Modern Aviation Transport Modes 2023 PDF

MODERN AVIATION TRANSPORT MODES DLBAMMATM01 MODERN AVIATION TRANSPORT MODES MASTHEAD Publisher: IU Internationale Hochschule GmbH IU International University of Applied Sciences Juri-Gagarin-Ring 152 D-99084 Erfurt Mailing address: Albert-Proeller-Straße 15-19 D-86675 Buchdorf [email protected] www.iu.de DLBAMMATM01 Version No.: 001-2023-0331 Sarah Abbas © 2023 IU Internationale Hochschule GmbH This course book is protected by copyright. All rights reserved. This course book may not be reproduced and/or electronically edited, duplicated, or dis- tributed in any kind of form without written permission by the IU Internationale Hoch- schule GmbH. The authors/publishers have identified the authors and sources of all graphics to the best of their abilities. However, if any erroneous information has been provided, please notify us accordingly. 2 PROF. DR. KONSTANTINOS KALLIGIANNIS Mr. Kalligiannis is a professor and head of the aviation management study program at IU International University. He holds a PhD in airline branding from Cranfield University (UK), as well as an MSc in airport planning and management from Loughborough University and an MSc in air transport from Cranfield University. In the private sector, Mr. Kalligiannis has played a key role in aviation projects globally, including aviation transport strategy update for Bosnia and Herzegovina, white paper devel- opment for the Hellenic Ministry of Transport, as well as projects in Cyprus, Portugal, and India. Additionally, he provides airport training courses in the United Arab Emirates, Saudi Arabia, and Oman. Mr. Kalligiannis has held leadership positions in Lithuanian and the American higher educa- tion institution and has taught aviation, strategy, and branding courses at universities inter- nationally. His areas of expertise and research interests include airport strategy, manage- ment and operations, and airline branding. 3 TABLE OF CONTENTS MODERN AVIATION TRANSPORT MODES Module Director.................................................................. 3 Introduction Signposts Throughout the Course Book............................................. 8 Suggested Reading................................................................ 9 Learning Objectives.............................................................. 10 Unit 1 Overall Market Development and Basic Concepts 11 Author: Sarah Abbas 1.1 What are Business Models?................................................... 12 1.2 What are Airline Business Models?............................................. 14 1.3 Historical Development of Airline Business Models.............................. 16 Unit 2 Full-Service Network Carriers 21 Author: Sarah Abbas 2.1 Major Players................................................................ 23 2.2 S.W.O.T...................................................................... 24 Unit 3 Low-Cost Carriers 27 Author: Sarah Abbas 3.1 Major Players................................................................ 28 3.2 S.W.O.T...................................................................... 32 Unit 4 Charter/Integrated Tour Operators 37 Author: Sarah Abbas 4.1 Major Players................................................................ 38 4.2 S.W.O.T...................................................................... 40 4 Unit 5 Regional Carriers 43 Author: Sarah Abbas 5.1 Environment and Trends..................................................... 44 5.2 Major Players................................................................ 46 5.3 S.W.O.T...................................................................... 47 Unit 6 General and Business Aviation 51 Author: Sarah Abbas 6.1 Environment and Trends..................................................... 52 6.2 Major Players................................................................ 57 6.3 S.W.O.T...................................................................... 59 Unit 7 Urban Air Mobility 63 Author: Sarah Abbas 7.1 Air Taxis..................................................................... 64 7.2 Unmanned Aerial Vehicles.................................................... 65 7.3 Infrastructure Requirements.................................................. 67 7.4 S.W.O.T...................................................................... 68 Unit 8 Cargo Carriers 71 Author: Sarah Abbas 8.1 Importance of Air Cargo...................................................... 73 8.2 Integrators.................................................................. 74 8.3 Combination Carriers........................................................ 75 8.4 All-Cargo Operators.......................................................... 77 8.5 Trends in Air Cargo........................................................... 78 Appendix List of References................................................................ 82 List of Tables and Figures......................................................... 87 5 INTRODUCTION WELCOME SIGNPOSTS THROUGHOUT THE COURSE BOOK This course book contains the core content for this course. Additional learning materials can be found on the learning platform, but this course book should form the basis for your learning. The content of this course book is divided into units, which are divided further into sec- tions. Each section contains only one new key concept to allow you to quickly and effi- ciently add new learning material to your existing knowledge. At the end of each section of the digital course book, you will find self-check questions. These questions are designed to help you check whether you have understood the con- cepts in each section. For all modules with a final exam, you must complete the knowledge tests on the learning platform. You will pass the knowledge test for each unit when you answer at least 80% of the questions correctly. When you have passed the knowledge tests for all the units, the course is considered fin- ished and you will be able to register for the final assessment. Please ensure that you com- plete the evaluation prior to registering for the assessment. Good luck! 8 SUGGESTED READING Borden, N. (1984) The concept of the marketing mix. Journal of Advertising Research, 24(4), 7–12. Available online. Gross, S., & Lück, M. (2016). The Low Cost Carrier Worldwide. Routledge. Holland, J., & Leslie, D. (2017). Tour Operators and Operations: Development, management and responsibility. CABI. Pattillo, D. M. (2020). The general aviation industry in America: A history. McFarland. Pels, E. (2008) Airline network competition: Full-service airlines, low-cost airlines and long- haul markets. Research in Transportation Economics, 24(1), 68-74. Schäfer, J. G. (2023). Air cargo: Participants – Processes – Markets – Developments. Springer Nature. Vasigh, B., & Azadian, F. (2022). Aircraft Valuation in Volatile Market Conditions: Guiding toward profitability and prosperity. Springer Nature. 9 LEARNING OBJECTIVES Airlines can be classified into a wide range of categories, including full-service network carriers (FSNC), low-cost carriers, general and business carriers, charter airlines, cargo car- riers, and regional airlines, to mention a few. Students will learn the fundamentals of sev- eral airline business models, commercial aviation, and other facets of general aviation in the topic Modern Aviation Transport Modes. Additional topics discussed include the operational complexity and financial promise of more recent advancements in business aviation and urban air mobility. The first topic of discussion in this course will be business models and how they are used in commercial aviation. The importance of large commercial air transport with some dis- cussion of general aviation and business jet markets will be covered along with other rele- vant topics like the analysis of marketing strategies and value propositions, the strength and weakness of each aviation business model. Upon successfully completing the course, students will gain a fundamental understanding of business models, what they are, and why they are important, as well as an enhanced understanding of distinctive airline business models, insight into the major market play- ers, understanding of the opportunities and threats facing business models, and the inter- pretation of concepts related to general aviation, business jets, and urban air mobility. 10 UNIT 1 OVERALL MARKET DEVELOPMENT AND BASIC CONCEPTS STUDY GOALS On completion of this unit, you will be able to... – explain what a business model is. – decide what is important when building a business model. – identify different business models in the aviation industry. – list the main characteristics of each airline business model. 1. OVERALL MARKET DEVELOPMENT AND BASIC CONCEPTS Introduction Marketing is the term we use to describe the “social and managerial process by which indi- viduals and groups obtain what they need and want through creating and exchanging proucts and value with others.” (Strydom, 2005, p.2). This definition is not limited to prod- ucts only, but also extends to services that consumers may purchase. This definition is likely to vary depending on the industry sector, the type of products and services, as well as the medium in which transactions are taking place, but its main components remain the same. In any marketing process, there are four key factors, often referred to as the ‘Four Ps’ or the ‘Marketing Mix’, which are product, price, place, and promotion. These were made well-known in the 1950s by Harvard advertising professor Neil Borden. He discussed the numerous methods that businesses may engage their targeted custom- ers through advertising techniques in his 1964 article "The Concept of the Marketing Mix." (Borden, 1964). Today, the Four Ps are still used by companies to design and execute their business models and to market their good and services. Market development is a more elaborate process in which companies seek to expand the promotion of their products into new markets in order to acquire new customers. For example, a company that manufactures smart phones in Germany may choose to market its product in another region. It may also retarget existing customers with a new product. For example, the company may introduce a smart watch as part of its line of products. 