As a result of this fundamental market shift, by the fourth quarter of 2000 — close to a year before the September 11 terrorist attacks would slash air travel even more — the hub and spoke airlines’ cost per available seat mile (CASM) rose above revenue per available seat mile (RASM) for the first time since the first half of the 1990s. This eventually increased to an unprecedented cost-to-revenue gap of close to 2 cents per seat mile in the fourth quarter of 2001.
Now the hub and spoke carriers are faced with a thorny challenge. Changing a long-standing business model is difficult and extremely risky. There is the fear that revenue premiums will be lost, but that costs will not fall commensurately. It is difficult to downsize fixed-cost structures; infrastructure may be underutilized with a new business model; and the installed base of aircraft may not fit the new requirements. But to become consistently profitable and competitive again, the major airlines have no choice but to restructure their business model. A boom in high-yield passengers is not likely to happen again anytime soon; Web-based search tools have made it easier for travelers to find low fares; and low-cost carriers have significant untapped growth potential, especially on the East Coast.
A New Operating Model
To navigate this difficult business environment, the large airlines will have to reduce unit costs by some 25 to 35 percent. This will likely require them to radically simplify their core processes and operations. And they’ll have to achieve this significant restructuring without giving up the critical elements of service and coverage expected by their most lucrative customers.
Successful business model change in other industries — such as automotive assembly, certain segments of heavy manufacturing, and financial services — shows the airlines can reduce the burdens of the cost of complexity. Primary options for restructuring the hub and spoke model in the airline industry include:
• Remove scheduling constraints to achieve higher asset and personnel utilization and increase the pace of operations. At present, the airlines generally schedule flights to arrive and depart in peaks to provide effective passenger connections. This causes longer aircraft turns (to allow passengers and baggage to connect to their next flight), traffic congestion, and aircraft downtime at the origin cities in order to meet connection needs at the hub. The result is low labor and aircraft utilization, and a system structured around the needs of the least profitable customers. Connecting passengers provide significantly lower yields (35 to 45 percent lower revenue per mile than local passengers) and necessitate more complicated logistics. Nevertheless, because of current pricing strategies and fleet deployment, airlines rely on connecting passengers to fill seats that otherwise would be empty.
|“Successful business model change in other industries, such as automotive assembly, segments of heavy manufacturing, and financial services, shows the airlines can reduce the burdens of the cost of complexity.”|
This may require rolling or random hubs, which would allow for more operationally efficient, continuous flight schedules throughout the day. The approach would be particularly attractive at “mega-hubs,” where the scale of operations limits the trade-offs between efficient operations and efficient connections.