fly light ltd -...
TRANSCRIPT
NorEdge Interanational Dr Norman A Naaman [(BA (Hons), MA (Econ), Doctor of Finance, CPA, CIA, CISA)]
FLY LIGHT LTD Strategic Plan
TABLE OF CONTENTS
1.0 Executive Summary .................................................................................................................... 3
Introduction ........................................................................................................................................... 3
Growth industry aviation .................................................................................................................. 3
The Lufthansa Aviation Group ........................................................................................................ 3
The Company- Fly Light .................................................................................................................... 4
Services ................................................................................................................................................... 4
The Market ............................................................................................................................................. 5
Financial Considerations ................................................................................................................... 5
1.1 Objectives ....................................................................................................................................... 7
1.2 Vision ................................................................................................................................................ 7
1.3 Mission ............................................................................................................................................. 7
1.4 Our Values ...................................................................................................................................... 7
2.0 Environmental Scan of the Airline Industry ....................................................................... 8
2.1 Introduction ................................................................................................................................... 8
2.2 Regulatory Environment ........................................................................................................... 9
2.3 Market Analysis ............................................................................................................................ 9
2.3.1 Global Airline Industry ........................................................................................................... 9
2.3.2 The Transformation of Air Transport .............................................................................. 13
2.3.3 A new market outlook .......................................................................................................... 16
Transformation of the market....................................................................................................... 16
2.3.4 The changing face of air transport .................................................................................. 16
2.3.5 The environment .................................................................................................................... 20
2.4 The Airline Industry Analysis by Region ........................................................................... 20
2.5 The Airline Industry Environmental Scan Summary .................................................... 30
2.5.1 Pest, Porter’s Five Forces, and stakeholder Analysis ............................................... 34
2.6 Conclusion .................................................................................................................................... 38
3.0 Strategic Management Plan ................................................................................................... 39
3.1 Introduction ................................................................................................................................. 39
Management and Culture ............................................................................................................... 39
More than just an airline, a lifestyle ............................................ Error! Bookmark not defined.
Superior Product and Service ....................................................................................................... 39
Strong Sales team............................................................................................................................. 39
Low Cost Operation .......................................................................................................................... 40
Low Break-Even Point ...................................................................................................................... 40
The Internet ........................................................................................................................................ 40
3.2 Strategy ........................................................................................................................................ 40
Operating Strategy: One type of aircraft, one class of service ........................................ 40
3.2.1 Pricing Strategy ...................................................................................................................... 40
Simple and Transparent Fare Structure .................................................................................... 40
3.2.2 Sales, Marketing, and Distribution Strategy ............................................................... 41
Marketing and Sales Strategy ...................................................................................... 41 Sales and Distribution ...................................................................................................... 42 Large Volume Companies (1000+ sectors per annum) ...................................................... 42
Medium Volume Companies (50-1000 sectors) ..................................................................... 42
Small and Medium Enterprises (up to 50 sectors) ................................................................ 42
Electronic Ticketing ........................................................................................................................... 42
Distribution and Revenue Management .................................................................................... 43
Travel Agency ..................................................................................................................................... 43
Call Centres ......................................................................................................................................... 43
Direct Sales through the Internet ............................................................................................... 43
Advertising and Communication .................................................................................................. 43
3.2.3 Growth Strategy ..................................................................................................................... 43
Phase I: Market Penetration in high density routes ............................................................. 44
Phase II: Extend service to medium/low density long haul routes ................................ 44
Other Opportunities .......................................................................................................................... 44
3.2.4 Operations ................................................................................................................................ 44
Air Operator's Certificate and Operating License .................................................................. 44
Slots and Airports .............................................................................................................................. 44
Maintenance and Training .............................................................................................................. 45
Management ........................................................................................................................ 45 Convenience ........................................................................................................................................ 45
Frequent Flyer Program .................................................................................................................. 45
3.2.5 Organizational Structure ..................................................................................................... 45
3.2.6 Values and Culture ................................................................................................................ 47
3.2.7 Financial Plan .......................................................................................................................... 48
1.0 Executive Summary
Introduction
Lufthansa has attuned to the changing markets with a clear strategy. The focus is
on core competences and profitable growth. It has further improved efficiency
and increased competitiveness. Currently it has taken further steps to occupy a
good position compared with international competition – as the most attractive
and profitable European network carrier with a global offer. Fly Light is one of the
innovations within the group that has been formed to cater for a specific niche
market with a mission to deliver ‘positively outrageous service at unbelievably low fares.’
Growth industry aviation
The aviation market is a growth industry par excellence: it is growing twice as
fast as the gross national product. Globalisation, which would not be conceivable
without transport services for people and goods, is one of the most significant
driving forces.
For an airline, especially, it is essential to have a tight network.
LH’s flight network – the densest in Europe – represents an excellent base from
which it can develop continued profitable growth. Together with its partners in
Star Alliance it also offers the largest global network.
Opportunity to participate in the forecast increase in air traffic and to grow with it
is certainly available: economic relations between countries are becoming even
closer. Asia, notably China, and India are opening up to world trade more and
more. The growth rates in air traffic in the Far East are correspondingly high:
Eight to ten per cent for China and India, around three per cent forecast for
Japan, while an increase of five to six per cent is expected worldwide.
The Lufthansa Aviation Group
As an Aviation Group, Lufthansa pursues activities in five business areas:
Passenger Business, Logistics, MRO, Catering and IT Services. The basis for our
activities is the management of international passenger and cargo flights,
independently and with partner airlines. Europe is our home market. In addition
to air transport, we provide our customers with integrated solutions along the
entire service chain by consistently harnessing synergy potential. We also offer
our skills in aircraft maintenance and overhaul, airline catering and IT services to
external customers, worldwide.
All our business areas make a significant contribution to sustainable value
creation in the Group by focusing consistently on their core business. They all
target on market leadership in their business segment. Our corporate and
business area portfolio is stable but not static. We judiciously anticipate changes
in the business environment, in which we operate, and adapt our portfolio to
accommodate them. We operate in the market under the core Lufthansa brand
and other brands. All those brands manifest our commitment to providing
customers with a service noted for safety, reliability, punctuality, technical
competence, quality, flexibility and innovation.
Lufthansa is committed to creating sustainable value for its investors with aim at
a performance level that stands as a benchmark for the European airline industry.
Business success does not rule out a corporate policy geared to sustainable
development and care for the environment. Lufthansa is fully committed to
keeping a balance between them. Protecting the environment is therefore a prime
corporate objective, to which we subscribe with total conviction.
The Company- Fly Light
Fly Light, a Low Cost Carrier Division of the Lufthansa group has been created
and will be organized as a Limited Liability Company based in Germany. The
principle investors and operators will be responsible for all airplane acquisitions
and company decisions.
Fly Light will operate its flights in major Europe’s Airports. The flight records,
scheduling, and office will be located within the LH group’s offices.
Services Passenger Transportation is the central business segment of the Group in terms
of size and core competencies. LH gains a wider access to markets and exploits
expansion possibilities for example by being part of the Star Alliance. This applies
in particular to Asia and Eastern Europe, but also in the Americas. Cooperation
with Air China is an important milestone in opening up the Asian market. To this
extent it is an important task of Lufthansa to expand airline partnerships in
Germany, Europe and worldwide.
Following EU policies of aviation liberalization, Fly Light’s ‘no-frills’ airline will start
with the Southwest model: low fares, no on-board meals, no allocated seats,
often using regional airports and lower staffing costs. Initially expected to attract
mainly leisure travellers, much of the demand could turn out to be from business
travellers who resent paying premium fares to travel within Europe. Estimates
suggest that almost half the customers for the low-cost carriers are price
conscious business travellers. The ‘no-frills’ operations undercut the big carriers
by as much as 50 per cent and focus mainly on high volume, short-haul, point-to-
point trips. Low fares will be achieved by exploiting several important levers to
achieve low cost (the alternative of low fares with high costs is clearly
unattractive). A report by the Civil Aviation Authority of the UK notes that the
‘no-frills’ operators can get costs per seat down to half those of the major
network carriers. Savings come from:
- Distribution costs – it has been estimated that as much as 25 per cent of
the cost of conventional air tickets comes from distribution, e.g. travel
agent commissions and promotion, the computerized reservation system
shared by major airlines and the coupon exchanges to reconcile passenger
switches. Direct selling and ticketless travel avoid most of these costs.
- In-flight catering and staffing – conventional airlines provide ‘free’ meals
and drinks in their ticket prices. Removing these services saves money
(and a lot of waste when passengers turn down the food because they
want to sleep).
- Fleet uniformity – a fleet standardized on a single aircraft type drastically
reduces maintenance and spares costs and crew training.
- Regional airports – using regional airports instead of the major hubs has
several important implications. It gives access to the underserved regional
population in the regional airport’s catchment area; fees are lower; less
congestion allows the operator to be more efficient and to get better utilization from the aircraft (because they stay on the ground for less time).
The Fly Light service will adopt the ‘no-frills’ offer Southwest makes to its
customers. The essential elements are:
- very low fares – with the effect of filling the aircraft with people who might
not otherwise have flown at all
- cattle-car boarding with no assigned seating or classes of seat
- no in-flight service apart from a soft drink and a bag of nuts
The Market
In order to achieve our goals we will primarily expand in markets which have the
highest potential. For intercontinental traffic this means, for example, that we
want to extent and build up our business in China and India, the most important
Asian growth markets.
Europe is growing in the metropolis and locally. A significant component of our
strategy in continental travel is therefore to be present, ourselves or with strong
partnerships, wherever Europe is growing, such as Eastern Europe.
We gain a wider access to markets and exploit expansion possibilities for example
by being part of the Star Alliance. This applies in particular to Asia and Eastern
Europe, but also in the Americas. Our cooperation with Air China is an important
milestone in opening up the Asian market. To this extent it is an important task of
Lufthansa to expand airline partnerships in Germany, Europe and worldwide.
Our customers benefit from Star Alliance through the global network and high
frequency of flights. Together we are striving to enlarge the group of airlines.
Since 1997, the number of partners has increased from five to 16 members. They
also want to intensify their cooperation. This includes, for example, creating a
common IT platform. Apart from Star Alliance, Lufthansa Regional is an important
part of the partnership concept. Our passengers benefit from a comprehensive
and high quality range of direct flights and transfer possibilities in the regional
segment.