1.1 What are Business Models? The term ‘business model’ refers to an organization’s strategy to generate a profit. It out- lines the products or services the business plans to provide, the market it has selected, and any anticipated costs. Business models are essential for all businesses, whether new or established. It is through such models that a company determines capital and invest- ment requirements, personnel and hiring needs, short- and long-term business objectives, among others. To remain current with changing consumer demands and industry developments, busi- nesses must constantly adapt their business strategies. “Companies need to find a response to the trends that affect all globalized markets,” (Glauner, 2017, p. 221). Addition- ally, business models help investors evaluate organizations that interest them, and employees comprehend the future of a company they might want to work for. Before discussing how to create a business model, it is important to define basic concepts that are necessary to marketing in general, and to business models in particular: 12 A customer is a “person who purchases the product or service for his own use or con- sumption,” (Madeswaran, 2019, p.16). The term "consumer" can refer to either an indi- vidual or a corporation who gets, utilizes, or pays for a good or service and has access to a range of goods and providers. Every company wants to attract clients or customers and persuade them to purchase the products they are selling. It is also important for companies to retain their existing customers and keep them coming back. Customer value is how a customer perceives the worth of your product or service. Worth can refer to a number of factors, including the advantages that these goods or services give your target market or the price-to-quality ratio. A vital component of business models is the value proposition. It outlines the goods or services a company offers and the factors that make customers or clients find them desirable. Ideally, value proposition is what sets the product or service apart from those offered by other companies in a competitive market. Pricing and costs are the two main axes of a company's business model. Often, the cost is the outlay required to produce a good or service that a business sells. Price is what a customer pays in return for services or good. Gross profit is the result of the interaction between both actions, selling and buying. A strong business plan is conducive to a healthy gross profit. Many analysts look at gross profits to assess a company’s success. How to Create a Business Model There is no one-size-fits all approach to building a business model. Deciding on the opti- mal business model for a company depends on the type of business and the market envi- ronment it operates in. To build a business model, most companies observe the following general steps: Identifying the target audience Most business model plans will begin determining the target audience. Who are the cus- tomers? What the characteristics of their customers? What are their needs? Once the tar- get customer is clearly identified, businesses can develop their products, strategy, and messaging to appeal to their target audience. Defining the problem Any business model must satisfy a need that exists within in the market. An airline trans- ports passengers between diverse destinations. A phone service provider facilitates com- munication. An auto repair shop fixes problems with vehicles. Without a specifically defined problem, a business cannot identify the needed services and products by which this problem area is addressed and catered to. Proposing clear services Once the target audience and their need have been identified, define how the product or service you are selling and how it will meet the customers’ needs. 13 Mapping the operational plan This plan includes all the activities that the company will undertake during the coming 12 months in order to deliver the desired product or service. Monetization A business model is not valid unless it outlines how it will generate revenue. What is the value that your product offers to customers? How much are your customers willing to pay for the product? How much does the company need to operate, cover its costs, and ulti- mately generate profit? The business model should answer all of these questions. Testing the business model Once the operational plan based on your business model is rolled out, it must be subjec- ted to rigorous testing and evaluation, with close attention paid to each aspect mentioned above, in order to assess its validity and viability. Customer feedback is sought, and mar- ket studies are continuously conducted. Business models are not set in stone, they can be altered and adjusted to remain relevant and profitable. 1.2 What are Airline Business Models? Industry developments are typically the result of significant technological advancements. The aviation business has a long history of innovation, and many new products have benefited from this dynamism. But regulatory changes and overall changes in the operat- ing environment have encouraged the development of novel business models for the avia- tion sector. A closer look at airline business models is useful to explain how an operator provides services to its customers, what value propositions are made, and how revenue is generated. As businesses, airlines are concerned with generating profit, and, despite occasionally needing government bailouts, the majority of their income comes from passengers. In addition to the price of the tickets themselves, airlines can also charge additional fees to customers, which helps increase their profit margins. Transportation metrics Most transportation metrics are built around traffic measured by Revenue Passenger In the aviation industry, Kilometers or Miles (RPKs or RPMs, respectively). ‘Available seat miles’ (ASMs), which transportation metrics refer to the method that measure an airplane's overall carrying capacity, and can consequently be used to generate an airline uses to measure revenue, are calculated by multiplying the actual number of seats on an aircraft by the its capacity to transport total distance. people. The term RPM describes the distance that paying passengers have traveled. It is com- monly employed as a traffic indication for airlines, and is calculated by multiplying the quantity of paying passengers by the distance traveled. For instance, a flight of 100 people covering a distance of 250 miles generated 25,000 RPM. (International Civil Aviation Organ- ization, n.d., p.7) An airline can figure out load factors by dividing RPM by ASM. 14 In the past, airline business models could be easily distinguished from one another. This has changed in recent years as a result of mergers and acquisitions, and as a response to Mergers and acquisi- competitive pressure. At the very least, future company models will be harder to distin- tions These are business trans- guish from one another. It is crucial to be able to contrast and conduct analysis to find the actions under which the most sustainable and profitable business models. ownership of one com- pany or business organi- zation is transferred to, or Existing Airline Business Models combined with, another. In general, the civil aviation industry is divided into seven different business models. Each of these models will be explained at length in the following units. The table below pro- vides a brief overview of the most common airline business models today. Table 1: Airline Business Models Aviation Transport Modes Main characteristics of the business model Full-Service Network Carriers This type of airline business model uses a hub-and-spoke system to (FSNC) carry a wide range of passengers. They also provide passengers with additional services such as in-flight comfort and connected baggage services. These carriers, often known as flag carriers, have histori- cally been mostly owned by the government but are now for the most part privately held. Low-Cost Carriers (LCCs) A low-cost carrier is an airline that provides basic transportation between city-pairs attracting customers with low fares. LCCs charge less while offering less facilities because they do not offer numerous things that were formerly included in the cost. Typically, this implies that neither the baggage nor the meals and drinks offered by other, more expensive airlines are included. Each carrier offers a unique option. Charter/Integrated Tour Operators An unscheduled flight that is not a part of a routine airline route is referred to as a ‘charter flight’. Operators of charter flights can choose the departure and arrival locations and timings. Various kinds of charter flights exist, such as those wholly by tour companies or leased by a tour operator. Regional Carriers In areas where there is insufficient demand for major airline service, regional airlines fill that gap. In contrast to big airlines, which Regional airlines often fly shorter routes with smaller aircraft and frequently operate aircraft with 100 or less passengers (typically between 50 and 80 seats but sometimes in excess of 100 seats). Some regional carriers are sometimes referred to as ‘commuter airli- nes’. General and Business Aviation General aviation refers to all flights not operated by the military or commercial airlines. Business aviation is a subset of general aviation that focuses on using aircraft and helicopters for commercial purpo- ses. Urban Air Mobility Urban air mobility is the practice of moving people and/or freight at lower altitudes within urban and suburban areas using tiny, highly automated planes. regions that were developed as a reaction to traf- fic congestion. The term typically refers to both established and developing technology, such as conventional helicopters, vertical- takeoff-and-landing aircraft (VTOL), and unmanned aerial vehicles (UAVs). 15 Aviation Transport Modes Main characteristics of the business model Cargo Carriers All-cargo airlines provide cargo and freight services from one airport to another but no passenger services. These carriers often use scheduled wide-body and containerized air freight to move com- modities on behalf of corporations and governments. Source: Sarah Abbas (2022). 