Airline Industry: An Introduction

Topic 1: An Introduction to the Airline Industry

• Success completion of this topic explains the importance of the airline industry from a domestic and international perspective
• Success completion of this topic analyses the air transportation industry's impact on the global economy
• Success completion of this topic describes air transportation's contribution to efficient business, personal, and pleasure travel
• Success completion of this topic analyses the various business models used by global airlines
• Success completion of this topic details the structure of the Australian airline industry
• Success completion of this topic describes the USA domestic market and its impact on the industry structure and US-based airlines
• Success completion of this topic compares the differences between the USA and Australian airline industry structures
• Success completion of this topic lists the economic characteristics of the airline industry

Introduction to the Topic

• This topic focuses on the common carrier system of air transportation, which offers commercial air services to the public.
• Many aircraft operate worldwide outside the common carrier designation
• Examples include military aircraft and aircraft in general aviation
• General aviation includes private aircraft for pleasure and corporate aircraft for transporting executives to remote worksites.
• These non-common carriage operations are considered only if they affect common carrier systems.
• The public importance, economic impact of air transport, main business models, and the structure of the air transport industry are examined
• Key economic characteristics of the air transport industry are also examined

Importance of Airlines

• International air transport is essential for global economy
• International air transport stimulates exchanges and facilitates international economic relations
• Civil aviation includes air transport, non-commercial flying, and commercial non-transport activities like crop-dusting and aerial surveying
• Civil aviation includes infrastructure, such as airports, air traffic control, navigation, and aircraft component manufacturing
• Air transportation is the main part of civil aviation
• Demand for air transport is correlated with economic growth which makes air transport an economic catalyst
• The world economy is integrated and the international exchange of people, products, investment, and ideas are promoted

Air Transport's Contribution to The Global Economy

• Air transport is essential for world economic development
• Air transport connects people, countries, and cultures which drives global economic and social progress
• The industry gives access to global markets and generates trade and tourism
• It assists the links between developed and developing nations
• Aviation's "products" are passengers and air cargo safely and efficiently delivered worldwide
• In 2014, scheduled airlines worldwide carried about 3.2 billion passengers

Contribution to the Efficient Conduct of Business

• Speed, efficiency, comfort, safety, and economy are symbols of modern society and modern air transportation
• Air transportation enables travelers to fly worldwide within hours on commercial or general aviation aircraft
• Certain values are associated with this timeliness:
  • Quicker decisions and action
  • Less fatigue from travel
  • Greater mobility and usefulness of trained and experienced personnel
  • Decentralized production and distribution
  • Expansion of market areas with efficient management and sales personnel

Impact on Personal and Pleasure Travel Patterns

• Relatively few people had flown in a scheduled aircraft in 1940
• One-third of U.S. adults had flown by 1960
• Two-thirds of the population over 18 years of age had been airline passengers by 1981
• Over 85 percent of the adult population had traveled on a commercial flight by 2000
• Personal and pleasure travel impact has been as significant as business travel due to airline fares being affordable compared to other services
• The combination of speed and affordable fares has altered people's perception about personal travel

Full Service Carrier

• A "legacy" or "full service network carrier" (FSCNC) provides a wide range of pre-flight and onboard services such as service and connecting flights.
• Most FSCNCs operate a hub-and-spoke model and are called hub-and-spoke carriers
• Key attributes of the business model:
  • Complex yield management and fare structures
  • Frequent flyer programs
  • Differentiated product offering
  • Use of primary airports
  • Strategic alliances
  • Integrated scheduling
  • Different aircraft types
  • Use of congested hub airports
  • Prioritise customer service
  • Passenger segments
  • Complex service/product mix
  • High staff costs
  • Travel agents and internet