Bilateral cooperations also add to the routes on offer from Lufthansa. The number
of bilateral partners has increased from six to 15 airlines. The cooperation
involves, among other things, code sharing and mutual recognition of frequent
flyer programmes. Our partner airlines in this segment include Air China,
Shanghai Airlines and Air India.
Lufthansa and its partners offer direct flights between cities in Germany and
Europe as well as via the hubs connecting flights to around 800 destinations in
140 countries. Our “multi hubbing” concept serves to expand our market access
as well as improving the connection quality for our customers. With SWISS, the
previous hubs in Frankfurt and Munich are augmented by the addition of Zurich,
where SWISS already has a strong direct offer to Africa.
Financial Considerations
Financial flexibility gives room for strategic development and will make us more
independent of external influences. Lufthansa's growth plans are, therefore,
supported by a solid financial profile. Demanding minimum liquidity requirements,
a solid capital structure, investment-grade ratings and a host of bilateral banking
relationships are key elements of our financial set-up. By systematically analysing
and limiting financial risks, such as those from currently extremely volatile fuel
prices and exchange rates, we will also provide support for, and safeguard, the
Company’s operational and strategic development. Lufthansa also benefits, in
many cases, from flexible cost structures, which come into play during seasonal
or cyclical variations or in the event of unforeseen external occurrences.
The Group's fleet is not only by far the largest asset in the balance sheet, but also
is a resource which makes a key contribution to value creation. The Lufthansa
fleet consists of both Airbus and Boeing planes in addition to various regional
aircraft. This structure gives us the greatest flexibility in negotiations for new
aircraft, as the Group has the training and technical resources necessary for flight
operations for models of both suppliers. The different seating capacities and
ranges of the individual models ensure that they can be closely adapted to the
demands of various markets.
A modern, well-structured fleet is an important cornerstone for Lufthansa's future
competitiveness. This means that a number of factors must be taken into
consideration when renewing and expanding the existing fleet. The number and
size of aircraft must match expected traffic flows. At the same time, the aircraft
must be set up to meet the customers' wishes and to be as economical and
environmentally friendly as possible, particularly regarding fuel consumption. The
current fleet order programme takes these aspects into account and also makes
sure that sufficient capacity is available when needed.
The Airbus A380 is going to be the future backbone of our long-haul fleet for
routes with high passenger traffic. In order to fill the gap in capacity caused by
delivery delays, five Airbus A330s and seven Airbus A340-600s were ordered at
the end of 2006, which will be put into service successively from summer 2008.
To provide support for profitable growth at SWISS, its A330 fleet is also to be
modernised and extended from 2009 onwards. With the order for the Boeing 747-
8 Lufthansa will replace existing aircraft from 2010, and create additional
capacities for planned growth in intercontinental traffic in line with the market.
Lufthansa has the route network in Europe. As a result of expanding the
intercontinental routes this position also needs to be secured and developed. At
the same time, we want to make the network more attractive for business
travellers. This means that the European and regional fleets are systematically
modernised and expanded. The successive delivery of the Airbus A320 sub-fleet
ordered started in October 2007. From 2009 onwards, the regional fleet will be
modernised with more efficient aircraft.
A key competitive success factor is the ability to adjust capacities to market
developments. Lufthansa enjoys this flexibility in several respects. An anticipatory
order policy with staggered orders for new aircraft covers our requirements under
various growth scenarios. A high level of standardisation in the cockpit equipment
of sub-fleets (e. g. the Airbus A320 family), means that they can be deployed
flexibly across the different airlines in the Group. Furthermore, as the Group fleet
is largely unencumbered, the growth path can be adjusted by optimising the
share of new orders required for replacement and growth at short notice. In our
current fleet programme, therefore, we attach great importance to this flexibility
to adjust to different growth scenarios. If demand grows as expected, we will
successively rejuvenate older sub-fleets with ordered aircraft as planned. If
demand is brisker than forecast, however, we have the option of flying existing
aircraft for longer. We have also secured options with flexible draw-downs for all
sub-fleets in order to respond to higher demand at short notice. Equally, if the
market should enter a longer downturn, we are in a position to withdraw aircraft
from operations by bringing maintenance work forward or putting them out of
service earlier. The fleet being mostly owned by the Group and the estimated
useful life of twelve years provide this flexibility at only minimal ongoing financial
expense.
1.1 Objectives
1. Form the Fly Light Limited Liability Corporation (LLC) for liability protection
of personal and company assets. 2. Operate the flights for at least 50 revenue flight hours per month. 3. Fly Light revenue to exceed hangar, insurance, fuel, maintenance upkeep
and loan expenses resulting in a net income/profit. 4. Generate added value for the customers, to exploit market opportunities
and thus to contribute to the profitable growth of the Group.
1.2 Vision
To be the best low cost carrier airline in the European region.
1.3 Mission
Fly Light aims to become the most attractive and most profitable European low
cost network carrier with a global offer. The company also wishes to remain a
trusted low cost airline. Our most important commercial motto is “more cash“. By
this we mean sustained cash flow growth that creates value.
To achieve this we will offer low fares to eliminate most traditional passenger
services. Our practices will include:
1. a single passenger class
2. a single type of airplane, the Boeing 737 ( thus reduce training and
servicing costs)
3. a simple fare scheme (fares will increase as the plane fills up, which
rewards early reservations, known as "yield management")
4. unreserved seating (encouraging passengers to board early and quickly)
5. flying to cheaper, less congested secondary airports (avoiding air traffic
delays and taking advantage of lower landing fees)
6. short flights and fast turnaround times (allowing maximum utilization of
planes)
7. simplified routes, emphasizing point-to-point transit instead of transfers at
hubs (again enhancing aircraft utilization)
8. emphasis on direct sales of tickets, especially over the Internet (avoiding
fees and commissions paid to travel agents and corporate booking
systems)
9. employees working in multiple roles, for instance flight attendants also
cleaning the aircraft or working as gate agents (limiting personnel costs)
10. "Free" in-flight catering and other "complimentary" services will be eliminated, and replaced by optional paid-for in-flight food and drink.
1.4 Our Values
1. Focus on customer benefits The customer is central to our business
activities. We address customer requirements and offer commit to meeting
the customer fast travel needs.
2. Accent on core skills Our core skills determine our activities. Those skills
encompass management of flight networks, nurturing partnerships,
operating processes on the ground and in the air.
3. System integration sets the pace We will develop our system
integration in order to extend our competitive lead over other locations,
airlines and alliances. We will cooperate closely with major partners,
suppliers and infrastructure providers in order to integrate and optimise
our core processes.
4. Attractive working environment We will offer staff good working
conditions, commensurate incentives for personal development and an
energising, international corporate culture as they are integral to our
success.
5. Social responsibility We commit to keeping a balance between business
and social prerogatives. Environmental protection and sustainable development are prime objectives of corporate policy.
2.0 Environmental Scan of the Airline Industry
2.1 Introduction
The commercial aviation industry is unique as a production “factory”, with the
perishable nature of its primary product flowing out of each airport as its
factories. The product, available seats to a number of locations at a particular
time of day, is the perishable commodity. There is no way to recapture that
product and value once the plane departs if a seat is empty. The seat cannot go
on a shelf waiting to be purchased the next day (Lucio Petroccione Jr. 2007).
The airport-factory is dependent on receiving the inventory of seats, i.e. the
arriving aircraft, which produces available seats to leave the airport. The steady,
reliable delivery of inventory is highly dependent upon an independent vendor
and upon meteorological factors. Both variables may appear to be beyond the
airline’s control. For instance, the Federal Aviation Air Traffic Control System
(ATC) is responsible for the delivery channels and capacity of aircraft to the
airport factories on schedule. Airlines can sometimes influence ATC outcomes,
but they cannot directly control them. Weather, a constant and unpredictable
component, further contributes to the complexity of delivering inventory where
and when needed. The airlines themselves have limited control on the impact
and timely delivery of inventory in conformance to their production schedule (the
flight schedule). An area where airlines have some influence on this capacity is
through their network design and schedule. All of these elements are directly
linked, subjecting the process to a high degree of variation, which in industrial
terms creates a defect rate impacting the timely availability of capacity compared
to the planned schedule.
Once the inventory, the airplane, is on the ground, the factory strives for
optimum throughput levels in order to ship the newly available seats back out of
the factory. The cycle repeats itself over and over, and success is dependent
upon a steady, predictable throughput rate of production. In order for the airline
to survive and thrive, it must reliably deliver the inventory, profitably fill and
deliver the seats in a highly variable economic and operational environment, and
keep the costs well below the market price.
Pricing power has steadily diminished over the past decade with widely available
pricing information for consumers to compare and the overcapacity of available
flights in many markets. Due to steadily rising capacity (adding ever more seats
and airplanes to markets and hubs), the tolerable margins of error for achieving
operating profitability has decreased for the industry overall. In such conditions,
dependence on the productivity of a major outside vendor like ATC is quite
amplified. The success or failure of current airline business models depends more
than ever on the uncontrollable variables of ATC capacity control and on the
weather. Optimizing network design is no longer sufficient; survival in today’s
airline industry literally depends on excellence in network design and consistent
rigor in day-to-day execution (Lucio Petroccione Jr, 2007).
This section summarises the airline industry’s past, present and future outlook in
order to grasp the following key concepts:
The Key Success Factors
Successful airlines must do many things well. Not doing well in any one area may
not result in failure as we define it. However, performing very poorly in any one
area, or poorly in two or more areas, appears to make success elusive.
Airlines are in part service businesses. To be successful, an airline must be
effective in four general areas: 1) attracting customers; 2) managing its fleet; 3)
managing its people, and 4) managing its finances.
2.2 Regulatory Environment
Bilateral Agreement between U.S. and U.K.
Flights from major international airports in the U.K. to the U.S. are regulated by a
Bilateral Agreement between the two countries. The government negotiates
routes for its country and then distributes these to the airline of its choice.
Usually airlines have to submit an application detailing why its proposed service is
in the best national interest. This creates a barrier to entry which is difficult to
overcome. In addition, landing and takeoff slots at London Heathrow and London
Gatwick are difficult to obtain creating another barrier to entry. These barriers to
entry give a strong advantage to existing airlines. However, U.S. and U.K.
government have been negotiating possible liberalization of skies. If this
happens, we expect to see additional capacity out of Heathrow to the USA which
may have an impact on yields.
