Business Models in the Airline Industry

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Business Models in the Airline Industry
January 30, 2013

Winter term 2013

Outline
—  Evolution —  Hub-and-spoke route networks —  Legacy carriers —  Low cost carriers (LCCs) —  Ultra low cost carriers (ULCCs) —  Regional and charter carriers

Evolution
—  Before deregulation —  Full service network carriers —  No low cost models —  No price competition (same price on a given route) —  Full-quality service —  Point-to-point route networks —  After deregulation —  Proliferation of LCC models —  Hybrid carriers —  Industry consolidation (mergers and acquisitions) —  Alliances and joint ventures —  Service debundling —  Hub-and-spoke route systems

Hub and spoke route network
—  Hub and spoke - route network
structure by which a carrier utilizes an airport to route a broad range of Origin & Destination markets. —  Hub = Central node or airport —  Spoke = Nonstop routes radiating out from the hub connecting with various other markets —  E-D, A-B, C-B etc. O&D market is routed via hub; market cannot sustain frequent nonstop service

Hubs and traffic density
Vancouver (YVR), Calgary (YYC), Toronto (YYZ)
—  Lineal Route Ø  Each route supports 1
flight/day Ø  Average traffic density
1

YYC
1

1

YVR

YYZ

—  Hub Route Ø  Each route supports 2

flights/day Ø  Average traffic density Ø  2 flights/day per route Ø  Same total traffic as linear

2

YYC

2

YVR

YYZ

Types of hubs
—  Simple hubs – little or no coordination between in- and outbound flights. Spokes scheduled independently.

—  Complex hubs - flights are co-ordinated to arrive in “banks” (allow more and fast connections between flights but poor utilization outside banks and minimal interline traffic). Hub Traffic Distribution

Local O&D with hub city Connecting at hub Interline

Types of hubs
—  Directional
Ø  all arrivals from east, all departures to west Ø  E-W or N-S aligned spokes due to market, regulatory conditions Ø  geographic constraints (i.e. Canada, CX)

—  Multiple (Omnidirectional)
Ø  Reflective of mature hub development Ø  Broad domestic geographic network (i.e. U.S.) Ø  Characteristic of all major U.S. carriers

—  International
Ø  International & domestic networks co-ordinated Ø  Carriers primary international gateway for that region Ø  i.e. YVR (AC), SFO (UA), MIA (AA) Ø  i.e. HKG (CX), AMS (KL) - though no domestic networks

Time penalties of hubs
Three additional trip time components compared to nonstop flight: 1.  30 minutes for additional ascent/descent (stop) at hub airport 2.  Extra cruise time (depending on the angle) 3.  Connection time (30-60 minutes between flights)

Extra trip time offset by better total time for traveler:
—  Total time = trip time + waiting time —  Wait time = Time from Desired Departure to Actual Departure Linear: 2 flights per day per day nonstop, 8 hours apart. è average wait = 4 hours Hub: 4 flights per day, but via hub 2 hours apart è average wait = 1 hour è + 0.5 h ascent/descent è + 0.5 h extra cruise è + 0.5 h connection è total wait & incremental flight time = 2.5 hours

Demand effects
—  N cities in a hub network è N (N-1) / 2 potential city pairs
N N(N-1) 2 2 1 3 3 4 6 5 10 20 190 98 4,743

—  Supporting a hub - total traffic needed to support
an additional flight can be small

—  “Hubbing” keeps more traffic on-line (less interline) —  Feeder links can be important - hubs led to the rise of extensive “commuter” or “regionals” aligned or subsidiaries of major air carriers (e.g. AC Jazz)

Hub choice factors
—  Competition —  Weather (especially for cargo hubs) —  Geographic location —  Distance from the airline’s other hubs —  Local O&D market —  Airport congestion —  —  —  — 
groundside & air traffic access to gates & facilities room for future growth community support

Types of airline business models
—  Legacy or full-service network carriers —  Low cost...
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