Airline Industry

Last Updated: 09 Jul 2021
Essay type: Process
Pages: 13 Views: 156
Table of contents

The bilateral agreements specified the traffic rights for each operating carrier, the number of airports in which they operate, the number of carriers, and the recurrence of flights between the fixed airports. Those airlines were, in practice, the national flag carriers of each country (state-owned). Since 1947 the International Air Transport Association (DATA) has had the authority to set the ticket prices charged by international airlines at the worldwide international DATA conference.The national carriers, national governments, and the national airports dominated international air- transport until 1978.

In 1978, the United Stated domestic market started to become liberalized. In the sass and sass many international bilateral agreements were hanged (see Diagnosis 2001). Almost 25 years after the US market deregulation, Anderson et al. (2005) The carriers can compete freely on routes, frequencies, prices, and service levels. In addition, previous limitations on cross-border mergers within the EX. were removed. Thus, the old state- owned carriers, which belong to single countries, can be replaced by a broader private ownership structure, despite the national borders. However, much of the extra-E network is still regulated by bilateral agreements and this still has a significant impact on the network structure of the carriers.

The deregulation effects on the industry have been broadly analyses by several authors in terms of network development, pricing behavior, airlines-airports relations, and alliances. Some examples are Bernstein (1989, 1992); Dresser and Winded (1995); Button et al. (2000); urn et al. (2000); peels (2000); chipper (1999) and Barrett (2004). In the US, the deregulation has resulted in two main effects on network strategy. First, a large number of truckling' carriers have reorganized their network structures from a point- to-point (UP) system into a hub-and-spoke (HAS) system.

Order custom essay Airline Industry with free plagiarism report

feat icon 450+ experts on 30 subjects feat icon Starting from 3 hours delivery
Get Essay Help

Second, (see Gillie and Morrison, 2003) there has been an increase in the adoption of UP systems by low-cost, no-frills airlines such as Southwest Airlines. In the ELI, the deregulation produced a slow and rather small effect on routes and fares (see Bracken and Peels, 2003) in the initial stage, but during the late sass the changes gradually became bigger. The first change was the rise of the international airlines' alliances. The reasons behind the emergence of alliances are demonstrated (I. E. The economic globalization has created demand for intercontinental flights) and supply-related.

A Brief Analysis of the Economic Factors Behind the Alliances' Development

The second effect was the further development of the HAS strategy by the former flag carriers. The HAS configuration was already the predominant structure in Europe before the deregulation. However, Bracken and Peels (2003) questioned whether these networks were functioning in the HAS manner.

geographical size of the European countries and the fact that the flag carriers were connecting all major cities with price and capacity regulated by bilateral agreements, the potential for connecting traffic within Europe was limited. At an earlier stage of the EX. deregulation, Bergmann and De Wit (1996) addressed a potential regulation effect which still seems to be still latent in the market.

Their research question was: '... In a profit maximizing environment if airlines are free to enter and exit the market, design their networks and set fares and level of services, which West European airports will they favor as their main hub?... '. The study was carried out in 1996 when the EX. liberalizing was not yet finalized but one of its conclusions was that the airlines would intensify the use of the HAS system and would select a specific hub so as to maximize their profits.

Bergmann and De Wit concluded that, in he immediate future, national carriers in the EX. will continue to operate in their national home base for a substantial part of their products, but they will probably take the opportunity of a liberalized market by developing a secondary Euro-hub complementary to their national hub. Finally a concentration in the internal market will take place thus creating room for enhanced HAS operations.

While the concentration and development of the HAS system is widely documented as the main effect of deregulation, the selection of a specific hub by airlines is not evident. Most of the carriers still have their hubs in their original country. However, this aspect raises the questions whether the EX. deregulation has effectively created sufficient market liberalizing, as simulated by the Bergmann and De Wit model or whether it was able to diminish the role of hubs as entry market barriers. The third effect was the growth of low-cost carriers such as Ryan and asset.

They experienced fast growth after 1999 and often compete with full-service carriers on the same routes and for coincident segments, and they did not suffer as much from the crisis in the air transport industry after September 1 1, this is because the low fare levels still attract many passengers, and the air traveling publics fearing of flying to sensitive regions (North America and Asia) diverted passengers to fly intra-Europe. The deregulation and the increased competition have reduced the air fares.

Thus some effects on the charter operations are possible given that the gaps between the charter fares and the scheduled low-cost carrier fares are being reduced.

