scheduled services, cargo, regional flying, and now to executive charter. It is an interesting digression from Virgin's concept as a middle-man for charter services, but no fleet ownership. It will be interesting to note how this adventure will compete with the likes of the VLJ charter concept. Smaller, upstart firms may be able to provide customers with more intimate service, while Lufthansa can promote its extensive global network and entwine the offerings from various companies.

Lufthansa's accounts are booming and the carrier has also just announced an acquisition of 19% of LCC JetBlue. This is the largest investment in the US by a foreign carrier of an LCC. It should be regarded as a testament to JetBlue who straddle both the LCC and FSC borders. Although the company has been struggling operationally and financially, it does have the air of an LCC among the market, but it is attractive enough for Lufthansa to invest in the airline. It remains to be seen whether this purely a financial investment, similar to Iceland Air's acquisitions of easyJet and American Airlines shares, or it is more strategic in nature. Lufthansa already has a close relationship with United Airlines, that competes with JetBlue both with its own brand and with Ted. JetBlue, on the other hand, will soon announce a tie-up with Irish Aer Lingus. One must complement JetBlue on its innovative strategies in the industry

Future of Air Transport Conference

2007-12-05T01:32:00.001-08:00

I have been fortunate enough to attend iea’s Future of Air Transport in London this week (click here). As with the majority of other industry conferences there is limited new information to gain, but one can get deeper, more subjective insight into issues from those that may be directly involved

Here are some highlights that were gathered:

Rigas Doganis stressed among other things that legacy carriers must look at price simplification (e.g. SAS, Air Canada, Aer Lingus) to reduce complexity and challenge LCCs
Dermot Manion, Aer Lingus, spoke about their up and coming web-link with JetBlue, which will allow a passenger to purchase LAX-DUB in a single transaction, though it was not clarified whether there would be an interline agreement and what solutions will be offered in the event of irregularity.
The managing director of Zoom UK spoke how 15% of long-haul low-cost passengers are already connecting of their own accord, which is interesting to point out that passengers will work around obstacles if necessary. At a low enough fare passengers are willing to gather their bags and check-in again; the transfer time may be 2-3 hours but passengers do not mind if the fares are low enough. The MD also discussed how the airline found a solution to the problem of having capacity in the Canadian winter but no destinations, since southern routes were already full. The airline opted to start a UK operation and shift capacity to the UK during the winter and operate to leisure destinations from Europe. Flexible and innovative solution to a seasonal problem.
The discussion regarding the 2^nd stage of Open Skies was very lively and interesting. It was concluded that the EU may place their demands too high by expecting cabotage, while US carriers have already obtained what they wanted: LHR access. The final winner in the end is the consumer though.
Simon Lilley of flybe gave a fascinating presentation regarding the carrier’s transformation from a struggling regional into a hybrid low-cost regional. One ear-perking comment is the interest by the carrier to expand their business model to other regions on continental Europe, such as France, Italy, or the Nordic countries.
Continental Airlines has a Senior Vice President of Customer Experience, which is a fascinating title within an airline. This signals the emphasis the airline has on the product delivered to its customers.
Air Berlin’s global expansion and its segmentation will be in premium and leisure. Air Berlin will focus on premium traffic to the US and Asia, while LTU will provide operations for the leisure segments to the Southeast US and South African destinations.
The presentation by Car Trawler drove home the understanding that Ryanair is a low-fare airline but a premium marketplace. The airline has some of the lowest air fares but some of the highest car rental fees; a balance of the two is a successful formula.

There were many more presentations from companies such as Emirates, Ryanair, Car and Trawler. And to the end the day I noticed that at CPH they have placed a lighted Christmas tree offset from the runway; great little touch from the airport.

Price differentiated carbon offsets

2007-11-14T05:02:00.000-08:00

Airlines are beginning to catch onto the wave of selling carbon offsets to passengers. However, Virgin Atlantic has calculated it down to the exact kilogram...and even categorized it according to cabin class. Not only can passengers purchase carbon offsets while in-flight, but premium class passengers will pay more. Why? Well, their IFE units are heavier and their seats are heavier so these passengers are contributing more to the aircraft's fuel burn than economy passengers. This is bringing the unbundling concept to the carbon offset table.

Southwest's model is changing

2007-11-13T04:16:00.000-08:00

Southwest's model is adapting to meet the demands of the higher-yield business traffic that airline's covet. It has created a new fare category, Business Select, which will offer amenities that business travelers enjoy. A ticket in the new fare class will allow travelers to board first, more frequent flier points will be accrued, same day itinerary changes are possible, flights can be canceled, and one free alcoholic drink will be offered. Ticket flexibility combined with frequencies are features that business travelers benefit from. It appears as if Southwest's business model is getting a little upgrade as it focuses its attention on premium passengers.
Below is a small presentation which shows the relationship between market size and business model complexity. If airlines want to operate with the masses then the model must be simple, however competitive forces push an airline to adapt its model. As the airline moves up the scale it can operate in new markets, yet it adds complexity to accommodate the needs of this new market. As you can see this may result in an death-till-the-end spiral. This is the concept found in Clayton Christensen's work, however adapted to the business model framework rather than the production framework.

| View | Upload your own

Review of Virgin America

2007-11-13T04:09:00.000-08:00

Although I am a native to California's bay area I have yet to try Virgin America. I'll have to add that to my Christmas list. However, here is a review of a business traveler on the newly launched airline. Click here. It shows that the airline has a thought long and hard regarding the travel experience and it's integration, however it's execution is lagging. However, the airline is still granted some slack since it is still a newbie in the skies. It won't be long that the inauguration is over and the airline MUST create a seamless and trouble-free travel experience.

Survey results are published by Association of European Airlines

2007-11-02T01:01:00.000-07:00

The AEA has published a summary of the survey results from the global questionnaire regarding innovation and imitation in the industry in their quarterly publication, AEA Source. Click here. The association was extremely helpful with their assistance regarding the survey and I am indebted to the organization. They helped with contacting their members which ensured that I obtained the necessary results. A link to the publication is here. I recommend to browse past issues as there are interesting topics that are researched.

IT+Communication=Brand strengthening

2007-11-02T00:36:00.000-07:00

Company blogs are not the newest thing to hit the Internet anymore. Although, I am always pleased when I see them. It gives me the opportunity to learn more about the people in the company. And this is important, especially in the airline industry, as employees are the ONLY thing that competitors can never imitate. Employees and how they handle their customers are an airline's differentiators. Of course, this requires the necessary infrastructure, procedures, delegation, etc. A blog allows customers and other stakeholders to become more familiar with employees, learn about their functions, associate themselves with those that assist them during their travels. So, I just came across Delta Air Lines' blog, here. However, one thing that I have not seen yet, is an airline go the next step. Delta has created some animated shorts that are for pure pleasure and poke fun at the flying experience, here. These videos will help create a stronger brand awareness among passengers and make them laugh at the small annoyances that we experience during our journey; we've all had to do the lavatory dance or fight for the armrest. So, the cheap but powerful technology of YouTube is not only useful to get an immediate and powerful message across (JetBlue's CEO apologizing for their operational meltdown) but also as a marketing tool.

Edit: I just came across this video from JetBlue (here); it made me laugh

Jewelry and pajamas from 14A

2007-11-01T04:07:00.000-07:00

If air transport is becoming a commodity product then airlines must focus increasing attention on their brand creation and value proposition. Differentiation is challenging to obtain as there are relatively few to no patents possible in the industry. My previous research has shown that regardless how innovative airlines may be their nearest competitors are not shy to imitate their best ideas. One of the relative few safe havens and differentiators is the network, however as open skies and deregulation crumble bilateral hurdles these barriers will disappear. Therefore, subjects such as CRM, unique experiences, self service are all factors that can aid airlines in creating value and differentiation. That is why I always enjoy reading about airlines that attempt to create a unique and inimitable travel experience for their customers. Sterling in Scandinavia recently held a fashion show on board one of their flights which was co-branded with Pilgrim, a fashion accessory brand. Virgin America just announced the opportunity to fly SFO-JFK with two Victoria Secret models on board and a pajama party. Events such as these allow the airlines to capitalize on co-branding and give a boost to their brand. I predict that we will see much more of this, however it will be dominated by LCCs. Their customer base may be more receptive to such initiatives and the airlines can experiment more with offerings. However, network carriers will learn to offer their valued business customers similar experiences. Such as testing the latest cell phone or PDA.