1.3 Historical Development of Airline Business Models In recent years, the aviation business has seen significant disruption. Since the mid-1990s, new airline business models, including low-cost and hybrid airlines, have appeared in var- ious countries. There are numerous business models that can be classified as belonging to the airline industry. The bulk of airlines worldwide operate on one of seven business mod- els. The divide between the various business models now is less stark than it once was. Numerous low-cost carriers have adopted network operator characteristics due to compe- tition and the increased interconnectivity with services provided by other airlines. Fre- quent flyer programs are an example of such newly integrated characteristics. Thus, hybrid carriers have also been developed. The modern age of aviation started in 1903 when Orville Wright performed the first contin- uous powered flight in a plane built by himself and his brother Wilbur, bringing in the era of powered flying in the modern world. This 12-second flight inspired the creation of the first usable airplane in 1905 and sparked attempts all around the world to create better aircraft. Several aviation advancements emerged in the early 20th century when new planes and technologies were put into use. The airplane demonstrated its usefulness as a weapon during World War I, and early airmail service demonstrated that it could be used for commercial purposes. Despite technical developments after World War I, early flying remained a dangerous activity. Flying circumstances were difficult because the majority of pilots could only uti- lize magnetic compasses as navigational aids. To navigate by railroads and roads, pilots would fly 200 to 500 feet over the surface of the Earth. The light from bonfires on the land- ing field was used throughout the night and in limited visibility. Accidental fatalities were common (Federal Aviation Administration, 2022) The US Air Mail Act of 1925 opened the door to a prosperous commercial aviation industry, and companies like Pan American Airways, Western Air Express, and Ford Air Transport Service began providing regularly scheduled commercial passenger service. By the middle of the 1930s, the four major domestic airlines—United, American, Eastern, Transcontinen- tal, and Western Air—had begun operations and would go on to dominate commercial travel for the majority of the 20th century. Historically the early days of aviation were focused in the US and Europe. (Federal Aviation Administration, 2022) 16 The Jet Age Jet engines are significantly less complex than piston engines, making them more reliable, safe, and affordable to operate. Since they burn kerosene instead of gasoline, they create a lot of thrust for their weight. Jet aircraft can therefore be built bigger and fly faster than aircraft using piston engines. The jet engine transformed aviation. Because of the power and endurance of jets, larger, faster, and more effective airplanes could be built. Additionally, the advancement of jet technology allowed airlines to reduce their operating expenses and ticket rates. For a brief period, ‘jetting’ across the Atlantic was considered incredibly prestigious and trendy, and a new type of traveler class known as the ‘Jet Set’ formed. However, as airline prices dropped in the 1970s, more people were able to travel, and the exclusivity of jet travel was challenged. Passenger numbers more than doubled between 1955 and 1972. Nearly half of all Americans had taken flights by 1972, yet the majority of passengers were still business travelers. Only a small minority of people traveled frequently. In the United States, hundreds of millions of travelers now fly annually. Deregulation Deregulation of the airline sector is the process of removing government-imposed restric- tions on airline entry and costs, particularly those carriers allowed to operate on a given route. A pivotal moment in the history of aviation was the United States Airline Deregula- tion Act of 1978. It was the first complete demolition of a major government control struc- ture since the Supreme Court deemed the National Recovery Act illegal in 1935. Most observers agree that airline deregulation has been successful. The vast majority of travelers have profited from its advantages, as promised by its supporters. Lower fares and greater productivity have been the two most significant effects of deregulation (Kahn, 1995). “The overwhelming majority of the traveling public has enjoyed these lower fares. In 1990, according to the Air Transport Association, 91 percent of all passenger miles trav- eled were on discount tickets, at an average discount of 65 percent from the posted coach fare” (Kahn, 1995). However, not all travelers have benefited equally from the pricing com- petition that deregulation unleashed. This is because the degree of rivalry varies among markets. Prices per mile are often much higher on routes with less traffic compared to routes that are frequently visited. Additionally, they are more expensive for the small pro- portion of customers who must pay full coach costs due to their refusal or inability to fulfill the requirements for discounts. such as advance booking and non-refundable fares. The deregulation of the aviation industry was not restricted to the United States only. European aviation markets have historically been heavily regulated and protected by gov- ernments. But in the middle of the 1980s, a single market for European air travel was about to be established, requiring an alteration to this situation. The European Union (EU) liberalized the aviation industry by relaxing the rules regulating the aviation industry over different stages during the 80s and the 90s. The EU completed a regional integration of its 17 member states' shared airspace into a single aviation market in April 1997, around fifty Chicago Convention years after the Chicago Convention came into effect. Later, neighboring nations, includ- This was the convention ing Iceland, Norway, and Switzerland, joined the single market. by which the Interna- tional Civil Aviation Organization, a United While deregulation brought on many benefits to the industry, it has also resulted in a vari- Nations specialized ety of issues, such as traffic congestion and fierce competition between FSNC and new agency, was founded in 1945. entrants to the market such as LLCs, which has led to the bankruptcy of a number of major airlines. In the end, the vast majority of the major airlines in the 1980s experienced some form of loss, either by nearly going bankrupt or by seeing less-than-expected financial growth. SUMMARY Depending on the industry sector, the type of products and services, and the medium in which transactions take place, the definition of market- ing could vary but its main components remain the same. In any market- ing process, there are four key factors, often referred to as the Four Ps or the Marketing Mix: product, price, place, and promotion. Market development is a more elaborate process in which companies seek to expand the promotion of their products in new markets in order to acquire new customers. For example, a company that manufactures smart phones in Germany may choose to market its product in another region. The same company can also retarget existing customers with a new product. For example, the company may introduce a smart watch as part of its line of products. The term business model refers to an organization’s strategy to generate a profit. It outlines the products or services the business plans to pro- vide, the market it has selected, and any anticipated expenditures. Busi- ness models are essential for all businesses, whether new or estab- lished. It is through such models that a company determines capital and investment requirements, personnel and hiring needs, short- and long- term business objectives, among others. Most transportation indicators are built around RPKs or RPMs. A meas- ure of an airplane's overall carrying capacity that can be used to gener- ate revenue, available seat miles (ASMs), are calculated by multiplying the actual number of seats on an aircraft by the total distance. An airline can calculate load factors by dividing RPM by ASM. A pivotal moment in the last few decades of aviation was the United States Airline Deregulation Act of 1978. It was the first complete demoli- tion of a major government control structure since the Supreme Court deemed the National Recovery Act illegal in 1935. 18 While deregulation brought many benefits to the industry, it also resul- ted in a variety of issues, such as traffic congestion and fierce competi- tion between FSNC and new entrants to the market such as LLCs, which has led to the bankruptcy of a number of major airlines. In the end, the vast majority of major airlines in the 1980s experienced some form of loss, either by nearly going bankrupt or by seeing less-than-expected financial growth. 19 UNIT 2 FULL-SERVICE NETWORK CARRIERS STUDY GOALS On completion of this unit, you will be able to... – define the full-service network carrier (FSNC) business model. – identify the principal characteristics of FSNCs. – provide example of the major FSNC today. – explain the strength, weakness, opportunities, and threats to FSNCs today. 2. FULL-SERVICE NETWORK CARRIERS Introduction Full-service network carriers (FSNCs) are also called network, legacy, and traditional air- lines. The business model is typically focused on offering air services to several destina- tions with a wide range of auxiliary services, including in-flight amenities, flexible booking options, multiple classes, and airport lounges. Additionally, these airlines generally offer domestic and international flights and cater to both business and leisure travelers. FSNCs employ a hub-and-spoke network structure and provide passengers with specialized serv- ices. These airlines try to expand their itineraries from their hub locations while providing services to all passenger categories. Increasing connection benefits airlines as well as pas- sengers. From hubs, travelers can connect to several different flights. They can reach their destinations without switching between different airlines because they have a variety of flight schedule options. Figure 1: The Point-to-point and Hub-and-spoke Models Source: Sarah Abbas (2022) Full-service network airlines have at least one hub that is the center of all airline activities. Customers can choose from a variety of connecting flights, which require precise network management. Routing, scheduling, and fleet assignment are all aspects of network man- Yield management agement. Another crucial element of this airline's business model is yield management. This process occurs when The basic objective of the operations is to use resources or capacity that will yield a higher airlines distribute their set number of tickets in return. the most lucrative way. 22 2.1 Major Players The major FCNS players set their product apart from the rest of airlines by introducing a variety of classes, including first, premium, comfort, and economy class, as well as a range of in-flight amenities, including food and drinks. They run all sector lengths and make an effort to attract both leisure and business travelers. As a result, they emphasize their high- quality services across the entire vacation experience rather than just emphasizing rates. Use of main airports, frequent flyer programs, and airport lounges are other traits. Through airline partnerships, these airlines also provide numerous connecting flights, joint reward programs, and access to airport lounges in numerous other airports. This