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A New Operating Paradigm
2RPUS1747-0126-011303v1.ppt
Booz Allen Hamilton
Leading strategy and technology consulting firm
– 11,000 employees, $2.2B
– Founded in 1914
Our clients in air transportation:
– Governments, airports, air navigation providers
– Airlines, logistics, GDSs, travel agencies, equipment and service providers
A global team: USA, Europe, Asia, Latin America, Africa
Breadth:
– Strategy, operational restructuring, organizational design
– Systems design and implementation support
– Policy and regulatory advice
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Airline crisis is unprecedented – current price levels appear consistent with long term trends
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Ce
nts
Pe
r A
va
ila
ble
Se
at
Mil
e(c
/AS
M)
(Ad
jus
ted
To
20
01
Do
lla
rs)
Unit Revenue and Cost Trend(U.S. Industry)
CASM decline:RASM decline:
1979–1992: 1.5%pa1979–1992: 1.8%pa
CASM increase:RASM increase:
1993–1998: -1.0%pa1993–1998: +0.6%pa
Note: CASM reduction Q3 2002 somewhat overstated due to accounting effects
Source: Company Financial Statements, Back Associates, BAH Analysis
Unprecedented cost-revenue gap, started before 9-
11
Risk that revenues will revert to “old”
trend line
Unit Revenue (RASM)
Unit Cost (CASM)
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Low Cost Carrier PotentialLow Cost Carrier Potential
The paradigm shift between point-to-point and network business models is far from over
Low Cost Carriers (LCCs) can conservatively participate in 70% of the US market
LCCs now participate in 43% of O&D market
Significant growth potential remains– Eastern U.S.– Increased breadth in existing strongholds– Increased depth in O&Ds currently
served
~ 16-18% Small City Markets
TotalTotal
Non-StopService
Available
Non-Stop Service
Not AvailableTotalTotal
44% 6% 50%50%Major Hub Cities
7% 2% 9%9%Minor Hub Cities
10% 3% 13%13%Large Non-Hub
6% 2% 8%8%SWA Connection
9% 7% 16%16%Other
78%78% 22%22% 100%100%
U.S. Domestic Market Structure(O&D Passenger Trips Y2000)
~ 10% Over 2,000 Miles
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The fundamental threat to hub and spoke carriers lies in price realization
Average Yield(1) in Hub Markets
C/ASM
0
10
20
30
40
50
60
0 500 1000 1500 2000 2500
OA Yield No SWA preserve
OA Yield SWA conn
OA Yield SWA direct competition
SWA Yield non-stop
SWA Yield connect
Note: (1) Revenue per revenue passenger mile, including PFC and taxes
(2) OA: Other Airline
Source: DOT Y.2000 data, BAH Analysis
SWA non-stop competition reduces OA yields 25%-35%
SWA one-stop competition reduces OA yields 15-20%
SWA non-stop competition reduces OA yields 25%-35%
SWA one-stop competition reduces OA yields 15-20%
RANGE
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Total U.S. and U.S. - International O&D Market
Connecting Passenger Trips
Non-Stop Passenger Trips
The situation is complicated by an excess of hub capacity
Current Travel Structure(Passenger Trips, Y2000)
Source: U.S. DOT, BAH analysis
International
Domestic
No Non-Stop Service Available 22%
Inadequate Non-Stop Service 10%
Other Connections 9%
Connect In USA 30%
~70% Do Not Connect in US
~60% ofDomestic Trips Are
Non-Stop
Current Domestic Connections
~40%
~110 MO&D PAX
~410 MO&D PAX
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…resulting in an unsustainable revenue positions at hub-and-spoke carriers
Degree Of Price Sensitivity
Degree Of Price Sensitivity
Low:Individual chooses airline, travels on business or rich personal travel
Low:Individual chooses airline, travels on business or rich personal travel
Non-Stop Passenger Flight
Non-Stop Passenger Flight
20% - 30% revenue20% - 30% revenue
Connecting Passenger Flight
Connecting Passenger Flight
Medium:Corporation is principal decision maker, drives bargain
Medium:Corporation is principal decision maker, drives bargain
10% - 15% revenue10% - 15% revenue 10% - 15% revenue10% - 15% revenue
High:Mostly leisure travel and price sensitive business
High:Mostly leisure travel and price sensitive business
15% revenue15% revenue 10% - 15% revenue10% - 15% revenue
Generally Product Advantage
Significantly Higher Yields (Without LCC Price Impact)