Feed and primary airports

2007-10-05T08:29:00.000-07:00

So many students, journalists, and industry observers continue to regurgitate the mantras that LCCs only fly to secondary airports and FSCs use regional carriers to do the majority of their flying. So, I made these graphs for all to see. The first one shows us the growth trend of United Airline's use of regional partners in their network. Unfortunately, the database only offers this level of detail back to 2003, so it is not possible to get a longer look. However, the trend is upward. However, you can see that it's growth rate slowed considerably from 2005 and beyond. In 2007 it was approximately 10%, which is not a lot for the network as a whole, but relative to other FSCs it is double the average.

| View | Upload your own

These next two slides show the average ASK flown to primary airports and by regional partners divided by the three strategic groups: FSC, LCC, and Regional. Not surprisingly the FSCs fly nearly exclusively to primary airpots, which is complemented by regional partners. LCCs, on the other hand, fly 86% of their ASKs to primary airports, which squashes the concept that only secondary airports are their destinations. Say that to JFK, SFO, CPH, or DEN. The other slide shows how much of a group's ASK is flown by regional partners. The FSCs get, on average, 5% of their ASK covered by a regional partner, while LCCs puddle around at 1%. However, that one 1% is greater than most would ever mention. A regional-feed seed has been planted among LCCs and only time will tell if it sprouts. We read about Frontier's Lynx operation (a wholly-owned rather than CPA agreement) or JetBlue's E190s. These are examples that LCCs realize that thinner, monopoly markets are of interest and that regional partners may be a tool of the future.

I can't make this stuff up

2007-10-02T11:10:00.000-07:00

Let me set the scene: A boardroom full of stiff, black suited lawyers. They are arguing the intimate details regarding Hawaiian Airlines' accusation about Mesa's Hawaiian adventure, go!, and corporate espionage. A key player, Mesa's CFO, accidentally highlighted the wrong files on his hard drive while he was deleting his private PORN collection and wiped out files related to the case. I don't know which is worse: the fact that he had porn or that he maybe kept intimate competitor data in the same folder. Sometimes this industry manages to create a chuckle or two.

See, Hawaiian Airlines was going through bankruptcy court and Mesa Air Group was a potential investor in a restructured airline. However, Mesa opted out of a deal and established its own inter-island carrier, go!. Hawaiian Airlines was a little disturbed by this because Mesa Air Group had been given private data, and then created a carrier to compete with Hawaiian. Not everybody plays fair in this world. I can't wait to see if more surprises pop up during this Agatha Christ case.

Check-in here, there, everywhere

2007-10-02T09:11:00.000-07:00

The other day I was asked to comment on a charter airline's new check-in service. The company is offering its customers the option of checking-in, luggage and all, at the hotel. This certainly eases a passengers' travel experience and is a benefit of IATA's stated goal of all airlines being ticket-less in the near future. This charter airline isn't the first to offer such a service, however they are probably one of the few that offer it today. However, I just read that Copenhagen Airport will cooperate with the city's transport providers and offer CUSS check-in machines at various strategic locations. This is cooperation at its best and offers customers real value. The airport plays the role of a supporting infrastructure to airlines and clearly what makes airline passengers happy makes airline's happy, and airlines are an airport's customers. The airport has the role as a supporting actor. If the check-in area or baggage system does not function optimally then airline customers are hassled. The problem is that the airline gets the blame, not the airport. So, the airport has to strive to offer a seamless solution, but does not get any of the rewards from the end-user, that goes to the airline usually. The airport has just christened its new metro service on the 28th of September and it offers users a painless and quick journey into and from the city (although they should have put an escalator from the passenger overpass to the terminal floor, instead of the world's two slowest elevators (public elevators in Denmark seem to be slow everywhere)). Now the airport is going to put CUSSs in metro stations, train stations, and parking lots. Passengers can check-in and print a luggage tags from a number of locations beyond the airport boundaries. Once in the terminal they can drop off their luggage with the airline or go straight to the security line. This frees up the check-in for those that can't use the automated machines or need special assistance (plus CPH is architecturally beautiful but not very practical; who designed the sole passenger exit door to spew travelers directly into where people have to check-in and wait in line?). A win-win situation. Less waiting for those that are self-supporting and for those that aren't. It's great to see an airport that understands how to cooperate with other transport modes and infrastructure elements, rather than operate with a closed-minded view focusing on ramp ops.

I want your money...but not your cash

2007-10-02T05:58:00.000-07:00

JetBlue has just announced that the airline has gone cashless. The airline isn't the first to make such a move, but it shows the drive for simplicity at the airline. Credit and debit card penetration in North America must be near 100%, especially among airline passengers. It makes sense for JetBlue to make such a payment adjustment. One argument against going cashless is that passengers with a few extra bucks in their pocket may be more willing to buy something to eat than if they have to take the plastic out. However, I would think that consumers are becoming more accustomed to making small purchases with their credit cards than in the past. No longer are they only used to buy the tv or car, but also a pack of gum. The cabin crew has to spend less time with each customer; they don't have to wait for the guy in 28B to origami-fold himself in order to fish out some spare change. Now they can provide more service throughout the cabin. Plus, I have read arguments that cash is a pig-pen of disease and going cash-less may lower sick days. I think there are other sources of disease in an airplane that are important, but it's a noteworthy comment. Cash that disappears in pockets of cabin crew is also minimized. More importantly though, such purchasing may allow the airline to better customize their services and products. Imagine if JetBlue knew that every Tuesday from Oakland to New York they always sold out of Merlot to people from the Midwest. That sure would help operations plan their trolleys in the future. Back home at headquarters the airline doesn't have to administer all those coins and bills. That costs money and time. SAS recently admitted that accepting all sorts of currency and coins resulted in tons of money that would be cost prohibitive to count. A credit-card only cabin would solve that problem (of course, others crop up, but they must be addressed as they appear).

On a side not, the JetBlue representative at the Low Cost Airline Congress in London promoted their partnership with Dunkin' Donuts. This is something that North American airlines are more prone to do than others I have seen (sorry, I know US and European airlines best). This has been common in the past with higher-priced items, such as wine, but not commodities. Of course, the margins on a generic cup of coffee may be higher than a branded one, but maybe it is the small things that customers notice and help generate word of mouth advertising. Those who love to gossip about the details about their trips always mention the details. "Gloria, they even had Dunkin Donuts. You know how much Herb and I love Dunkin Donuts. And the hotel folded our towel in the shape of hummingbird!" You don't hear them talk about how their ticket was cheap because the airline does not sell through GDSs, does not offer interlining, or has a single fleet. You see airlines out there that promote their branded coffee, cookies, sandwiches, and much more.

Southwest goes to Sweden!!!

2007-10-02T01:33:00.000-07:00

Southwest goes to Sweden! Well, only as a participant at the annual Routes conference, a networking fair for airlines and airports from across the world. So, the airline is not going to be flying Hobby-Arlanda...not anytime soon though. The LCC did though make some eyebrow raising comments though:

Southwest international service with its own aircraft is "in the pipeline of things we're interested in...that's way out in the future for us [though]," said by Bob Jordan, Southwest's executive vice president for strategy, procurement and technology.

As a matter of fact, Southwest will offer international service in 2009...but with codeshare flights on partner ATA...and only to nearby destinations, such as Caribbean, Mexico, and Canada.

Long-haul low-cost is with us today, both on traditional network carriers and with dedicated carriers. As one LCC executive commented on low-cost long-haul, “Our biggest competitor is the back-end of a 747.” Traditional carriers are able to offer low-cost fares in their lowest classes. However, these may not be economically viable and are not always on offer. Oasis in Hong Kong and Air Asia X offer dedicated low-cost long-haul. It only makes sense for Southwest to cautiously enter this market via their partner ATA. The airline has codeshared in the past with the carrier from Iceland, but this was short-lived. The models are morphing and this is a natural transition.

Route established on a co-op basis

2007-09-24T00:54:00.000-07:00

What do you do if your local airline does not offer the non-stop route that you desire? You get support from local businesses and start a co-op to offer the route. This is exactly what a property management firm did in Denmark to start a route from Billund, Denmark to Lviv, Ukraine. The local business market near Billund desired a direct route to an area where many do business but there was a lack on direct connections. UPG, a Danish property management firm, established UPG Airservice, a co-op with local businesses, to provide service to Ukraine using two aircraft from Sun-Air, a Danish regional based in Billund. Any profit from the route will be divided among the co-op owners according to the share of tickets bought.
This is a very innovative way for local businesses to establish the desired routes and for an airline to secure a revenue source for their assets. Depending on the details of the contract there may be limited risk for Sun-Air as the airline may provide capacity on a fee-for-departure contract, similar to US regionals. The 32-seat Dornier jets that Sun-Air use may be the right capacity, although something smaller may allow more of such arrangements.

