An industry sage once unkindly observed that the airline business is one which has never yet seen a box it cannot think within, so perhaps it is time to challenge some elements of the established business models developed for long haul, writes Peter Morris chief economist from Ascend
Airlines are unique in the extent to which they are hamstrung by national regulations dating from another era. Unlike many other global industries, the international airline business, by its very nature, had to face up early to the issues of potential globalisation. Governments therefore chose a nationally based regulatory path, reflective of its mid 20th century genesis. Bilateral agreements based on national ownership and control are merely the most obvious examples.
The exponential growth in the air travel market during the past six decades has seen increasing economic pressures for a move away from "national champions", as carriers increasingly seek to achieve market scale and attract a global audience. There is an increasing realisation that the industry is held back from achieving the economies of true globalisation achieved by many other industries.
In many cases - such as steel, telecoms, computers, cars, publishing, chemicals, pharmaceuticals - the "cross-border" benefits of globalisation and a reduction in national protectionism have generally seen significant new value created for shareholders and consumers. Although there remain regional and niche markets served by highly specific and differentiated air services, the nagging truth about most medium- and long-haul routes is that passenger air transport is essentially a commodity. Price and time are the key drivers, and the time factor tends to be largely similar for direct services.
The traveller purchases safe transport from point A to point B in a more or less comfortable seat, which may be upholstered in blue or grey or red or green. A range of carriers compete to provide this relatively undifferentiated commodity product, while spending heavily on marketing in an attempt to create a perception of service differentiation and thus some modicum of customer loyalty.
Yet other carriers, seeking to compete with the direct-A-to-B price and time offering, attempt to lure travellers with high price elasticity or low time elasticity to fly instead via hub C, sometimes by reducing prices below cost.
One defining characteristic of the industry, a legacy in part of its regulatory history, is that with a few exceptions, passenger airlines are vertically integrated - they take responsibility for all activities from operating the aircraft through to marketing their services to prospective customers.
The exceptions are franchise and wet-lease carriers, for example the regional partners of the US majors, who are responsible for efficient flight operations but not for marketing, branding and selling their services.
Indeed, it's interesting to note that economies of scale are driving consolidation in the US market - a small number of carriers now operate the vast majority of regional flying for the majors.
What opportunities could be opened for airlines if this separation of operation and marketing were more widely applied? Does it make sense to do so?
Imagine, for example, a hypothetical "Efficient Airways", an operationally focused carrier specialising in efficient long-haul widebody passenger service from New York. Efficient Airways doesn't market itself to consumers, only to other airlines - much as specialised cargo carriers such as Global Supply Systems and Air Contractors do. It targets smaller European medium-haul airlines that each have limited long-haul transatlantic service with correspondingly few economies of scale. In essence, it offers a lower-cost solution for their non-core operation: "We'll fly one or two long-haul aircraft on your behalf. You don't have to worry about flight crew or maintenance or keeping a back-up aircraft. We'll provide cabin crew if you want, or you provide your own. We'll give you a white aircraft, or paint it in your colours if you want, and we'll tailor the interior for your requirements."
It is worth noting that the recent advent of on-board wireless connectivity and the likes of iPads as in-flight entertainment devices make the rapid customisation of IFE services significantly less daunting. The approach sketched above has some similarities to the business model of a carrier such as Privatair, although widebodies with space for multiple cabins open up other intriguing possibilities. Separating the consumer product from the airline operation would lower the barriers to entry and would even allow non-airline brands to diversify into providing passenger air service.
Let's say Efficient Airways flies an Airbus A380 every day from London to New York. Most of the aircraft's cabin is in full-economy high-density configuration which is contracted to, and sold by, a large European no-frills carrier.
However, there is also a premium cabin which is marketed and sold, not by an airline, but by a well-known global hotel brand. Thus, at a relatively low cost and without the need for an air operator's certificate, the hotel company is able to extend its brand naturally into the travel business. Meanwhile, the no-frills airline doesn't have to dilute its own cheap-and-basic brand message.
There is some transport-industry precedent. During the heyday of the railways from the late 19th century onwards, separately owned Pullman cars provided a luxury class on US and British trains, and sleeping cars on European trains were run by Compagnie des Wagons-Lits, a separate company from the national railways.
We can take this a stage further and consider the overall cost savings from combining capacity, especially on routes to and from congested airports.
If two carriers each offer three A330 or 777 departures a day on a competed route, be it Heathrow-New York Kennedy or Beijing-Singapore, consider the savings in slots, fuel and crew costs if these could be combined into three shared A380s.
Doesn't a reduction in frequency reduce consumer choice? Airlines have always traded off frequency for capacity to cut costs. In any event, on a typical Monday in October there are no fewer than 27 flights from Heathrow to New York, including six departing between 10.00 and 11.00. The consumer is not short of schedule choice. "But isn't this just a modern block-space codeshare?" Not really. A classic codeshare agreement sees airline A's passengers flying with airline B and experiencing essentially none of the airline A brand - except perhaps for a welcome announcement from the cabin crew.
What we're imagining here is two or more fully differentiated customer experiences on board. Perhaps Airline A's branding is within the top deck of the A380 and Airline B's on the lower deck. Perhaps the hotel group has also taken one cabin. Efficient Airways, the actual operator, is the "landlord" of the aircraft, leasing out parts of the space to its various "tenants", and focusing its efforts entirely on delivering a safe, efficient operation, without having to concern itself with consumer marketing.
Why would Airline A or Airline B consider doing this? Most likely to cut costs, but it could also be to improve their frequency offer - combining their own flights with shared flights - or to extend their network.
Either way, the airline maintains far more control over its product than it would in a conventional codeshare. Meanwhile, Efficient Airways is likely to achieve its lower costs through its larger aircraft or perhaps it also has an existing cargo operation on which to draw for synergies.
Airlines considering such a step will have to underpin their venture with a robust legal and oversight structure. Each party's legal responsibilities, not only to each other but in particular to their customers, must be clear to avoid any "virtual airline" grey areas. Efficient Airways in particular must be top-notch in terms of safety and regulatory oversight. Such a commercial structure would clearly drive up average aircraft sizes, making a more efficient use of scarce resources such as slots, while still allowing each marketing carrier a high degree of product differentiation.
Indeed, it's principally the cost savings enabled by a move to bigger aircraft which could drive the adoption of this model.
Unorthodox in an airline context? Certainly. Impractical? In more aeropolitically restrictive parts of the world, perhaps. But as a tactic to allow carriers to cut operational cost while keeping control of their marketing and customer experience, we'd like to think Efficient Airways Inc. is out of the box - but not too far out.
ABOUT THE AUTHOR: Peter Morris is chief economist at Flightglobal's data and consultancy arm Ascend. Patrick Edmond, who is managing director of aviation strategy consultancy e2consult, assisted with the content for this article.
Source: Air Transport Intelligence news