The Open-Skies Agreement Between the Ex. and the Us

On 30 March 2008, the most ambitious air service deal ever negotiated, took effect. European airlines can now fly without restrictions from any point in the EX. to any mint in the US. The new ELI-US agreement is expected to increase competition and reduce the airfares in the biggest international air transport market.

The Open-skies agreement contains numerous positive elements but three key elements seem decisive in the future of the worldwide air traffic.

Airline Business Models

  • 17 companies are classified identically without discrimination based on their country of origin (if in the ELI).
  • Flights now possible between any point in the EX. to any point in the US: the airlines will be able to fly from any European airport to any US estimation.
  • Flights now possible beyond the US towards third countries: European companies will also be allowed to go beyond the US and provide destinations using the US as a stopover.

With respect to the operation of cargo flights between the US and third countries: freight will follow the same above-mentioned rules as passenger traffic. This will allow flights from any European airport to any US airport with any European or US company. This major improvement will equalize the rights of all EX. Member States which previously did not have a bilateral agreement with the US and hush enhance the destination possibilities for many Europeans. Some other key factors of the agreement provide for cooperation in fields such as security, safety and environment.

  1. Security: The EX. and the US will work towards compatible standards and practices for entering territories in order to facilitate air regulation.
  2. Safety: A consultation procedure will be set up to consider safety concerns on either side, and there will be recognition of the development of safety responsibilities at EX. level.


The US airlines may be subject to taxation of aviation fuel on routes between Member States. This agreement represents only a first step in the process of metallization of the European and US sky. Both the EX. and US agreed to engage a second phase of negotiations after May 2008 aimed at tackling the following issues: facilitating foreign investments; fostering the development of liberalizing. Indeed the deal leaves in place some key limitations:

  • Ownership and the control of the airlines. Foreign entities remain limited to owning no more than 25 percent of the voting shares in a US carrier-49 percent in an EX. carrier- and foreigners can not exercise actual control on US carriers. The US domestic market remains entirely closed to foreign airlines, and sabotage in the US remains prohibited under the 'Fly America' policy. Most important of all, the US carriers will finally enter London Heathers, the key getaway airport in Europe for the US to full compete with the EX. carriers.
  • The emerging forms of business models in the airline industry are presented in terms of how the carrier generates revenue, its product offering, value-added services, revenue sources, and target customers.
  • The deregulation and new competitive interactions between firms always result in mom adjustment of the player's own business model to that of the competitor.

Three main sets of airline business models that will be described in the next sections are:

  1. Full-service carrier or FCC
  2. A low-cost carrier or LLC
  3. Charter carrier or FCC

A full-service carrier (FCC) is defined in this study as an airline company developed from the former state-owned flag carrier, through the market deregulation process, into an airline company with the following elements describing its business model:

  • Core business: Passenger, Cargo, Maintenance.
  • Hub-and-spoke network: This has as TTS major objective the full coverage of as many demand categories as possible (in terms of city-pairs ) through the optimization of connectivity in the hub.
  • Global player: Domestic, international and intercontinental markets are covered with short-, medium- and long-haul flights from the hubs to almost every continent.
  • Alliances development: No individual airline has developed a truly global network. Thus the network is virtually enlarged by interlining with partner carriers and become part of multi-HAS systems.
  • Vertical product fermentation: This is affected through in-flight and ground service, electronic services (Internet check-in) and travel rules to cover all possible market segments.
  • Customer relationship management (CRM): Every FCC has a loyalty program to retain the most frequent flyers. The frequent flyers programs (OFF) have became part of a broader strategy called CRM. The general purpose of CRM is to enable carriers to better manage their customers through the introduction of reliable processes and procedures for interacting with those customers.

The final aim of the CRM is to enhance the passenger's buying and traveling experience in order 6 Airlines' demand can be divided into: primary need, or the need for a passenger to travel from A (origin) to B (destination) and back at a certain time on a certain day. The use of the 'cityscape market' or 'O market' derives from this reason; and secondary need or the preference for a certain airline, compared in terms of product quality, brand, and pre-and post-sales customer services, etc.. The term CRM is used to describe either the software or the whole business strategy oriented to customer needs.