Better late than never

2007-09-19T10:40:00.000-07:00

As I am nearing the inevitable completion of my PhD I have been deeply buried in data and analyses which is my excuse for my distraction from posting here. I have though found the time to travel to London to attend the World Low Cost Airline Congress. This is the second time I have attended the event which always attracts a number of CEOs and airlines, so it makes for an interesting time to hear the developments that are taking place. The most interesting presentations I heard were from the Air Asia X CEO who handled the role in stride. It is certainly an exciting time to hear about long-haul low cost, and it will be interesting to watch the development of the industry. It reminds of those "old timers" who when asked about their initial reactions to LCCs said, "We never thought it would work. Passengers expected a certain level of service. We expected them to last a year or less." Well, those exact same sentiments are being repeated again in 2007. So, we'll see if there will be a repeat. JetBird, an up and coming low cost on demand charter company is very, very interesting. Rather than going the seat-for-sale option this carrier will be charting their Embraer Phenom on an per aircraft basis. They aim to cut the costs associated with traditional business jet charter and offer it to the "masses." Of course, the price won't be near Ryanair, but it will be near a business class seat. We were told that many corporations have approached JetBird about shuttle services, which reminds of Intel and PG&E in the Bay Area that had similar contracts. Looks promising.

In addition, we heard from Ryanair's representative who repeated the findings about my post regarding industry cycles and aircraft acquisitions. Airlines must learn not to purchase aircraft when everybody else is doing the same; the price is increased beyond what is acceptable.

The other development I wanted to address was JetBlue's announcement that it was going to increase focus on ancillary revenue. This was a hot topic at the conference and a number of LCCs are talking about adding 10-20% of ancillary revenue to their operations. The focus alone on this subject produces interesting developments as it opens up a world of opportunities. Cross branding, innovative concepts and ideas all help to push the industry in a direction it hasn't been before.

LCCs only utilize "secondary" airports

2007-08-20T04:57:00.000-07:00

Most industry commentators continue to emphasize that one reason low-cost carriers are so successful is that they only use secondary airports. They are accurate to some extent when they state that service to Oakland rather than San Francisco allows lower landing fees, less congestion, and sometimes, as an added bonus, quicker access to the city center. Dallas Love is closer than DFW, and so is London City than Heathrow. However, if all LCCs only utilize secondary airports, such as Oakland, Love, or London City, then what are LCCs doing at SFO or DFW? Why are they operating at this congested, over-priced primary airports? Did they have a malfunction and require assistance? Was it an unscheduled stop? No, the truth is that many LCCs operate to primary airports because sometimes the disadvantages outweigh what the customer wants...access to a destination. I have done an analysis of all the seats that LCCs flew in 2005 to all their scheduled airports, and it is far from the truth that only secondary airports are used.
A definition, and a word of caution, is in order. A secondary airport is usually an under-utilized, reliever airport that complements a city and its main, primary airport. Sometimes this airport is far away from a city center (Malmø compared to Copenhagen) and sometimes it is close (London City compared to Heathrow). There is no formal definition of a secondary/primary airport. A secondary airport is usually within a specific radius of a city center, say 50 miles or so, and is not the primary airport for that area. Here in lies the challenge: when doing an analysis what is a secondary and primary airport? What about an airport like Billund in Denmark? It is nearly 300 km from Copenhagen or Hamburg. It is not exactly in a tourist mecca. Is this airport a primary or secondary airport? I have classified it as a primary airport since BLL does not provide secondary, relief service for another airport nearby. So, Ryanair's service to BLL is noted as service to a primary airport. This was done for all the destinations that Ryanair served in 2005. The sum of the annual ASK to secondary and primary airports was divided by the total annual ASK to get a percentage, which is what the graph is showing.

Maybe not surprisingly is that Ryanair, easyJet, and Southwest top the list with the highest percentage operated to secondary airports. The caveat is that it is not 100%. Southwest is only operating 35% of their annual ASKs to secondary airports. All that service to Saint Luis, Pheonix, Salt Lake City, San Diego, LAX, and Las Vegas is service to primary airports. Now, please let me know if I have listed an airport wrongly. My geographic knowledge of the entire globe is limited. No airports served by Virgin Blue or WestJet were listed as secondary. Maybe this is error on my part and I apologize. Please let me know and I will adjust the figures. I had to use an online map service and compare airline operations to airports nearby. If it seemed reasonable that some passengers would substitute airports I listed it as secondary. As with anything it is very subjective. Of course, some LCCs helped me out by marketing a destination as serving a not-too-distant city.

Let's use real data

2007-08-06T12:05:00.000-07:00

I decided that it would be more appropriate to use real data to show how the industry's orders, deliveries, and operating margin work together. Below is data from Boeing show that manufacturer's total orders and deliveries worldwide with financial data to the corresponding year. It is possible to discern a that in some periods orders to peak during a downturn in the industry.

New planes and causality

2007-07-30T12:46:00.000-07:00

Unfortunately, I have not been able to post as much I would like to. Currently, I am attempting to become smarter by attending the Essex Summer School in the UK, and learning more about causality. Very interesting method that I intend to apply, qualitative comparative analysis (QCA), which has not been looked at before in the airline industry. Briefly, it analyzes particular paths an airline can choose to achieve profitability. For example, the literature on LCCs suggests that success depends on a number of simplistic elements (single fleet, no GDS, no FFP, no amenities, one-way pricing, no network integration, etc.), however observers point at the outlying LCCs which follow a slightly different path and yet are successful (diversified fleet, GDS presence, FFP, network integration, primary airports, etc.), and authors usually say something to tune of, "yeah, well, they're different" or "they operate in a different environment." What research lacks is a study that analyzes which unique combinations do actually lead to success, maybe a successful LCC that does have network integration requires a GDS presence, or if you have a diversified fleet then an FFP should be an option. This is what QCA can be used for. So, as the results come pouring in then I will be sure to post them.

In other news...IATA has released its recent figures, which shows that load factors, worldwide, were 75.7%, which is a slight improvement compared to the previous year, yet the planned growth may shift this load factor figure. The worldwide fleet will accept 1800 new aircraft over the next 18 months, which is 10% of the world's fleet! Of course, many of these are replacement aircraft, however growth in the Asian region will require additional aircraft units, while in the EU and US, the growth plans are lower, however still positive. The dilemma with the industry is that airlines often place orders for new/replacement aircraft when times are good; the accountants and forecasters see that growth is planned for the future and need additional capacity. However, it takes time to rivet an aircraft (or mold, in the case of the 787) and deliveries are often years ahead of actual orders, and in the meantime the industry has taken a nose dive and delivered aircraft arrive at an inappropriate time. This capacity increase just adds fuel to the fire and planners must accommodate these additional seats the best they can. So, it will be interesting to see how this reoccurring theme will be played out this time. This is shown in the slide below.

Take my money...please

2007-07-12T00:43:00.000-07:00

If a firm has a great, great product but payment options are a hindrance then customers won't put up with the hassle of buying. Cash is a great liquid payment option, but it sure doesn't work online, and that is how the majority of travelers purchase airline tickets today, either through an airline's own website, a consolidator (i.e. Orbitz), or a travel agent. Cash payments tend to also raise a red flag in today's security-hyped times. That is where airlines have to find some other distribution and payment options. We have seen some creative solutions by airlines that adapt to the local culture. Air Asia and other Asian LCCs allow customers to buy tickets at 7-11s, ATMs, and video stores. Why? Because these are institutions that locals use a great deal and trust, and their tickets are priced such that customers of these institutions are the ones that airlines want to get a hold of. In Europe we have heard of Air Berlin and SAS discuss distributing their tickets via supermarkets. Research indicates that the woman in the house holds a great deal of sway in deciding where the family will go on vacation, and the woman tends to be the lead shopper for food; so placement of travel products in their location is ideal. Make it available and some may come.

It looks like Southwest has introduced a new payment option for its patrons, Paypal. Click here. Paypal is in essence an electronic bank account that can be used to make purchases online and does not require customers to enter sensitive information on a slew of websites. Rather, customers can link their bank account to their Paypal account, which instills trust in online purchasing. Northwest Airlines recently made the same option available to their customers. This a great way for these airlines to expand their reach by making payment for their services simple and inviting. As with all innovators, this is something new that maybe only tech-freaks will utilize in the beginning, but as online retailing expands more and more these airlines will be well positioned to benefit.

Paypal was purchased by online auction house, Ebay, in 2002 and offers travel solutions on its site. I was unable to determine if genuine travel auctions are offered by Ebay, but this may be a natural transition for airlines like Southwest and Northwest. However, this distribution method has contributed to the commodization of the airline industry and I would imagine that airlines would be hesitant to going down that path after their experiences with Priceline. That may be a future topic for this blog. However, if these airlines strike a deal by distributing their seats via Ebay, bypassing the auction function, may be an interesting distribution method. Definitely something to keep an eye on.

