Airline strategies and business models 2016 Airline Planning Workshop

Objectives • Connect market segments and passenger expectations • Connect potential airline business models with passenger expectations • Connect deregulation and potential airline business models • Connect partnering strategies and alliances with both deregulation and airline business models • Connect cargo strategy impact on airline success

The passenger is at the center Regulatory Environment

Airline and Industry Strategies

Passenger Expectations

Technology

Passenger market is segmented

Long-Haul 35% Travel

Business 30% Travel 40-50% Revenue

Long-haul business

Long-haul personal

Short-haul business

Short-haul personal

Short-Haul 65% Travel

Personal 70% Travel 50-60% Revenue

Table exercise/discussion questions 1.

What are two key passenger expectations for your market segment?

2.

How are these passenger expectations changing? Long-Haul 35% Travel

Business 30% Travel 40-50% Revenue

Long-haul business

Long-haul personal

Short-haul business

Short-haul personal

Short-Haul 65% Travel

Personal 70% Travel 50-60% Revenue

Passenger expectations vary Long-Haul 35% Travel

Business 30% Travel 40-50% Revenue

• Low price sensitivity • Time sensitive – on-time and many frequencies • Non-stop; point-to-point • High service levels • Premium end-to-end experience • Latest tech in cabin • High comfort • Lie-flat seat • Key airports • FFP integrated with Alliance/partners

• Price sensitive • Low time sensitivity • On-time performance • Some cost for changes • Leisure destinations • Wi-Fi connectivity • Entertainment choices at low or no cost • Unbundling is OK • Upgrades from FFP

• Price sensitive (a degree) • Extremely time sensitive – frequencies, on-time • Flexibility to make changes • Primary airports • Latest technology in cabin • Bin space • Bundled offerings • Preferred seating • FFP • Expect some self-service (airports, etc)

• Highly price sensitive • Time sensitive to a degree • Still looking for point-to-point (but price stronger) • Minimal service levels • On-time reliability still important • Unbundling is OK

Short-Haul 65% Travel

Personal 70% Travel 50-60% Revenue

Business models and strategies LIBERALIZATION BUSINESS MODELS MERGERS, ACQUISITIONS

History of regulation in commercial aviation • International air transportation is mostly negotiated between two countries (bilateral) – Under the framework first introduced in the 1944 Chicago Convention • Increasing liberal agreements over the past decades, beginning in the 1970s • Open Skies deals are the most liberal • Chicago Convention framework is still being used today • Ownership of airlines remains to be nationally based

Freedoms of the Air

Freedoms of the Air

Deregulation •

Reduce government control of commercial side of airline industry – Privatization of government owned airlines – Airlines set own fares

•

Increased competition in the aviation industry – Emergence of hub and spoke – Access to new routes

•

Reduced barriers to entry for new airlines/business models • Most ownership rules still in place

Liberalization within a country (deregulation) Impacts of deregulation within the U.S. Southwest Airlines in 1971 – “Texas Triangle”

Southwest Airlines in 2015 – Largest LCC

DAL SAT

HOU

Deregulation allowed Southwest to grow into the World’s largest LCC

Deregulation amongst a group of countries Liberalization within the EU 1997 Any European carrier Can offer service On intra-European routes

12000

10000

ASMs (millions)

8000 1987 Any European carrier Could fly scheduled Service to any European Market

6000

4000

2000

0 1985

•

Source: OAG / Innovata

1990

1995

2000

2005

2010

2015

7.4%

7.2%

9.6%

6.4%

5.4%

4.6%

5 year CAGRs

Liberalization between two countries •

•

Bilateral – Negotiated between two sovereign nations – Specified type of traffic allowed (traffic freedoms) – May specify: airlines, airports, capacity, frequency & fares – Typically includes a “nationality” clause – Reciprocity – Any changes have to be approved by both governments Open skies – Typically no traffic restrictions other than domestic (Cabotage) – No limitations on airline designations, points served, service levels (frequencies & seats), nor fares – Changes in services do not have to be approved by both governments – What remains: • “Nationality” clause • Reciprocity

A typical bilateral (except Open Skies)

Typical Example: • Total 18 frequencies per day allocated to specific route groups • No gauge restrictions • Fare: no restrictions • Must be Chinese controlled airlines

U.S. airlines benefit from Open Skies U.S. airlines dramatically boosted service to Heathrow after U.S.-EU Open Skies