The main misconception of CRM is that it is only software, but actually it is the whole business strategy. Major areas of CRM focus on automated service processes, personal information gathering and processing, and self-service. It attempts to integrate and automate the various customer-serving processes within a company. 19 to personalize the carriers' services. In this perspective, the CRM is an extra tool to differentiate the airline product. Yield management and pricing: To support product differentiation, pricing and yield management is sophisticated, with the aim of maximizing the network revenues.

Multi-Channel Sales

Sales channels are divided into indirect off-line (intermediate travel agencies) or indirect on-line (web intermediate electronic-agents); direct on- line: the passenger buys the tickets directly via the airline's Internet sites ; direct off- line: the passenger buys the tickets directly via the airline's call centre, the airlines city office (COT), or the airline's airport office (TAT). The FCC cover all of these above is technologically supported by external companies called Global Distribution Systems (Gags). Among the most diffused Gags are: Galileo, Amadeus, Worlds, Saber.

Low-Cost Carriers

The concept of 'low-cost carriers' or LLC originated in the United States with Southwest Airlines at the beginning of the sass. In Europe, the Southwest model was copied in 1991, when the Irish company Ryan, previously a traditional carrier, transformed itself into an LLC and was followed by other Laces in the I-J (e. G. asset in 1995). In the literature, there are several similar definitions of an LLC, also known as a low fare or no-frills airline (see Appendix II for a complete list of LLC existing in Europe).

In this study an LLC is defined as an airline company designed to have a competitive advantage in terms of costs over an FCC. 9 In order to achieve this advantage, an LLC relies on a simplified business model (compared with the FCC), a model which is characterized by some or all of the following key elements:

  • Core business: This is passenger air-service despite the ancillary offers are increasing and becoming part of the LLC core business. ;
  • Point-to-point network: The network is developed from one or a few airports, called 'bases', from which the carrier starts operating routes to the main destinations. Destinations are only continental within the EX. or the US. No connections are provided at the airport bases, which function as aircraft logistics and maintenance bases.
  • Secondary airports: City-pairs are connected mainly from the secondary or even tertiary airports - such as London Alton - that are less expensive in terms of landing tax and handling fee and experience less congestion than the larger ones

Some authors have analyzed the e-commerce market in the airline industry (see Roy and Filtrated, 1998; Unashamed, 2000; Carjack, 2002). 9 Riley (2003) defines the LLC as an airline that '... Aims to keep operating costs significantly lower than the traditional flag-carrying airlines... ' .  Small airports will strive to gain the LLC' operation and the usual way is to reduce airport charges. Similarly, air transport activity generates welfare that is a multiple of the airports' activities, inducing regional economic and social development. Local authorities recognize that the LLC operation is a potential driver for social and economic developments, and are willing to provide financial help The reduced airport fees can be understood as an incentive, as most of these secondary airports are public.

These incentives can be quite relevant and can be deemed to contravene the Ex.'s competition rules.

  • Single aircraft fleet: In general, the LLC operates with one type of aircraft such as the Boeing 737 series with a configuration of 149 seats. The fleet composition also depends on the fact that they operate on only short- or medium-haul routes.
  • Aircraft utilization: The aircraft is in the air, on average, more hours a day compared with Offs that have to respect the connectivity schedule.
  • No-frills service: The product is not differentiated as they do to offer lounge services at airports, choice of seats, and in-flight service, and they do not have a frequent flyer program. Fare restrictions are removed so that the tickets are not refundable and there is no possibility to rebook with other airlines.

Minimized Sales/Reservation Costs

All tickets are electronic and the distribution system is implemented via the Internet or telephone sales centre (only direct channels). Passengers receive an e-mail containing their travel details and confirmation number, when they purchase.

The LLC does not intermediate the sale with travel agents and nor does it outsource the distribution to GAS companies. Ancillary services: LLC increasingly have revenue sources other than ticket sales. Typical examples are commissions from hotels and car rental companies, credit card fees, (excess) luggage charges, in-flight food and beverages, advertising space. The potential growth of this revenue comes from telephone operations and gambling on board. Minute (2006) reported that Ryan's revenue from sources other than ticket sales contributed IEEE million to its net profit of IEEE million.

Those revenues already represent 16 percent of the aerie's total revenue. For easy Jet, that kind of income originally represented only 6. 5 percent of the airline's total revenue, but it increased by 41. 3 percent from 2004. Not every low-cost airline implements all of the points mentioned above. For example, in 2005 Air Berlin started the UK domestic services as feeders to its German services out of Standee, exploring the hub-and-spoke operations. The differences between the FCC and LLC business models are multifaceted (see, e. G. , Laddering et al. , 2004).