Open Skies for Regional Airports (Bermuda II Agreement)
International flights from all the regional airports in the U.K. (Stansted,
Birmingham, Manchester, etc.) are regulated by this Agreement with the U.S.
which enables all national airlines of each country to operate an unlimited number
of flights between these airports and any U.S. international airport. Fly Light will
therefore be able to benefit from this Agreement by operating out of Stansted. Fly
Light will still have to apply for the routes but these will be automatically granted.
2.3 Market Analysis
2.3.1 Global Airline Industry
Major Airlines Characteristics:
Focus on hubs
In order to increase load factors, major airlines have adopted a hub and spoke
strategy which consists of centralising flights at an airport therefore benefiting
from connecting passengers in addition to origination and destination passengers.
As a result of this strategy, many passengers are forced to make stopovers,
increasing their travelling time.
Fly Light will offer point to point services which offer significant time savings for
premium passengers.
High fixed costs
Major airlines have large overhead costs and many are tied in to labour contracts
which prevent them from reducing these costs significantly.
Fly Light will maintain a lower cost base and therefore maintain a competitive
advantage.
Lack of customer focus
Overall, airlines tend to lack customer focus. By focusing on hubs and alliances,
airlines gain efficiencies but these strategies are of limited benefit to the
customers.
Fly Light will offer an individual service and its success will be built on customer
focus.
Consolidation with major alliances: Star Alliance, One World
While most industries have consolidated in the past few years through mergers
and acquisitions, the airline industry's consolidation is based predominantly on
alliances and minority equity stakes. Starting with code-share agreements and
extending these to full alliances have been the common pattern followed by
airlines around the world. These alliances enable airlines to benefit from each
others network and distribution capability. While very beneficial to the airlines, it
is arguable whether the consumer really benefits from these alliances as they
tend to reduce competition. Customer satisfaction usually suffers as a result of
this consolidation, creating an opportunity for Fly Light.
The most successful alliance to date is the Star Alliance which is comprised of
Lufthansa, United, SAS, Thai, Varig, Air New Zealand, Ansett Australia, All Nippon
Airways, and recently Singapore Airlines. Its main competitor, One World, is
comprised of British Airways, American Airlines, Cathay Pacific Airways, Qantas,
Finnair, and Iberia. Another important combination is Virgin-Singapore Airlines.
Singapore now owns 49 percent of Virgin Atlantic and the two airlines will be a
strong competitor on the transatlantic market.
Following Swissair's acquisition of 85 percent of Sabena, other European airlines
have started to talk about possible mergers and acquisition. On the U.S. side,
United and U.S. Airways have announced a merger which has prompted other
talks within the major airlines. This consolidation will be closely monitored by the
regulatory bodies and it is uncertain how many will be approved.
Fly Light is an off shoot of these alliances and will remain committed to its niche
strategy. The larger the alliances become, the more opportunities there are for
niche airlines to prosper.
Low Cost Airlines are gaining market share
Following the continued success of Southwest Airlines, many start-up airlines
have emerged in the past ten years, both in Europe and in the U.S. The low cost
airlines focus on short-haul traffic and have been key in stimulating demand by
offering extremely low fares. These airlines initially targeted the leisure traveller
but in recent years they have attracted a growing amount of business travellers
who were not satisfied with the high prices charged by the major airlines. The
main challenge faced by these young companies is that of safety. After the
ValueJet accident in Florida, customers were concerned that low cost airlines did
not maintain their aircraft correctly and were more dangerous to fly than the
majors.
While low cost airlines continue to thrive in the U.S., the more recent European
additions such as Easyjet, Virgin Express, Go Fly, Ryanair, and others are
experiencing tremendous growth and are presenting a serious challenge to the
major airlines short-haul strategies.
Fly Light will benefit from this trend as passengers are now used to flying with
newer airlines which do not have the history of State-Owned carriers.
Regional Airlines are increasing point-to-point travel
The Regional Airlines are by far the most profitable segment of the market with
net margins as high as 15 percent. They benefit from very fuel efficient modern
aircraft (Regional Jets) and are able to focus on high yield passengers by
providing point-to-point services and more frequencies. By using smaller jets,
boarding and disembarking times are reduced which enables fast turnaround of
the aircraft. Companies such as Comair and Atlantic Coast in the U.S. and
Crossair, Air Littoral, and British Regional Airlines in Europe have grown
tremendously in the past few years.
Fly Light is in effect an extension of the Regional Airlines by offering point to point
services on a short-haul basis first with possibility of long-haul flights later on.
Focus on Point to Point Traffic
The majority of the business traffic between London and New York is point to
point as business travellers from other European capitals tend to fly direct.
Connecting Traffic U.S and Europe
While Fly Light will focus primarily on point to point within Europe, it will benefit
from connecting traffic originating in secondary cities in the U.K., Europe, and the
U.S in the longrun. Premium travellers in those cities have to connect in a hub in
order to travel to the U.S. and they could easily combine a low-cost European
flight into Stansted with a Fly Light flight to the U.S. The following table highlights
the various secondary cities that are served by a low-cost airline operating at
Stansted and with arrival and departure times within 2 hours of a Fly Light flight:
Airline Secondary European City
Go Fly Bologna, Copenhagen, Edinburgh, Faro, Malaga, Palma
Ryanair Cork, Kerry, Knock, Nimes, Biarritz, Carcassone (Toulouse), Perpignan, St. Etienne (Lyon), Venice, Pisa, Glasgow, Anconna, Malmo, Brescia, Dinard
Buzz Dusseldorf, Bordeaux, Berlin, Marseilles
Airline Secondary American City
American Albany, Baltimore, Boston, Buffalo, Cleveland, Hartford, Los Angeles, Philadelphia, Pittsburgh, Raleigh/Durham, Rochester, San Juan (P.R.), Syracuse, Washington
American West
Las Vegas
Delta Albany, Atlanta, Baltimore, Boston, Los Angeles, Philadelphia, Pittsburgh,
Airline Secondary American City
Richmond, Rochester, Washington
National Airlines
Los Angeles, Las Vegas
Northwest Detroit
TWA Las Vegas, Los Angeles, San Francisco, St. Louis
United Boston, Los Angeles, Washington, D.C.
“No-Frills” Flying In Europe
Following EU policies of aviation liberalization, several European “no-frills” airlines
started with the SWA model:
• Low fares.
• No on-board meals.
• No allocated seats.
• Often using regional airports, and
• Lower staffing costs.
Initially expected to attract mainly leisure travellers, much of the demand has
turned out to be from business travellers who resent paying premium fares to
travel within Europe. Piercy N stated that estimates suggest that almost half the
customers for the low-cost carriers are price conscious business travellers. The
low cost flight market from the UK to Europe grew from zero to 5 per cent in just
two years. The “no-frills” operators undercut the big carriers by as much as 50
per cent and focus mainly on high volume, short-haul, point-to-point trips. Low
fares are achieved by exploiting several important levers to achieve low cost (the
alternative of low fares with high costs is clearly unattractive).
Piercy N stated that a recent report by the UK CAA noted that the “no-frills”
operators can get costs per seat down to half those of the major network carriers.
In his assessment savings come from:
• Distribution costs
It has been estimated that as much as 25 per cent of the cost of conventional air
tickets comes from distribution, e.g. travel agent commissions and promotion, the
CRS shared by major airlines and the coupon exchanges to reconcile passenger
switches. Direct selling and ticketless travel avoid most of these costs.
• In-flight catering and staffing
Conventional airlines provide “free” meals and drinks in their ticket prices.
Removing these services saves money (and a lot of waste when passengers turn
down the food because they want to sleep). However, easyJet estimates that
while it has three cabin crew on a short-haul flight, the equivalent BA flight will
have six cabin crew, because that is the only way to distribute and collect hot
towels and serve all passengers with drinks and food and another round of drinks
on a short flight.
• Fleet uniformity
A fleet standardized on a single aircraft type drastically reduces maintenance and
spares costs and crew training.
• Regional airports
Using regional airports instead of the major hubs has several important
implications. It gives access to the underserved regional population in the
regional airport’s catchment area; fees are lower; less congestion allows the
operator to be more efficient and to get better utilization from the aircraft
(because they stay on the ground for less time).The major players in establishing
and growing the low cost market in Europe are the following companies EasyJet,
Debonair, Ryanair and Virgin Express.
2.3.2 The Transformation of Air Transport
Air transport is in a highly dynamic period. Challenges include a slowing world
economy, high oil prices, and in some markets, slowing traffic growth according
to the ‘Current Market Outlook 2008-2027’ report by Boeing today's realities
show how air transport will be transformed over the next 20 years. The next
sections derive much of the content from this report.
Resilience
Over the past 20 years, air travel grew by an average of 4.8 percent each year.
This was despite two major world recessions, terrorist acts, the Asian financial
crisis of 1997, the severe acute respiratory syndrome (SARS) outbreak in 2003
and two Gulf wars. The resilience of air transport growth comes from its intrinsic
importance to the livelihood of people around the world.
On average over the next 20 years, passenger travel will grow at 5.0 percent and
cargo at 5.8 percent. The fastest growing economies will lead the transformation
into a more geographically balanced market. More productive, new airplanes will
play a greater role, and there will be relentless pursuit of further environmental
progress.
Source: Boeing market outlook 2008-2027
Balanced Growth
Airplanes in 2027 will be more productive. Each will carry about 40 percent more
traffic (RPKs) than the average airplane today. Fewer airplanes will be needed to
accommodate the same volume of travel. So the fleet needs to grow by only 3.2
percent each year, although travel will grow at 5.0 percent.
Longer Distances
The average growth in airline passenger numbers will be around 4.0 percent each
year. More people will be travelling by air as economies grow. Markets will open
up through reduced regulation and increased competition. As markets expand,
new travel opportunities will mostly be on longer distance flights.
The air transport fleet plays a fundamental role in stimulating and sustaining
economic activity. This tie-in is clear, with the 3.2 percent annual fleet growth in
line with expected long-term economic growth of 3.2 percent.
Using the Right Airplanes-Technology
As airlines seek better financial returns, they match the airplanes used more
closely to the precise economics of the routes they fly. This means that airlines
will in general use larger regional jets and single-aisle airplanes, and more small-
and medium-sized twin-aisle airplanes.
A natural product of this improved operational efficiency is that the average
airplane has a lower environmental impact. In the year 2027, 82 percent of the
fleet will be airplanes that do not exist today. They all will have been delivered
new and will be better than today's fleet in every respect. More environmentally
progressive, better for passengers and better for airlines.
