Kevin O

1
Airline strategy The long view

• Kevin OToole
• EDITOR
• AIRLINE BUSINESS
• Air Transport and Tourism Synergies and
  Parallelisms
• University of Surrey

2
National champions

• Market conditions

• National markets
• Heavy regulation
• Low competition
• High growth rates 2xGDP

3
National champions

• Strategies for success

• Dominant market share
• Regulatory support/access
• Absorb/kill local competitors
• Match world standards
• Control supply chain
• control pricing

4
National champions

• The legacy

• National political constraints
• Complexity/bureaucracy
• Inflexibility on cost
• Lack of differentiation
• All things to all menwithin a national boundary

5
Global players

• The new market conditions

• Deregulation
• Global economy
• Fierce competition/market disciplines
• Maturing markets growth 1xGDP
• Internet democracy smart buyers

6
Global players

• Strategies for success

• Global reach
• Customer not product focus
• Profit driven not cost led
• Segmented brands
• Differentiated products
• Cost flexibility

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

• Travel agencies
• Online sites
• Finance houses
• etc
• GDS
• System providers
• etc
• Airlines
• Hotels
• Car hire
• etc

Global retailers/ arrangers

• Global reach
• Strong brand
• Customer base
• Many products

Supply chain managers

• Economies of scale
• Systems expertise

Production/ capacity suppliers

• High utilisation
• Economies of scale
• Production expertise
• Flexibility

9
Can the model adapt?

• Built-in inflexibility

• Regulation safety, security, bilaterals,
  competition etc etc etc
• People large unionised workforce
• Assets heavy metal!

10
Can the model adapt?

• A smokestack industry!

• Vertical integration retail logistics
  production
• Owns all parts of the chain.
• .and pays for them
• Result Low margins and high risk

11
Can the model adapt?

• Asset heavy

Balance sheet ratios 01/02 Balance sheet ratios 01/02 Balance sheet ratios 01/02 Balance sheet ratios 01/02
billion sales ratio norm
Revenues 238 x1 x1
Fixed assets 191 x1.2 x3-4
All assets 310 X0.8 X1.5
Source Bridging the GAAP 4-02
12
Can the model adapt?

• Workforce heavy

• Service industry levels of people cost
• employs 1.5-2 million worldwide
• revenue/cost 200k per employee
• Expensive
• Heavily unionised

13
A marginal business
Top 150 airline groups 5 year record Top 150 airline groups 5 year record Top 150 airline groups 5 year record Top 150 airline groups 5 year record Top 150 airline groups 5 year record Top 150 airline groups 5 year record
2001 2000 1999 1998 1997
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

• The response

• 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

17
New models

• The response

• Tackle fixed costs
• Gain global scale
• Economies of scale
• Move beyond national boundaries
• Market mobility

18
New models

• The response

• Tackle fixed costs
• Gain global scale
• Increase offer
• Match offer to customer value
• Exploit new distribution channels
• CRM
• Increase the offer

19
Online services for customers(Base All
respondents)
20
New models

• The longer term

• Choose where to sit in the chain
• Asset light service business.or
• People light production business
• Dont spend or depend on the wrong assets
• Learn from other retail/production models

21
New models

• Examples

• 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

22
New models

• Possible 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