Future airline business models

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

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

Future Airline Business Models

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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.

Survey results are published by Association of European Airlines

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.

What are airlines saying around the world?

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.

Southwest is a changin'

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.

Cater to the business fliers

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.

LCCs taking over FSCs

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.