Source: Boeing market outlook 2008-2027
Reshaping the Fleet
Today's record high fuel prices are forcing many airlines, particularly in the United
States, to take urgent action in cutting back capacity or reducing planned growth.
They are invariably doing so by reducing use of their oldest and least efficient
airplanes, while retaining their investment in new airplanes.
Dynamic Markets
Air transport markets are dynamic: they are always changing. New competitors
drive changes to ongoing operations. The development of new markets shifts
emphasis into new territories. Although the largest markets will remain, emerging
markets will become big enough to bring new influences to the world order in
aviation.
Shifting Emphasis
Asia is now expected to need the most new airplanes as well as representing the
largest market by value of deliveries. For first time, the value of the European
airplane market will be equivalent to that in North America. As the airplane
market expands, welcome competition is anticipated from manufacturers in Asia
and CIS.
New trade routes and global sourcing will stimulate air cargo markets, for
example, with strong growth in Southwest Asia. One-stop-to-anywhere airlines in
the Middle East have a highly expansive vision. Investment in infrastructure and
airplanes is on a scale to match.
U.S. network carriers are already seeing contraction in domestic operations as
they shift emphasis toward more rewarding international routes. Stronger growth
in U.S. markets will come back in time. Meanwhile, the current fast pace of
growth in Europe is expected to moderate a little.
A Better Balance
Dynamic markets combine to transform the future market toward more balance.
In 2027, Asia Pacific and North America will both have around 30 percent of the
fleet in service, with a further 25 percent in Europe and CIS. There also will be
more balance between different types of airlines and between replacement and
growth demand for airplanes.
Source: Boeing market outlook 2008-2027
Efficient Freighters
A shift toward larger freighters and new, more efficient airplanes will help keep
air cargo transport affordable. Sustained growth of world trade and global GDP
will drive a 5.8 percent average annual increase in air cargo traffic, consistent
with past trends. New air trade routes will reach out to under-served places.
2.3.3 A new market outlook
Transformation of the market
• Airline business priorities are being transformed as a result of high fuel costs.
• Competition between airlines is being transformed through the growing
presence of low-cost airlines, and through continuing liberalization of domestic
and international market regulations.
• Global airplane markets are being transformed toward a better geographical
balance in demand.
• The fleet is being transformed to become more efficient, in terms of lower fuel
use and higher unit productivity.
• Newer airplanes, the development of new fuels, and improved operating
procedures are transforming environmental performance.
2.3.4 The changing face of air transport
As airlines around the world face individual challenges and opportunities,
fundamental changes in the market are taking place.
Short term becomes long term
Markets evolve as near-term actions combine with underlying strategic shifts in
the business environment, leading to long-term changes in the industry.
Airline business conditions are very different around the world. After a number of
years of strong growth and improving financial results, the near-term business
outlook is weakening in North America, Europe, and Japan. In contrast, the
outlook in much of Asia, the Middle East, Russia, Africa, and Latin America is for
continued near-term growth.
Fuel prices and airline finances
In pursuit of the best possible financial returns in difficult trading conditions,
airlines around the world have consistently restructured their operations. Fleets
have been renewed and simplified. Routes and networks have been realigned to
focus on profitable markets, and airlines have pushed cost reduction measures
wherever possible.
As a result of these efforts, in 2007 airlines achieved their first year of global
profitability on a net basis since 2000. This achievement occurred despite the
doubling of oil prices between 2003 and 2007, increasing the industry’s fuel
expense by $90 billion. The surge in fuel prices through July 2008 means that on
an operating basis, the world’s airlines are expected to come close to breaking
even or possibly make a small profit.
On a net basis, airlines are now expected to lose money again in 2008. U.S.
airlines are generally considered to be facing the most severe challenges to
profitability as both their fuel costs and their revenues are dollar-denominated.
They do not fully benefit from currency exchange-rate protection from the impact
of high fuel prices. Even in the United States, some airlines have been profitable
by focusing on maintaining low costs of production, using fuel hedges, and
adjusting capacity to local market conditions.
Underlying long-term demand
As has been the case over previous decades, long-term demand growth in air
travel is expected to remain, regardless of current market pressures. Robust
underlying demand reflects the intrinsic value of air transport to society.
Price sensitivity of air travel
In the recent period of generally strong economic conditions, airlines have been
able to pass on a measure of their increased costs from higher fuel prices in the
form of fare increases and fuel surcharges. Passenger demand sensitivity to the
increased cost of air travel is relatively low when all airlines respond to the same
cost pressures by increasing overall ticket prices. Passengers become more
sensitive to price when airlines compete in the same markets or there are other
travel options available. In the increasing number of short- or medium-haul
markets that are liberalized, airline business models that focus on value for
money will be most competitive. Passengers also have increasing latitude to
adjust total trip expenditure by focusing on areas other than air fares. The chart
shows how the proportion of passenger trip costs accounted for by air fares is
decreasing over time in the United States and European Union.
Overall trends
As economic growth slows in the near term, airlines will tend toward lowering
fares in competitive markets. They will concentrate capacity in their stronger
markets. Airlines with the highest costs will restrict growth in short haul markets
and focus on longer routes and premium traffic. Low-cost specialists will continue
to grow in local markets, with some taking advantage of international market
liberalization by developing longer range, mainly leisure oriented services.
Strengthening revenues
Airlines employ a number of strategies to seek continuous improvement in
revenues. These include developing higher value services in business and leisure
markets. New premium services, from economy plus to improved business and
first class products, can draw traffic from competing airlines or improve fare mix.
Airline alliance membership and partner network coordination make services
available to a wider selection of customers and might strengthen brand appeal.
Airlines are also actively switching capacity to higher yielding markets, which tend
to be medium to long haul and international services.
Ancillary revenues: a source of additional income
In addition to raising ticket prices or applying fuel surcharges, airlines are
generating income in many other ways. Charges such as booking fees, baggage
fees, and income from the sale of food and goods on board the airplane are
providing 5 to 7 percent additional income, with some airlines raising as much as
20 percent of their income through such ancillary revenues. Airlines such as
Allegiant, Ryanair, and easyJet source more than 15 percent of their revenues
from ancillary charges.
Taking a retail rather than travel-oriented approach to marketing, the millions of
visitors to airline web sites represent a potential distribution channel for all kinds
of goods and services. Although currently generating a small proportion of
revenue, any income generated comes at little cost to the airline. Over time, a
more significant shift in the direction of a retail-oriented approach to web sales is
likely. For example, the Ryanair web site receives over 200 million visitors a year
and provides access to services as unrelated to air travel as competitive quotes
for domestic electricity and gas supplies. Contribution to profit
A powerful example of ancillary revenue contribution to profit, Allegiant receives
nearly $28 per passenger1 over and above fares paid, accounting for over 20
percent of total revenues. Promotional activities generate ancillary revenue, such
as advertising on board the airplane or activities such as Allegiant’s agreement
with Blue Man Group in Las Vegas, a key destination for the airline. One of its
aircraft carries an image of Blue Man Group, who refers to Allegiant during their
show. The airline sells tickets to the show on its web site and receives a fee for
each booking.
On-board sales through IFE systems
As in-flight entertainment (IFE) systems become more sophisticated, additional
revenues will be generated through an expanded range of on-board activities and
sales of communication services (e.g., cell phone, text messaging, and Internet
connections).
Revenue from cargo services
Cargo services, including carrying freight in the lower holds of passenger
airplanes, continue to contribute positively to airline income, accounting for a
typical 10 to 12 percent of airline revenues. Some airlines gain as much as 35
percent or more of total revenues from their cargo business. Cargo markets have
expanded, and cargo yields have been reasonably strong.
The revenue-cost equation
Sustained improvement in financial results is a matter of simultaneously
addressing revenues and costs, regardless of airline region or business model.
Airlines are implementing far-reaching cost management programs and
generating revenue by raising fares and charging for services that formerly were
free. Such cost management can also bring benefits. For example, charging
baggage fees encourages passengers to bring fewer bags, which reduces handling
and fuel costs.
Tackling costs
Over the last 3 years, fuel costs rose from around 15 percent to 30 to 40 percent
of operating costs and as much as 60 percent for some airlines. Cost
management is of vital importance. Fuel hedging has been a key instrument for
some airlines in managing volatile fuel prices.
Although hedging levels and strategies vary, many airlines have successfully
hedged to allow certainty in planning for specific business periods, while also
taking some of the risk out of changing fuel costs. Capacity discipline has been
important in bringing down unit costs. While traffic has grown, airlines have taken
capacity out of slow-growing domestic or short-haul markets and parked those
airplanes or flown them in stronger, international markets instead.
New airplanes are part of the answer
Under past difficult business conditions, airlines refrained from ordering new
airplanes until their finances improved. Their existing fleets, being to some
degree written down, held lower capital costs than new airplanes. Delivery of new
airplanes might have been delayed or these airplanes were temporarily parked to
avoid adding unwanted capacity. Under current conditions, new airplanes are an
important component of recovery strategies because they hold the key to
lowering airline costs. New airplanes are more fuel efficient than older airplanes in
the fleet, and their higher productivity enables airlines to maximize utilization of
their assets, which leads to lower production costs.
Forecast trends
Airline strategies to address the revenue cost equation have led to five specific
trends that are reflected in our forecast:
• Many of the oldest passenger airplanes are being parked and are unlikely to
return to service.
• Meaningful quantities of 15- to 20-year-old airplanes will be available for
conversion to freighters. FedEx, for example, cites fuel savings of up to 36
percent and increased capacity of 20 percent by using its newly converted 757-
200Fs in place of its existing 727-200Fs.
• Demand for new airplanes is holding steady; new airplanes offer better fuel
efficiency and better productivity than airplanes in the current fleet.
• Regional airlines are maintaining profitability by moving to larger regional jets.
The overall requirement for smaller regional jets is significantly lower than was
expected in a lower fuel-price environment.
• Many single-aisle airplanes and small twin aisle airplanes will be replaced with
airplanes slightly larger than those in the existing fleet.
Growth opportunities
After cost management, one of the most important elements of the revenue-cost
equation is appropriate matching of capacity to demand. With costs actively
managed, airlines focus on best meeting the needs of specific market segments.
Passenger requirements vary between regions and between short- or long-haul
services. Different types of service or airline business models will be successful in
different markets.
The specific requirements of passengers on short-haul routes means that low-cost
airline growth will be rapid and that the growth of network airlines will generally
be focused on longer haul or international markets.
