Kevin O’Toole EDITOR AIRLINE BUSINESS Air Transport and Tourism: Synergies and Parallelisms University of Surrey Airline strategy: The long view
National champions National markets Heavy regulation Low competition High growth rates 2xGDP Market conditions
National champions Dominant market share Regulatory support/access Absorb/kill local competitors Match world standards Control supply chain… …control pricing Strategies for success
National champions National political constraints Complexity/bureaucracy Inflexibility on cost Lack of differentiation All things to all men…within a national boundary The legacy
Global players Deregulation Global economy Fierce competition/market disciplines Maturing markets – growth 1xGDP Internet democracy – smart buyers The new market conditions
Global players Global reach Customer not product focus Profit driven not cost led Segmented brands Differentiated products Cost flexibility Strategies for success
The problem today is… The industry as a whole has not sufficiently adapted to face those changed market conditions… …it has often not been free to… …BUT if airlines are not ready to meet these challenges others will
Market collision Global retailers/ arrangers Supply chain managers Production/ capacity suppliers Global reach Strong brand Customer base Many products Economies of scale Systems expertise High utilisation Economies of scale Production expertise Flexibility Travel agencies Online sites Finance houses etc GDS System providers etc Airlines Hotels Car hire etc
Can the model adapt? Regulation – safety, security, bilaterals, competition etc etc etc People – large & unionised workforce Assets – heavy metal! Built-in inflexibility
Can the model adapt? Vertical integration: retail + logistics + production Owns all parts of the chain…. ….and pays for them Result: Low margins and high risk A smokestack industry!
Can the model adapt? Asset heavy Balance sheet ratios 01/02 $ billionsales rationorm Revenues238x1 Fixed assets191x1.2x3-4 All assets310X0.8X1.5 Source: Bridging the GAAP 4-02
Can the model adapt? Service industry levels of people cost: employs million worldwide revenue/cost $200k per employee Expensive Heavily unionised Workforce heavy
A marginal business Top 150 airline groups 5 year record Revenues-5.2%8.2%7.0%2.0%3.0% Op margin-2.0%4.2%5.3%6.8%7.2% Net margin-4.2%1.1%3.0%3.1%3.2% Source: Airline Business World Airline Rankings
Source: Bridging the GAAP 4-02
Source: Airline Business World Airline Rankings
New models Tackle costs Outsource what is not essential Build flexibility into capacity etc New deals with partners eg power-by- the hour New deals with unions The response
New models Tackle fixed costs Gain global scale Economies of scale Move beyond national boundaries Market mobility The response
New models Tackle fixed costs Gain global scale Increase offer Match offer to customer value Exploit new distribution channels CRM Increase the offer The response
Online services for customers (Base: All respondents)
New models Choose where to sit in the chain Asset light service business….or People light production business Don’t spend or depend on the wrong assets Learn from other retail/production models The longer term
New models European charter Four integrated travel groups …led by retail packaging …flying is incidental/adaptable Cargo Few express integrators …and going further eg Deutsche Post Belly cargo becomes a commodity Examples
New models Branded producer Differentiated, desired named brand Unbranded producer Efficient, flexible, global and cheap Retail consolidator Customer connection, broad offer Niche player Exploiting inaccessible markets Global giant Sheer market power Possible models