The Airlines Business Models in a 20 years Perspective

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The Airlines Business Models in a 20 years
Perspective
Presentation by Fabio Gamba Deputy Secretary
General Association of European Airlines
(AEA) 25 January 2007, Oslo
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About AEA
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About AEA
In 2005 AEA airlines Carried 320 million
passengers and 6 million tonnes of
cargo Operated 10,720 flights every day with
2,400 aircraft in fleet Served 620 destinations
in 160 countries Directly employed 378,000
employees Generated 75 billion total turnover
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Important regulatory developments took place in
the last 10 years

• 2. European enlargement opened up this market
• The various waves of Enlargement (1995, 2004,
  2007) widened the remit of this Internal Aviation
  Market and the opportunities for carriers
• Vastness of todays EU (7,500km from
  South-Western Portugal to North Eastern Finland)
  makes air transport a necessary tool for EUs
  cohesion

• 3. Liberalisation with third countries the next
  step
• Objective is to create more opportunities for
  airlines and consumers, but also to allow for
  cross-border EU consolidations
• Traditional traffic right setup only allows
   national  carriers to fly from a Member State
  to a third country - this goes against freedom of
  establishment

• The basis Liberalisation in the EU air transport
  market
• EUs 1992 Third Package fully liberalised
  competition between airlines
• Carriers licensed in any EU Member State can fly
  anywhere within the EU fares are set freely
  State aid is restricted

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This liberalisation has paved the way for new
entrants

• No frill carriers took up new opportunities
• Traffic growth in two digit range every year

Seats on offer 2003 and
2006
Source OAG / AEA
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New entrants shake up the traditional business
model
After possible reshuffling
Traditional business portfolio
Intercont.High YieldPoint-to-Point
Intercont.High YieldTransfer Traffic
Specialists(High Yield Point-toPoint)
IntercontinentalConnectedPremium
ContinentalHigh YieldPoint-to-Point
ContinentalHigh YieldTransfer Traffic
IntercontLow YieldPoint-to-Point
Intercont.Low YieldTransfer Traffic
ContinentalLow YieldPoint-to-Point
ContinentalFeederBusiness
Service level, contribution per ASK
Service level, contribution per ASK
ContinentalLow YieldTransfer Traffic
StandardContinentalPoint-to-Point
Traditional carriers
Low CostCarriers
Cont/Intercont Tour OperatorPoint-to-Point
Charter Carriers
Charter Carriers
Complexity of Business Model, Unit Cost
Complexity of Business Model, Unit Cost
Source BAH/ adapted AEA
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Some airlines are Stuck in the Middle
Reasonable Margins, Network effects,Loyal
customers, economies of scale,Superior product
and reputation, high innovation
Premium Carriers
BA, AF/KL, LH
Low Margins, under pressure by LCC, spread
business Model, low differentiation, moderate
growth, medium service level
StandardCarriers
Alitalia,CSA, TAROM
High Margins, high growth, simple business model,
high volume, low service level
RyanairEasyjet
Low Cost Carriers

• Traditional Smaller and Medium Airlines business
  models are often not distinct enough. Airlines
  are paralyzed in a Stuck in the middle position

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Clear Business Models translate into profitability
Ryanair EasyJet
EBIT Margins AF, BA, LH
SmallMedium AEA

• Constant results within the groupings
• Low Cost Airlines margins decreasing
  (competition through other LCC, consolidation
  ahead)
• Airlines need to position themselves with a clear
  business model

Source Company reports, AEA
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Airport / Airline landscape in 20 years
Airports
Airlines
Consolidation of the industry
Emergence of Mega Hubs
Specialisation of airports
Specialization of the business model
Rise of P2P (inter)continental traffic
Growing volumes
more P2P routes
Niche carrier and specialists strengthen
Intercontinental competition
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Airports Specialisation of the business model
Current situation
Possible future situation
Hub airports of different size
Megahubs
Regional/ P2P airports
Specialist Hub airport
Regional / P2P airports
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Global competition between hubs

• Middle Eastern hubs are likely to deviate
  European connecting traffic
• Large capacities are built up by several Middle
  Eastern carriers

EU
NA
ME
India
Asia /Pacific
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Implications

• Need for more capacity partly mitigated by larger
  aircraft
• Hubs are no longer monopolies
• Improved intermodal links necessary
• Need for increased partnership airlines/airports
  to achieve lowest cost, maximum efficiency and
  tailor-made solution

• Possible barriers
• Limitations inherent to the hub systems
  complexity
• Infrastructural limitations (capacity, noise,
  etc.)
• Resistance to further expansion of airports
• Competition between the hubs at world level is
  increasing
• Customers increasingly consider alternatives
  because of Complexity, Taxes, Delays at Hubs

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P2P rises on Longhaul too
VS
B787

• Future traffic growth will generate volumes that
  allow more P2P longhaul routes
• European secondary cities will be connected to
  intercontinental destinations
• Direct flights could make a case (consumption,
  time, cost)
• Middle Eastern carriers are already operating to
  European secondary cities DUS, GGW, HAM, MAN,
  NCE,

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P2P Implications

• ATM complexity increases
• AEA  traditional  carriers are following the
  low cost model approach on continental
  point-to-point routes
• The segment provides still high growth rates but
  consolidation among airlines is ahead
• Further Expansion of regional airports expected,
  due to more point-to-point routes and success of
  Low cost model

• Possible limitations / risk
• High share of leisure traffic, pax volumes are
  very price elastic with any change in parameter
  growth is at risk (security charges,
  environmental taxes, price of kerosene)
• Airport dependency on one or small number of (No
  Frill) carriers

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Conclusions

• Europe has developed from a Western European
  economic community to a pan European free trade
  area more than ever in need of aviation
• The degree to which Europe can reduce
  fragmentation will determine its global
  competitiveness
• Traffic volumes are expected to grow because
  mobility is a function of affluence
• Three to four hub airports will become key mega
  points of entry in Europe, point-to-point markets
  will continue to proliferate and grow within
  Europe with greater importance attached to
  intermodal co-operation
• This does not mean that European carriers will
  survive. In a world of global competition, that
  will depend upon joint business partnerships with
  other stakeholders the key to a flexible
  response to changing market requirements.