2.3.5 The environment
Improving on an already impressive record
Environmental progress in aviation is a continuous theme and one that is
receiving more attention than ever before. At Boeing, more than 75 percent of
our research and development efforts concentrate on advancing environmentally
progressive innovations, from pioneering sustainable biofuels and other
renewable energy sources to designing new noise reducing technologies and
optimizing air traffic system efficiency.
Boeing is continuously working to make commercial air transport cleaner, quieter,
and more efficient. According to the Intergovernmental Panel on Climate Change
(IPCC), the contribution of air transport is just about 2 percent of human
produced CO2 emissions, although this could reach 3 percent by 2050. As such,
the industry is working toward carbon-neutral growth (no increase in carbon
emissions in spite of traffic growth) as a first step toward a carbon-free future.
2.4 The Airline Industry Analysis by Region
New influences
Air transport markets are dynamic: they are always changing. The largest
markets will remain, and emerging regions will bring new influences.
Shifting emphasis
Asia is expected to need the most new airplanes and will represent the largest
market by value of deliveries. For the first time, the value of the European
airplane market will be equivalent to that in North America. As the airplane
market expands, welcome competition is anticipated from manufacturers around
the world. New trade routes and global sourcing will stimulate air cargo markets,
for example, with strong growth in Southwest Asia.
Airlines in the Middle East have a highly expansive vision of the market for
onnections etween any two major world centers with only one top. Investment in
iddle Eastern infrastructure and airplanes is on a scale to match. Network airlines
in the United States are already seeing contraction in domestic operations as they
shift emphasis toward more rewarding international routes. Stronger growth in
North American markets will return in time. Meanwhile, the current fast pace of
growth in Europe is expected to moderate a little.
A better balance
Dynamic markets combine to create a more balanced future. In 2027, Asia-Pacific
and North America will each have approximately 30 percent of the fleet in
service, with another 25 percent in Europe, Russia, and Central Asia. More
balance will exist between different types of airlines and between replacement
and growth demand for airplanes.
Each region has unique requirements shaping the market
Airlines of each region and business model have unique requirements for their
future fleet. An immediate need at many airlines is to replace large numbers of
older airplanes. Elsewhere, growth into opportunities generated by market
liberalization is the priority. In every region except the Middle East, fleet changes
will lead to a reduced share in the largest and smallest airplane categories.
Benefiting people worldwide
The number of people who can afford to travel by air is growing every day. In the
world’s most populous nations and fastest growing economies, people are joining
the middle classes at an unprecedented rate, gaining the income, leisure time,
and desire to travel.
The large, rapidly growing economies of China and India will demand a larger
share of the world’s air transport and of the global aircraft fleet. Although North
America and Europe will account for about half the market, demand will stabilize
across the global market as emerging regions follow their own economic cycles.
Affordable long-range air services are key to spanning the vast distances that
separate markets such as Oceania, Russia, and Central Asia, where ground
transport infrastructure is lacking.
The Middle East is transforming itself into a global crossroads for air transport. Air
traffic in prosperous Northeast Asia will continue to match the average global
growth rate, spurred on by the success of low-cost carriers and growing demand
for affordable long-distance service.
Key to regional growth and development
Air transport is the prime mover in Southeast Asian economies. Bringing tourist
revenues and fostering business opportunities among the region’s commercial
centres, air transport is recognized by the Association of Southeast Asian Nations
(ASEAN) as key to the region’s development and integration into the global
economy.
CHINA
Plans are in place to expand China’s aviation infrastructure, which will be a
continual challenge as the region continues to grow strongly.
China is the world’s second largest commercial aviation market, after the United
States. Since 2000, the number of air passengers has more than doubled, with an
average annual growth rate of 13.5 percent. Over the next 20 years, the demand
for air travel will grow at an annual rate of 7.9 percent. After a period of rapid
expansion, the passenger market is expected to moderate to a period of
sustained long-term growth. Domestic traffic alone will grow at an average
annual rate of 8.9 percent due to rising income levels and improved services
offered by the airlines. Air traffic was adversely affected following an 8.0
magnitude earthquake that hit China’s Sichuan Province on May 12, 2008. It was
one of the nation’s worst natural disasters in modern history. An estimated
70,000 people lost their lives and thousands more were injured or missing.
Commercial air transportation played an important role in bringing medical
supplies and other emergency cargo to the region.
Rapid increase in air cargo volumes
The number of freight operators in China has rapidly increased. The volume of
cargo transported by air is steadily rising. Over the next two decades, cargo
traffic carried by Chinese airlines will grow at an annual rate of 7.1 percent—well
above the world average. Trade growth is being strengthened by a relaxation of
regulations on ownership of air cargo operations and their market penetration.
SOUTHWEST ASIA
High-growth markets
Air transport demand is being fuelled by robust economic growth, combined with
expanded air service agreements. Intense economic development in Southwest
Asia is driving a need for imported goods and materials, while exports of textiles
and equipment continue to escalate. Annually, international air cargo moving
into, within, and out of Southwest Asia now exceeds
Despite major challenges, the region’s air transportation system is poised for
dramatic growth. India’s airports handled close to 120 million domestic and
international passengers for the 1-year period ending March 2007, representing a
21 percent increase over the previous year. This is the fastest rate of expansion
of any market in the world. Looking ahead, the region’s air traffic is expected to
grow at an annual rate of 8 percent.
Investment in airports
To keep pace with this growth, public and private interests are investing $9 billion
in India’s airports over 3 years. Critical improvements to India’s 10 largest
airports will include new passenger terminals, cargo facilities, and runways. New
airports are also being built to meet demand. In addition, more than $1 billion is
being invested at 35 nonmetropolitan airports in less developed parts of India.
Young population spurs growth
With a population of approximately 1.1 billion people, half of all Indians are under
the age of 25. This vibrant group represents an increasingly prosperous segment
from which airlines can attract new customers. They are finding air travel to be a
cost-competitive alternative to the once dominant railways.
International service growth
According to a report from McKinsey Global Institute (MGI), India’s middle class
will grow to nearly 600 million people by 2025. MGI estimates consumer
consumption within this segment of the population will increase nearly fourfold,
reaching $1.5 trillion (U.S.) over the next 20 years. A recent CLSA Asia-Pacific
Markets survey found that 41 percent of Indian households had not taken a
vacation over a 12-month period. With only 0.02 annual air trips per capita in
India, there is a clear opportunity to attract travellers away from railroads onto
airlines. Of those who had taken a vacation, an overwhelming majority chose to
take ground transportation, with a similar situation in Bangladesh and Pakistan.
The influx of new capacity in India has stimulated new demand due to price
competition. The combination of competitive air fares and rising consumer
spending power could result in the Southwest Asia domestic market sustaining an 8.5 percent annual air traffic growth rate over the next 20 years.
Liberalization strengthens markets
Rapid growth has been stimulated by new airlines, driving down fares, improving
efficiency, and increasing the frequency of service on many routes. Liberalization
is an important factor. A recently improved bilateral agreement between China
and India is just one example of work under way to open new opportunities in
high-growth markets. Air service has rapidly expanded between Southwest Asia
and other major regions. Traffic to and from the Middle East, for example, has
increased by nearly 70 percent over the past 5 years. India’s open skies
agreement with the United States, which effectively removes all restrictions on
new nonstop service, will lead to further traffic growth.
NORTHEAST ASIA
Airport expansion and further liberalization in Japan and Korea will stimulate air
travel and contribute to economic growth.
Airport expansion and liberalization
Overall, air travel growth in Northeast Asia is expected to match the world
average. Regional traffic between Northeast Asia and other Asia-Pacific regions is
projected to grow more rapidly, at 6.2 percent. Orders for twin-aisle jets have
increased as demand for economic long-haul service continues to grow. Capacity
at both Tokyo’s Haneda and Narita airports will expand in 2010. The opening of
the international terminal and fourth runway at Haneda airport will provide a 40
percent increase in capacity for both domestic and international flights. The
extended second runway at Tokyo Narita airport will also enable growth in
international services. Traffic will increase substantially, with both airports looking
at extended hours of operation. Korea’s Incheon airport (Seoul) is also expanding
with additional gates and a third runway. Air cargo service in Northeast Asia
remains strong, with growth forecast at 7 percent. In the intra-Asia cargo market,
the top 10 country pairs include China to Japan and Korea, and Japan to Korea,
Taiwan, Singapore, and Malaysia.
Low-cost carrier opportunities
Operating restrictions are gradually easing between countries in the region and to
other nations in Asia-Pacific, including China. Low-cost carriers—both domestic
airlines and LCCs from outside the region—are showing a strong interest in
serving this market as regulations ease and airport capacity expands. This is
stimulating a demand for single aisle airplanes.
SOUTHEAST ASIA International tourist destinations
The top 10 sources of visitors to Southeast Asia are ASEAN countries, Europe,
China, Japan, Korea, the United States, Australia, India, Taiwan, and Hong Kong
ASEAN members liberalize air services
The region’s 10 countries have worked through ASEAN to strengthen their
economic community and encourage collaboration. In November 2007, ASEAN
members signed an agreement to achieve liberalization of scheduled passenger
routes between capital cities and full liberalization of air freight services by
December 2008. ASEAN envisions establishing a single aviation market by 2015.
Substantial orders for new airplanes, including twin-aisle jetliners, reflect
confidence in continued economic growth. The Southeast Asia market is favorable
for low-cost carrier expansion, which helps stimulate air travel growth. AirAsia,
Jetstar Asia, Lion Air, and Tiger Airways have increased services to more
countries.
Aviation key to economic success
Commercial aviation plays an essential role in the economic development of
Southeast Asia. Low-cost carriers allow tourists to visit multiple locations in the
region, driving the development of hotels and other guest facilities. Air
transportation also supports business activity in major cities and centers of
commerce. The region has experienced strong economic growth above world
average, which is expected to continue for the next 20 years. Air passenger traffic
is projected to flourish at 6.8 percent, and air cargo will also be strong. The
growing strength of the passenger market is due, in part, to liberalization.
OCEANIA (AUSTRALASIA)
Australia and New Zealand are gearing up for growth while taking on cost
challenges with sophisticated strategies.
Strategies set stage for future growth
Commercial airlines in Australia and New Zealand are facing tough competition,
along with high fuel prices and rising operating costs. Despite these challenges,
the industry is looking ahead to a period of significant growth in both passenger
and cargo traffic. New aircraft are on order to meet the anticipated demand.
