Airline strategies and business models

Strategic planning is a continual process for airlines. Plans must take into account the challenging and ever-changing competitive environment as well as how passengers define value. For example, business travelers are sensitive to flight times and expect a high level of service. Short-haul business travelers tend to be more sensitive to ticket prices than long-haul business travelers. Leisure travelers are more sensitive to price but less demanding about service levels.

Deregulation has had a significant impact on airline strategies during the past several decades. As regulations on commercial aviation relax, airlines gain freedom to vary fares in response to competition and demand, develop network and schedule planning, and manage other key aspects of airline business. Deregulation has helped stimulate traffic and network growth, and the resulting competition provides increased choice to travelers. Airline business models continue to evolve in order to adapt to the dynamic marketplace.

Low-cost carrier business model

The low-cost carrier (LCC) business model has grown tremendously over the past two decades. Successful LCC pioneers include Southwest Airlines in the United States and Ryanair in Europe. The LCC model focuses on business and operational practices that drive down airline costs. Typical cost-saving practices include operating at secondary airports, flying a single airplane type, increasing airplane utilization, relying on direct sales, offering a single-class product, avoiding frequent-flyer programs, and keeping labor costs low. Such tactics helped LCCs reduce unit cost by 20 percent to 40 percent compared with network carriers. Their lower cost structure allows LCCs to reduce fares, which significantly stimulates traffic. Thus, the LCC model has proved successful throughout the world and has driven the growth of air travel.

Recently, many LCCs have diverged from traditional LCC tactics. Customer expectations, regional variations, and competition have forced LCCs to adapt to new challenges. In today's market, it is not difficult to find an LCC flying multiple airplane types, operating at primary airports, or offering frequent-flier programs. Other variations include using global distribution systems, offering more frills to passengers, or even flying medium- to long-haul routes. Despite these developments, the LCC model and LCC profitability continue to grow.

Network carriers

At the other end of the spectrum, network carriers include the largest airlines in the world, such as United, Air France, and JAL. Network carriers tend to have major hub operations for domestic, regional, and international services; large, complex fleets; airline alliances; and a broad array of service offerings, such as airport lounges, onboard meals, and multiple cabin classes. Hub operations significantly increase network reach and allow carriers to offer convenient one-stop connections around the globe.

Some carriers use the geographical advantage of their location to funnel both short- and long-haul traffic through their hubs. Examples include Emirates in the Middle East and Copa Airlines in Latin America. These carriers have grown strongly in recent years and plan continued expansion in the coming decade.

Less common business models include airlines that specialize in charter or inclusive tour operations. Some regional carriers operate smaller airplanes to serve airports that are unserved or underserved by major airlines.

Cargo models

Carrying freight and mail gives airlines revenue opportunities beyond transporting passengers. Air cargo is commonly used for shipments of high-value, time-sensitive, or perishable goods that are not well suited for surface transportation. Many airlines carry cargo in the lower hold of passenger jets. Some operate dedicated freighters in addition to passenger airplanes. A few airlines, including express carriers that provide fully integrated logistic services for businesses and consumers, focus exclusively on air cargo. The air cargo business differs in many respects from the passenger business. In particular, air cargo flows are more directional than passenger flows: passengers generally travel round trip, but air cargo does not. Therefore, network strategies for cargo operations differ significantly from passenger network strategies.

Partnerships and alliances

Airline partnerships, either full alliances or other cooperative arrangements, have become powerful tools for expanding networks, enhancing revenue, and reducing costs. Code sharing is a common partnering tactic, and code-sharing routes have grown nearly 8 percent annually during the past decade. The three major alliances (Star Alliance, SkyTeam, and oneworld) now provide more than 60 percent of global capacity. Many airlines have also entered joint ventures, some with antitrust immunity that allows them to operate more closely on applicable routes.

Airlines are also taking equity stakes in other airlines as a growth strategy. Partial acquisitions, full mergers, and cobranded subsidiaries are typical examples. These strategies are effective for opening new markets, obtaining new traffic, and rationalizing costs. Airline mergers have catalyzed industry consolidation and enabled participants to remain competitive. Creating subsidiaries has allowed airlines to expand their brands to foreign countries and to stay within foreign-ownership regulation limits. All of these tactics have contributed to the profitable growth of the industry.