business model is built on providing wide-ranging services for passengers across dif- ferent continents. It therefore requires a range of aircraft with varying capacities, and these aspects take time, resources, and labor to implement. This also means higher capi- tal, more labor, and increased operating expenses. To deal with these complex operations, FSNCs rely on yield management, loyalty programs, computerized reservation systems, and customer relationship management, in addition to carefully managing intricate schedules, capacity, and frequency. The three most well-known FCNS are American, United, and Delta Airlines, though the list may be lengthy given the extensive mergers and acquisitions of airlines in recent years. In addition, Lufthansa, KLM, British Airways (IAG Group), and Air France are the four most dominant airlines operating in Europe under the FCNS label. KLM is the longest-running airline in Europe with its original name (Air-France-KLM, n.d.). As a result, while having a strong brand image over time, its public acceptance as a heritage airline also takes into account the length of service in the airline business. Extensive Fleet Owning a sizable and diverse fleet is another trait shared by FSNCs. Given the size of the market for regional and international service, a larger fleet of aircraft helps to meet the high demand-supply requirements. At the same time, the diverse fleet assists in satisfying the requirements of various routes and flight demands. A large and diverse fleet does not mean that FSNC ignore the advantages of fleet commonality, such as the decreased need Fleet commonality for crew training and the increased sharing of maintenance infrastructure, but this can be This term refers to a uni- form fleet of airplanes accomplished by having a significant number of aircraft of a given type for a given set of that have similar parts flight profiles within the FSNC fleet. The below table indicates the fleet size for major FSNC across the world in 2019 (Airportcodes, 2019). Table 2: FSNC Fleet Sizes FSNC Fleet size FSNC Fleet size American Airlines 956 aircraft KLM 107 aircraft Delta Air Lines 879 aircraft Emirates 271 aircraft United Airlines 765 aircraft Air Canada 180 aircraft 23 FSNC Fleet size FSNC Fleet size Air China 418 aircraft British Airways 267 aircraft Lufthansa 290 Aircraft Air France 206 aircraft Source: Sarah Abbas (2022) Frequent Flyer Programs FSNCs are known for providing frequent flyer programs (FFPs), which is a type of a loyalty program offered for passengers, especially those with a high frequency travel. Numerous airlines provide frequent flyer programs that are intended to motivate program partici- pants to earn points that can be exchanged for flights or other benefits. Managing FFP falls under the customer relationship management (CRM) tool, which is the process by which an airline or any business in general manages its customer contacts, employing data anal- ysis to process vast volumes of information in a way that enhances customer service and contributes to an increased revenue. Notwithstanding CRM tools, which are costly in and of themselves, FFPs require a sizable amount of administrative effort and generally involve an entire department devoted to promotion, strategy and customer service. As such, FFPs represent a great deal of cost, which is why they are a mainstay of the FSNC business model, rather than LCCs, which often do not have an FFP program. 2.2 S.W.O.T. A SWOT analysis, which examines a business’s strengths, weaknesses, opportunites for maximizing profit, and threats to its current operations and potential growth, gives the business useful information about the market, competitions and future business plans. The FSNC sector is not an exception; it too has strengths and opportunities that, if used by an airline, can significantly aid in its growth as well as in minimizing its weaknesses. Strengths FSNCs benefit from air travel’s well-established safety record and the fact that it is widely regarded as a speedy and secure mode of transportation. With each passing year, flying gets safer. The 2022 Global Safety Report from the International Civil Aviation Organization (ICAO) was recently made public. According to the data, there were 9.8 percent fewer acci- dents in the aviation sector in 2018 than there would have been in 2020. Accidental deaths involving aircraft decreased by 66 percent. A notable strength is the growth of tourism, which has resulted in a considerable rise in international travelers, with figures showing an increase in international travelers. “An estimated 474 million tourists travelled internationally over the period, compared to the 175 million in the same months of 2021.” (World Tourism Organization, 2022.) 24 The rising income levels are one of FSNC's benefits. As individual salaries rise, disposable income also rises, enabling more people to use airlines to travel to their destinations. Despite the decline in travel due to the COVID-19 pandemic in 2020 and 2021, FSNCs have expanded over time. This can be partially related to the growing global population and the rise in the number of people who travel. Weaknesses The FSNC business model demands a significant capital investment due to the high air- craft and overhead cost. Proper marketing strategies are essential in order for FSNCs to obtain their return on investment. Infrastructure development is one of FSCN’s biggest problems. The infrastructure has not been able to keep up with the aviation industry's rate of growth. As a result, it significantly slows down the sector. A further development of FSNC should give priority to infrastruc- ture development and construct modern airports with enough runways passenger areas. An advanced infrastructure would also improve traffic-related delays for passengers. FSNC are known to have an extremely high spoilage rate. The revenue from a seat is for- Spoilage rate feited once a passenger is late for a flight. To avoid or lessen this occurrence, the airline The term ‘spoilage rate’ refers to the ratio of should establish a process for contacting each passenger before to departure to remind denied boardings to total them of their trip. boardings. FSNC must maintain a sizable work force that is dispersed throughout a huge operational spectrum. A thorough examination of the staff is necessary to verify competency and the ability of the employees to operate with little supervision is necessary in order minimize related workforce management costs. Opportunities Investment in information technology and technical innovation offer a great opportunity to lower operating expenses for a business. In order to provide better customer service, FSNC can rely on information technology. This would persuade customers to pay more for the services and increase FSNC's profit margins. Supply chain improvements, such as finding a fuel source at a lower cost, would signifi- cantly reduce FSNC’s operating expenses. Negotiating better terms in general can contrib- ute to raising profit margin. There is room for FSNC to expand and cover more ground. To offer their products and services, airlines might grow into underserved markets. Larger customer bases would increase their revenue. 25 Threats FSNC are subject to numerous threats such as the fluctuating global economy and its noticeable impact on both leisure and business travel. Less individuals are likely to travel for leisure and business while the global economy is in decline. To reduce the negative impact, FSNC aim to keep its operating costs as low as possible in order to prevent poten- tial losses, and to avoid having its operating costs exceeding its revenue. Government laws that have just been introduced could pose serious threats to FSNC. Reg- ulations created by government action could be quite expensive to adhere to. Regulations related to market liberalization could also increase threats from foreign airlines operating on similar points and routes. SUMMARY Network, legacy, and classic airlines are all full-service network carriers (FSNC). The primary goal of the business model is to provide air travel to numerous destinations along with a variety of ancillary services, includ- ing as in-flight comforts, flexible booking options, several classes, and airport lounges. These airlines also provide domestic and international service, and they welcome both business and pleasure visitors. FSNC offers travelers specialized services and operates a hub-and-spoke net- work. Another characteristic shared by FSNC is ownership of a vast and varied fleet. A greater fleet of aircraft helps to meet the high demand-supply requirements due to the expansion of the regional and worldwide serv- ice market. The diversified fleet helps to meet the demands of various routes and flying demands at the same time. The well-established safety record of air travel and the fact that it is largely considered as a quick and secure means of transportation both work in favor of FSNC. Flying becomes safer with each year that passes. However, several risks are present for the FSNC business model, such as the shifting nature of the world economy and how it affects both leisure and business travel. People are less likely to travel for both work and pleasure when the world economy is in decline. In order to minimize the negative effects, FSNC strives to maintain its operational costs as low as possible. This will help to avert potential losses and limit operating expenses from surpassing revenue. 26 UNIT 3 LOW-COST CARRIERS STUDY GOALS On completion of this unit, you will be able to... – explain what the low-cost carrier (LCC) business model is. – identify the principal characteristics of LCCs. – provide examples of the major LCCs. – explain the strength, weakness, opportunities, and threats to low-cost carriers today. 