انحراف درآمدهای شرکت هواپیمایی : چرا مدل کسب و کار شبکه های هواپیمایی خراب است

This paper looks at the inherent flaws that have emerged in the business models that have been pursued by the major network airlines. The business model adopted by the low-cost carriers is more robust and has gradually undermined the ability of the network carriers to practice the price discrimination needed for them to recover their full costs. The full service network carriers still have a future but they will take a smaller market share. The paper points to a number of modifications that need to be made to the full service network carriers’ business model if it is going to maximise this share.

As the new millennia dawned, it became clear that the business model of the network airlines was broken: it was no longer able to drive a revenue base which could cover the traditional cost base of these air carriers including an allowance for an adequate rate of return on invested capital. This has been articulated in Hansson et al. (2002). The airline business model—essentially designed to take anyone from anywhere to everywhere, seamlessly—was a great innovation, but is no longer economically sustainable in its current form (Hansson et al., 2002). Air Canada CEO Robert Milton has also echoed this sentiment: At the heart of the problem is the business model which full service carriers—including Air Canada—have used to generate revenues for five decades.”1 While the problems with the ability of the network air carrier business model to cover its costs was well-know earlier, the tragic events of 11 September 2001 produced a shock to the industry which made the problem plain enough for all to see. In the period from 1945 to then end of the 20th century, the world's airline industry built a remarkable product. A passenger almost anywhere in the world could purchase a ticket to seamlessly fly to almost any other part of the world. This remarkable feat did not require an industry structure consisting of a single global airline. Rather, it used a complex, but effective set of relationships among hundreds of individual air carriers. Individual airlines invested in internal systems, infrastructure and procedures to connect passengers within their own network, as well as to the networks of other airlines, including competitors. Industry standards and facilitation services provided by the International Civil Aviation Organisation (ICAO), the International Air Transport Association (IATA), SITA/ARINC and others, were critical and effective in providing the global standards and services (financial and technical) to make world-wide connectivity possible. Travellers enjoyed low transactions costs—a single call to one airline or travel agent would procure for them a ticket to anywhere, potentially using the services of many carriers, and allowing refundability, flexibility, and in a large number of cases, transferability. As plans changed, the traveller could change to different flights of the same or other carriers. Travellers also enjoyed relatively hassle free travel experiences—at lease relative to extreme difficulty of making connections on the passenger rail systems prevalent in the first part of the 20th century.2 In developing this network product, however, air carriers required costly systems and infrastructure to serve their passengers. The same infrastructure was used to serve all passengers. This included both those passengers needing the connectivity, as well as those passengers whose journeys were simple point-to-point itineraries. While never empirically examined, economists would say that there seemed to be economies of scope in providing air transportation services to the passengers with simple itineraries as well as to those passengers requiring connectivity services.3 It was believed it would have been more expensive to build a separate set of air carriers to serve the simple itinerary passengers, than it was to provide the network product to consumers who only needed simple services. Regardless of whether this assumption was correct or not, market conditions have changed. The demand for air transportation has been observed to grow at roughly double the rate of the growth in the general economy. This has resulted in an dramatic increase in the size of aggregate and individual aviation markets. As these markets grew, and as entry into air transportation markets was deregulated, a new breed of air carrier emerged. Southwest Airlines might be considered as the first carrier to develop a successful business model for this new type of carrier. It offered a very simple and therefore low-cost service targeted at passengers with simply itineraries. As a result, this carrier has grown and has joined the ranks of the largest air carriers in the US (and the world). While Southwest was the first carrier with the new business model, Ryanair is perhaps the best example, as it is most extreme in reducing costs and confining its services only to passengers with the simplest of journeys. For example, Ryanair currently does not provide any network connectivity services; it even does not allow its own passengers to purchase through tickets that connect to its other flights. Passengers with simple itineraries have less need of baggage and Ryanair strictly limits the amount of baggage and carry on items. Passengers with simple itineraries, do not need complementary meal services. Managing the inventory of seats available for sale is simpler when there is no need to consider the revenue impact of connecting passengers versus originating passengers. There are no interrupted trip expenses, etc. The simple characteristics of its passengers needs and the services Ryanair chooses to offer, have allowed it to dramatically lower costs. The lower costs have allowed it to offer lower fares. Given the elastic nature of consumer demand for airline services, this stimulates market size and the revenue base. Ryanair's costs are so low that in spite of lower ticket prices, it has a wide margin between yield and unit cost. This, in turn, has given the carrier resiliency to weather the significant recent industry downturns. It might also be added that this business model also increases general transportation safety. Air transport has a very high safety record, and to the extent that low fares encourages travellers to use air transport rather than use automobiles, overall transportation safety rates are improved. This business model, which I refer to as the low-cost carrier (LCC) business model,4 has proven to be financially successful. By this, I do not mean that any carrier following an LCC model will be successful. Rather, I mean that the successful LCC carriers have financially outperformed the traditional network carriers with whom they compete. I refer to the business model of the traditional network carrier as the full service network carrier (FSNC) business model. The LCC carriers have achieved the highest market capitalisation of any passenger air carriers in the US (Southwest), Canada (WestJet) and the European Union (Ryanair).5 (The relative profitability of the US and Canadian carriers is shown in Appendix A.) As can be seen, the two LCC carriers listed have almost always achieved the highest financial returns in the industry. The consistent superior financial performance of the LCC business model, the generally poor financial performance of the FSNC in all but a few years, and current economic conditions, all suggest that the FSNC business model is no longer an effective business model. This conclusion is held by others, including airline executives such as Robert Milton of Air Canada, and a number of industry observers in the financial and consulting sectors, as previously cited. All this is not to say that there is no role for the FSNCs in the future airline industry. To the contrary, they will continue to provide valuable and much needed air services. For example, there is no direct air service (scheduled or charter) from where I live in Vancouver to Hamburg. Yet, I highly value attending the annual Hamburg Aviation Conference. For this trip, I need to consume the FSNC product, while for other trips, the LCC product fits my need and provides greater value relative to cost. The issue is not whether the FSNC business model will exist in the future. It will. Rather the issue is the scale of that model and the changes required to make it a more successful model for its shareholders, employees and consumers. I put forth the following propositions regarding airline business models for the future: • The LCC model has been successful with consumers and with shareholders and will continue to grow. It is not a fad, but rather a business model with a permanent role in the marketplace. • Perhaps the most important impact of the LCC business model on FSNCs has been the introduction of low one way fares. This has undermined the price discrimination ability of the FSNCs, and is the most important pricing development in the industry in past 25 years. • The FSNC model will continue to exist. It is not doomed to disappear. It provides a highly valuable service to many customers. • The FSNC model, however, will serve a declining share of the market. That share will eventually stabilise with a share of passengers carried in the range 40–50%, although with a higher revenue share. • A consequence of the reduced market share of the FSNCs, combined with economies of scale in provision of FSNC services, means that consolidation of FSNCs is desirable and necessary. • Consolidation of FSNCs will inevitably involve either consolidation across national frontiers (mergers between airlines in different countries) or needlessly complex business arrangements between groupings of carriers of different countries to achieve as many of the efficiencies that outright mergers would have enabled. Nations would be well served by eliminating foreign ownership restrictions of air carriers and allowing cross border airline mergers,6 and finding other means of achieving nationalistic goals for air transport.7 • With or without consolidation, the FSNC business model, as currently implemented by many carriers, contains two serious business decision-making elements which must be corrected. First is correcting the overestimation of the value of network revenue contributions to individual routes (referred to as beyond revenues in this paper). The second is correcting the failure to switch from short-term to long-term pricing decisions as air carrier fleets are renewed. These two errors have led FSNCs to offering more capacity than is economically efficient, and than is financially viable for investors. The balance of this paper will focus on the issues of the reduced market share of the FSNCs and the consequent need for consolidation, and the decision-making errors of beyond revenues and failure to move to long-term pricing.