SEA LHR SFO

LAX DEN

MSP

PHX ORD DTW

DFW IAH

ATL

EWR BOS PHL

JFK IAD BWI RDU

New service More service

MIA

Source: OAG June 2007/2008

Same service

Multilaterals

Agreements between multiple countries • •

• •

•

Is structured like bilateral or open skies agreement Still negotiated between governments Examples of multilaterals Creating common aviation areas – ASEAN – EU Single Aviation Market Regional bilateral agreements – US – EU open skies – MALIAT (Kona) agreement

Why is liberalization important? Continued liberalization adds to growth

Source: IATA, Oxford Economics

Business models and strategies LIBERALIZATION BUSINESS MODELS MERGERS, ACQUISITIONS

Low cost carriers have changed the industry Long-Haul 35% Travel

Business 30% Travel 40-50% Revenue

LCCs

Short-Haul 65% Travel

Personal 70% Travel 50-60% Revenue

LCC business model has gone worldwide Today LCC’s operating in most regions

Europe & CIS

North America

Flights/week: 42,720 km/flight: 1,190

Flights/week: 41,000 km/flight: 1,440

Middle East

Flights/week: 3,820 km/flight: 1,560

NE Asia & China

Flights/week: 14,400 km/flight: 1,100

SE Asia

Flights/week: 20,930 km/flight: 1,160

Latin America

Flights/week: 14,400 km/flight: 1,010

Africa

Flights/week: 1,310 km/flight: 1,050

SW Asia

Flights/week: 7,450 km/flight: 1,080

Oceania

Flights/week: 2,730 km/flight: 1,660 Source: Diio/Innovata 2015

Only Selected Regions Have Low LCC Penetration 2015 LCC market share - measured in annual seats (by airline domicile)

SE Asia

54%

S Asia

50%

Europe

36%

Lat America

33%

N America

29%

World

28%

Oceania

26%

NE Asia

16%

Middle East Africa China Former CIS

12% 9% 9% 1%

Source: Diio/Innovata 2015, jets only | 22

LCC business model evolving • ULCC • Low fares • Ancillary revenue • Secondary airports • No connections / point to point • Once aircraft type / high utilization • Hybrid LCC • Premium cabin • Seat assignments • Frequent flyer • Code-sharing • Connecting flights / major hubs • Long-haul flying • Additional aircraft types

LCC’s strategizing to meet the needs of their customers 23

LCC unit cost advantage is critical 20 18

Unit costs in US cents/ASM, 2014

19.0

16 14 13.3

12 10

12.4

10.9

8

9.7

6 4 2

0 Avg. of US major network carriers Source: US DOT Form 41 Stage length adjusted to system average

Southwest JetBlue Allegiant Spirit LCCs must achieve at least 20-40% lower cost than network carriers

Low costs and fares stimulate growth Local traffic and average yields before and after LCC entry

750,000

Before SWA

After SWA 60¢

600,000

Annual O&D Passengers

75¢

48¢ 42¢ 450,000

45¢

300,000

30¢

22¢ 27¢

30¢

150,000

15¢

16¢ 0

Denver (DEN)

Source: Sabre ADI, 2009-2011

Chicago (MDW)

St. Louis (STL)

Airlines focusing on ancillary revenues 2014 $25,000 $24,000 $23,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0

Top 10 airlines ancillary revenue (US$)

Passenger revenue

Top 10 airlines ancillary revenue (% of Total Revenue) 2014 40% 30% 20% 10% 0%

•

A la Cart

•

Fare / Product Bundle

– – – – –

Buy onboard Checked bags Seat assignments Early Boarding WiFi

– Early boarding, seat, bags

Other sources of revenue •

Commission –Based

•

Frequent Flyer Programs

•

Advertising

–

Hotels, rental cars, travel insurance

–

Sale of miles/points

Source: The CarTrawler Yearbook of Ancillary Revenue / IdeaWorks Company

Medium-Haul LCCs

Medium-haul LCCs

OSL-BKK (8666km)

OAK-ARN (8581km)

CPH-HGH (8283km)

ARN-BKK (8290km)

RUH-MNL (7770km)

LAX-CPH (9022km) MCO-VCP (6787km)

KWI-MNL (7596km)

NRT-OOL (7236km)

JED-KUL (7060km)

