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Published: July 24, 2007

 
 

The Big Squeeze

Taking this approach a step further, Aer Lingus, the national carrier of Ireland, transformed itself from legacy carrier into low-cost airline in the mode of its rival, Ryanair, with a wrenching reorganization that began in the first half of 2001. After lowering salaries and firing staff, Aer Lingus focused on point-to-point passenger traffic, simplified its fleet, decreased turnaround times, and stripped costs from every aspect of its operations. By 2002, a projected loss of €27 million (US$24 million) had been long forgotten, in the wake of €35 million ($32 million) in earnings. Since then, Aer Lingus has remained profitable and has become such a thorn in the side of Ryanair that the start-up attempted to acquire it in 2006.

Becoming a premium carrier can be even riskier for a legacy airline, in large part because of the need for expensive investments in training, infrastructure, and product development. It is hard to identify a carrier that has successfully made this transformation. Even creating such a premium service from scratch is difficult: Witness Australia’s OzJet, which launched an all-business-class shuttle serving the busy Sydney–Melbourne route. It couldn’t build a customer base quickly enough and folded after only four months.

How can legacy airlines steer out of this no-man’s-land? Booz Allen Hamilton has developed a five-point strategy that integrates the best elements of low-cost and premium airlines, as well as those of multiple-brand airlines (for instance, those serving short-haul routes on a low-cost basis while offering premium services on long-haul international flights). The strategy plays off the strengths of the legacy carriers — their far-flung networks, strong brands, and sheer size — to match, and perhaps beat, the specialists at their own games.

1. Consider point-to-point flying. Traditional hub carriers can no longer treat their best customers as second-class citizens. To compete with low-cost carriers, they must separate out the most heavily traveled point-to-point routes from the rest of their networks and differentiate their service offerings by the needs of the travelers on these flights. Three types of routes should be considered: holiday destinations, small regional services, and intercity trunk routes. A good example of the latter is the London–Munich route: Obviously, commuters would prefer to fly on a dedicated shuttle rather than being squeezed onto large planes along with connecting travelers just in from the long flight from New York, as they now are. The challenge for traditional carriers in setting up point-to-point routes is to maintain efficiency in operations that may lack the scale of large hubs. But by focusing on heavily trafficked direct routes and attracting new passengers with high-quality point-to-point connections, aircraft utilization and seat load factors can be profitable.

2. Create secondary hubs. The traditional hub-and-spoke network relies on just a few major hubs, through which most passengers are routed. Shifting to multiple hubs, which provide flexible routing alternatives, can relieve some of the pressure on individual hubs. Travelers needn’t fly so far out of their way when connections are made through the most convenient hub. Peaks in arrivals and departures that cause congestion and costly demands on ground services can be reduced by strategically dividing connections among hubs. Following its merger, Air France–KLM now maintains major hubs in Paris and Amsterdam. The advantage: greater routing flexibility, with some connections that can be moved to new times or smaller cities with spare capacity. U.S. carriers such as Southwest that use random hubs have found that they can make a big difference in overall cost per flight, thanks to faster turnaround times and higher aircraft utilization.

3. Meet customer expectations and needs. The more closely airlines can meet the individual needs of passengers, the more loyal those passengers are likely to be. Premium airlines are masters at understanding which services their customers are willing to pay more for — and which ones they’re not. The key is to recognize the trade-off between the value of providing additional services and the costs. National carriers can tailor their services to suit their passenger base, from meal choices to seat design. Airlines can also move away from the traditional three classes to develop new airline brands for particular routes or passengers. Unbundling product and service choices will enable more competitive and dynamic segment offerings, allowing the air traveler to choose which services he or she considers the most valuable and pay accordingly — whether it’s for pickup services, priority check-in and boarding, in-flight entertainment, or onboard food and drinks, for example.

 
 
 
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Resources

  1. Brian Graham and Timothy M. Vowles, “Carriers within Carriers: A Strategic Response to Low-Cost Airline Competition,” Transport Reviews vol. 26, no. 1 (January 2006): Looking at different ways of establishing low-cost operations as a response to changed market forces, the authors describe the potential drawbacks and success factors of developing a new carrier model within an existing legacy carrier’s business model. Click here. (Registration required.)
  2. JayEtta Z. Hecker, “Commercial Aviation: Despite Industry Turmoil, Low-Cost Airlines Are Growing and Profitable,” Testimony Before the House of Representatives Subcommittee on Aviation, Committee on Transportation and Infrastructure, June 3, 2004: Summarizes the General Accounting Office’s findings regarding the measures taken by airlines to reduce costs and improve revenues and balance sheets. PDF Download.
  3. Hagen Lindstädt and Bernd Fauser, “Separation or Integration? Can Network Carriers Create Distinct Business Streams on One Integrated Product Platform?” Journal of Air Transport Management vol. 10, no. 1 (January 2004): In looking at the ideal organizational design for airlines, the authors argue that separating operations is the best approach. PDF Download.
  4. Chuck Lucier, “Herb Kelleher: The Thought Leader Interview,” s+b, Summer 2004: The cofounder and chairman of Southwest Airlines explains why an airline’s employees are the key to a profitable business. Click here.
  5. Chris Manning and Stephan Gross, “Airline ‘No Man’s Land’”: The Crisis Faced by Traditional Hub Carriers and How to Escape It,” Booz Allen Hamilton white paper, April 2007: The article on which this Leading Idea was based takes a closer look at the evolution of the airline industry. PDF Download.