1. Kevin O’Toole EDITOR AIRLINE BUSINESS Air Transport and Tourism: Synergies and Parallelisms University of Surrey Airline strategy: The long view

2. National champions  National markets  Heavy regulation  Low competition  High growth rates 2xGDP  Market conditions

3. National champions  Dominant market share  Regulatory support/access  Absorb/kill local competitors  Match world standards  Control supply chain…  …control pricing  Strategies for success

4. National champions  National political constraints  Complexity/bureaucracy  Inflexibility on cost  Lack of differentiation  All things to all men…within a national boundary  The legacy

5. Global players  Deregulation  Global economy  Fierce competition/market disciplines  Maturing markets – growth 1xGDP  Internet democracy – smart buyers  The new market conditions

6. Global players  Global reach  Customer not product focus  Profit driven not cost led  Segmented brands  Differentiated products  Cost flexibility  Strategies for success

7. 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

8. 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

9. Can the model adapt?  Regulation – safety, security, bilaterals, competition etc etc etc  People – large & unionised workforce  Assets – heavy metal!  Built-in inflexibility

10. 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!

11. 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

12. Can the model adapt?  Service industry levels of people cost: employs 1.5-2 million worldwide revenue/cost $200k per employee  Expensive  Heavily unionised  Workforce heavy

13. A marginal business Top 150 airline groups 5 year record 20012000199919981997 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

14. Source: Bridging the GAAP 4-02

15. Source: Airline Business World Airline Rankings

16. 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

17. New models  Tackle fixed costs  Gain global scale  Economies of scale  Move beyond national boundaries  Market mobility  The response

18. 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

19. Online services for customers (Base: All respondents)

20. 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

21. 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

22. 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