3. LOW-COST CARRIERS Introduction A low-cost carrier (LCC) is an airline that does not provide additional services that are typi- cally included by full-service carriers in the passenger fare. LCCs are defined as airlines that “offer comparatively low prices but offer fewer comforts such reduced leg room, no on-board meals and no passenger services such as lounges and reading material. LCCs charge for all extra services such as meals and baggage.” (Copur, 2015, p.540) Most analysts consider Southwest Airlines, an American carrier based in the state of Texas, to be the first low-cost carrier (Francis, 2003, p.267). Southwest, which prospered as an LCC following the Deregulation Act of 1978, served as an example for another low-cost model across the world. Cost saving is the foundation of Southwest Airlines and all other low-cost strategies, and this partially translates into lower ticket prices for customers. When it was first established in a regulated United States (US) environment, Southwest Airlines’ business model had two key concepts that set it apart from other existing models. First, Southwest prioritized short-haul point-to-point flights within Texas, rather than using a hub-and-spoke arrangement, not by choice but because in pre-deregulation US a startup airline could only fly within the confines of one state. Second, they offered a limi- ted service and only in one class. After deregulation in the late 1970s, this business model was transposed to interstate routes within the US as well. In the 1990s, as the deregulation of airspace advanced across the European Union, low- cost carriers emerged, and the Southwest low-cost model was expanded upon by the air- lines such as Ryanair and EasyJet. They emulated Southwest’s effective operational strat- egy to a point, but instead of providing fewer services, they provided none. Food and drink had to be purchased on board, and there was no money-back guarantee or reservation option, among other things. Additionally, they began selling tickets straight to customers online, as opposed to selling them via travel agents, thus reducing distribution costs by avoiding commissions and fees. 3.1 Major Players Southwest Airlines is considered as one of the most successful low-cost carriers in the US and it epitomizes the deregulation era in the US in several ways. The Airline Deregulation Act of 1978, which removed government control over fares, routes, and market entry of new airlines, allowed Southwest to start operations in 1971, and grow rapidly. By 1974, they carried their one-millionth customer. A number of new jets and locations were added over the following few years, with five additional cities added in 1977 alone. Southwest had increased its service by the middle of 1988, offering about 900 flights daily throughout its network of routes serving 27 destinations in 13 states. By 1989, revenue had surpassed the $1 billion mark. (Black, 2015, p.54). 28 Southwest's business model is based on low costs and high efficiency, which was made possible by the deregulation act. Southwest has been able to offer lower fares than its competitors by keeping its costs low through measures such as using a single type of air- craft and keeping its fleet young, which reduces maintenance costs. By 1993, Southwest Airlines had “much lower operating costs than most airlines,” (U.S. Department of Trans- portation, 1993). Southwest was also able to expand its route network rapidly as a direct result of deregulation. The airline's route network has grown to serve over 103 destina- tions in the U.S. which was only possible because of the deregulation act which has provi- ded them with more flexibility in terms of routes, schedule, and pricing. All other low-cost airlines have something in common: They either have a "modified" ver- sion of the Southwest low-cost model of operating or are based on it. The low-cost lead- ership strategy used by low-cost airlines is responsible for their success. Key characteris- Low-cost leadership tics to this business model are illustrated in this table. strategy This type of strategy is aims to provide goods or Table 3: LCC’s Main Characteristics services for less money than its rivals. Fare Restricted but affordable fare Network High frequency point-to-point routes Distribution No tickets, only phone centers and online platforms Fleet High utilization, uniform type of aircraft Airport Smaller airports with quick turnaround times Sector length Short (around 400 nautical miles) Source: Sarah Abbas (2022) Low-cost airlines continue to operate on the same core principle: to give customers the best deal possible by charging less than FSNCs. However, some LCCs have altered their tactics to try to differentiate themselves from their rivals as a result of the intense compe- tition among airlines. This approach is referred to as the differentiation strategy (Alamdari & Fagan, 2005, p.378). This type of strategy is used by companies to differentiate them- selves from the competition in the market. In the LCC business model, this could translate into selling additional services such as priority boarding passes, extra legroom seats and hot meals on board. When it comes to the fundamental services provided, airlines like EasyJet and Ryanair in the European market adhere to the more traditional low-cost lead- ership strategy. Historically, secondary airports have served as the home base and the destination for LCCs. This is due to their lower charges for handling as well and in some cases, airports seeking to develop a region may even provide subsidies. But the operation of Ryan Air and EasyJet into hubs like Paris Charles de Gaulle, Amsterdam, Geneva International, Dub- lin, Gatwick, and Manchester, to name a few, has changed this situation somewhat. In the United States, Southwest operates out of Los Angeles International and even provides connecting flights to their other destinations, simulating this type of traffic movement. 29 How Do LCCs Make Money? One could assume that airlines' ability to turn a profit is directly related to the cost of their tickets. For many established carriers, this is more frequently the case; for low-cost carri- ers, it is less so. In fact, total operational expenses are frequently higher than projected revenue from passenger fares alone. This means that low-cost airlines' ability to generate income comes at least partially from supplementary revenue. Services that go above and beyond the fare and taxes for transporting a passenger from point A to point B are referred to as ancillary services. Airlines offer a variety of services and take part in other activities related to their primary business of transporting passen- gers by air, such as non-flight scheduled services, internet-related services, and the sale of goods and beverages during flight. The money LCCs make from ancillary services is refer- red to as ancillary revenue. To illustrate the importance of ancillary services in the LCC business model, the following is an extract from the 2020 Ryanair Annual Report (Ryanair, 2020, p.70). Table 4: Ryanair Annual Report for the year 2020 Fiscal Year Ended March 31, Operating 2020 2019 2018 2017 2016 Data: Average 37.46 37.03 37.03 40.58 46.67 Booked Pas- senger Fare (EUR) Ancillary Rev- 19.71 17.14 15.48 14.83 14.74 enue per Booked Pas- senger (EUR) Source: Sarah Abbas, 2022, based on Ryanair Annual Report (2020, p.70) The first line represents the average booked passenger fare, that is , how much money on average the airline received from ticket booking per passenger. The second line represents the ancillary revenue per passenger, meaning how much money the airline received from selling extra legroom seats, food and beverages on board, checked-in bags, among other things. While the average revenue from booked tickets declined between 2016 and 2020, the revenue from ancillary services rose by 33.7 percent. (Ryanair, 2020, p.70). Ryanair is well-known for generating a significant portion of its revenue from ancillary services. As explained above, the company's ancillary revenue streams include baggage fees, seat selection, in-flight meals and snacks, and travel insurance. Ryanair also charges customers a fee for booking their flights through the company's website, as well as for printing boarding passes at the airport. The airline has also been known to charge for changing or canceling a reservation, and even check-in fees if the passenger doesn't check-in online. Ryanair's ancillary revenue strategies have been credited with helping the company to keep its base fares low, which has contributed to its success as one of the larg- 30 est LCCs in Europe. “Ancillary revenues accounted for approximately 37% of Ryanair’s total operating revenues in fiscal year 2021 and approximately 34% of Ryanair’s total operating revenues in fiscal year 2020.” (Ryanair 2020, p.105) In conclusion, the airline is able to grow its business, while also cutting down its ticket pri- ces, which draws more customers. LCCs in general do not make money by selling low-cost tickets; instead, they seek to draw customers in and sell them add-on services, like extra luggage, food, duty-free products, hotels, car rentals and insurance. After the success of Southwest Airlines and its LCC business model in the 1970s, the low- cost airline industry has seen significant development. Low-cost airlines have proliferated, emerged in almost every region of the globe, and are now comparable in size to the big- gest legacy carriers. Below is an overview of the present market and the biggest low-cost airlines today. Southwest Airlines Fleet size: 742 aircraft The largest LCC is Southwest Airlines, which currently has a fleet of 742 aircraft. This pla- ces it behind American Airlines, Delta Air Lines, and United Airlines (which are all FSNCs) as the fourth-largest operator in the world by fleet size. It is the largest Boeing operator and is known for its whole Boeing 737 fleet. It has historically also flown the Boeing 737-200, 737-300, and 737-500. (Southwest Airlines, 2022) Ryanair Fleet size: 505 aircraft The Irish LCC is the biggest LCC in Europe. Ryanair offers flights throughout the continent. As of 2022, the airline has 505 aircraft in its fleet. This number includes aircraft operated by its subsidiaries Buzz, Malta Air, and Lauda Europe. Although Lauda Europe has introduced the Airbus A320 to Ryanair's fleet, the Boeing 737 still makes up the majority of its aircraft. (Ryanair, 2022). easyJet Fleet size: 318 aircraft It is not unexpected that easyJet and Ryanair are both on the list of airlines with the larg- est low-cost fleets given their history as bitter rivals in the European low-cost market. EasyJet operates through three airline companies: easyJet Switzerland, easyJet Europe, and easyJet UK. Almost all of the airline's planes were previously based in the UK. How- ever, the airline created easyJet Europe in 2017 as a result of the UK's exit from the Euro- pean Union. The Airbus A319 and A320 make up the majority of the airline's all-Airbus fleet. (Easyjet, 2022). JetBlue 31 Fleet size: 282 aircraft Given its relatively shorter history, US-based JetBlue ranks in an excellent fourth with 282 aircraft. The airline was formed by businessman David Neeleman and it began flying in 2000. From its center in New York, service was quickly expanded. As a premium service on flights from New York to Los Angeles and San Francisco, it introduced Mint in 2014. With the help of its Airbus A321LR, it has recently continued to grow and now offers transatlan- tic flights between New York and London. Today, Airbus A320s and Airbus A321s make up the majority of jetBlue’s fleet but it also operates Embraer ERJ190 aircraft (JetBlue, 2022). IndiGo Airlines Fleet size 280 aircraft The inclusion of IndiGo Airlines on the list demonstrates the swift expansion of low-cost options in Asia. Despite only having begun operations in 2005, it quickly rose to the posi- tion of largest operator in India. There are currently 280 aircraft in its fleet, including Air- bus and ATR, a Franco-Italian aircraft. (Indigo, 2022). 