Product Parity Or Disadvantage
Moderately Vulnerable
Vulnerable
Competitive Composition: Typical Mainline Carrier, Pre-Crash
20% - 25% of revenue
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0
5
10
15
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25
0 200 400 600 800 1,000 1,200 1,400 1,600
Britannia
Average Stage Length (miles)
Cen
ts /
AS
MCASM Versus Stage Length
2000
Network carriers have a huge cost gap vs LCCs
BA
EasyJet
LH AF
KL
IB
Ryanair
SK
SWA ATA
AS AA
AWA
NW
DLCO
US
UATW
AirT
AZ
Source: BAH Analysis
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Financial Structure Work Rules, LaborRelations
Production Model Other
Drivers Of Unit Cost DifferencesU.S. Network Carriers and SWA
(737-300: Stage Length, Seat Density and Factor Cost Adjusted, Y2000)
c/ASM
7.2 12%
15%
70%
3%
Schedule
Process & Pace
Distribution
FrillsOther
Baseline(SWA)
-50%-50%
Much of this cost differential is a result of production model choices, not frills
Note: Average Airline based on Delta, United, and US Airways
G&A
Sales and Res
Other
Pax, Bag, Cargo Handling
Ownership Costs
Maintenance Costs
Fuel Costs
Pilot Costs
Onboard Costs
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Lower CostDifferentiated ServicesViability
Random hubbing Improved asset productivityReduce TAT and handling complexityAlter trade-off between efficient operation
and optimum connectivity
Random hubbing Improved asset productivityReduce TAT and handling complexityAlter trade-off between efficient operation
and optimum connectivity
Restructure Network / Hub Operations to Remove Scheduling Constraints
(“Below the Wing Processes”)Reduce
complexity, increase
pace
High service levels where needed or expected (local vs. connectivity)
Low-cost service levels where possible (high-value vs. low-value customers)
High service levels where needed or expected (local vs. connectivity)
Low-cost service levels where possible (high-value vs. low-value customers)
Create Separate Business Systems for Distinct Customer Segments
(“Product Differentiation”)
Separate simple from complicated tasks; apply tailored process streams
Reduce low-value interactions with staffSimplify reservation, ticketing, check-in
Separate simple from complicated tasks; apply tailored process streams
Reduce low-value interactions with staffSimplify reservation, ticketing, check-in
Simplify Customer Interface at the Airport and in Distribution(“Above the Wing Processes”)
Achieve pure business streams
Provide specialized
services and appropriate schedule qualities
A new business model may emerge that closes 70-80% of the cost gap and re-establishes product differentiation
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A new industry structure may emerge – or the next crisis will be a repeat on steroids
New Business ModelNew Business Model
2-3 new network based carriers emerge by continent– 1 or 2 random hubs each– Many centers of mass a la SWA– Greater focus on non-stop services
1-2 low costs carriers by continent
Regional carriers that perform two missions– Feed for limited number of random
hubs– Point to point flying in business and
smaller markets
2-3 new network based carriers emerge by continent– 1 or 2 random hubs each– Many centers of mass a la SWA– Greater focus on non-stop services
1-2 low costs carriers by continent
Regional carriers that perform two missions– Feed for limited number of random
hubs– Point to point flying in business and
smaller markets
Incremental EvolutionIncremental Evolution
Network carriers stick to current business model– Continued share loss to LCCs– Low cost subs fail again– Regional operators take over larger
proportions of network
1-2 low cost carriers succeed by continent
Regional carriers pick up failing routes, remain more focused on feed
Next crisis is an amplification of current one
Network carriers stick to current business model– Continued share loss to LCCs– Low cost subs fail again– Regional operators take over larger
proportions of network
1-2 low cost carriers succeed by continent
Regional carriers pick up failing routes, remain more focused on feed
Next crisis is an amplification of current one
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