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A New Operating Paradigm

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Title: A New Operating Paradigm


1
A New Operating Paradigm
2
Booz Allen Hamilton
  • Leading strategy and technology consulting firm
  • 11,000 employees, 2.2B
  • Founded in 1914
  • Our clients in air transportation
  • Governments, airports, air navigation providers
  • Airlines, logistics, GDSs, travel agencies,
    equipment and service providers
  • A global team USA, Europe, Asia, Latin America,
    Africa
  • Breadth
  • Strategy, operational restructuring,
    organizational design
  • Systems design and implementation support
  • Policy and regulatory advice

3
Airline crisis is unprecedented current price
levels appear consistent with long term trends
Unit Revenue and Cost Trend (U.S. Industry)
Unit Revenue (RASM)
Unit Cost (CASM)
Cents Per Available Seat Mile(c/ASM) (Adjusted To
2001 Dollars)
CASM decline RASM decline
19791992 1.5pa 19791992 1.8pa
CASM increase RASM increase
19931998 -1.0pa 19931998 0.6pa
Risk that revenues will revert to old trend
line
Note CASM reduction Q3 2002 somewhat
overstated due to accounting effects Source
Company Financial Statements, Back Associates,
BAH Analysis
4
The paradigm shift between point-to-point and
network business models is far from over
U.S. Domestic Market Structure (OD Passenger
Trips Y2000)
Low Cost Carrier Potential
  • Low Cost Carriers (LCCs) can conservatively
    participate in 70 of the US market
  • LCCs now participate in 43 of OD market
  • Significant growth potential remains
  • Eastern U.S.
  • Increased breadth in existing strongholds
  • Increased depth in ODs currently served

Non-StopServiceAvailable
Non-Stop ServiceNot Available
Total
44
6
50
Major Hub Cities
7
2
9
Minor Hub Cities
10
3
13
Large Non-Hub
6
2
8
SWA Connection
9
7
16
Other
Total
78
22
100
10 Over 2,000 Miles
16-18 Small City Markets
5
The fundamental threat to hub and spoke carriers
lies in price realization
Average Yield(1) in Hub Markets
60
OA Yield No SWA preserve
50
  • SWA non-stop competition reduces OA yields
    25-35
  • SWA one-stop competition reduces OA yields 15-20

OA Yield SWA conn
40
OA Yield SWA direct competition
C/ASM
30
SWA Yield connect
20
SWA Yield non-stop
10
0
0
500
1000
1500
2000
2500
RANGE
Note (1) Revenue per revenue passenger mile,
including PFC and taxes (2) OA Other
Airline Source DOT Y.2000 data, BAH Analysis
6
The situation is complicated by an excess of hub
capacity
Current Travel Structure (Passenger Trips, Y2000)
Connect In USA 30
110 M OD PAX
International
70 Do Not Connect in US
60 ofDomestic Trips Are Non-Stop
410 M OD PAX
Domestic
Other Connections 9
Inadequate Non-Stop Service 10
Current Domestic Connections 40
No Non-Stop Service Available 22
Source U.S. DOT, BAH analysis
7
resulting in an unsustainable revenue positions
at hub-and-spoke carriers
Competitive Composition Typical Mainline
Carrier, Pre-Crash
Degree Of Price Sensitivity
Non-Stop Passenger Flight
Connecting Passenger Flight
LowIndividual chooses airline, travels on
business or rich personal travel
20 - 30 revenue
MediumCorporation is principal decision maker,
drives bargain
10 - 15 revenue
10 - 15 revenue
HighMostly leisure travel and price sensitive
business
15 revenue
10 - 15 revenue
Generally Product Advantage Significantly Higher
Yields (Without LCC Price Impact)
Moderately Vulnerable
Product Parity Or Disadvantage
Vulnerable
8
Network carriers have a huge cost gap vs LCCs
CASM Versus Stage Length 2000
SK
AZ
AF
LH
US
BA
KL
Cents / ASM
EasyJet
IB
AA
AS
UA
NW
TW
AirT
CO
AWA
DL
Ryanair
ATA
SWA
Britannia
Average Stage Length (miles)
Source BAH Analysis

9
Much of this cost differential is a result of
production model choices, not frills
Drivers Of Unit Cost DifferencesU.S. Network
Carriers and SWA(737-300 Stage Length, Seat
Density and Factor Cost Adjusted, Y2000)
7.2
12
c/ASM
Other
15
GA
Sales and Res
70
Schedule
Pax, Bag, Cargo Handling
-50
Process Pace
Ownership Costs
Onboard Costs
Distribution
Maintenance Costs
Fuel Costs
Frills
3
Other
Pilot Costs
Baseline(SWA)
Note Average Airline based on Delta, United, and
US Airways
10
A new business model may emerge that closes
70-80 of the cost gap and re-establishes product
differentiation
  • Random hubbing
  • Improved asset productivity
  • Reduce TAT and handling complexity
  • Alter trade-off between efficient operation and
    optimum connectivity
  • Separate simple from complicated tasks apply
    tailored process streams
  • Reduce low-value interactions with staff
  • Simplify reservation, ticketing, check-in

Restructure Network / Hub Operations to Remove
Scheduling Constraints(Below the Wing
Processes)
Simplify Customer Interface at the Airport and in
Distribution(Above the Wing Processes)
Reduce complexity, increase pace
  • Lower Cost
  • Differentiated Services
  • Viability

Achieve pure business streams
Provide specialized services and appropriate
schedule qualities
  • High service levels where needed or expected
    (local vs. connectivity)
  • Low-cost service levels where possible
    (high-value vs. low-value customers)

Create Separate Business Systems for Distinct
Customer Segments(Product Differentiation)
11
A new industry structure may emerge or the next
crisis will be a repeat on steroids
New Business Model
Incremental Evolution
  • 2-3 new network based carriers emerge by
    continent
  • 1 or 2 random hubs each
  • Many centers of mass a la SWA
  • Greater focus on non-stop services
  • 1-2 low costs carriers by continent
  • Regional carriers that perform two missions
  • Feed for limited number of random hubs
  • Point to point flying in business and smaller
    markets
  • Network carriers stick to current business model
  • Continued share loss to LCCs
  • Low cost subs fail again
  • Regional operators take over larger proportions
    of network
  • 1-2 low cost carriers succeed by continent
  • Regional carriers pick up failing routes, remain
    more focused on feed
  • Next crisis is an amplification of current one
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