Airline Network Strategies Dr. Peter Belobaba Presented...
Transcript of Airline Network Strategies Dr. Peter Belobaba Presented...
Airline Network Strategies Dr. Peter Belobaba
Presented by: Alex Heiter
Network, Fleet and Schedule
Strategic Planning
Module 5: 28 March 2016
Istanbul Technical University
Air Transportation Management
M.Sc. Program
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Lecture Outline
Evolving Network Strategies
Capacity Discipline and Profitability Recent Capacity Strategies of Western airlines Capacity Reduction Impact on Yields and Load Factors
Global Network Expansion: Emerging Carriers Rapid Growth of Competing Hubs
Airline Cooperation and Consolidation Alliances and Code-sharing Joint Ventures Mergers and Acquisitions
2 04 de marzo de 2016
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The Evolution of Networks
Hub Operation 55 City Pairs
Network Operation 231 City Pairs
Point-to-Point 5 City Pairs
Pre-1980s Route vs. Route
1980s-1990s Hub vs. Hub
21st Century Network vs. Network
CO
MPE
TITI
ON
ST
RU
CTU
RE
www.airlines.org
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US Airline Network Developments
US airlines have posted five profitable years 2010-2014 Dramatic improvements in unit costs and productivity since 2002 US bankruptcy laws allowed major labor cost reductions Recovery from financial crisis and record fuel prices in 2008-09
Profitability despite high fuel prices and slow recovery Industry consolidation – “Big 3” Legacy plus Southwest/AirTran Emphasis on profits and financial strength over market share
Unique network strategies Domestic “capacity discipline” International capacity expansion
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US Airline Industry Profits 2000-2014
Source: US Bureau of Transportation Statistics
(35,000)
(30,000)
(25,000)
(20,000)
(15,000)
(10,000)
(5,000)
-
5,000
10,000
15,000
20,000
Milli
ons
Years
Oper Profit
Net Profit
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US Airlines System RPM Shares (1Q 2014)
Source: US Bureau of Transportation Statistics
23.7%
20.5% 19.8%
11.8%
4.4% 3.3%
1.8% 1.8% 1.7% 1.7% 1.2% 1.1% 1.0% 1.0% 0.0%
5.0%
10.0%
15.0%
20.0%
25.0%Largest 4
carriers with 75%+ of RPMs
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696 688 566 529 502 446
2213 2147 2068 2002 1737 1517
978 939 971 1003 1115 1223
4273 4324 4278 4254 4277 4300
8160 8099 7882 7787 7631 7485
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
2010 2011 2012 2013 2014 2015*
Turboprops Small RJs (50 seats or less)Large RJs (51 to 99 seats) Other Jets (100 seats or more)
8% Decrease in US Domestic Flights (thousands) from 2010 to 2015
* Forecast
Source: M. Halpin (2015)
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Larger Aircraft – Percentage of US Domestic Flights Aircraft Type
9% 8% 7% 7% 7% 6%
27% 27% 26% 26% 23% 20%
12% 12% 12% 13% 15% 16%
52% 53% 54% 55% 56% 57%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012 2013 2014 2015*
Turboprops Small Regional Jets (50 seats or less)Large Regional Jets (51 to 99 seats) Other Jets (100 seats or more)
* Forecast
Source: M. Halpin (2015)
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0 200 400 600 800 1000 1200
JetBlue
Alaska
United
Southwest
Delta
American
Average Stage Length of US Domestic Flights per Airline
2010 2015* * Forecast
+ 6 %
+ 10 %
+ 11 %
+ 8 %
+ 12 %
- 0 %
Average Stage Lengths Have Increased
Source: M. Halpin (2015)
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-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
YoY % Change GDP YoY % Change Domestic Seats
Domestic Seat Capacity Stagnant Despite Economic Growth
Source: M. Wittman, Data from BTS T-100 via Diio Mi, BEA
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US Domestic Capacity Discipline Has Led to Higher Yields and Load Factors
$0.12
$0.13
$0.14
$0.15
$0.16
$0.17
$0.18
65%
67%
69%
71%
73%
75%
77%
79%
81%
83%
85%
20002001200220032004200520062007200820092010201120122013
Yiel
d (U
SD/R
PM)
Aver
age
Load
Fact
or
LOAD FACTOR
YIELD
Source: MIT Airline Data Project
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International v. Domestic Network Growth
Intercontinental growth has proven successful in conjunction with alliance partners Presence of low cost carriers make domestic profitability difficult Low cost carrier operations primarily focus on largest origin and
destination markets which makes profitable flying more difficult
Important to diversify route portfolio between international and domestic flying Domestic networks sized primarily to feed international flights can
benefit from carrying international connecting passengers Higher revenue international traffic helps to compensate for
higher cost structures of more mature carriers in the market
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Total International ASMs for U.S. Airlines
70%
72%
74%
76%
78%
80%
82%
84%
86%
88%
90%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
50
100
150
200
250
300
350
Load
Fac
tor
Year
Avai
labl
e Se
at M
iles (
billi
ons)