The LCC model has been successful with consumers and with shareholders and will continue to grow. It is not a fad, but rather a business model with a permanent role in the marketplace. Perhaps the most important impact of the LCC business model on FSNCs has been the introduction of low one way fares. This has undermined the price discrimination ability of the FSNCs, and is the most important pricing development in the industry in past 25 years. The FSNC model will continue to exist. It is not doomed to disappear. It provides a highly valuable service to many customers. However, it will serve a declining share of the market. It will eventually stabilise with a share of passengers carried in the range 40–50%, although with a higher revenue share. A consequence of the reduced market share of the FSNCs, combined with some types of economies of scale in provision of FSNC services, means that consolidation of FSNCs is desirable and necessary. For most nations, consolidation of FSNCs will inevitably involve either consolidation across national frontiers (mergers between airlines in different countries) or needlessly complex business arrangements between groupings of carriers of different countries to achieve as many of the efficiencies that outright mergers would have enabled. Nations would be well served by eliminating foreign ownership restrictions of air carriers and allowing cross-border airline mergers, and finding other means of achieving any nationalistic goals for air transport. With or without consolidation, the FSNC business model, as currently implemented by many carriers, contains two serious business decision-making elements which must be corrected. First is the need to correct the overestimation of the value of network revenue contributions to individual routes (referred to as beyond revenues in this paper). This error led FSNCs to offering more capacity than is economically efficient, and than is financially viable for investors. Second is the need to correct the failure to switch from short-term to long-term pricing decisions as air carrier fleets are renewed. This error led FSNCs to offering more capacity than is economically efficient, and than is financially viable for investors. The orientation of the LCC decisions is subtly but significantly different from that of the FSNCs. A FSNC makes decisions about capacity, then turns over pricing to a system which maximises revenues conditional on operating the flight. An LCC, in contrast, makes decisions on capacity to offer, then establishes the pricing parameters to achieve revenue which cover total costs. For the LCC, price decisions are linked to long-term costs, whereas for the FSNC pricing decisions may be divorced from costs. It is the difference between revenue maximisation versus profit maximisation.