The significant structural cost gap between the two models results from these monumental differences.  Overall, the LLC model can operate at 49 percent of FCC costs. In particular, 37 percent out of a total 51 percent of costs difference can be attributed to explicit network and airport choices (or business place and process complexity); another 9 percent of the LLC cost advantage comes from the distribution system and commercial agreements (costs which are narrowing with the elimination of commissions and GAS). A remarkably

Airline Business Models

The LLC has 51% cost advantages in relation to he FCC (Source: Diagnosis, 2001) Cost reduction Full-service carrier Low-cost carrier Operating advantages Higher seating density Higher aircraft utilization Lower flight and cabin crew costs Use cheaper secondary airports Outsourcing maintenance/ single aircraft type Product/service features Minimal station costs and outsourced distribution No agents or GAS commissions Reduced sales/reservation costs Other advantages Smaller administration and fewer staff/offices.

Laces have successfully designed a focused, simple operating model around nonstop air travel to and from high-density markets. On the other hand, the FCC model is cost-penalized by the synchronized hub operations (e. G. Long aircraft turns, slack built into schedules to increase connectivity) that implicitly accept the extra-time needed for passengers and baggage to make connections. In addition, the FCC business model relies upon highly sophisticated information systems and infrastructure to optimize its hubs. Franken (2004) stated that the most relevant success factors of Laces are their network configuration and their streamlined production processes in relation to Offs.

Charter Carriers

A charter carrier (C) is defined, in this study,10 as 'an airline company that operates flights outside normal schedules, by a hiring arrangement with a particular customer'. Al Charter flights have acquired the more specific meaning of a flight hose only function is to transport holidaymakers to tourist destinations. However, 10 Studying the charter business model does not come within the scope of the study. However for the sake of completeness, we have decided to include a concise description of this model here. 11 The CSS are defined in contrast to scheduled flights even though they also operate to regular schedules (not always published). Tickets are not sold directly by the charter airline, but by tour operator companies who have chartered the flight.

Although charter airlines typically carry passengers ho have booked, individually or as small groups to beach resorts, historic towns, or cities where a cruise ship is waiting for them, sometimes an aircraft is chartered by a single group, such as members of a company, a sports team, or the military. In includes flights, accommodation and other services. In the past, this was a regulatory requirement. With the EX. deregulation the flight-only packages' can now be sold only to those who want to travel to the destination. Most European charter airlines now form part of vertically-integrated organizations, incorporating a tour operator, travel agency chain, airline and, more often hotels and ground transportation companies. Some examples of vertically-integrated charters are Britannic Gumbo, Condor, Air Jet, and Virgin Sun. Some Offs have set up charter divisions: for example, CALM owns Martin Air or Lufthansa owns Condor.

For a detailed description of the charter market, we refer to Diagnosis (1991). Furthermore, CSS frequently operate from airports, or dedicated terminals, where there is no scheduled service. Much of the traffic through small- and medium-sized airports in the United Kingdom consists of harder flights, and the survival of these airports often depends on the airline landing fees they get from the charter companies. The economy of density pursued by CSS requires that the flights should operate on the basis of near 100 percent seat occupancy, and the standard of seating and service may be lower than on scheduled airlines. reveal that in 1997 the two largest Laces in Europe, asset and Ryan, had unit costs more than double those of the largest I-J charter airlines. CSS were divided into the ones that Oromo part of vertically-integrated tour operating groups and those that remain independent.

The sources of cost advantage that the two types of charter airline have over the Laces were analyses and identified as the following:

  • Larger aircraft and longer-haul destinations;
  • Higher load factor, aircraft utilization and labor productivity
  • Lower distribution costs, landing fees, aircraft leasing costs, and admit & finance costs.

Williams (2001) provides a brief overview of the charter carrier business model and its vertical integration in the ELI.He addresses the question whether Rupee's charter carriers will be replaced by Laces and his answer is negative.

Competition between Business Models

Competitive interactions between firms always result in adapting the player's own business model to that of the competitors, and this is also occurring in the airline industry. The LLC sector continues to grow strongly, and as it does so the business.

Cite this Page

Airline Industry. (2018, Jun 21). Retrieved from

Don't let plagiarism ruin your grade

Run a free check or have your essay done for you

plagiarism ruin image

We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Save time and let our verified experts help you.

Hire writer