MEL-HNL (8869km) SIN-SYD (6290km) Airline

Wide-body A/P

AirAsia X

A330

Azul

A330

HNA Capital

A330

Cebu Pacific

A330

Jetstar

787-8, A330

Jin Air

777-200

Norwegian

787-8

PAL Express

A330

Scoot

777-200, 787-8/-9

Source: OAG 2015 – for wide-body service from Norwegian, AirAsia X (incl. Thai, Indonesia), Jetstar, Cebu Pacific, Scoot, Azul, Pal Express, HNA Capital, Jin Air

Network business model Long-Haul 35% Travel

Business 30% Travel 40-50% Revenue

Personal 70% Travel 50-60% Revenue

Short-Haul 65% Travel

Focus on multiple passenger segments

Global network carriers are large RPKs Share

Global Network Top 9: 34%

Source: ICAO, IATA, airline annual reports, Boeing analysis

Top airlines by RPKs - 2014 Rank

Airline

RPK(billions)

1

American Airlines

350.7

2

United Airlines

330.9

3

Delta Air Lines

326.6

4

Emirates

230.9

5

Air France-KLM

229.3

6

Lufthansa Group

214.6

7

IAG

202.6

8

Southwest Airlines :LCC

173.9

9

China Southern Airlines

166.6

10

Air China

154.7

Common characteristics • • • • • •

Large complex fleets Major hub operations Domestic and Int’l markets Bilaterally controlled environment Long haul & short haul routes Broad range of service levels – First class, airport lounges, onboard meals and IFE – Economy, buy on board, ancillary fees

• Alliance membership Serving multiple segments increases complexity

Differentiation for different market segments Airport  PED boarding pass  Automated boarding  Lounges On board  First  Business  Premium Economy  Economy

Value analysis: revenue benefits vs associated costs

Hubs increase reach and create value

•

•

The ideal airline network creates value to customers

Hub example: 3 airplanes; 15 city pairs*

Hubs make valuable travel options City A

•

City D

Hubs are cost effective City B

Hub

City C

*City A to 6 other cities + City B to 5 other cities + City C to 4 other cities = 15 city pairs

City E

City F

Example Hub: London (LHR) to Athens (ATH)

10 6

DUB

2

EDI MAN

Other 10

LHR YVR

3 7

5

SFO

8

45

9 BOS

YYZ ORD

4 6

PHL

IAD

LAX

6

JFK

10

ATH

LOCAL PAX 45 MIA

3

CONNECTING PAX 89

134 TOTAL PAX Collect traffic at one point to create volume for non-stop service

Network carriers use marketing arrangements for revenue & cost benefits Anti-trust immunized joint venture Expanded cooperation to develop joint network

High

Limited cooperation on specific routes

Low

FFP and Lounge Access

Direct coordination of network and scheduling

Joint planning, pricing, and selling (revenue, cost and benefit sharing)

Code Sharing Interlining

Marketing arrangements do not imply ownership & control

Example: Qantas had 134 airport pairs in 2014 flying their own metal Network (2015)

― Own metal ― Partner metal

Own

Partner

Total

134 Source: OAG 2015

Qantas’s airport pairs 4X with code sharing Network (2015)

― Own metal ― Partner metal

Own

Partner

Total

134

396

530 Source: OAG 2015

Airline alliances now provides over 60% of world capacity Star Alliance U.S./Canada

Europe

Asia Pacific

Other

oneworld

SkyTeam

Major Unaligned

Codeshare flights by ATI JV have increased 2010

2015 N ATL, TPAC & Europe-Japan

N ATL only

ATI JV

ATI JV 15%

5% No Codeshares 52%

Alliance 24%

Other Codeshares 17%

No Codeshares 43% 1% CrossAlliance

Alliance 26%

Other Codeshares 15% 1% CrossAlliance

130 billions ASKs (weekly) •

SOURCE: OAG/Innovata August

169 billions ASKs (weekly)

Contrasting anti-trust immunity (ATI) vs non-ATI joint ventures Airlines joint ventures granted ATI are able to operate as metal neutral U.S. requires open-skies to be in place, other governments don’t Within ATI, some are granted immunity globally, while some are limited to specific markets (i.e. North Atlantic) Non-ATI joint ventures • Can participate in the alliances’ networks and some marketing programs • Cannot discuss price, route allocation, etc.

