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Published: December 6, 2002

 
 

Flight for Survival: A New Operating Model for Airlines

Flight for Survival
By taking all of these actions, and simultaneously addressing remaining distribution disadvantages, the major airlines could reduce their unit cost disadvantage for leisure travel by 70 to 80 percent — from about 15 cents to 8 to 10 cents for a 500 to 600 mile flight — bringing it more in line with that of the low-cost carriers. One downside the hub and spoke airlines would experience with these complexity-cutting strategies is revenue loss from shrinking connecting passenger volumes. But the airlines could make up this revenue loss by using their lower cost base to stimulate market growth and open point-to-point routes that were unprofitable at the former cost levels. In other words, with a lower cost structure, the large airlines would be better positioned to launch a marketplace battle against low-cost carriers, rather than being on the defensive in price wars.

“Although transformation may seem daunting, the risk of inaction is much greater than the risk of acting and dealing with some missteps along the way.”
The new operating model for hub and spoke airlines that we suggest would greatly improve their chances of survival, as costs would be more closely balanced with customer needs. Processes would be designed to reflect the simple needs of the vast majority of customers, and discretionary expenditures would be focused on areas that add the most value to the consumer experience and contribute to the bottom line. Such a model would almost certainly result in substantial changes to most airlines’ product attributes and support requirements, including network structure, pricing, airplane fleets, and service policies.

Although this transformation may seem daunting, the risk of inaction is much greater than the risk of acting and dealing with some missteps along the way. At this writing, one major U.S. airline has already retreated into Chapter 11 and others may follow. The first airline to implement a fundamental business model change will shape the new competitive landscape. The prize that awaits first-comers is significant, not just in terms of lower costs, but also in considerable growth opportunities.


Authors
Tom Hansson, hansson_tom@bah.com
Tom Hansson is a vice president in Booz Allen Hamilton’s Los Angeles office. He focuses on strategy and operational restructuring in the airlines and travel arena.

Jürgen Ringbeck, ringbeck_jurgen@bah.com
Jürgen Ringbeck is a vice president in Booz Allen Hamilton’s Düsseldorf office. He focuses on strategy and transformation for companies in global transportation industries, such as airlines, tourism operators, postal and logistics companies, and railways.

Markus Franke, franke_markus@bah.com
Markus Franke is a principal in Booz Allen Hamilton’s Düsseldorf office. He focuses on strategy, network management, sales, and distribution in the airlines, transportation, logistics, and rail industries.
 
 
 
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Resources

  1. “Airlines: A New Operating Model — Providing Service and Coverage Without the Cost Penalty,” by Tom Hansson, Jürgen Ringbeck, and Markus Franke, November 2002. Click here.
  2. “Catching Travelers on the Fly,” by David Newkirk, Brad Corrodi, and Alison James, s+b, 4Q 2001. Click here.
  3. “Airports as Engines of Economic Development: Great Airports Are Critical for a Region,” by Cyrus F. Freidheim and B. Thomas Hansson, s+b, 3Q 1999. Click here.
  4. Airine Merger Integration — Take-Off Checklist,” by Tom Hansson, Gary Neilson, and Sören Belin, January 2001. Click here.
  5. “Punctuality: How Airlines Can Improve On-Time Performance,” by Alexander Niehues, Sören Belin, Tom Hansson, et al., May 2001. Click here.
  6. “Out of the Hangar into the Boardroom,” by Daniel Lewis and Mercedes Mostajo Viega, April 1999. Click here.
 
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