Airline Network StrategiesDr. Peter Belobaba
Network, Fleet and Schedule
Strategic Planning
Module 17 : 13 March 2014
Istanbul Technical University
Air Transportation Management
M.Sc. Program
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Lecture Outline
Review: Evolving Network Strategies
US Airline Network Developments Impacts of Recent US Mergers International vs. Domestic Network Growth
Global Network Expansion: Emerging Carriers Rapid Growth of Competing Hubs
Airline Cooperation and Consolidation Alliances and Code-sharing Joint Ventures Mergers and Acquisitions
2 24 de febrero de 2014
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Review: Evolving Network Strategies
From linear – to hub construction – to hub-to-hub flying
From national dominance – to a regional footprint –to a global focus
Domestic networks supporting international growth International expansion contributes to improved on board
revenue for the domestic operation
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The Evolution of Networks
Hub Operation55 City Pairs
Network Operation231 City Pairs
Point-to-Point5 City Pairs
Pre-DeregulationRoute vs. Route
1980s-1990sHub vs. Hub
21st CenturyNetwork vs. Network
CO
MP
ET
ITIO
NS
TR
UC
TU
RE
www.airlines.org
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US Airline Network Developments
Industry consolidation through mergers US Airways and America West in 2005 [US Airways] Delta and Northwest in 2008 [Delta] United and Continental in 2010 [United] Southwest and AirTran in 2012 [Southwest] American and US Airways in 2014 [American]
International vs. Domestic Network Growth Domestic Capacity Cuts and Shifts to Regional Partners International Network Expansion
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US Carrier System RPM Traffic Share 12 Months 2012
Source: Aviation Daily, 1/21/2013
22.6%21.3%
15.9%
12.9%
7.8%
4.2% 3.8%3.1% 2.6%
1.5% 1.5% 1.3% 0.8%
0%
5%
10%
15%
20%
25%80.5%
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Impacts of Mergers on Flight Volumes
US Airways and Delta Airlines effectively absorbed flight volumes of America West and Northwest, respectively, with little to no change in total mainline flight volumes
18,119 16,860
60,836
37,540 33,970
0
20,000
40,000
60,000
80,000
2000 2005 2010
US Airways Total Flight Volume
America West US Airways
44,657 42,414
75,097
58,750 61,559
0
20,000
40,000
60,000
80,000
2000 2005 2010
Delta Airlines Total Flight Volume
Northwest Airlines Delta Airlines
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Drop in US Domestic Capacity –Shift to Regional Partners
US
Do
mes
tic
AS
Ms
in B
illio
ns
Source: ATA
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International v. Domestic Network Growth
Inter-continental 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 yield international traffic helps to compensate for higher
cost structures of more mature carriers in the market
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Domestic Departures from U.S. Airports
Drop of 1.3 million departures/year since 2007.