"The coldest winter I ever spent was a summer in San Francisco"

2007-06-27T10:16:00.000-07:00

My time at UC Berkeley has been great. The ATRS and WCTRS conferences were back-to-back and one couldn't ask for a better setting at the campus of UC Berkeley. Even the summer fog stayed away, and allowed the Bay Area to shine.
The conferences were all well-planned and the quality of papers/presentations was very high. Some noted research that I managed to retain among all the presentations was:
1. How pricing strategies in various strategic groups has little affect on other groups. So, LCC pricing strategies do not force FSCs to change their pricing strategies significantly. The interesting question is though, what happens when the groups begin to merge, which is the research/trend that I am seeing.
2. Strategic variation/response between airlines in the same strategic group and market is limited, which points to collusion, however when an opposing group's airline is present in a market it forces the other group member to respond drastically.
In addition, I made it to some operational presentations. Very interesting study on the transfer of training in upset recovery and a CRM study.
I will certainly try to post more about the presentations when I find the time.

Head in the clouds

2007-06-14T17:45:00.000-07:00

I have my head in the clouds as I am visiting family, teaching flying, and attending an air transport and tourism conference at UC Berkeley in California. I will certainly post some interesting findings from the conference and comment on the some industry movements that are fascinating.

Eco-labels to air travel

2007-06-04T04:33:00.000-07:00

Flybe has announced that it is going to make its environmental footprint transparent to its customers by listing its emissions and noise footprint to customers on its website. Click here to see the press release. This way customers are able to see which routes are the least harmful to the environment. Customers are then offered the change to purchase carbon offsetting points. Maybe an industry labelling scheme is on its way?

Open Sky has done just that

2007-06-04T04:28:00.000-07:00

It looks like the Open Sky agreement between the US and EU has done just that, opened the skies. Sir Richard Branson has just announced that Virgin Atlantic plans to operate a pure business class airline from European centers across the Atlantic, click here. Opposed to Eos, Maxjet, and SilverJet this venture will have the backing of the Virgin group and they can certainly capitalize on that. The challenge is not to dilute the Virgin Atlantic offering out of the UK. The service level is already quite high near the nose of the aircraft, although I am excited to see what innovative ideas they conjure up for this venture.

What are airlines saying around the world?

2007-05-30T05:09:00.000-07:00

A portion of my PhD studies is to question how airlines change their business models and why they are changing. A survey was sent out to every scheduled passenger airline in the world earning more than $5 in revenue. I got a response rate of 21%. The results were very interesting and show that airlines do indeed innovate their business models, but they are also heavily reliant upon imitation of their competitors, especially those in other groups. Below is a PowerPoint presentation of the results. Take a look at it if you want to learn how airlines create value for their customers, what activities they are changing and why, and who executives turn to for inspiration.

Fly for what?

2007-05-30T04:12:00.000-07:00

Well, seems like spring is in the air since new airlines are popping up left and right. I don't know if they are rose buds or weeds, only time will tell. Here is another one, Fly for Beans. I wouldn't recommend investing in this venture either. I remember reading that JetBlue was struggling to come up with an appropriate name for their airline. The founder was favoring calling the airline IT, and had many creative ideas on how to capitalize on the name (one was luggage tags called schlep IT). Apparently someone stressed that such a name doesn't instill confidence among passengers. I would nominate this as another one of those company names. Do I even have to mention it, Fly for Beans is basing its business model on the low-cost theme.

A palette of colors

2007-05-30T04:03:00.000-07:00

Apparently someone has conjured up a new airline, FlyPink, which is aimed at the female traveler who demands luxury, click here. This is unbelievable and I doubt the business plan is routed in reality. Short, weekend-based travel trips for girls being flown in pink planes, getting served pink champagne, and pampered in the departure lounge is the target market. I am doubtful that much research has been done into this scheme. Reminds of me BackPackerExpress, the attempt at low-cost, long-haul aimed at young backpackers. Needless to say, that airline never took to the skies either. If airlines that offer champagne in first class with global networks are struggling to earn a profit, while marketing themselves to both men and women, I doubt this airline can break the code to do so. I did stress that airlines need to find a niche to capitalize on to flatten out the descent into commoditization, but this is not what was meant.

Chicken, meat, or cookie?

2007-05-30T00:30:00.000-07:00

Midwest Airlines has repeatedly avoided a takeover by AirTran. With the power of the Internet now a petition has surfaced to show support for the airline and an attempt to "save the cookie." Midwest is popular among travellers for offering freshly warmed chocolate chip cookies and they don't want to loose this perk. Check out www.savethecookie.com. Of course, the airline does also offer leather seating and descent service, but the fact such a small item, a cookie, has been the cause of so much frustration in this airline merger is interesting. Airlines have not done enough to capitalize on their unique attributes to build loyalty. Differentiation in the industry is tough to notice and is supporting the transition to a commodity service. Airline management needs to add some power to get their airline out of this graveyard spiral.

Innovative communication

2007-05-25T07:18:00.000-07:00

Here is an excellent example of an innovative communication strategy by JetBlue. It is a little dated but this example was raised in another blog and I wanted to share it with you. David Neeleman, the CEO and founder of JetBlue, is seen here issuing an apology and follow-up on the events that took place this spring.

The airline was forced to cancel a number of flights and the irregular events put a dark cloud over the once sparkling airline. The utilization of YouTube to communicate with customers and partners of JetBlue is a great communication tool. It's more or less free, it's instananeous, it reaches a huge audience, and shows how the airline embraces technology. We see this too with Southwest's own blog, Nuts about Southwest, but this is part of the next web-wave. I would love to see more companies, not just airlines, incorporate YouTube and other technologies in their communication strategies.

On a side note, airlines are paid by customers to provide a service. 99% of the time that service is delivered with no or minimal disruptions; the customer gets what is paid for and doesn't think much about it. I'd call this an average service offering. If the airline offers outstanding service and the customer has fond memories of the trip, this is an above-average service offering. I would venture to say that the majority of airline customers experience an average service offering. Now, when an airline has an irregular day, caused by weather, strikes, mechanicals, or some other event, this is when an airline can really shine and show their excellent service offering. Unfortunately, the majority of airlines do not plan for this contingencies. To see it another way, airlines are like your phone service. When it works we don't give it a second thought, but when something is wrong we expect immediate fixes and we judge our service provider by how things are handled during irregular operations. Airlines are the same way. Pilots go to recurrent training not to train for regular operations but irregular operations. Airline management should also prioritize and have a plan in place for irregular operations. This may go a long way to providing an abover-average customer experience.

A new way to fly...maybe

2007-05-24T04:00:00.000-07:00

Eclipse Aviation has recently beefed up its order books with yet another air taxi order, this time from ETIRC Aviation which ordered 120 of the jets with options on another 60. Eclipse now has 2,700 orders and options for their innovative product, and approximately 1,700 are from air taxi firms. 1,400 of those 1,700 are from DayJet alone! Those are impressive numbers and shows that there certainly is interest in supporting such air taxi services. There is only one problem, the economics of success are deceptive and it will be a real struggle to create a viable enterprise out of such a venture. As Richard Aboulafia notes in his blog, if there are 10,000 air taxis by 2020 that produce 21 billion ASMs that will only replace 1.2% of the planned ASMs in 2020. That sure isn't a capacity dent. Then of course there is the cost of transportation. Today most passengers can fly nearly everywhere in the US, on low-cost airlines, network airlines, regional airlines, "commuter" airlines. Then there are those that can afford their own private charter. Granted this can sometimes take you to closer where you want to go, but that convenience comes at a price. As you can see in the slide below the cost of using the service of an air taxi is going to far outweigh that of an airline.

And what does an airline offer its customers? Frequent departures, an integrated network, global reach, etc. Right now DayJet only has operations planned for Florida. Of course, that will expand as the fleet grows. But the air taxi is promising a maximum 30 minute wait for your flight. It all sounds great but I was not able to find anything about price on the site. I will admit that the concept is novel, it has the theoretical potential to be a radical innovation in the air transport industry, I am concerned about the economics of it though. We'll have to watch and see what happens, both in the US and Europe.

Flexibility = value

2007-05-23T09:02:00.000-07:00

We love flexibility...in all that we do, this includes air travel. Low-cost airlines gave passengers a great deal of flexibility in offering one-way fares. We were forced to purchase a round-trip ticket in the same class with traditional airlines. This allowed them to generate extra revenue. Restrictions were bad for consumers but good for airlines...at least on the revenue side. LCCs changed that. SAS has been very innovative and had success with their one-way concept which allows passengers to book tickets either one-way or round-trip in different classes. Now JetBlue wants to test refundable fares. They stress that their main hold-up is technology, which is only a matter of sitting down and working out the coding. This will attract even more corporate travellers because many corporate travel policies do not allow business travelers to book non-refundable fares. Corporations may pay more for their refundable tickets, but they make up for this in the flexibility that are offered. JetBlue does allow passengers to switch names on tickets but now want to take that a step further.