Low Cost Carriers

• A low cost airline/carrier (LCC) offers low air fares, but eliminates unnecessary services
• LCCs focus on cost reduction for a price leadership strategy:
  • Young and homogenous fleet of medium-sized aircraft to reduce fuel, maintenance, staff, and capital costs
  • High-density seating to lower unit costs
  • Variable in-flight seating costs are impacted by passenger numbers
  • Ground times and flight delays reduced by serving smaller airports and focusing on point-to-point flights to maximize daily aircraft utilization
• Key Attributes:
  • Low fares on a high percentage of seats.
  • Simple fare structure
  • No frequent flyer program
  • Cheaper product design
  • Secondary airports
  • Non-participation in strategic alliances
  • Point to point services
  • Standarised fleets
  • Optimised aircraft utilisation
  • Reduced customer service costs
  • High concentration on leisure traffic
  • Cost and staff minimisation
  • Low travel agent fees and extensive use in the internet

Holiday Carriers

• Holiday/leisure carriers focus on transporting tourists to their destinations
• "Charter airline" was used to describe them before
• Most holiday flights weren't sold directly, but were in charter packages by tour operators
• Many operate as scheduled,seasonal services
• Leisure carriers use direct point-to-point flights, a homogeneous medium-to-large aircraft fleet, and high-density seating to achieve low costs per seat mile (or kilometer)
• Typically offer full tourist class services like meals, non-alcoholic drinks, entertainment, newspaper, magazine and toys
• Yield management and network are the main differences between LCC and leisure carriers
• Leisure carriers charge costs prices, with seasonal promotions, surcharges of discounts

Regional Airlines

• Operate with smaller, 20-100 seat aircraft
• Routes are restricted to a geographically defined region
• Some regional carriers focus on point-to-point flights between smaller airports for decentralisation and independence
• Some others work as feeder FSCNC airlines that connect their partner hub with regional airports

Conventional Air Cargo Airlines

• Combination carriers use typical passenger aircraft to carry both passengers and freight in the lower deck holds
• Some airlines use narrow bodied, single aisle aircraft like the A321, where others use wide-bodied aircraft like the A330
• Cathay Pacific, China Airlines, Etihad Airways, Singapore Airlines, Qantas and Air France/KLM are all combination carriers

All Cargo Airlines

• These specialist all-cargo carriers run ad-hoc and scheduled services
• Cargolux in Luxembourg and Nippon Cargo Airlines in Japan are the largest independent all-cargo carriers

Integrators

• The integrators provide door-to-door overnight services globally
• Integrators use global multi-modal networks, with their own aircraft, planes, trucks, and handling/storage facilities
• Integrators provide value-added services, such as customs brokerage, logistics services, warehousing, inventory control, and electronic data interchange
• Integrators guarantee delivery times with pricing
• FedEx and UPS are biggest firms
• DHL and TNT Express are the other major ones but they are slighly smaller

Australia's Air Transport Industry structure

• Common-carrier transportation has four classes in Australia:
  • Domestic trunk routes for Qantas and Virgin Blue
  • Internal Airlines for Qantas and Virgin Australia
  • Low Cost Airlines for Jetstar and Tiger Airways
  • Regional Airlines for Qantas Link and Regional Air Express (REX)
• A domestic airline in Australia is an airline performing routine transportation services that carries an aircraft of 38 seats or more or with a payload of over 4200kg
• A regulated duopoly was in place before deregulation of the domestic market in 1990 that included Qantas and Ansett Australia
• A small number of regional, commuter airlines also existed
• Deregulation opened the market enabling new domestic routes and airlines
• Ansett collapsed after a year due to financial issues with the price war
• Compass Mark II was launched in the Australian domestic market for 6 months before it failed
• Impulse had a low-cost, no-frills basis using Boeing 717 aircraft on few dense routes around Sydney in June 2000
• Virgin Blue was established shortly after Impulse entered the market
• Qantas took over Impulse in the first half of 2001 caused by its liquidity issues
• Collapse of Ansett Australia was a major domestic event in 2001
• OzJet operated 3 Boeing 737s on the Melbourne/Sydney/Melbourne trunk route in 2005 but only operated domestic airlines for four months
• Since the 1990s Australia's aviation policy allows foreign-owned airlines to operate domestic services if they satisfy the Foreign Investment Review Board’s national test
• Qantas, Jetstar, Tiger Airways, and Virgin are currently used in Australia's domestic market