3.2 S.W.O.T. SWOT analysis is an important tool to provide companies with an overview of current operations and potential growth. The low-cost carrier sector is not an exception; it too has strengths and opportunities that, if used by an airline, can significantly aid in its growth and weaknesses. Strengths The success of LCCs in lowering their cost bases can be attributed to a number of impor- tant variables such as including in-flight amenities, crew and aircraft utilization, seating arrangements, the use of secondary airports, digital and direct distribution, and more. Innovation is another notable strength of LCCs. No European airline has contributed more to changing the nature of short-haul travel than Ryanair, possibly with the exception of easyJet. By imitating Southwest Airlines' business strategy, it launched the low-cost revo- lution in Europe, but after this initial act of imitation, innovation in technology and in mar- keting was the secret to LCCs in Europe and around the world. One of the key aspects of Ryanair business model is the "no-frills" approach, which involves offering low base fares and charging extra for the ancillary services. This allows the airline to offer very low fares to customers, while still making a profit. Additionally, Ryanair operates a single aircraft type fleet, which reduces maintenance and training costs. LCCs usually employ a younger fleet of aircraft that is fuel-efficient and rely significantly on fuel economy, according to the United States Department of Transportation’s First Quar- ter 2019 U.S. Airline Financial Data, fuel consumption charges typically account for 10–20 32 percent of an airline's total costs. (United States Department of Transportation, 2019). LCCs deploy younger fleets of fuel-efficient jets to lower fuel costs. These newer fleets also aid in saving money on employee training and upkeep. Low-cost airlines fly over shorter distances, which enables them to run more flights each day. Due to their high throughput, they must work within strict time constraints; turn- around times for jets are frequently between 30 and 40 minutes. LCCs also make an effort to serve a variety of flight directions in order to best utilize their fleets and boost passen- ger volume. With shorter turnround times, LCCs are often able to schedule an additional flight each day, vastly increasing their aircraft utilization compared to FSNCs. By far the greatest strength of the LCC is simplicity. A unified fleet, the lack of complicated infra- structure for passenger services, mileage programs, for example, provide considerable cost savings, which can be passed on to passengers. Weaknesses LCCs may suffer from a misconception that they are less safe than traditional FNSCs. This perception is flawed. In fact, the majority of the leading low-cost airlines have only been operating for the past decade or two, thus they operate some of the newest aircraft mod- els with the most modern safety features. Budget airlines are extremely concerned with upholding their reputation and track record for flight safety since the idea that low-cost flights are intrinsically less safe than full service flights is one that is difficult for low cost carriers to dispel, particularly in emerging LCC markets. Although many LCCs do outsource pivotal functions such as maintenance, there is no evidence that this has had any impact on safety. However, customer perceptions can be difficult to change. The perception that LCCs provide an inferior level of service than FSNCs is not borne out by the evidence. The top 50 airlines in the Skytrax 2019 rankings includes ten LCCs (World Airline Awards, 2019). Airlines such as Jetstar and EasyJet consistently score in the top percentiles of customer surveys. Perhaps one of the main reasons for this is customer expectations. With LCCs the basic value proposition is transportation from point A to B in the most efficient way possible. However, legacy carrier passengers, may still have an expectation of full service, i.e., meals, free bags, and free seat selection, that have long ago been shelved in the FSNCs quest to emulate LCCs. The point-to-point model adopted by LCCs brings on a number of constraints and geographical limitations. If a desired origin- destination pair is not offered by the LCC, passengers will have to resort to an FSNC, as in the hub-and-spoke model, or use another means of transportation. Opportunities The market for low-cost travel is huge, but it's also fiercely competitive. Making their flights appealing to business travelers is one new tactic that several of these firms are cur- rently experimenting with in an effort to stay competitive. Ryanair recently debuted its business traveler package. This package deal includes a number of advantages for a single price, such as flexible booking options, quick lane security, a choice of reserved seating in premium rows. 33 LCCs have an opportunity to grow through mergers and acquisitions. Major carriers are considering mergers or partnerships with LCCs in order to benefit from network rearrange- ment and LCCs' cost-effectiveness as a result of the rise of LCCs. Threats Fuel costs have a significant impact on how the industry develops. Fuel accounts for a larger share of costs for lower cost carriers, making LCCs more sensitive to significant input price rises. Many LCCs were substantially at risk as jet fuel costs reached new heights. While regional airlines and integrated tour operations are different business models than that of LCCs, however, they all compete in terms of transporting passengers on short dis- tance trips and some of them target the same segment of passengers seeking tourism des- tination. Perhaps the greatest threat to the LCC ironically stems from the business model’s own suc- cess. FSNCs have established or acquired their own LCC subsidiaries such as Eurowings (Lufthansa), Vueling (IAG Group) and Transavia (Air France/KLM). Although these subsidia- ries face their own unique set of challenges with respect to their parent companies, they nonetheless offer the same general value proposition to customers as the LCCs. SUMMARY An airline is referred to as an LCC if it follows a specific strategy of focus- ing on cost reduction. This can involve many different aspects such as fleet simplification or not offering standard services that are generally included in the fare. LCCs are classified as airlines with low overhead costs, relatively low fares and few amenities such as baggage handling and onboard dining, unless it is paid for by the passenger. Simplicity in fleet and network planning is the key to LCC operations. Southwest acted as a model for other low-cost business models all over the world after it was established in the wake of the Deregulation Act of 1978. Southwest Airlines and all other low-cost tactics are built on cost- mimimization, which largely translates to lower ticket rates for passen- gers. Low-cost carriers started to appear in the 1990s as the European Union's airspace deregulation process advanced. The Southwest low- cost model was developed by the British airlines Ryanair and EasyJet. LCCs have used secondary airports as both their starting point and their final destination. However, this position has been slightly altered by the operation of Ryan Air and EasyJet into hubs like Paris Charles de Gaulle, Amsterdam, Geneva International, Dublin, Gatwick, and Manchester, to mention a few. 34 LCCs are able to expand their route networks while lowering ticket costs, which in turn attracts more travelers through. In general, LCCs do not make their profits by selling low-cost itckets, instead, they try to attract clients by offering them add-on services like extra luggage, food, insur- ance, and other “ancillary revenues.” 35 UNIT 4 CHARTER/INTEGRATED TOUR OPERATORS STUDY GOALS On completion of this unit, you will be able to... – explain what the Integrated Tour Operators business model is. – identify the principal characteristics of Integrated Tour Operators. – provide examples of the major Integrated Tour Operators in business. – explain the strengths, weaknesses, opportunities, and threats to Integrated Tour Oper- ators today. 4. CHARTER/INTEGRATED TOUR OPERATORS Introduction The International Civil Aviation Organization (ICAO) divides civil aviation into two catego- ries, general and commercial. General aviation includes all types of recreational activities. Commercial aviation is all transactional aviation activities that provide services to passen- gers. Commercial aviation is either scheduled or non-scheduled (The International Civil Aviation Organization, 2013). Examples of scheduled aviation were explored in earlier chapters, such as FSCNs and LCCs. Non-scheduled activities such as charter flights are often employed by integrated tour operators, particularly when operated with aircraft in the 150+ seat category. Tour operators, as the name suggests, operate more than just the flight portion of the tour. They typically bundle the accommodations, sometimes cruise reservations, and other highlights of the vacation into a package. A crucial part of the global aviation mar- ket used to be played by integrated tour operators, especially in Western Europe. While much less common nowadays, the business model is still used today by several compa- nies such as TUI in Germany. In addition to greatly boosting the market's overall economy, they offer tourists practical services that help them reach their destinations. In the past, many tour operators owned their fleet of aircraft, and some such as TUI still do. They also create a retail network of travel agencies for more effective product distribu- tion without having to pay commissions to third parties. Even though the primary goal of tour integration is to save costs, the tourism industry is still quite competitive. Invest- ments in supply chain management and integration require a lot of capital. The cost of distribution channels, marketing, and promotion are major factors in the sale of tours. 