Not only that, but JetBlue is considering a virtual first class. I love it. I love the name, the concept, the idea, the challenge. Of course, I don't know how likely it is to work, but just the thought of creating such a concept is a great move. JetBlue must have a great learning capacity to learn from its experimentation and trials; what a great way to capitalize on innovative thoughts. The airline wants to create the possibility for travellers to purchase a window or aisle seat with an empty middle seat. In other words, give passengers a little more breathing space by ensuring they have no one next to them. All this for a small fee. This isn't the first time this has been done. SAS had a similar concept. JetBlue is thinking about offering it on low load-factor days, such as morning, weekday flights, when business travellers are more likely to travel and loads are light. A great way to challenge the competitors, a novel idea, and I wish them luck.

Southwest is a changin'

2007-05-23T08:01:00.000-07:00

Southwest Airlines, that stable, low-cost airline that sticks to what it knows best and is consistently rewarded financially for doing so, has decided to make a sweeping change to its distribution policy. The airline has traditionally relied on its own distribution channels, which today means the Internet, which accounts for nearly 70% of all tickets sold. However, the airline has stressed that it is finding it increasingly challening to meet its targets and now it wants to get some better paying passengers into its seats. That means business travellers. Business travellers book closer to departure when there are fewer seats. My economics teacher in high school taught me that if supply is limited and there is a demand we can expect a higher price. So, business travellers are good for Southwest. There is only one caveat. Business travellers usually don't book their tickets themselves, they use travel managers. And since travel managers have to make a lot of bookings they use the global distribution systems because they don't have time to surf the Internet like we do when we go on vacation. To be visible in GDSs requires that airlines pay a fee, which is what all the other GDS-present airlines have been trying to lower. Southwest, being a low-cost airline, has been reluctant to be visible in GDSs because it adds cost, complexity, and it relinguishes some pricing control. In the past though Southwest has been present in the GDSs via a GDS bridge, but it was limited access. Now, the airline has done an aboutface and signed a 10-year content agreement with Galileo which will eventually see the airline in the Apollo system. The agreement excludes Southwest's web specials, promotions and Ding offerings, which is unique in that all other airlines have full-content agreements. GDSs more or less demand that airlines make all their fares visible, including those cheap web fares, but not Southwest. That's how much pull the airline over GDSs right now. In addition, Galileo is not authorized to pass the information on to third-party sites. So, what we are seeing is a partly a response to JetBlue's GDS agreement as Southwest is experiencing increased competition and an imitative strategy of those nasty network carriers on the other end. Southwest is exposing itself to more and more full-service networks by entering markets such as Denver and San Francisco, which increases competition with those carriers. To be competitive Southwest places itself in GDSs to capture some of the network carriers' customer base with their lower fares. It makes for interesting watching.

World's first green airline?

2007-05-23T05:50:00.000-07:00

We might as well stay on the topic of sustainability and environmentally friendliness. It appears as if there is a small airline in Costa Rica, Nature Air, which advertises itself as a green airline. The airline pays an annual fee of $60,000 to farmers to entice them not to clear cut forests to graze cattle. The forested sites help offset the airline's annual CO2 emission of 5,000 tons. The airline has had success with the venture since it began in 2004...and the airline is profitable with a margin between 4% to 7% per year. The airline has a fleet of 17 Twin Otters and has 80 daily flights.

The airline does have a green past actually. A consultancy specializing in sustainable tourism in Central America was challenged due to a lack of transportation infrastructure when they decided to purchase Travel Air in Costa Rica to help build up the transportation sector. Now before some of you expect Southwest or Northwest to purchase forest lots to offset their fleets of 400+ aircraft one needs to understand the level of environmentalism in Costa Rica. The country actually makes more money from tourism than all its other commodity exports and employs nearly 50,000 people in its park structures. In 1997 Costa Rica pioneered sustainable tourism certification in Central America and the country is frequented by many eco-tourists. Now, of course the environmental footprint of a European travelling to Costa Rica to enjoy such pristine beauty is quite large, but a flight with Nature Air can help to alleviate one's conscious. British Airways and SAS both offer their customers the option of purchasing carbon offsets, which is a step in the right direction. However, easyJet has recently voiced concern over these schemes as transparency may become an issue. The aviation industry certainly needs to explore the possibilities to help mitigate their footprint, however as stressed before, many other sectors deserve a once-over as well.

Going green for green

2007-05-22T13:06:00.000-07:00

Much as taken place in this dynamic and wonderfully exciting industry while I have been abscent. Copenhagen Business School hosted Airways 07, our annual aviation conference held by the Center for Tourism and Culture Management, which I hope to comment on in the near future. Also, I finally managed to get some results from my survey which was mailed to a large number of airlines worldwide. When I finished writing a summary I intend to post some results for all to see here as well. Of course, a few highlights spring to mind when I think about the past few weeks, so I will pick those that I find intriguing.

At the Star Alliance 10th anniversary right here in Copenhagen it was announced that the organisation has created a transport and marketing partnership with UNESCO-MAB, the World Conservation Union (IUCN) and Ramsar Convention on Wetlands. One of the goals is to provide a more forceful and unified communication strategy to defend the industry's position. The environment is an issue close to my heart and in my family, and one cannot deny that aviation does have a negative impact on the environment, as does every other human activity, however aviation has recently come under increasing environmental pressure. Aviation does contribute a small, but growing CO2 amount, as well as, ozone, methane, and cirrus and contrail clouds. Aviation produces roughly 2% of global CO2, 1.6% of green house gases, and about 3% of warming if one considers both CO2 and non-CO2 impacts. If business-as-normal then this will grow to about 5% by 2050.

No doubt this is important when policy makers are discussing ways in which to reduce emmissions, however when one studies the numbers at a macro level then the topic becomes less one-sided. Our power-stations are producing a little more than 21% green house gasses (GHG), land-use and bio-mass burning 10%, agriculture 12.5%, residential 10.3%, and the list continues. Aviation is only a miniscule part of the problem, yet it is getting so much attention. I have yet to see a politician stand up and propose a cap or tax on heating a house, driving an inefficient car, research improved agricultural processes. These policies are not as visible as that orange colored plane we see from the highway, nor are they as popular with constituents. Those other policies may actually force us to change our lifestyles or habits, while an aviation scheme is seen as limiting those that can afford it, yet it is only targeting 2% of the world's CO2.

Air Asia X goes with Airbus

2007-04-24T08:25:00.000-07:00

FlyAsianXpress, the long-haul brand of Air Asia, has confirmed an order for 10 A330-300s. It appears as if the world's leading LCCs are going to seriously attempt long-haul operations, with JetStar and Ryanair getting into the mix too. FlyAsianXpress had evaluated the 777 but delivery positions were not acceptable, which is related to Ryanair's O'Leary stating that his airline would wait a few more years before confirming an order as demand is currently high and driving prices up. In the meantime, FlyAsianXpress plans to have 25 A330s on the ramp within the next five years.

Southwest eyeing unbundling

2007-04-12T10:55:00.000-07:00

Southwest Airlines may be eyeing unbundling some of its services in a bid to achieve its 15% annual earnings growth, which may not be possible through ticket sales alone. The airline did trial assigned seating in the summer of 2006 in select cities and got mixed customer reviews. In addition, the airline has stated that it won't have a reservation system that can handle assigned seating until 2009. The airline has portrayed an image of the customer-friendly airline that does not charge for such services, even poking fun at rivals who do so. However, it may have to change its offerings if it wants to continue its growth pattern. The challenge is identifying those services that customers value and are willing to put cash on the table to purchase.

American Airlines targets female travelers

2007-04-12T10:20:00.000-07:00

American Airlines is the first airline to create a dedicated position and website to female travelers. The website, www.aa.com/women, hopes to target the gamut of women who travel with American Airlines through pages titled: Women Connected Through Business, Women Connected Through Lifestyle, Women Connected Through Each Other. These pages offer advice to female travelers about specific issues related to their purpose of travel.

Women are occupying more seats in aircraft. Adventure travelers are now 52% women. British Airways stated that female business travelers have doubled in the past five years. Hotels and taxi services have been offering services directly aimed at women. American Airlines reports that almost 50 million travel with the airline annually and the airline hopes to increase its relationship with this growing segment. It is reported that if the airline can raise the number of women traveling by 2% ($100 / segment) then the airline can capture an additional $94 million in revenue.

This move by American Airlines shows the importance of the business model and how airlines can adjust their activities to address a specific segment. Although this is the first gender-oriented focus, maybe the power of the Internet will allow airlines to be more creative when focusing on specific segments.