QANTAS

• Queensland and Northern Territory combined names in 1920 to launch Queensland and Northern Territory Aerial Services, which later became known as Qantas
• The purpose was to serve the Australian Outback
• Qantas Empire Airways was reformed in 1934 with 50-precent company ownership by the United Kingdom in Imperial Airways
• In 1947, the Australian Government acquired previously owned shares by Imperial Airways and all other shares
• Qantas Airways acquired Australian Airlines in September 1992 which was renamed in August 1967
• The merged airline was partly privatized in 1993, which led to a competed process in 1995
• Qantas provides domestic services within Australia and international services to Asia, Europe, New Zealand, South Africa and the USA.

Virgin Australia

• Virgin Blue Airlines (now Virgin Australia) began operations in August 2000 with 2 B737 aircraft's with 7 flights per day between Sydney and Brisbane
• Original owner was Sir Richard Branson
• After the fall of Ansett Australia, it sought investors.
• Patrick Corporation purchased a 50% stake in Virgin Blue in 2002
• The airline was publicly listed on the Sydney Stock Exchange in 2003
• Pacific Blue, was released in 2004 as an airline to connect Australia with New Zealand and other islands through leisured based locations
• New management with Toll Holdings gained control in 2006 and released ownership again in 2008
• Virgin Blue started again operating as a "New World Carrier" to be competitive
• Virgin Australia launched V-Australia with Boeing 777-300ER's with services to Los Angeles in 2009
• The airline added Embraer E-170 regional jets to operate during slower periods
• V Australia and Pacific Blue were launched as Virgin Australia in December 2011
• Virgin Blue was the independent LCC that managed to survive in Australia's domestic market

Jetstar Airways

• Qantas launched Jetstar Airways as a response to Virgin Blue's aggressive growth, which was consistent with strategies used by other full-service network carriers
• Starting in May of 2004, Jetstar Airways began providing low flight operations
• Operations started Jetstar with 14 inherited Boeing 717s and 800 weekly flights to destinations located around Australia
• Also operated flights to and from Avalon Airport which later made it Australia's first "secondary city” airport
• Qantas moved Jetstar in 2004 into a fleet with 177 seat Airbus A320 aircraft to create better efficiencies in fuel and technology
• Jetstar was first launched to capitalize over the "leisure travel market" and link capital cities in Australia with destinations for leisure
• The focus was also broadened to link Australia's population centers
• Operations broadened to provide international locations, and starting up services to New Zealand in December 2005
• With key locations set in Asia and the Pacific, Jetstar International launched in two class series in 2006
• Jetstar soon became the largest low cost carrier in Asia which ran routes using both Airbus and Boeing models.

Tiger Airways

• Tiger Airways Australia was founded in Singapore in 2007
• Tiger Airways used the same "foreign owned carrier" business as its Singapore company
• Operations started in Melbourne with low-cost service to Darwin and Perth
• 5 Airbus A320 were utilized to start service
• Tiger Airways' arrival in the market forced competitors like Jetstar to accommodate the same service locations
• Competitor's strategy was also changed as Qantas allowed Jetstar to travel among the same routes served

International Airlines

• During 2014, it was stated that 54 international airlines provided services to the country
• Airlines listed showed the top 10 using passengers and market share
• The overall market consisted of the following top 10 airlines:
  • (1) Qantas Airways, (2) Emirates, (3) Singapore airlines, (4) Jetstar Airways, (5) Virgin Austrlia, (6) Air New Zealand, (7) Cathay Pacific, (8) X Air Asia, (9) Malaysia Airlines, and (10) Thai International
• This list includes percentages of customers who travel across all of these service locations

Regional Airlines

• Is an airline that performs public transport services and whose fleet contains smaller capacity with under 38 seats of and payload of 4200kg
• Airlines are defined as having trends of including bigger aircrafts to operate within this sector
• Services that operated regionally provide those communities to swiftly and easily more traffic to destinations