Sophisticated business strategies are being implemented to stay competitive and
set the stage for future growth. This includes the rapid expansion of low-cost
operations.
In March 2008, Australia and the United States officially signed an open skies
agreement, which allows designated carriers unlimited operations between the
two countries. Virgin Blue’s new long-haul carrier, V-Australia, is planning to take
immediate advantage of the agreement by launching service between Sydney and
Los Angeles. The agreement also provides opportunities for cooperative
marketing arrangements, including code sharing, between Australian and U.S.
carriers. Potential new routes could include such destinations as Chicago,
Houston, Dallas, Seattle, and Las Vegas. Competition driven by tourism
Tourism is an important industry in Australia; domestic and international airlines
compete to serve this market. A variety of international franchise LCCs have
seized opportunities to carry travellers to and from Australia through both short-
haul and long-haul routes. Freight traffic through Oceania is projected to grow at
a substantial rate of 7 percent. Australia has the highest volume of air cargo
traffic in the region.
LATIN AMERICA
Growth of Latin American airlines will be among the strongest in the world,
featuring newer, more efficient airplane fleets and more comprehensive airline
networks.
Strong focus on customer service
An increasingly strong focus on customer service is providing Latin American
carriers the ability to stimulate traffic domestically and compete internationally.
Traffic growth within Latin America is among the highest in the world
Annual traffic growth within Latin America will be 6.7 percent, making it the
highest growth region outside Asia-Pacific. Economic growth, increased stability,
and liberalization in trade and air transport are contributing to above-average
traffic growth rates projected for the region. Air transport liberalization has driven
down fares by providing an environment for emergence of low-cost carriers in the
region, particularly in Mexico and Brazil. Low-cost flights have stimulated demand
by increasing tourist traffic and attracting first-time fliers, who might otherwise
have traveled by alternative means such as bus—or not traveled at all. The
strong business focus of the LCCs has enhanced service and offered passengers a
wider and more cost-competitive variety of choices.
Robust growth in long-range traffic
Network carriers have opened up new longrange routes such as Mexico City to
Shanghai (Aeroméxico) and Santiago to Toronto (LAN). Success in expanding
point-to-point service and improved access to capital have led to growth in
demand for long-range airplanes. Continued investment in infrastructure will
facilitate the high growth rates expected in Latin America.
NORTH AMERICA
Improvements offered by newer generation airplanes, including greater fuel
efficiency, make a compelling case for fleet renewal.
Higher performance fleets
U.S. airlines are looking to transform their fleets to more efficient, higher
performance airplanes that carry more passengers. Financial challenges in recent
years have slowed fleet turnover below historical levels. Improvements offered by
newer generation airplanes, including significantly greater fuel efficiency, make a
compelling case for fleet renewal. There is also demand for the most
environmentally progressive airplanes.
The difficult road to profitability
After several years of multi-billion-dollar losses, the North American airline
industry returned to profitability in 2007. Network airline restructuring focused on
restoring financial health, largely through continual cost reduction. Resurgence of
U.S. and Canadian airline profitability has been short-lived, however, due to
record high fuel costs. Fuel expense now accounts for over 40 percent of airline
operating expenses, up from a quarter of all expenses just a few years ago. The
move to more fuel-efficient airplanes will play an important role in sustained
financial viability. At the same time, it will make older airplanes available for
conversion to meet a growing global need for more fuel-efficient freighters.
Domestic and international markets
Low-cost carriers have gained 10 points of domestic market share since 2000,
resulting in a significant shift in the North American competitive market. The
LCCs, many of which are new domestic airlines, have a business model focused
on high utilization, discount pricing, and efficient business practices.
LCC domestic market share will climb over the next 10 years as network carriers
focus on international services. Higher LCC growth rates will push network carrier
domestic share down to 65 percent over the coming decade. Despite the
domestic service reductions by network airlines, these carriers have not given up
on plans for overall expansion. They have realized the profitability of services to
increasingly liberalized, higher yield and perhaps less competitive international
operations. Intercontinental flights now account for more than 40 percent of U.S.
network carrier mainline flying, with all indications pointing to continuing
expansion.
Flights between the United States and Canada have increased significantly. Both
countries are expanding business ties under the North American Free Trade
Agreement and further liberalization of the Canada-U.S. Air Transport Agreement.
Over the last 10 years more than 1,400 new weekly transborder flights have been
added, with an additional 41 new airport pairs receiving nonstop flights.
Airline consolidation and cooperation
News headlines of proposed mergers and joint ventures have led many industry
observers to conclude that a major round of industry consolidation may be under
way. The successful completion of one or more of these transactions would have
a dramatic effect on the competitive landscape of the U.S. airline market.
Advantages would include eliminating duplicate services and combining
complementary route networks. Consolidation creates long-term challenges,
including the integration of disparate fleets, corporate cultures, information
technology systems, and labor contracts.
Domestic market drives strong single-aisle sales
North American lifestyles in large part depend on rapid coast-to-coast and
interregional transportation, with a broad choice of frequencies across many city
pairings. Seventy-one percent of new deliveries will be single-aisle airplanes,
driven by the need to provide the most comprehensive and economic market
coverage.
Twin-aisle fleets will evolve as airlines continue to expand their international
services to a continually wider range of airport pairs and frequencies. Small- and
mid-sized twin-aisle airplanes will represent 16 percent of the North American
fleet in 2027, with large airplanes representing 4 percent. Over the next two
decades, the total fleet size in North America is expected to grow approximately
50 percent to nearly 11,000 airplanes.
EUROPE
Airlines in Europe will continue to benefit from large domestic markets, global
vision, and new opportunities through international market liberalization.
Strategies developing with the market
The European airline market is constantly changing. Long-term traffic growth is
expected to slow over the next 20 years from recent rates of 6 to 7 percent each
year, to an average of 4.1 percent. Airlines are adjusting their strategies in line
with the changing competitive environment on routes within Europe and to make
the most of emerging opportunities to countries outside Europe.
The European Union is working to bring about its vision of an extended area of
open market regulation encompassing its neighbors (the European Common
Aviation Area). With an aim of including 35 countries and 500 million people
by 2010, this area could eventually extend to 58 countries and 1 billion people.
Expansion of the free market will continue to stimulate air travel demand on
short- to medium-range routes.
Long-range markets to the Middle East and North America recently have opened
up. Open skies agreements with countries in these regions have perhaps brought
more new competition than opportunities for European airlines in the near term.
However, in the long term European airlines should benefit from greater global
market access and the freedom to invest in overseas airlines and markets. As
such, they will be pivotal in shaping future global airline groupings and perhaps in
establishing single airline entities that operate throughout the largest domestic
and international markets.
Shifting domestic markets
Many of the short European city pairs are already well served by air service or are
the future target of expanded high-speed train networks. The average length of
scheduled routes flown using airplanes with 100 seats or more within Europe
increased from 850 km (530 miles) in 2000 to 995 in 2007. Eighty-four percent
of routes added over these 7 years were longer than 800 km (500 miles). We
expect that by 2027 the average flight length within Europe will be 1,255 km
(780 miles). As low-cost airlines succeeded in profitably satisfying local demand
for flights on these shortrange routes, network airlines shifted capacity to key
business-oriented markets. They concentrated their own short-range capacity on
routes where they can generate higher yields—such as routes with a business or
premium leisure orientation. 41 Network airlines typically divested themselves of
short-haul capacity (e.g., the sale by British Airways of its regional operation to
Flybe) or established distinct lower cost operations.
Markets to Eastern Europe and Central Asia are expanding a little more rapidly
than those in Western Europe, but considerable opportunities remain in western
markets where low-cost penetration is relatively low, such as the French and
Italian domestic markets.
Environmental focus
European policymakers plan to introduce market pricing schemes governing
emissions, including EU airlines and those from other countries operating in
European markets, although ICAO has jurisdiction in this area. Airlines share
concern over escalation in these relatively uncontrollable costs and possible caps
on future growth. In the meantime, they are minimizing fuel use through fleet
strategy and operational procedures, simultaneously minimizing their
environmental impact and improving their financial performance.
In 20 years’ time, 93 percent of the European fleet will be new, having been
delivered from 2008 onward. The airplanes from today’s fleet remaining in service
at that time will mostly be used as freighters where their utilization and
contribution to emissions are considerably lower. Freight markets make an
important contribution to European airline finances, and European airlines are
pioneers in air freight developments, including launch customers for the 747-8F
(Cargolux) and 777F (Air France).
MIDDLE EAST
The Middle East vision is to fully exploit its potential as a travel destination and an
international hub for commercial aviation. Major investments are being made in
both transportation and visitor facilities. Oil revenue and international business
operations are drawing a significant number of business travellers to the area just
as new hotels and visitor attractions are drawing tourists. Sustained investment
in commercial aviation infrastructure continues, including $36.8 billion being
spent on expanding capacity at 10 airports by 2012.
Location is a strategic advantage
Its central world location means that the Middle East is an ideal connecting point
for one stop airline service between virtually any two cities of the world. Carriers
in the region have been taking advantage of this, carrying passengers between
Europe, Africa, and Asia through the Gulf. Approximately one third of all traffic
carried by Middle Eastern airlines goes to Europe.
Dynamic economic development and ambitious growth plans continue to
sustain an unprecedented rate of expansion.
Air traffic growth for Middle Eastern carriers has significantly outpaced worldwide
averages. In 2007, air traffic grew at a rate of 16.9 percent. At a time of high fuel
prices, Middle Eastern airlines are in a strong competitive position with large cash
balances and investment in highly efficient new airplanes. Most of the more than
800 airplanes on order are for long-haul service. The new Al Maktoum
International Airport in Dubai (JXB) promises to be one of the largest in the
world.
Young residents are potential fliers
The Middle East has a young population with rising incomes. The average annual
median age is less than 25 years, compared with 41 years in Western Europe and
36 years in North America. Even the youth-dominated population of China has a
median age of 33 years. This young population in the Middle East is likely to bring
a strong increase in air travel in the years ahead.
Around 85 percent of the 4.4 million UAE residents are not citizens, with India
and Pakistan representing the largest expatriate groups. The large population of
migrant workers uses air transportation to travel to and from their home
countries. This is particularly prevalent throughout the Gulf nations of Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia, and the UAE, where the guest worker
population is above 36 million.
