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Published: May 21, 2003

 
 

Flight for Survival: A New Business Model for the Airline Industry

• Implement Tailored Business Streams.  In other industries, such as manufacturing, complexity reduction has been achieved by applying a TBS approach. The basic principle is to segment operations into distinct business streams: Separate processes are created to handle routine and complex activities; capabilities and approaches are tailored to the inherent complexity of the chosen task and based on what customers are willing to pay. That often entails standardizing or “industrializing” the routine and stable processes, while segmenting and isolating the parts of the operation that are more complicated and variable.

By and large, the hub-and-spoke airlines have done exactly the opposite. Airlines have sophisticated, universally applicable processes for handling most, if not all, possible situations. It doesn’t matter whether the passenger is on a simple one-hour flight or is traveling from one continent to another. This has added unnecessary costs to processes, and made them hard to automate and change, requiring massive retraining of personnel when a process is altered. If the airlines embraced TBS, simplified their policies, and streamlined their core processes to address the basic needs of the majority of customers, they could drastically reduce the number of activities performed at airports. Furthermore, they could automate many more of them, saving huge amounts of time and money. In this environment, the reservation and passenger-handling process would be designed so that passengers wouldn’t need last-minute changes or long, multiple interactions with airline staff at the airport. Instead, travelers would be able to get to the gates faster.

At airports, dedicated processing staff would still deal with the small percentage of travelers who need to change itineraries, connect to a different airline, or request other special services. And customers who require extras (except for perhaps the most frequent flyers) would potentially pay for them in the ticket price or through a transaction fee. Efficiency improvements would be systemwide, cascading from reservations to front-line staff. Overall, the product and experience would be better, and the organization would be much more efficient at delivering it.

• Create Separate Business Systems for Distinct Customer Segments.  In simplifying their business model, large carriers have to be careful to retain the loyalty of their most profitable and frequent customers by providing more differentiated amenities, lounges, and services on the ground and in the air than they do today. This could mean separating both airport and onboard services into two (or more) classes, focused on either leisure or business passengers. Other industries’ experiences suggest that mingling complex and simple operations, each of which has distinct objectives and missions, often increases costs and lowers service standards. This must be avoided: The goal is to offer a higher service level where it is needed, at a low operating cost. Besides providing more amenities, this approach would help create purer business streams that reflect the distinct needs of different customer segments.

It will be important for large carriers to retain the key service advantages they have over low-cost carriers, including destination breadth, superior loyalty programs, and select onboard amenities. At a minimum, this approach would enable greater product distinction than there is today. The objective is twofold: Change the business model to serve all customers better by providing a more efficient and less time-consuming experience; and provide dedicated services (and flexibility) to the customer segments prepared to pay for them.

These proposed restructuring elements are highly interdependent. If they’re effectively coordinated, they will increase the pace of airline operations, reduce and isolate complexity, and increase service specialization — all results that are necessary for carriers to fly beyond the industry turbulence they’re experiencing today. We estimate that by adopting these approaches, the major airlines would bring costs more in line with those of low-cost carriers, reducing their unit cost disadvantage for leisure travel by 70 to 80 percent.

 
 
 
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Resources

  1. Tom Hansson, Jürgen Ringbeck, and Markus Franke, “Flight for Survival: A New Operating Model for Airlines,” s+b enews, December 6, 2002; Click here.
  2. David Newkirk, Brad Corrodi, and Alison James, “Catching Travelers on the Fly,” s+b, Fourth Quarter 2001; Click here. 
  3. Susan Carey and Scott McCartney, “United’s Bid to Cut Labor Costs Could Force Rivals to Follow,” Wall Street Journal, February 25, 2003; Click here.
  4. Darin Lee, “An Assessment of Some Recent Criticisms of the U.S. Airline Industry,” The Review of Network Economics, March 2003; Click here.
  5. Shawn Tully, “Straighten Up and Fly Right,” Fortune, February 17, 2003; Click here.
 
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