Gulf 3 success: one stop to everywhere • 6th Freedom business model but with differentiation

2005

• Prime location

• Supportive governments • Efficient operation • Strong brands • Utilizing 8000NM aircraft

2015

: Emirates : Qatar : Etihad

Source: OAG 2015 & 2015

An 8 hour flight is within reach of… ~15% of the World’s Population

>80% of the World’s Population

www.gcmap.com : Range circles at 4,000 mi

Emirates business model is strategically located to serve more than 80% of the world’s population within an 8 hour flight of Dubai

Non-global Network Carriers face challenges Long-Haul 35% Travel Global Network

Business 30% Travel 40-50% Revenue

Non-global Network

Short-Haul 65% Travel

Personal 70% Travel 50-60% Revenue

How do non-global network carriers differ from global network carriers? • Lower fleet complexity • Typically just one key hub • Can be domestic only or both domestic and international • Long-haul might just be Transcon • Business travel remains key

• Partnering levels vary

Charter Carriers evolving Long-Haul 35% Travel Global Network

Business 30% Travel 40-50% Revenue

Charter

Short-Haul 65% Travel

Personal 70% Travel 50-60% Revenue

Class exercise

Long-Haul

Global Network

Business

Non-global Network

Charter

Personal

LCC

Short-Haul

For the segments shown below: • •

What is the top challenge in capturing these passengers? What strategies/tactics might be used? 1

2

3

Global Network Carrier

Non-global Network Carrier

LCC

Business Long-Haul Business Short-Haul

Business Short-Haul

Air Cargo

Competitive advantage: High value/time sensitive goods

1% of world trade TONNAGE is carried by Air Cargo

35% of world trade VALUE is carried by Air Cargo

0% Note: Does not include trans-border tonnage that was transported by truck, rail or fixed installations such as pipelines or conveyors

20%

40%

60%

80% Source: IATA

100%

Total air cargo industry revenue by business model World air cargo revenue Passenger belly only 10% All cargo 11%

Express carriers 38%

Combination carriers 41%

$92.6 billion

Express carriers

$35.1B

Combination carriers

$38.3B

All cargo

Passenger belly only

$9.7B

$9.5B

Freighters, directly or indirectly, contribute to 90% of total air cargo industry revenue Sources: Air Transport Intelligence, U.S. DOT F41, Boeing estimates, and airline reports. (2012 Data)

Will passenger aircraft belly capacity make freight aircraft obsolete? No! Case study: daily flights, Asia to/from North America

150 150

Pax flights

Converting lower hold capacity to equivalent freighter flights

Issues limiting pax belly: • Range and payload capability • Passenger load factor 50-60 60-70 • Regulations • Weight, volume, hazmat and 10 dimensional • Handling Equivalent Freighter Total location and freighter flights freighter ramp proximity flights flights

80% Asia  North America Cargo Carried on Main-deck Source: Innovata, DOT T-100, 2013, Boeing Analysis

Business models and strategies LIBERALIZATION BUSINESS MODELS MERGERS & ACQUISITIONS

Mergers, acquisitions and consolidations

Airline mergers •

Mergers can provide multiple benefits – Rationalization of costs (including capacity discipline) – Expand market access and global reach – Ability to compete with competitor mergers

•

Recent major carrier mergers have been important to remain competitive

•

Cross-border mergers can be highly creative in working with foreign ownership restrictions

Examples

Airlines are making equity investments, buying stakes in other airlines Examples For multiple reasons:

49%

49%

• To gain access to restricted markets

29%

33.3%

• To gain needed network feed

24%

40%

• To overcome alliance weakness

49%

21.2%

Up to 48.7%

• To gain valuable airport slots

2.98%

10%

MyCargo 48%

Note: Darwin Airline was renamed to

48%

UNK

Airlines are creating subsidiaries for many purposes • Expanding across borders into new markets – example: Southeast Asia • Implementing different business model at subsidiary – example: new LCC or medium-haul LCC

• Short-haul feed for Global Network carrier – example: HOP! at Air France

Example: Southeast Asia

Key Takeaways • Customers (passengers) need to be at the center of your plan • Passenger expectations differ by segment – Which passengers are you trying to capture? • Deregulation enables innovation and is a key market trend • Airline business models are not “black and white” – What is your airline’s business model? • Airlines are working together in many different formats • Don’t forget about opportunities from Air Cargo!

MonteCristoAir Case Study Connection • What is MonteCristoAir’s current strategy? • Given the key factors MonteCristoAir is facing, does their strategy need updating? • What are the key regulatory issues facing them? • What is their current business model? • How should they adapt their business model to fit their environment?

• What partnering level is right for MonteCristoAir? • Should air cargo be part of their operations?

Copyright © 2015 Boeing. All rights reserved.

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Copyright © 2015 Boeing. All rights reserved.

BOEING PROPRIETARY

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