U.S. Airline ASMs U.S. Airline Load Factor
Source: MIT Airline Data Project
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Shift to International Flying by US Airlines
0
10
20
30
40
50
60
American Continental Delta Northwest United US Airways
1995200020062013
Perc
ent o
f Sys
tem
ASM
Percent of Capacity in International Markets
Source: MIT Airline Data Project
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Global Network Expansion: Emerging Global Carriers
Continued rapid growth of these airlines will affect global traffic flows Emirates (Dubai), Etihad (Abu Dhabi), Qatar (Doha) and Turkish
(Istanbul) building large hubs that depend on connecting traffic Future success is highly dependent on negotiating new bilateral
rights to further expand their hub networks
Implications for airports Emerging carriers looking for new spoke cities to feed their
connecting global hubs with 6th freedom international traffic Operations involve long-haul, wide-body (and A380) aircraft and
full-service products (premium classes, lounges) Competition among airports to attract these new services
At BOS, Turkish started in May 2014 and Emirates in March 2014 Emirates added 2nd daily 777 flight in October 2015 Qatar begins service in March 2016
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Geographical Advantage to Access the Emerging Market Traffic Flows
14,800km
4,500 nm 86% World Population
63% World GDP
4,600km 36% World Population
16% World GDP
Source: Airbus
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The emergence of Gulf/Middle East carriers has caused a shift in global traffic flows across major connecting hubs
Global Traffic Flows are Shifting Toward Gulf/Middle East Carriers
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Airline Cooperation and Consolidation
Regulatory hurdles block the type of cross-border consolidation that has occurred in other industries. International flight operations still regulated by bilateral
agreements Limits on foreign ownership of airlines in many countries Influence of political and union forces against such consolidation Anti-trust laws can constrain mergers and cooperation even
within same country
Many forms of cooperation possible: Code-sharing agreements between two airlines Membership in global airline alliances Joint ventures to share both revenues and costs Mergers and acquisitions
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MERGER OR ACQUISITION
ANTITRUST IMMUNITY
LIMITED JOINT VENTURE
Integration Level 0%
CODE SHARE
100%
Prof
it O
ptim
izat
ion
/ C
ost I
mpr
ovem
ent
100%
Alliances and Strategic
Partnerships
Airline Partnerships Have Goals of Increased Revenues and/or Lower Costs
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Code-Sharing
Under a “code-share” arrangement, partner airline places its own code on an alliance flight: Partner markets and sells its own tickets for the flight
Flight is actually operated by another alliance airline
Flight is listed twice (or more) in airline schedules and computer reservations systems (CRS)
Code sharing increases consumers’ perceptions of network coverage in CRS displays: EXAMPLE:
TK 002 JFK-IST
also listed as SQ* 6202 JFK-IST
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Global Airline Alliances 2014
Year of Formation 1997 2000 1999
Member Airlines 26 20 15
Annual Revenues $173 B $150 B $142 B
Annual Passengers 637 M 588 M 506 M
Destinations Served 1269 1,064 992
Daily Departures 18,000 15,000 14,000
Source: K. Al-Sayeh (2013) MIT Study
oneworld 15%
SkyTeam 19%
Star Alliance
26%
Unaffiliated 40%
ASK Share (YE May 2014)
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0
5
10
15
20
25
30
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012(Feb)
Aeroméxico Air France Delta Korean Air
Alitalia
Continental Northwest
KLM Aeroflot
Copa Airlines China Southern Air Europa Kenya Airlines
--Continental-- --Copa Airlines-- --Northwest--
Vietnam Airlines Tarom
China Eastern China Airlines
American British Airways Qantas Cathay Pacific Canadian
Finnair Iberia
Aer Lingus LAN --Canadian-- Japan Airlines
Royal Jordanian Malev --Aer Lingus--
Mexicana S7 Airlines Lufthansa
United Air Canada SAS Thai Airways Varig
All Nippon Airways Air New Zealand Ansett Australia
Singapore Airlines Austrian bmi Mexicana
--Ansett Australia--
Asiana LOT Polish Spanair
US Airways Croatia Airlines Adria Airways Blue 1 --Mexicana--
Swiss South African Airways
Air China Shanghai Airlines --Varig--
TAP Portugal
Turkish Airlines Egyptair
Brussels Airlines Continental
TAM Linhas Aereas Aegean Airlines --Shanghai Airlines--
--Continental--
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15
12
Ethiopian Airlines
Growth of Global Alliances
Source: Tugores, T. (2011) MIT SM Thesis
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Alliance capacity growth over the past decade
11% 12% 16% 17% 19%
24%
53%
48%
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
2005 2014
Flig
hts
oneworld SkyTeam Star Alliance Other
15% 16% 16%
19% 21%
26% 48%
40%
0500
1,0001,5002,0002,5003,0003,5004,0004,5005,000
2005 2014A
