Business Models in the Airline Industry

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