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Flight path to success

How airlines can achieve profitability in today's competitive climate

Success in the airline industry remains elusive. While many carriers have returned to profitability, Jetsgo’s recent filing for bankruptcy protection illustrates the importance of a sound business model. The good news is that passenger demand is up and several major carriers have now completed their restructuring efforts.

While the economic situation is far worse today than it was in the early 1990s, thanks in no small part to 9/11 and the Iraq War, profitability is possible for both network and low-cost carriers. The key is to build strategies that don’t compromise successful, unique points of differentiation — because, right now, business models are blurring. Both network and low-cost carriers are converging on a “middle ground,” which, over time, will result in a game of commodities. To prevent this, careful consideration of competitive advantages is needed across all parts of the business, in particular, channels to the consumer, service model and operations. Of course, other factors, will also be critical. But targeting the right consumers with the best business model is paramount for a successful, long-haul journey.

A changing landscape
The composition of the industry has changed dramatically in just a few short years. Recent market share changes are driven by low-cost, “no-frills” carriers capitalizing on structural cost efficiencies and leveraging other advantages in the marketplace. For example, they enjoy lower labour costs and use of secondary airports on routes, as well as high seat density and fast “at-gate” aircraft turnaround time.

As a result of intensifying price competition, most network carriers have suffered a decline in revenue per seat mile. Unfortunately, investment capital and financing are becoming more costly and harder to attract because of the losses incurred by creditors and investors during recent restructurings.

Today’s increasingly demanding consumer calls for an adaptive service model. Both business and leisure travellers are more price sensitive than ever, and flagging demand from lucrative business travellers – which had accounted for as much as 60 percent of network airline revenues – is not likely to rebound to former levels.

The “middle ground”
As low-cost carriers pursue ambitious expansion plans and move toward a full-service model, they risk losing their competitive advantages. At the same time, restructuring plans are taking network carriers toward a lower-cost model.

Risks for low-cost carriers:

  • higher cost structures
  • productivity shortfalls
  • no sustainable, cost-competitive value creation

Risks for network carriers:

  • loss of stakeholder privileges, alliances and brand strength by trying to compete head-to-head with low-cost carriers
  • alienation of core customers who value additional services at reasonable prices
  • an overall lack of differentiation

The opportunities
Right now, the business models are blurring. Low-cost carriers are moving away from the business model that made them successful, while network carriers are trying to strike a balance by maintaining the “right” service offerings in a profitable way.

With a profitable business model, both low-cost carriers and network carriers can compete. The key is for both types of carriers to do what they do best. Profit will come from many different initiatives, including driving more business with core consumers, choosing the right consumer targeting and price balances across routes, and ultimately managing operational costs. In the long run, clearly defining a strategy and business model based on unique offerings and selling points is the only sustainable route for both low-cost and network carriers.

 

Facts about flying

  • By 2010, business and leisure passengers worldwide will increase to 2.3 billion (up from 1.6 billion today).
  • Few airlines have stayed profitable since 9/11. Demand has returned; bottom-line growth has not.
  • The cost differential between network and low-cost carriers is as high as
    2 to 1, even after adjustments for pay scales, fuel prices and seat density.