Region serves as a cargo traffic hub
The region serves as an important cargo traffic hub. Much of the air cargo
travelling through Middle Eastern airports is en route from one neighbouring
region to another. The Middle East is also a significant sea-air market. For
example, goods from south Asia arrive in the Middle East on ships and continue
on to Europe by air.
The Dubai Flower Centre is helping to open new markets for flowers grown in East
Africa. Europe is the largest air cargo partner to the Middle East. The continued
high price of oil, along with economic diversification, will have a significant
positive effect on personal incomes and increase the region’s demand for
products imported from Europe.
Open skies policies key to growth
With relatively small domestic markets, securing agreement for liberal market
access (or open skies agreements) with as many countries around the world as
possible is central to executing the region’s airline growth plans. Many major
carriers in the Middle East are planning regional expansion and studying low-cost
subsidiaries. Growth of independent low-cost airlines has also been strong to
date. FlyDubai is among other future startup airlines, beginning service in 2009
and having on order 54 737NGs. Other LCCs will follow, to create a growing
demand for single-aisle airplanes.
AFRICA
Some of the world’s most profitable airlines are in Africa. Future challenges
include modernization and competition from abroad.
Drive toward fleet renewal
Africa has the second oldest fleet, behind those of Russia and Central Asia, and it
is in need of renewal. Three quarters of the fleet consists of single-aisle airplanes,
which serve markets within the region and on many routes between northern
Africa and Europe, Africa’s largest intercontinental passenger market. Fleet
renewal would help satisfy environmental regulations at European airports. Renewal, infrastructure needed
Four of the world’s top 20 oil-producing countries are in Africa. Economic growth
is forecast at 5.1 percent. Even so, the continent’s limited transportation system
is slowing the spread of economic vitality. Air transportation is a highly effective
alternative to ground transportation over difficult terrain. Access to landlocked
areas of Africa is limited by a lack of roads and railways. The spread of air
transportation will require expansion and modernization of the continent’s
airports.
Market liberalization
Liberalization in markets across Africa is needed in the form of regional
intergovernmental agreements, because bilateral aviation agreements are
predominant. The Yamoussoukro Declaration, an attempt to spread liberalization
throughout the region, has not been widely adopted. Europe is Africa’s most
active trading partner. Principal exports from Africa by air to Europe include
perishables and apparel. Imports flown in include machinery, telecommunication
equipment, pharmaceuticals, and manufactured products.
RUSSIA AND CENTRAL ASIA
Airline consolidations and alliances are contributing to more efficient operations.
Fleet renewal is gathering pace.
Domestic air travel
The ICAO1 reports that air travel in the region increased by 20 percent in the last
year alone. Airlines are responding to this surge in traffic by renewing their fleets.
Russian and Central Asian airlines have more than 300 airplanes on order. By the
year 2027, 63 percent of the fleet will be replaced. Nearly 50 percent of all new
deliveries will be single-aisle airplanes, and 36 percent will be regional jets with
up to 90 seats. Over a 10-year period, the number of city pairs served by air has
increased by more than 70 percent, from 880 to more than 1,500. Strong
potential for transfer from rail services exists because more than 80 percent of all
domestic travel in Russia is carried by Russian Railways.
Foreign airlines growing
The majority of flying to, from, and within Russia and Central Asia is on the
regions’ airlines. Foreign carriers operating in the region jumped from 50 in 1997
to 67 in 2007. New entrants with scheduled service include Air Berlin, bmi, Niki,
Hainan Airlines, Meridiana, Travel Servis, Carpatair, Clickair, and Montenegro
Airlines.
Strong economic growth emanates largely from a wealth of natural resources. Air
cargo in markets to or from Asia and Europe is particularly strong, especially
shipments originating in China, Japan, Korea, and Thailand. Imports include
consumer electronics, apparel, pharmaceutical and medical goods, industrial
machinery, and oil and gas extraction equipment.
2.5 The Airline Industry Environmental Scan Summary
Competition
Case Study of an LCC: The rise of easyJet Fly Light’s primary competitor
Founded in 1995, easyJet is a front running European low cost airline along with
Ryanair. It has over 100 routes to almost 40 key business and leisure airports in
Europe. The phenomenal growth of easyJet, since its first flight in November
1995, was boosted by its merger with Go-fly in August 2002. EasyJet has a very
strong business model which is the backbone of its success. It uses the Internet
to reduce distribution costs. It maximises use of each of its aircrafts. The easy Jet
decision makers believe in trend-setting ideas like serving no lunch on board for
faster turnaround time in airports which reduces its airport charges as well. They
have also taken the help of IT systems for e-ticketing and legacy systems which
are accessible through servers located worldwide and thus have transformed their
operations into a paperless environment. In this context, they have developed a
data warehouse which helps to migrate data from the various operational
systems automatically. They have also implemented reporting tools which include
OLAP (On Line Analytical Processing) tools for data mining.
Economic Forecasts
IATA, AEA and other leading organizations like ATI predict a steady growth for
LCC’s in the coming years which would also proportionately increase the entire
European air traffic volume. However, the growth rate of the larger airlines is not
very promising and airlines have to come up with newer strategies to cope up
with this immense upsurge of the low-cost sector. In this event, the European
airlines can take a cue from Delta Airlines in US who in Jan 2005 have declared to
reduce their fare prices by 50% for travel within the continent.
Globalisation: The Open Skies Agreement
After the creation of a Single Market in air transport in 1992, which enabled free
access to the market for all airlines from the community, the European
Commission expressed the view that the Member States should no longer enter
into bilateral agreements with third countries on an individual basis. USA started
offering "open skies" agreements to other countries from 1992. The ‘open skies’
policy is the basis for accomplishment of a single market free of discriminations
and enhances a coherent European policy for international aviation.
Recently, in the context of the presidential elections, Vagn Sorensen, Chairman
of AEA (Association of European Airlines), has stated the negotiations regarding
the Open Sky Agreement to be remarkable. According to him, the key is the
change in global travel patterns and airlines must be able to exploit new
opportunities quickly within the globalised marketplace. He expected the EU and
the US to demonstrate their willingness to assume leadership in this matter.
Market Structure and Share Prices
There has been a considerable rise in the volume of air passengers in the
European Transportation Industry, from about 167 in 1996 to above 280 in 2004.
This growth has been accelerated by the entry of low-cost airlines in the market
that has definitely given a major fraction of people to travel by air who would
have travelled by other means normally. It is very evident that the majority
market for no-frills airlines are leisure travellers. Budget airlines have played a
significant role in the growing consumer interest in flexible, self-packaged
vacations and weekend city breaks markets.
The LCC growth is amply reflected by the share prices over the last ten years.
There has been a steady increase in the share prices of low-costs after the entry
of Ryanair and easyJet reflecting a shift in preference from the European Majors
towards the LCC’s. When the Low-cost market was going strong, many airlines
entered into the scene and tried to fragment the market. But increase in
competition and reduction of prices took heavy toll on many airlines like, GetJet,
Flyeco and Sabena and they got bankrupt or had to enter into mergers.
The 9/11 impact hit strongly across the entire market like a stroke but the
recovery of Ryanair as compared to flag carriers like British Airways or Air France
has been outstanding. Such pioneer low-cost carriers, which had initially entered
the market to take a chunk of the shares of the majors, now individually
dominate over a segment of the market.
According to the IATA Annual Report of 2004, the industry was hit by four
horsemen of the apocalypse – SARS, war in Iraq, terrorism, and a poor economy.
In 2005, the price of oil threatened to be another barrier. However, Ryanair with
an extremely economical operating cost model, which is responsible for its high
operating profit margin, is ideally seated to lead the recovery.
Case Study of an Alliance: Air France – KLM
Air France, since its merger with the Dutch company KLM, led to the creation of
Europe's leading airline group: Air France-KLM. Its credo of quality service,
punctuality and now services like electronic ticketing means that travelling is
easier than ever before. The new group ‘Air France-KLM’ relies on its strength and
the complementary nature of their brands and also on the hub and networks of
both the airlines.
The Survival Strategies
Alliances, Spin-offs and Cross-Holdings
Global alliances have greater scope and are the most significant strategic
alliances in terms of network expansion. The prime purpose is to achieve all the
marketing benefits by linking two or more large airlines operating in
geographically distinct markets, ideally in different continents. Global alliances
normally involve code sharing on a large number of routes. They may, however,
extend to include schedule co-ordination, joint sales offices, ground handling,
combined frequent flyer programmes, joint maintenance activities as well as
some equity stake transfer. The individual members may have other route or
region specific alliances.
Major Global Alliance Networks
Europeans took a leaf out of their US counterparts and found that increase in the
size of an alliance would give rise to greater scope of penetrating the market. To
achieve the desired horizon of scope, alliances and mergers were a useful
solution, as these would generate extra traffic volumes between the partner
airlines. The new trend in the European airline market set by the entry of low-
cost airlines like Ryanair forced some traditional airlines to launch their low-cost
versions to capture the new segment of passenger revenues and stay in the
competition.
The formation of bmi baby from British Midlands is a classic example of this kind
of spin-off. Following the change in the market trends in the European aviation
sector, some of the more profitable airlines entered into the game of acquiring or
holding shares in other relatively smaller airlines to boost their profits. This
strategy paid off in many cases and Ryanair set up an ideal example of such
cross holdings.
Ryanair outsources all its check-in and airport services to Servis air in all its
locations including its main base at Stanstead. EasyJet on the other hand, makes
sure that its fleet is on air for about 12hours per day on an average in
comparison to 9 hours for most of the larger airlines.
Some low-costs operate from secondary airports that are far from cities to
minimize the ground handling costs at the major airports. All these factors add up
to a cost advantage of 40-65% per ASK over traditional airlines on intra-
European international routes.
The airline industry is always up against the combined forces of volatile revenues
and high fixed costs. Around 60% of the total cost incurred by the airlines is
virtually invariable in the short run. This section of costs is incurred by aircraft
ownership, fuel costs, ground handling charges, maintenance and airport charges.
Thus, the management has few alternatives while facing the challenges of cutting
cost. It can only optimize in areas like crew costs, sales, marketing and
distribution, passenger services and administrative costs.
Although the factors constituting the fixed and variable costs of leisure and no-
frills carriers are similar, the different strategies involved gives rise to a
significant difference in the total running costs. The low-cost model ideally looks
to outsource as many of the non-core business functions as possible. They do not
boast of complicated networks or eye-catching frills. On the other side of the coin,
the leisure carrier operating model aims at maximizing its own assets and
resources to optimize the return on capital expenditure.