0
2
4
6
8
10
12
2007 2008 2009 2010 2011 2012
Mill
ion
s o
f D
epar
ture
s
Core 30 Non-Core 30
Source: Diio Mi Schedule Data
57.3%
42.7%
60.7%
39.3%
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Total US Domestic Capacity IndexFlights Down 14%; ASMs Down 8% Since 2007
0.80
0.85
0.90
0.95
1.00
1.05
2004 2005 2006 2007 2008 2009 2010 2011 2012
FLIGHTS
SEATS
ASMS
‐11%
‐ 8%
‐14%
Source: Diio Mi Schedule Data
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Capacity Shift from U.S. Domestic to International Routes
Source: Airlines for America
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Diversification of the Route Portfolio Critical to Improved Profitability
Percen
t of System ASM
Percent of Capacity in International Markets
0
10
20
30
40
50
60
1995 2000 2009 2011
American Delta United US Airways
Source: MIT Airline Data Project
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US Airline International Service IndexLarger Aircraft and Longer Flights Since 2004
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
2004 2005 2006 2007 2008 2009 2010 2011 2012
FLIGHTS
SEATS
ASMS
Source: Diio Mi Schedule Data
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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 will start May 2014 and Emirates in March 2014
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Geographical Advantage toAccess the Emerging Market Traffic Flows
8,000 nm
4,500 nm86% World Population
63% World GDP
2,500 nm36% World Population
16% World GDPSource: Airbus
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Flights from Emerging Carrier hubs have more than doubled since 2004
Flights to all regions have increased rapidly over the past 8 years
Nearly 50% of flights are destined to Europe
0
50000
100000
150000
200000
250000
2004 2005 2006 2007 2008 2009 2010 2011 2012
Africa Asia Australia Europe Latin America North America
Source: Karim Al-Sayeh, Innovata SRS, accessed through Diio Mi
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Competition with European Hubs
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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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The Synergies of Airline Cooperation are Determined by the Level of Integration
Economical Benefit/Complexity
Special Prorate Agreement (SPA)
(Free sale) Codesharing
Merger/ M&A
Depth of integration
100%
no cooperation
Interline Agreements
Sales Incentive Agreement
Blocked Seat Agreements (Codeshare)
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4
5
6
8
Alliances
JV
Bilateral Joint Ventures (Revenue)
Bilateral Joint Ventures (Profit)7
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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 012 JFK-ISTalso listed as US* 5003 JFK-IST
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Airline Alliances and Network Coverage
“Strategic alliances” between two airlines take the economic logic of hub networks one step further: Partner airlines can expand their network coverage without
increasing their own flights and operating costs Leads to further consolidation of loads, as two or more airlines
now contribute passengers to a single “alliance flight” Marketing power of larger networks is reinforced--more
destinations, seamless connections, frequent flyer benefits Additional cost savings are possible in alliance airlines due to
combined flights, airport check-in and club operations, integrated purchasing and information systems
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HubsAirline I
HubsAirline II
NetworkAirline II
NetworkAirline I
AircraftAirline I
AircraftAirline II
AircraftAirline II
& Airline I
International Alliance Networks
International alliances link their networks through hub-to-hub flights
Global Strategic Alliance -- Strongly connected domestic networks linked together through high-density flights between international hubs
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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)
AeroméxicoAir FranceDeltaKorean Air
Alitalia
ContinentalNorthwest
KLM
Aeroflot
Copa AirlinesChina SouthernAir EuropaKenya Airlines
--Continental----Copa Airlines----Northwest--
Vietnam AirlinesTarom
China Eastern China Airlines
AmericanBritish AirwaysQantasCathay PacificCanadian
FinnairIberia
Aer LingusLAN--Canadian-- Japan Airlines
Royal JordanianMalev--Aer Lingus--
MexicanaS7 AirlinesLufthansa
United Air CanadaSASThai AirwaysVarig
All Nippon AirwaysAir New ZealandAnsett Australia
Singapore AirlinesAustrian bmiMexicana
--Ansett Australia--
AsianaLOT PolishSpanair
US AirwaysCroatia AirlinesAdria AirwaysBlue 1--Mexicana--
SwissSouth African Airways
Air ChinaShanghai Airlines--Varig--
TAP Portugal
Turkish AirlinesEgyptair
Brussels AirlinesContinental
TAM Linhas AereasAegean 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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Global Airline Alliances
Year of Formation 1997 2000 1999
Member Airlines 27 15 12
Annual Revenues $174 B $112 B $92 B
World RPK Share 30% 19% 19%
Destinations Served 1135 832 712
Countries Served 181 169 145
Source: Tugores, T. (2011) MIT SM Thesis
Star Alliance, 25.2%
SkyTeam, 15.7%
oneworld, 13.7%
Others, 45.4%
Available Seat Kilometres
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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 GlobeSelected 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• 787 delivery delays, A350 still years away• Replacement alternatives for smaller narrow-body fleet?