Ryanair comtemplating across the pond operations

2007-04-12T01:31:00.000-07:00

I had to check the publication date on Flight International's recent article, "Ryanair boss Michael O'Leary plans launch of transatlantic no-frills airline with fleet of 50 Airbus 350s or Boeing 787s," click here, and make sure that it wasn't an April Fool's joke. It seems to be geniune enough considering it is dated April 11th.

Apparently, O'Leary and his team are looking at launching a trans-Atlantic subsidiary to the US following the recent Open Sky agreement. It would link with Ryanair's 23 bases in Europe with a handful of secondary airports in the US: Baltimore, MD; Providence, RI; and Islip, NY. The operation would be a separate entity from Ryanair and would not offering connecting services for passengers. O'Leary makes the point that they want to avoid complexity in the business model. Keeping activities simple and uncluttered allow for easier adjustments and trials. The operation will most likely utilize A350s or 787s and will be purchased near the end of the decade when they expect the demand to soften and prices to come down.

The article does not mention continuing on inside of the US. However, with Tony Ryan's investment in Allegiant and that airline's statement that it wants to be a Ryanair look-a-like, that may be something in the works. Of course, cross-Atlantic low-frills flying is not new to aviation. Laker's SkyTrain, People Express to London, or even Icelandic Air's former backpacker image. However, all these airlines are now defunct (except Iceland Air, however its image has certainly improved from its earlier days). There are various explanations for their failure, however Ryanair has something they didn't: passenger feed from all of the EU. People Express did have its US feed, however the CEO, Don Burr, did state that distribution strategies of People Express' competitors helped to undermine the airline. Ryanair is operating in the age of the Internet and doesn't have to fight with competitor-owned GDS'.

No one can say that the airline industry sits still for very long.

Cater to the business fliers

2007-03-22T12:13:00.000-07:00

First they were in the GDS, then they were out, and now they are back in. JetBlue appears to have a wavering love of the business flier. Business fliers like to book at the last minute and therefore put more money on the table for a seat. However, they also demand more perks, which add costs. Now JetBlue has announced that the airline is researching offering refundable tickets for higher fares. They want to be able to reserve the greater pitch aisle seats at the front of the plane for those corporate fliers, see here.

This little blurb is just another sign that the traditional classification of airline business models are blurring. JetBlue, a low-cost airline in the daily literature, is emulating more and more the traditional airlines in the market. This is necessary since JetBlue is realizing it can't offer all those perks at the lowest fares in the market. It has two options, shed costs and dilute its offering, but that will strip the airline of its charm, or attempt to capture more business fliers at higher yields. Eventually, traditional carriers will imitate LCCs more and more and the models will not be easily distinguished in the future.

Open Skies treaty and business model innovation

2007-03-22T11:21:00.000-07:00

Today the EU transport ministers unanimously approved the Open Skies treaty between the EU and US. This long negotiated treaty between the US and EU is a big step towards a global liberalised aviation market. It effectively allows any EU carrier to depart from any airport within the union to any US airport, and vice versa. The deal though fails to grant cabotage to carriers, in other words, allowing European carriers to operate domestic flights within the US market. A major sticking point in the negotiations was the limited access point to London Heathrow and the reluctance of the UK to ratify the treaty. Under the earlier aviation agreement trans-Atlantic flights between LHR and the US was limited to 4 carriers. British Airways and Virgin Atlantic were not keen on giving up this resource and lobbied hard to side track the treaty.

However, carriers are able to say one thing and work on contradicting strategies at the same time. This is just smart business. Virgin Atlantic recently announced that it is looking at offering trans-Atlantic flights from airports outside of LHR. Continental, on the other hand, has already filed an amended DOT application for trans-Atlantic operations, click here.

A new route is not considered a business model innovation, however the increased competition may lead to innovations throughout the industry, on both sides of the Atlantic. We may eventually see closer coordination with alliance partners or a reallocation of partners entirely. On-board services may be adjusted in an attempt to differentiate from competitors. So, don't hold your breath for any immediate changes to business models, but in the long run we may see some changes.

777s for Virgin Blue

2007-03-21T08:23:00.000-07:00

Boeing has just scored the sale of six 777s for Virgin Blue's foray into the long-haul market. This contract is worth more than US$ 2 billion for Boeing and may just usher in the long-haul LCC business model...sort of. I have not seen any news on the configuration plans for the airline. Currently Virgin Blue is shopping for US routes and prefers to bypass the Hawaiian islands and head straight for the mainland. It will be interesting to watch this development, along with Virgin America's conditional go-ahead from the US DOT.

Pay for your ticket...and your bags

2007-03-07T05:50:00.000-08:00

Observers of the airline industry have noted that Ryanair took the Southwest Airlines business model, dehydrated it of all its frills and now have an airline that is focused on moving passengers from A to B, even more so than Southwest, and that Ryanair may actually become a copied model in the future. While Southwest has had operating margins hovering near 10% or less, Ryanair can brag with margins consistently above 20%. Rumors have it that some US airlines are looking at the Ryanair model, such as Allegiant and Skybus. However, Spirit Airlines has decided to take one step closer to the Ryanair model. Click here and you can read their About Us page about their plans for charging for all checked baggage. Their business class service will cease to exist, while the more spacious seats up front will still be available. In the future passengers can pre-pay for their checked luggage. This is not the first time such a model has been implemented. People Express utilized this concept as well. It will be interesting to see how the consumer reacts. It might just be that future students of the industry will note how the Ryanair-model has influenced a new breed of airline.

Don't focus entirely on the Atlantic

2007-02-20T04:39:00.000-08:00

News of innovation within the airline business model has been dominated by the Europeans lately, however those on the other side of the globe have not been sitting on their laurels. Australian Virgin Blue has just announced an impressive 81% surge in half-year profits, $98 million USD. This has been aided by a less volatile fuel price and increased business traffic.

The airline has already followed in the footsteps of JetBlue and ordered more than a dozen Embraer aircraft to capture thinner traffic flows. However, now the airline is stepping into the long-haul league and negotiations are underway with Boeing for 7 777s. Long-haul flights should commence in the second half of 2008. It has already begun the process of applying for US traffic rights, but destinations in Hong Kong, Japan, and Canada are also in the works. In another twist, Virgin Blue has admitted that an ultra-low cost brand has been contemplated for very thin leisure routes. This brand would likely operate 737s with an additional row of seats, essentially lowering seat costs by 5-6%. The CEO goes on to state that a Ryanair-look-a-like would most likely not be interesting to Australian consumers, but if that is what they want Virgin Blue would not hesitate to offer such a brand. Consumers the world over have demonstrated their love of low-fares and a Ryanair model would work in any market. It is interesting to hear of an LCC interested in starting an ultra-low LCC. This has not been successful in Europe or the US with mainline carriers, but maybe Virgin Blue will be able to carry if off. The source of this information is found here.

The Australian market has been a news generator for some time now. The aviation-focused Texas Pacific Group and Macquarie Bank have made a bid for Qantas, while Singapore Airlines attempted to gain rights on the Sydney - Los Angeles route.

"Low-cost" long-haul has so far bypassed American carriers. Europe and Asia have seen the sprouting attempts at this model, however its success is far from guaranteed. And as one Nordic LCC stated, "Our biggest competitor in the low-cost long-haul is the back end of traditional carriers."

Aer Lingus expands its reach

2007-02-16T12:24:00.000-08:00

Aer Lingus has been capturing headlines this week, although not the front-page kind. It appears now that the former FSC will stretch its reach and has plans to open its first base outside Ireland. This is a first for a European flag carrier, as far as I know. Both Ryanair and easyJet have country-neutral names and brands so it has been much easier for them to expand throughout the continent. Air Berlin, which leaves nothing to the imagination as to its origins, has been successful with its operations in the south of Europe. This German LCC also opened a base in England in direct response to those UK LCCs intruding on its home turf.

Aer Lingus is reporting that it has narrowed its search down to three bases outside of its home country, which will allow it to open up to 15 new routes. Rumors abound that this is not a one-off for the carrier and that we will likely see more foreign bases open up. With the airline's tie-up with JetBlue, expansion deeper into the European continent will benefit this cooperation. However, this strategic move for the Irish carrier will not come without its struggles as unions have voiced their opposition. It's not that unions are opposed to expansion per se but they have voiced their concerns about the work rules that Aer Lingus intends to apply. In addition, employees will most likely be employed under local rules rather than Irish.

Aviation in Europe is certainly not going to become boring in the next few years.

LCCs reach out and link up across the Atlantic

2007-02-06T23:21:00.000-08:00

ATW is reporting that JetBlue has all intentions to tie-up with Irish Aer Lingus, initially an Internet tie-up making their respective networks available to site visitors. This confirms Neeleman's statement on January 30th that JetBlue anticipated entering into interline or codeshare agreements with one or more international carriers. Aer Lingus, on the other hand, is set to depart the oneworld alliance later this year, although it has stated its intentions to continue codeshare agreements with its previous partners.

