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Airline Business Models

Jagoda Egeland

Strategy & Policy Manager

Airports Commission Briefing

London, 17 March 2014

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The global aviation sector: Two parallel trends

• Consolidation, partnership & network integration (legacy carriers)

• Budget travel, mostly offered by new entrants (low-cost carriers = LCCs)

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Legacy carriers vs. low-cost carriers

Legacy carriers Low-cost carriers

Hub-and-spoke networksPoint-2-point connections on the

thickest or previously unserved routes

A range of different aircraft (from 737 to A380)

Small, efficient aircraft (737, A320)

Based at hub airports, often close to large agglomerations

Based at primary or secondary airports

Branding, extensive route network, loyalty programmes

Affordability, availability at secondary airports

Short-haul and long-haul Predominantly short-haul

Business and leisure Predominantly leisure

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Currently, the three major alliances hold over half of global seat capacity…

5Source: DfT analysis based on CAA airport statistics

Passengers at UK airports by ELFAA membership, 1990-2012

…but most growth over recent years has been due to LCC expansion

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This picture is constantly changing

The AC is looking into factors that are driving that change•Regulation

•New aircraft technology

•Behaviour of aviation users

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Regulation: Further consolidation or further expansion of LCCs?

• A global EU-US Open Skies agreement will be a chance for low-cost carriers to expand?

• Will restrictions on foreign ownership of airlines be relaxed over time and hence strengthen the alliances?

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New aircraft technology: A long-haul low-cost revolution?

Source: Norwegian Air Shuttle, n Magazine, March 2014.

• Will Boeing 787 and Airbus A350 facilitate low-cost dominance in the long-haul market or will they simply reconfirm the position of legacy carriers?

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Low-cost carriers’ input-cost edge is larger for short-haul flights than for long-haul ones

Source: McKinsey Quarterly, Budget carriers face difficult odds moving into the most profitable sector of the airline industry.

Why LCCs may not want to fly long-haul?

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Will LCCs and legacy carriers reach into each other’s business models?

• Business travel with LCCs• Asian consumer will dominate route networks in

2030• Self-connecting

• LCC model predominantly on short-haul and the thickest long-haul routes

• Legacy carrier model serving the majority of long-haul connections

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The AC is looking into potential scenarios for each short-listed scheme

• What will the potential airport charges be?– How affordable is the proposal to airlines?– New entrants?

• What kind of airline business models could different levels of charges attract?– Scenarios and their plausibility– What is the potential competitive impact on the UK

airport system in each case?– What connectivity can potentially be delivered?

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Airline Business Models

Jagoda Egeland

Strategy & Policy Manager

Airports Commission Briefing

London, 17 March 2014