4.1 Major Players A tour operator primarily creates the final tourist product by incorporating various travel elements and tourism services into a planned tour or vacation, including the flight from the original point to the destination. The tour operator undertakes the following tasks: purchasing tourism services from suppliers planning tours for future anticipated demand reserving all or some rooms of lodging units for a season or annually making airline reservations in the form of seat blockage or allotment making cruise reservations chartering flights and hiring aircraft determining the specifics of tours and holidays 38 promoting and marketing tours selling its products directly online, offline, or through indirect distribution channels. It is often the case that the role of selling organized tours is assumed by the tour operator through contractual arrangements and bulk purchases. An integrated tour operator pro- duces and directs tourist demand and matches the need with the destination's tourism supply by realizing high investments and attaining low costs in the development of tourist products (Camilleri, 2018, p.21). What differentiates a tour operator from a travel agency for example, is that the former promotes vacations and trips rather than specific locations. Depending on its expertise and supply, the specialized tour operator promotes particular locations. To reduce opera- tional and investment risks while boosting sales and profitability, the tour operator diver- sifies the tourist goods in their sales range. The primary service providers for a tour operator are airlines, cruise operators, accommo- dation units, hotels, and vacation resorts, ground operators, tour operation at the destina- tion, and organization and conduct of sightseeing and leisure activities. The tour operator designs its itineraries in accordance with anticipated future demand and estimated sales, which are based on historical occupancy rates, sales numbers, and market analysis. The Role of Aviation in Integrated Tour Operations Aviation plays a key role in the integrated tour operator business, by providing transporta- tion for tourists to and from their destinations. Airlines are important partners for tour operators as they are responsible for getting tourists to their destination and back home. This can include direct flights, connecting flights, and charters. From a revenue perspec- tive, air travel plays a significant role in determining the overall cost and logistics of a tour package. Tour operators sometimes own their airlines or negotiate with existing airlines for discounted rates and favorable flight schedules to offer their customers more afforda- ble and convenient travel options. Tour operators typically use airlines to package and create tour products, such as all-inclusive packages that include flights, accommodations, and activities. This can be done by creating contracts with airlines, to provide flights at a lower cost, or by creating a package of flights and hotels that are coordinated to work together. Nowadays, charter flights of any size, to or from any location in the world, can be arranged by integrated tour operators. Aircraft chartering services have a long history of collaborat- ing with travel agencies, tour operators, and travel organizations to provide the travel component in the all-inclusive tour packages offered to customers. Integrated tour operators employ an indirect sale approach to secure multiple services and products from different suppliers and act as middlemen to offer these services and products to customers. While it is true that in some cases the operator owns a fleet of aircraft and maybe the lodging property as well, inclusive tours require additional services such as sightseeing tour, food and beverage, and ground transportation. These goods and services need to be supplied by third parties who do not enter in direct contact with cus- tomers. In the direct sale approach, the customer and service provider are in direct con- 39 tact, as when booking airline tickets. By using this process, the customer has a flexible negotiation option to get different prices and services on different dates while making a purchase from the supplier, i.e., the airline. There are not as many integrated tour operators in business today as there used to be years ago. One of leading operators, Thomas Cook, collapsed in 2019 after 187 years in the market. It began in 1841 by organizing railway tours and expanded to operate its own hotels and airline carrier (Collinson, 2019). The current landscape of integrated tour is dominated by the following operators: TUI Fleet size: 150 aircraft The TUI Group includes TUI fly. TUI operates in a number of cities and flies to locations all over the world. More than 150 planes are in the TUI fleet. TUI increases their fleet to more than 175 aircraft at the busiest times of the year by renting additional aircraft. TUI fly Neth- erlands & Belgium offers flights to more than 100 locations from airports in the Nether- lands, Belgium, France, and Morocco. (TUI Group, 2022). Condor Fleet size: 50 aircraft One of the top leisure airlines in the world, Condor serves over 9 million passengers annu- ally and flies to almost 100 locations in Europe, Africa, and the Americas. The German air- line was a subsidiary of the bankrupt British tour operator Thomas Cook. When the latter declared bankruptcy, Condor continued to operate under its own name. Condor Technik GmbH (CTG) maintains facilities in Frankfurt, Munich, Düsseldorf, and Hamburg to service the Condor fleet. Condor’s business model combines both integrated tour operation and scheduled flights (Condor, 2022). 4.2 S.W.O.T. This SWOT analysis will identify the internal and external factors that can have an impact on the integrated tour operator’s business model. Strength Distribution and reach: Integrated tour operators typically have an expansive outlet of locations, and a robust distribution network ensures that its products are quickly and easily accessible to a vast number of customers. TUI, for example, has a low-cost structure that enables it to make expenses minimum and sell its packages for a low price, making them accessible to customers. 40 Social media: Facebook, Twitter, and Instagram are among the three most popular social media networks. The active presence of integrated tour operators on such platform con- tributes to expanding the marketing and branding of the company. TUI has millions of fol- lowers on each of them, approximately 6 million followers on Facebook alone. Partnerships: Integrated tour operators typically form strategic alliances with its vendors, agents, merchants, and other interested parties which facilitate its operations and secure the flow of supply chain. Weaknesses High costs: Integrated tour operators may have a large fixed cost structure, which can make them more vulnerable to economic downturns or changes in consumer preferences. Competition: The integrated tour operator business has tough competition, not necessa- rily with other integrated tour operators, but with LCCs that offer holiday bundles. Some LCCs offer car rental and hotel booking as part of a booking package, which attracts the same consumer segment as that of integrated tour operators. Opportunities Reaching new customers: Integrated tour operators may be able to expand their market share by entering new markets or by developing new products and services. Thanks to the internet and the increasing number of internet users, TUI has a chance to increase its online presence by penetrating new markets and engaging with new customers. New sectors: Integrated tour operators have an opportunity to expand their package into new sectors such as health tourism, which is a growing market that could attract a consid- erable segment of customers. Threats Suppliers: With disturbance to the supply chain in recent years because of the COVID-19 pandemic, suppliers are either unable to match the demand or re-negotiate their agree- ment terms. This could mean high expenses for tour operators from an operational point of view. Exchange rate: A company like TUI, for example, which has international sales but local suppliers, is impacted by the exchange rate's ongoing fluctuations. 41 Political unrest: Tourism is one of the first sectors that is impacted in case of political tur- moil. Such events are a direct threat to the business mode of integrated tour operation. SUMMARY Integrated tour operators used to be major players in the world aviation business. Many tour companies still employ the business model even if it is less fashionable these days. They not only significantly increase the market's total GDP but also provide travelers with useful services that assist them in getting where they are going. The primary method by which a tour operator produces the finished good for the tourist industry is by adding different travel components and tourism services into a planned tour or getaway, including the flight from the starting point to the destination. The integrated tour operated business flourished following the Deregu- lation Act of 1978 in the United States when the "charter-only" airlines were able plan flights to new locations that were previously only served by scheduled flights. 42 UNIT 5 REGIONAL CARRIERS STUDY GOALS On completion of this unit, you will be able to... – understand regional carriers’ history and business model. – identify the position of the regional carriers within the current aviation industry. – provide examples of the major regional carriers today. – explain the strengths, weaknesses, opportunities, and threats to the regional carriers’ business model. 5. REGIONAL CARRIERS Introduction Prior to the Airline Deregulation Act of 1978, Full Service Network Carriers (FSNCs) were compelled to use a direct-route, or the point-to-point model. Larger airlines were forced to use planes that were probably half empty to travel directly between two minor markets, which lost them money. Regional airlines, often known as commuter airlines, established their position in the commercial aviation sector thanks to the act. By requiring the prora- Proration of charges tion of charges for connecting service, the Act gave commuter airlines a way to replace an This term refers to divid- FSNC at specific locations of their networks. The Act also permitted regional airlines to ing the fare that the cus- tomers pay among multi- provide scheduled service with a maximum of 50 seats. Regional airlines consequently ple carriers in proportion had to obtain operating certifications and abide by more onerous operating and reporting to the travelled segment requirements. on each carrier. The level of codesharing between major carriers and commuter airlines was significantly extended with the advent of the hub-and-spoke system soon after deregulation. FSNCs operating hub-and-spoke networks observed that commuter airline passengers were fre- quently taking those short-haul flights as a part of longer itineraries that frequently inclu- ded travel on an FSNC. As a result, these passengers could be a significant source of Feeder traffic feeder traffic for airlines at their hubs. The large airlines were left with two choices: oper- A feeder airline is one that ate the short-haul routes on their own or work out a deal with the current commuter carri- transports passengers to hub airports from loca- ers. The costs for supplying these tiny towns by the larger airlines remained significantly tions that are not served higher than those of the regional airlines, notwithstanding the increased efficiency by larger carriers brought about by deregulation. Regional airlines and FSNC enjoyed prosperous alliances. 