This would not be the first agreement among LCCs. Danish Sterling and SkyEurope have had a codeshare agreement for a number of years, as well as Southwest's collaboration with ATA, or Frontier and AirTran's marketing agreement.

Network coordination and related costs have to be closely studied as it is these factors that may have inhibited previous attempts at relationships. One can only question what this deal would look like if Ryanair had been successful in its bid attempt for Aer Lingus.

Aer Lingus transported 25 000 pax between Ireland and JFK and 15 000 between Ireland and BOS. These figures will hopefully benefit from JetBlue's network.

Technology-aided innovation

2007-01-31T05:16:00.000-08:00

The supporting structure of many service-oriented innovations is technology. Just look at what the Internet has enabled, and we have only scratched the surface of this revolutionary technological platform. Many years ago FSCs were technological innovators with their development and implementation of CRSs, however LCCs have grabbed hold of the Internet and are using it to their full advantage, one example is easyJet's collaboration with Microsoft.

Microsoft has just released Vista, the next operating system for PCs. Microsoft realized that today's computer users are suffering from information overload. They are saturated with websites, programs, user IDs, etc. To alleviate this problem Microsoft has designed a "sidebar and gadgets" application. So, rather than opening an Internet browser to simply check the weather, stock prices, or your favorite airline's deals, the information is readily available on the desktop at all times (this is not new to Mac users). These applications can be customized and downloaded from numerous developers. This is where easyJet has stepped in. easyJet is developing a sidebar gadget that will allow users to perform functions directly on the desktop rather than requiring them to open a browser. This innovative customer-relations function will bring easyJet closer to end-users. Although other airlines can develop their own sidebar gadgets easyJet will benefit from its first-mover position. This not the first user-demanded direct link to an airline though, and easyJet is again getting inspiration from Southwest Airlines.

"Ding! You are now free to move about the country" is the tag line of Southwest, and the airline expanded on this marketing line to its Ding! program. Ding is a free, downloaded program available at www.southwest.com since early 2005. Results show that users are less likely to cross-shop when they have initiated their own contact to the airline. There was 27% greater cross-shopping for travel in 2005 compared to 2003. In a little more than 1 year Ding had been downloaded 1 million times, and users are 45% more likely to book with Southwest via Ding than without. The program averages 5 clicks/user monthly and generated nearly $60 million in incremental bookings. With such impressive results it is surprising that other airlines did not initiate similar technological advances.

With the experiences of Southwest Airlines easyJet may well have gotten on the right track with this tool. It may take some time though for the airline to benefit from their cooperation with Vista. Most current computer users are satisfied with their operating system and will not rush out to purchase Vista. I just upgraded my own computer a few months ago and will not operate Vista until I decide to buy a new machine, and that will hopefully not be in the near future. Although, the sidebar and gadget application does sound interesting.

The LCC model crosses the ocean

2007-01-03T15:52:00.000-08:00

Happy New Year! It appears as if the shower of interesting aviation news hasn't let up for the holidays.

Virgin America must once again reapply for its application to fly. The DOT has not allowed Virgin America to solo stating concerns over its ownership structure. The airline does not meet the requirement that 75% of its voting interest be owned or controlled by US citizens. Other US carriers are unanimous in their opposition to the carrier's upstart, however many industry experts believe that the airline will eventually be given the green light.

Sir Richard Branson's Virgin Group's aviation exploits are not dominated by the US market alone. Industry rumors believe that Virgin Atlantic may find time to cooperate with Air Asia of Malaysia, and possibly even easyJet. The LCC business model may finally get its turn to shine as a long-haul product. Air Asia is said to be interested in offering flights from Asia to the UK. If the model is able to survive the initial upstart-hiccups it may be a viable model. However, don't expect British Airways or Lufthansa to worry too much. A long-haul LCC model either needs sufficient local traffic on either end, or a supportive feed network. The model is not inherently designed to offer connecting traffic an opportunity to feed onto the long-haul routes, however the LCC leaders have proven themselves to be quite innovative and may just find a solution to the problem. The Virgin Group appears to be slowly building quite an aviation empire. With Virgin Express and Virgin Atlantic in Europe, and Virgin Nigeria, and Virgin Blue, and potentially Virgin America. It appears as if South Americans may soon have a Virgin among them.

The LCC business model is attractive to a market segment that is very large, however some executives can't help but yearn for higher revenue passengers. While watching their aircraft being boarded they look to the dinosaur, legacy carrier across the ramp and see the first class passengers walking down the jetway. Many LCC leaders want to see those passengers walking onto their aircraft, not only for vacation but for business travel as well. This is where they start to tweak the model, sometimes successfully and sometimes not. The same holds true for executives at full-service carriers. It appears as if each strategic group is looking across the fence and adopting those business model elements that they think work best.

The challenge is that a business model is like your neighbor's well-made cake. You can't copy some of your neighbor's ingredients and get the same cake as them. Sometimes it may be better than theirs, but sometimes it may turn out worse.

LCCs taking over FSCs

2006-11-27T14:09:00.000-08:00

The airline industry has always amazed people and 2006 appears to be no exception.

America West, one of deregulation's few success stories, recently merged with US Airways Group and incorporated the US Airways name. It appears now that US Airways, former America West, is attempting to get its hands on Delta Air Lines! What a transition from its founding in 1981, bankruptcy a decade later, to its merger spree of 2006.

One can definitely say that the LCC business model is alive and well.

And we can not ignore Ryanair's attempt at gaining control of Aer Lingus. It appears as if the low-cost carriers have transformed themselves into formidable foes in the industry...in part due to the business model.

Of course, this demands that one ask what happens to the business model itself. Are the two models, LCC and FSC, transitioning to one hybrid model? Will US Airways transform Delta to a large, semi-LCC player? Or, will US Airways adopt the model of Delta and become an FSC? As the two models continue to battle over market share and target markets the will be adopting and adapting elements from each business model that works best.

CPAs are not an untouchable model

2006-10-26T18:51:00.000-07:00

The financial media often portrays the regional airlines in the US as untouchable darlings due to their capacity purchase agreements with major carriers. The lore is that these agreements insulate the regional airline from common industrial turmoil because expenditures are covered by the major partner. These small jet providers however are bound to the major partner, through good and bad. It is the contracting airline that holds all the cards in this relationship; if a provider can't fulfill their end of the bargain there is always someone else in the market that can. Small jet provider management is responsible for ensuring it holds up their end of the bargain, and hopefully they can do it for less than the major is paying per departure. The consequences of this inaction were witnessed in early 2001 when Delta Air Line's SJP, Comair, went on strike. Delta's passenger feed provided by Comair was crippled and Delta learned a valuable lesson: don't leave all your eggs in one basket. Soon Atlantic Southeast Airlines were in the picture and complementing Delta's passenger feed. Other majors in the industry began exploring diversification options. Of course, there is also Atlantic Coast Airline's refusal to subject itself to United Airline's CPA demands, and ACA's attempt to go-it-alone as Independence Air.

Now, Express Jet, which is the former wholly-owned subsidiary of Continental Airlines and operates as Continental Express is feeling the pain. Express Jet were unable to meet the demands of Continental's new CPA and were ordered to return 69 aircraft to Continental, who then planned to contract another partner to provide passenger feed (the SJP business model does not always own the aircraft, they are leased from the major partner). Express Jet could opt to keep the 69 aircraft and lease them from Continental at higher rates, however there was no need for them in the Continental network. So, the question now is: What does Express Jet do with 69 aircraft? Well, some other major may want a new feed partner, however Express Jet has a hard time competing with the major SJPs out there, SkyWest, Republic, and Mesa. Then there is the option of shifting the airframes to Europe where Express Jet has a subsidiary attempting to bring CPAs across the Atlantic. This is not going so well as the majority of major airlines in the EU wholly own or have large equity investments in their regional airlines. So, Express Jet has now started a corporate division. This division will be stocked with 10 aircraft that are being refitted to better suit passenger needs. That leaves up to 59 airframes without a home at the moment.

The SJP business model is not a sure-fire win for stakeholders. Look at the turmoil that Comair, Mesaba, and Pinnacle are going through. While this business model appears to be protected from industry challenges, it may only be truly successful if diversification is possible. Those SJPs that operate for numerous carriers in the market are the most adept at surviving a downturn in the economy.

Aviation business models defined

2006-10-12T12:15:00.000-07:00

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: http://ostpxweb.dot.gov/aviation/airlineclassifications.htm).

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.