SM
s (b
illion
s)
oneworld SkyTeam Star Alliance Other
• The three alliances collectively account for over 50% of all flights operated, and 60% of the generated global capacity in 2014
Source: Innovata Schedule Reference Service
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SkyTeam: Member Airlines
Africa Asia Australasia Europe Latin America Middle East North America
1 7 0 7 2 2 1
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oneworld: Member Airlines
American Airlines Group (USA)
Air Berlin (Germany)
British Airways (UK) Cathay Pacific (Hong Kong)
Iberia (Spain) Finnair (Finland) Japan Airlines (Japan)
LAN (Chile)
Qantas (Australia) Malaysia Airlines (Malaysia)
Royal Jordanian (Jordan)
S7 Airlines (Russia)
Qatar Airways (Qatar)
TAM (Brazil) Sri Lankan Airlines
Africa Asia Australasia Europe Latin America Middle East North America
0 4 1 5 2 2 1
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Star Alliance: Member Airlines
Africa Asia Australasia Europe Latin America Middle East North America
3 7 1 10 2 1 2
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Top 40 Airlines and Alliance Affiliations: Largest Airlines by Passenger Traffic
(RPKs) Rank Airline
1 Delta Air Lines 2 United Airlines 3 American Airlines Group 4 Emirates Airline 5 Southwest Airlines 6 Lufthansa 7 Air France 8 British Airways 9 China Eastern Airlines
10 China Southern Airlines 11 Ryanair 12 Air China 13 Cathay Pacific 14 Singapore Airlines 15 Air Canada 16 KLM Royal Dutch Airlines 17 Qantas 18 Turkish Airlines 19 Qatar Airways 20 Korean Air
Rank Airline 21 easyJet 22 ANA 23 Thai Airways 24 LATAM 25 JetBlue Airways 26 Aeroflot 27 Iberia 28 Air Berlin 29 Etihad Airways 30 Japan Airlines 31 Saudia 32 Transaero Airlines 33 Virgin Atlantic Airways 34 Alaska Airlines 35 Malaysia Airlines 36 GOL 37 Alitalia 38 Swiss 39 Asiana Airlines 40 China Airlines
SkyTeam (10) Oneworld (10) Star Alliance (10) Unaffiliated Source: Airline Business, Annual Rankings 2012
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Advantages of Airline Alliances
Airlines can strengthen networks and market position against competing alliances: Expand network coverage with little risk or increased operating
costs, and no new capital required (aircraft or facilities) Access to new O-D markets and incremental revenues Increased market shares in existing markets due to greater
presence, meaning increased traffic, revenues, and profit
For consumers, a “seamless” travel experience: World-wide service with single check-in, consistent passenger
service standards, club rooms and FFP benefits
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Disadvantages of Airline Alliances
Potential for disagreements among airline partners: Can be difficult and costly to completely standardize customer
service standards and procedures
Cost savings might not be as great as anticipated
Conflicting network and revenue sharing objectives
Possible for one partner to actually lose revenue as dominant airline exerts market and RM strengths
Alliance relationships are not permanent, as airlines switch partners and alliances
For consumers, confusion about code-sharing, operating carriers and potentially anti-competitive impacts.
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Consolidation Activity Around the Globe Selected M&A and/or Cross-Border Investment: 2005-Present
USA Non-USA Republic/Shuttle America Air France/KLM
US Airways/America West Copa/AeroRepública
SkyWest/Atlantic Southeast Lufthansa/Swiss
Pinnacle/Colgan Air China/Cathay Pacific*
Lufthansa/JetBlue* Cathay Pacific/Dragonair
Delta/Northwest Lufthansa/Brussels*/BMI/Austrian
Republic/Midwest/Frontier Avianca/TACA
United/Continental British Airways/Iberia
Pinnacle/Mesaba LAN/TAM
SkyWest-ASA/ExpressJet LAN/Aires
Southwest/AirTran TAM/TRIP*
Source: ATA and Deutsche Bank Global Research * Strategic investment but not full ownership or control
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Different Models of M&A Integration
Examples
Characteristics
Advantages
Disadvantages
One Brand Co-Brand Multi-Brand
Full integration
One management
One brand
Maximum of synergies
Fast decision processes
Loss of a potentially well known brand
Very high integration
Integrated management
Two brands
Higher synergies
Maintain (national) brands
Higher complexity
High integration
Management teams
Multi-brand
Profit center orientation
Maintain (national) brands
Flexibility in growth
Higher complexity
Source: Lufthansa Presentation to MIT (2010)
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Factors Affecting Future Networks
Network Structure • No evidence of shift away from large hub and spoke networks
• Even LCCs have been developing “focus cities” for connections
Industry Consolidation • Recent (and future) mergers could eliminate smaller hubs
• Alliances and joint ventures reinforce largest international hubs
Availability of New Aircraft Options • Newer generation widebody aircraft enable service to more
spokes from major global hubs
• Replacement alternatives for smaller narrow-body fleet?