5.1 Environment and Trends The introduction of the regional jet (RJ) has been one of the most significant recent advan- ces in the regional airline business. Between 30 and 100 passengers can board the small jet-powered RJ. Current RJs can seat up to 150 passengers. RJs were first introduced in the United States by Comair, a regional partner of Delta Air Lines (Eden, 2016, p. 193), and, in Europe, by Lufthansa Cityline at the end of 1992. The RJ was adopted by these and other airlines for many of their routes during the ensuing years as a result of the introduction leading to commercial success for both airlines. While RJs may potentially have greater costs per available seat mile than larger jets from an economic standpoint, the RJ's advantage is that, on routes with little passenger traffic, the money from the few travelers may actually pay the expenditures of an RJ. This would be impossible to do so for a full-sized plane. In other words, despite the possibility of greater expenditures per available seat mile on a regional jet, the revenue per available seat mile is likely to be significantly higher on a regional jet in comparison to a full-sized jet. This means that while full-sized planes cannot profitably service thinly trafficked routes, RJs can. 44 RJ adoption can be advantageous to FSNC in a number of ways. “There are four distinct motives that airlines can have for introducing RJs onto specific routes,” (Forbes & Leder- man, 2007, p.14) which are explained below: In an effort to minimize overcapacity and boost load factors, airlines may replace larger planes with RJ on routes with low demand. FSNC can resort to RJs in order to maximize flight frequency during off-peak hours of the day and modify the airline's capacity on the route, potentially providing a competi- tive advantage. RJs can take the place of the current turbo-prop service if airlines wish to provide better jet service or a slightly higher passenger capacity. RJs can be used to launch new services on routes that airlines would find unprofitable to offer with the other types of aircraft they have at their disposal. As these new routes mature, they can be replaced with standard single-aisle aircraft such as A320s and 737s. Regarding future trends, regional airlines will keep playing a significant role in the com- mercial aviation sector. They will still have to overcome a number of obstacles. As RJs grow in size, it will become harder to distinguish between the types of aircraft flown by LCCs and those flown by their regional airlines. The two primary manufacturers of RJs, Embraer and Airbus , have already released 70 seat RJs, which are in use in the fleets of numerous airlines. Both have also created RJs with a capacity of 100 seats, and various airlines have placed orders for these (Morris, 2022). It will be curious to see how LCCs and their pilots approach the question of whether mainline pilots or regional pilots should operate 100 seat RJs. The competition between LCCs and regional airlines may be affected by the airports they operate from, as regional airlines typically provide feeder service to and from major hub airports, while LCCs usually operate in secondary airports. Types of Regional Airlines Regional airlines can be divided into three different business models: totally owned by the airline it serves, owned by a holding company, and privately held (Cervantes, 2017). The most typical in the current market is entirely owned, in which a big airline like American Airlines or Delta Air Lines fully owns the regional airline. There are three wholly owned regional airlines operated by American Airlines, for example, with some being larger than others. Even though this type of total ownership of regional airlines may be desired, com- petition still exists among the three owned companies and, in the end, American Airlines decides how to allocate its regional flights. In the second business model, regional airlines are owned by holdings company. Typically, a holding company will retain ownership in a few distinct regional airlines. SkyWest Hold- ings, for example, is the owner of both SkyWest and ExpressJet. It is common for holding companies to work with FSNCs to provide regional flights within their hub-and-spoke sys- tem. The last business model is the privately owned regional airlines. These airlines were previ- ously wholly owned but were sold off to private investors. Thai Airway is an example of a privately held regional airline. Privately held regional airlines do not often have to share their financial reports publicly as in the case with state-owned airlines. 45 5.2 Major Players All of the main domestic airlines in the United States are well-known, including Delta, American, United, and others. However, regional airlines continue to make up a sizable portion of the aviation industry, and major airlines rely on them to transport passengers to and from places that are too small or unprofitable for large jets to reach. The following are the major players in the current regional airline industry. SkyWest Airlines Fleet size: 530 aircraft SkyWest has advanced significantly since it started. It was established in 1972 and offered $25 round-trip transportation for people between Cedar City, Utah, and Salt Lake City. It is the biggest regional airline in the United States today and its fleet includes Embraer E175s and different models of Bombardier CRJs. SkyWest comfortably outperformed a number of well-known traditional airlines, such as JetBlue, Alaska, Spirit, and Hawaiian Airlines, with more than 21 million passengers transported in 2020 (SkyWest, 2022). Republic Airways Fleet size: 328 aircraft Using a fleet of Embraer 170 and Embraer 175 regional aircraft, Republic Airways Inc., a regional airline subsidiary of Republic Airways Holdings, provides service under the names American Eagle, Delta Connection, and United Express. Its headquarters are loca- ted in Indianapolis, Indiana (Airfleets Aviation, 2022). PSA Fleet size: 169 aircraft Since its foundation in Latrobe, Pennsylvania, in 1979, PSA has undergone multiple name changes, mergers, and acquisitions. Originally called Vee Neal Airlines, it joined US Air in late 1980s as a subsidiary under the name Jetstream International Airlines. In 1995, PSA took the place of Jetstream under US Air. After American and US Air merged in 2013, PSA joined the American family (Airfleets aviation, 2022). KLM Cityhopper Fleet size: 55 aircraft KLM Cityhopper is a feeder airline that operates regional connections out of Amsterdam to neighboring nations and is wholly integrated into its parent business. In 2017, KLM City- hopper retired its fleet of Fokker 70 aircraft and now flies a mixture of Embraer 175 and 190 aircraft (Air France-KLM, 2022). airBaltic 46 Fleet size: 34 aircraft. airBaltic operates only regional jets, specifically, the Airbus A220-300. The airline was founded in 1995 and offers affordable tickets throughout its network, which includes the Middle East, CIS, Europe, and Scandinavia (airBaltic, 2022). 5.3 S.W.O.T. While regional airlines’ introduction to the aviation market helped the industry in major ways, the business model is not risk-free and has been tested over the years and the ever- changing dynamics in the aviation scene. The following is an overview of strengths, weak- ness, opportunity and threats that are faced by regional airline industry. Strength Long-term contracts with FSNCs usually provide regional airlines with the financial stabil- ity and ability to plan and expand their fleet or RJs. At one point, the regional airline busi- ness model was regarded as one of the less risky ones, as the fixed-fee contract secures profit margins and removes risk related to fuel prices, load factors, and fares. Regional carriers often have a strong presence in local markets, with established relation- ships with customers and businesses. They are also able to operate more efficiently and with lower costs per trip than larger airlines, which allows them to offer more competitive fares on thinner routes. Weaknesses RJs generally have a higher cost per seat than larger jets. On routes where load factors warrant operation of standard single-aisle jets such as 737s and A320s these will always be the more profitable alternative. Given regional airlines’ tight business with other players in the industry, such as FSNCs, every time the operational arrangement between a regional airline and a mainline carrier is altered, the stability of regional airlines is called into ques- tion. While pilot shortages have been affecting the aviation sector as a whole, regional airlines suffer from acute pilot shortage especially following the industry’s recovery from the COVID-19 pandemic (Josephs, 2022). One of the reasons that aggravates the shortage of pilots in regional airlines is that pilots of regionals are usually accumulating flying hours to advance in their career and join major FSNCs, which leaves regional airlines struggling to find new recruits. Regional carriers may have less brand recognition than larger airlines, which can make it harder to attract new customers. 47 Opportunities With increased interest in eco-friendly travel, regional carriers can capitalize on the popu- larity of smaller planes, which are generally more fuel-efficient. Consolidation is the great- est choice for regional airlines. Consolidations can allow regional carriers to expand their route networks by partnering with other airlines, which can help them reach more desti- nations. As fragmentation in the industry continues, RJs can serve as route openers, pro- viding airlines with opportunities to test new markets without risking major operating los- ses. Threats As more passengers have access to inexpensive fares and nonstop service offered by LCCs, the product that the regional airlines provide is becoming less appealing. As a result, the value of regional airlines as feeders within bigger networks is shrinking. SUMMARY Regional airlines,

Modern Aviation Transport Modes 2023 PDF

Document Details

Tags

Related

Summary

Full Transcript

Upgrade to continue