The Irish are at it again

2006-10-05T22:13:00.000-07:00

Well, it appears as if Ryanair has no intentions of slowing down their business model or strategic innovation with their announcement of a takeover bid for Aer Lingus. This appears to have come as a surprise to even the most hardened industry observer. There are many speculations about the true intentions of this move: is it a true expansion strategy (strange, considering Ryanair's current orderbook and delivery schedule); are trans-Atlantic hops the next big thing (maybe they are...to the East Coast at least; but Ryanair has been so successful by staying true to the current business model it is hard to believe that such a drastic change can be justified); maybe Ryanair is making a defensive posture (speculation concerning the bid on BA may have led Ryanair to believe that Aer Lingus may also be a target. The airline does have some coveted slots at LHR. Maybe Ryanair wanted their hands on those or to make sure that others could not benefit from them); if one looks to the US and the ever-overlapping of LCC networks maybe Ryanair is making a long-term strategic move when the inevitable end of cherry-picking routes comes to an end (airlines are not known for being long-term strategic planners, unless it concerns aircraft orders). Regardless of the intentions, many argue this goes against the grain with a low-cost carrier taking over a former full-service carrier. The current Aer Lingus is certainly not a full-service, network carrier such as British Airways or Lufthansa. The Irish airline in its current form is actually classified as a low-cost carrier in various articles and research papers; however, not to the same extent as Ryanair.

Ryanair announced that their intention would be to operate the two carriers as separate entities while making Aer Lingus more efficient. Ryanair certainly has the knowledge to operate an efficient and low-cost airline. Many have speculated what Ryanair could do with the long-haul arm of Aer Lingus; possibly creating a true low-cost, long-haul airline. This move certainly would allow Ryanair an opportunity to innovate both carrier's business models.

Ryanair's options:
The largest European low-cost carrier could certainly feed an enormous amount of traffic into Dublin for Aer Lingus' long-haul operations. This would possibly mean adapting the business model activities to include connections, affecting both operations and revenue management. Suddenly operating a connecting network rather than a point-to-point operation could have negative affects on the carrier. This proposition does assume that Aer Lingus will make more drastic changes to their business model to accommodate Ryanair's value proposition, target market, activities, and network.

Aer Lingus' options:
Aer Lingus has made some astounding headway in the recent years with regards to business model and strategic innovation. The carrier has creatively applied many aspects of the low-cost model to create a more profitable airline. If Ryanair does want to create complementing carriers then Aer Lingus needs to make some more changes to their model. Their value proposition and target market need to be adjusted to fit more harmoniously with Ryanair's. Ryanair has undoubtedly a partner network that the Irish flag carrier can benefit from, but that requires adjustments to current practices.

The merger of two airlines is certainly not a task for the faint-at-heart. To keep the two carriers as separate entities is probably the easiest and less turbulent transition possible. Ryanair does have experience with mergers from their acquisition of Buzz in 2003, however the mergee is usually not the happiest among the two.

In the meantime we will just have to wait and see what happens. As it stands now Aer Lingus has refused the bid. Undoubtedly, it is exciting to see Ryanair in action.

Ryanair and revenue stream innovation

2006-10-02T15:49:00.000-07:00

Irish low-cost carrier, Ryanair, is not only a highly successful airline but also very adept at business model innovation. Last week the airline announced that it had entered into a 5 year agreement with InviseoMedia to install seat-back advertising in its entire fleet. With the potential for advertisers to reach out to more than 40 million passengers this is surely to be a successful venture for Ryanair. The advertisements will be displayed on the tray tables and provide passengers with a moment of relief from the journey. This is not the first attempt by an airline to incorporate secondary revenue from advertising. America West implemented the concept in 2003 with a deal inked with Sky Media. Vanguard and Sun Country in the US resorted to selling ad space on overhead bins, while many have seen some of the colorful aircraft in Southwest's fleet. I read at one time that an airline was resorting to PA announcements from flight attendants promoting credit card applications, however I have been unable to find the source.

These are examples of airlines attempting to innovate the revenue stream of the business model. Historically, airlines have relied upon ticket revenue from passengers to pay the expenses, however with increased yield dilution airlines have been forced to be creative. Some carry cargo in the belly, others carry mail, and some carry both, along with baggage. Many of Europe's low-cost airlines have been aggressively attacking secondary revenue sources. Ryanair has even announced that its long-term goal is to potentially provide free airline tickets, while making enough secondary revenue to cover the expenses. This may sound extreme but such business model innovation can be an industry upset. There are numerous industries whose main product/service only provide a portion of total revenue. Some airlines have chosen to focus their attention on expanding their secondary revenue sources as a form of business model innovation. At the recent World Low Cost Airlines Congress 2007 there was an entire session devoted to this particular topic.

One interesting exercise is to look at Ryanair's website and count the number of services you can buy. I counted nearly 20. And remember, every interested customer who clicks on a link is putting a few cents in Ryanair's pockets.

What is the business model?

2006-09-28T13:20:00.000-07:00

Academics are beginning to delve deeper into the issue of business models since the first major breakthroughs were made in the late 1990s. Timmer is commonly attributed with bringing the term to light in 1998 with his article, Business Models for Electronic Markets. More recent additions include Afuah's 2004 book, Business Models: A Strategic Management Approach, as well as, a wealth of articles, such as Hedman & Kalling, The Business Model Concept, or Magretta's seminal Why Business Models Matter.

Its importance is widely accepted, even if its definition and understanding are not. The main components of the model include:
1. Value proposition: What is it that a company brings to the market, and what benefits do customers gain from utilizing a company's product and/or service.
2. Target segment: Which customers are the primary users. The value proposition and the target segment must coincide, in other words, your target market should value your offering.
3. Activities: This aspect of the model is what the majority of people describe as a business model; it is usually the most visible and the part of the model that can be relatively easily adjusted.
4. Network: The network describes how a company's partners, suppliers, customers and others all interact with the business model.
5. Competitive strategy: How does the chosen model compare to others in the industry? What advantages and disadvantages does it provide over competitors, and how easily are these eroded?
6. Finances: At the end of the day it is always necessary to do a financial analysis to test the financial sustainable of the business model. This aspect reviews revenue streams and associated costs, and hopefully results in positive figures.

It is imperative that companies realize that business model elements coexist in balance with each other in successful companies. If business model innovation only focuses on one element the balance may be upset, and the remainder of the model may require adjustment to ensure long-term sustainability.

A recent survey by IBM pinpointed that CEOs are paying more attention to business models than in the past. They indicated that business model innovation is a core element of long-term success. Business model innovation refers to a company's dynamics when it comes to adjusting, or changing, their business model to better suit their current market or enter entirely new markets. Examples of business model innovation includes the transition of IBM from an OEM manufacturer to a consulting firm or Apple's transformation from computers to business and consumer electronics.

Business model innovation is beginning to appear more and more in the airline industry. Aer Lingus' transition from a national, full-service network carrier to a low-cost carrier. Aer Lingus was struggling with Europe's largest low-cost carrier, Ryanair, right at its door step and needed to take drastic steps to avoid permanent damage. Today, the carrier is achieving positive financial results and preparing for an IPO. JetBlue has gone against the traditional low-cost carrier grain and aggressively targeted business travelers. The business model that is necessary to target that market segment is different from targeting leisure travelers. Business model innovation is imperative in today's fast-paced business world, and we will be seeing many more innovations within the airline industry in the coming years.

The importance of business models...in any industry

2006-09-27T14:30:00.000-07:00

There are some industries that are profitable and others that are less profitable. However, within any industry there are the upper echelon of successful companies, the middle-road, and the laggers. The question that many observers attempt to answer is: Why are some companies successful and others less successful? Sometimes it is access to specific assets, a patented technology, or an important network. Much research is beginning to indicate that a company's chosen business model has an enormous impact on its level of success.

The aviation industry, as a whole, has its fair share of sub-industries. There are full-service carriers, low-cost carriers, charter airlines, regional carriers. Within these sub-industries there are a range of business models. I will follow conventional wisdom and tend to focus on full-service and low-cost carriers as these are the most visible to the general public. Most research indicates that there are two types of business models in the scheduled-passenger industry, full-service and low-cost, however this is an over-simplification of the industry. There are many low-cost airlines that do not adhere to the conventional definition or follow the supposed low-cost airline business model, while the same holds true for full-service carriers. Numerous distinct business models are sprouting up across the globe within these two aviation sub-industries. Some passengers are flying with true low-cost carriers, such as Ryanair, some with low-cost carriers offering a slightly greater level of service, such as JetBlue, some with full-service carriers offering less-than-ideal full-service, many North American carriers, and finally others are flying with carriers that set the standard in service offering, such as Singapore Airlines. The business models are really a continuum stretching from pure low-cost to pure full-service, and the spectrum is populated from one extreme to the other.