Industry research shows that the airport charges, staff costs and price of
distribution for the larger network carriers are much more than their low-cost
counterparts. This is mainly due to the maintenance of a large infrastructure,
usage of primary airports and fees to be paid to the different GDS for bookings.
As the competition in the market becomes fiercer with the success of the low
costs, many larger airlines are tempted to change their operating model.
A Look across the Atlantic – The Southwest Model
Booz-Allen-Hamilton analysis demonstrates the advantage of the operating model
of Southwest Airlines, who pioneered the low-cost model in the US. Out of the
total cost differential from an average network carrier, 70% is due to its
operating model. However, only a small fraction of difference is caused by the no-
frills factor, while the greater part of the influence comes from the complex
business processes and distribution costs.
But here lies the catch! Any production model in an airline strategy has specific
assets, costs and process logic, and thus cost structures. However, all production
models have two things in common:
- They are capital-intensive
- Their fixed costs are high
Thus, it can be seen that the operating models of airlines are very rigid and re-
defining it totally is not at all a cost-effective solution. Airlines should accept the
fact that however troubled the water is, still there will be enough room for both
full time and low-cost carriers to co-exist. Their survival strategies should focus to
re-position themselves in the variable costs segments that are independent of the
operating model. The three pillars for operational restructuring are boosting
revenues, cutting costs and restructuring the balance sheet that makes profits up
by 10-18%.
Options IT System
The modern IT systems are just the ideal tools to optimize the airlines processes
and restructure their existing operating models economically. IT systems can help
in boosting revenues as well as cutting costs and thus enable the airlines to stay
ahead in the competition.
The IT Systems for Airline Restructuring – A Brief Overview
Revenue Accounting Systems are required totally the billing discrepancies of
the CRS and to keep a track on the exact number of passengers flown by
connecting airlines for network carriers. Billing Information Data Tapes (BIDT),
available from all GDS, provides airlines with extensive transactional data on all
their bookings made through the respective GDS. Revenue Accounting Systems
also deliver important information for the airline management and other strategic
departments like marketing, key account co-operations, network or sales
management.
Airlines like Lufthansa and United have implemented such systems and have
gained considerable amount of advantage from them.
Pricing Systems are thoroughly driven from extensive operations research
techniques that deal with pricing analytics, pricing execution, and pricing decision
optimization. These systems take into consideration the elasticity of demands and
try to provide pricing strategies dynamically to maximize profits for an airline.
They also provide decision support in critical situations. Leading pricing systems
along with revenue optimization techniques cause an overall revenue
enhancement of 6-8%.
Crew Scheduling Systems are essential for airline operations control as
managing crews is one of the most complex functions of an airline. Crew cost can
be controlled and it provides one of the greatest opportunities to boost revenues.
2.5.1 Pest, Porter’s Five Forces, and stakeholder Analysis
The airline industry has always been and continues to be the most fiercely
competitive business sector in all facets of its operations. Operating on paper thin
margins the drop in passenger traffic brought on by the events of September
11th, 2001 affected domestic United States airlines as well as all global carriers.
The events of that day have caused governmental intervention in the form of loan
guarantees, compensation for terrorist attack losses, as well as insurance related
to war risk (Shane, 2003). The majors refer to airlines earning revenues in excess
of $1 billion USD annually and generally they provide national as well as
international service. These airlines cater to the business class customer and
passengers who either expect or desire full in flight services such as meals and
related amenities The discount air carriers have changed the face of the airline
industry with their no frills, low-cost airfares and have put pressure on the majors
in terms of eroding their market share.
The preceding battle between discount carriers has further exacerbated the
majors thin operating margins and has resulted in Delta, Continental, Northwest,
United and US Airways (Beck, 2005) filing for protection under Chapter 11 of the
United States bankruptcy laws while they restructure and renegotiate union
contracts and creditor agreements.
PEST Analysis
The utilization of a PEST analysis with regard to Airlines takes into account the
political, economic, social and technological environment the industry is
embroiled in and how this has, is and will threaten to impact its operations and
profitability. The number of possibilities concerning macro-environmental aspects
is almost limitless, thus concentration will be paid to those areas perceived to
have the highest impact.
Political
The political stability of the United States and other Western countries was
severely shaken by the terrorist events of September 11, 2001, and this directly
resulted in a catastrophic drop in business as well as personal air travel (Ito et al,
2003). The preceding along with the following areas have impacted negatively on
earnings as well as profitability among the majors:
- Pricing regulations
- Wage legislation and union requirements
- Deregulation policies of 1978 - Increased emphasis on national and airport security
Economic
The overall economic climate prior to the events of September 11, 2001 called for
a mild recession and the airline industry was wrestling with discount carriers. The
pre 9-11 airline climate forecast a slight contraction as a result of the
reversionary climate which was dramatically impacted by the events of 9-11 and
the resulting economic aftermath (Ito et al, 2003):
- Dramatic slowdown of the economic growth rate
- Increase in fuel costs
- Balance of trade accounts - Inflationary and fluctuations of the dollars against the Euro, and Yen
Social
The emphasis on September 11th throughout these varied analysis is due to the
sweeping impact that event had on global events in all theatres. The social
implications thus shaped or amplified are as follows (Mayer, 2002):
- Increased layoffs impacting all income groups
- Sharp decrease in lower and middle class travel
- Decline in airline related vacations destinations
- Negative impact of air travel safety brought on by the events of 9-11
- Decrease in general airline related travel plans by consumers
- Low-fare travel stigma attitude shift to an acceptable alternative
Technological
The Internet’s impact on business and consumer purchasing habits heralded in a
new age of information exchange which changed the manner in which airline
tickets are sold.
- Airline SABRE system
- Decrease in airline travel agencies
- Introduction of Internet airline ticket reservations and ticketing
- Entry of Travelocity, Orbitz, Cheaptickets, Expedia and other best price
shopping services
- The availability of the Internet as a consumer and business fare and flight shopping tool
PEST Analysis table
• Increased Trade-union
Pressure
• Pilot Trade Union
• EU Expansion
• EU Abolishment of Duty-
free Sales
• Allegations of Misleading
Advertising
• “Climate Protection Charge”
• Fuel Price Increases
• Depreciation of US dollars
• EU Commission Rulings:
• Illegal Subsidies from
Airports
• Overbooked Passenger
Compensation
• Cancelled Flight
Compensation
• Reimbursement of Delayed
Passengers
Political - legal Economic
Sociocultural Technological
• Grey Market Increase
• Europe: Cars & High-speed
Trains
• Increasing travelling
lifestyles
• Increasing business
travelling
• Wireless Technology Expansion
• Internet sales/gambling
• Satellite television
• Increased internet competition
Porter’s Five Forces
Michael Porter’s ‘Five Forces” model provides a framework to view the airline
industry from the perspective of five forces that influence it:
Rivalry
American airline ranks as the world’s largest airline in terms of passengers
carried, however is rated number 11th in terms of overall airline quality
(Holderbach, 2004).
- Low-fare airlines garnered three of the top four spots in airline quality
ratings, 1. Jet Blue, 2. Alaska, 3. Southwest, 4. America West. All but Alaska
Airlines are low fare carriers. The remaining airlines are 5. US Airways, 6.
Northwest, 7. Continental, 8. AirTran, 9. United, 10. ATA, 11. American, 12.
Delta, 13. American Eagle and 14 Atlantic Southeast (Holderbach, 2004).
- Some of the more important facets within this category of the Five Forces model are:
slow market growth since 9-11
high fixed operating costs
low relative levels of product differentiation among the
majors
inroads of the low-fare carriers in the changing perception of
air travel
shake out of the industry since 9-11 in terms of
bankruptcies and failures
Threat of Substitutes
Within Porter’s model substitute services come into play when demand exceeds
supply, or vice versa. In the airline industry the excess supply has been attacked by low-fare carriers who have continually gained market share.
Buyer Power
The airline industry suffers from oversupply as well as fixed costs which served as
the foundation for low fare carriers who offer no frill flights in return for
discounted fares. This approach effectively pulled the casual traveller and spread
to frequent travellers and some classes of business travel for companies seeking
to cut costs. Buyer demand is re-shaping the airline industry as a result of these
options.
Supplier Power
In terms of this category, fuel is the single largest airline cost expenditure item
which affects all firms equally. Low Fare carriers by eliminating frills lower their
per flight operating costs which have and is attracting scores of travelers to their
fold.
Barriers to Entry / Threat of Entry
Traditionally, the high cost of entry in the airline industry reduced the threat of
entry by competitive companies. However the business model offered by low fare
carriers exploited the lower end segment of the market via price and provided a
foundation for the entry of Southwest, Jet Blue, America West and others (Ito et
al, 2003).
Stakeholders Analysis
By definition stakeholders are “…individuals or organizations who stand to gain or
lose from the…” (Nuseibeh et al, 2000) success as well as failure of an enterprise,
system or industry. A stakeholder analysis identifies the key stakeholders and
how their interests affect the industry as well as specified firms within said
industry in terms of their interests and how such impact viability as well as risk.
In terms of American Airlines as well as the industry, the key stakeholders in today’s terms are:
The varied unions that comprise the industry
Ticketing systems, which include those representing the airlines in code
sharing agreements as well as internet ticketing operations such as
Expedia, Orbitz and others.
Oil industry, as fuel suppliers
America’s business community Consumers
All of the preceding groups and institutions have an interest in seeing the
American Airlines succeed as competition is the driving force behind innovation, pricing controls, convenience and choice.
There are still many challenges ahead for the industry. Fuel costs continue to be
a huge cost component and barrier to profitability. Bankrupt carriers starved for
cash will continue to dilute fares, but will be able to use Chapter 11 provisions to
emerge fundamentally and structurally stronger. New low cost carriers (LCC)
continue to appear worldwide. In this economic evolution, cost structure is the
new battlefield in the airline industry. The design and implementation of a
continuous hub schedule model will enhance throughput in a capacity-constrained
network at no additional cost, achieving in the process the simultaneous goals of
reducing cost per unit of production and improving product quality. The business
models must change or move aside. Ultimately, the ability to maintain the lowest
cost while sustaining service and quality will determine the winners and losers.
The airlines must continue to evolve to create a strong, viable and profitable
industry. Consolidation is one mechanism that may allow the airline industry to
achieve its next phase. It creates capacity rationalization – for a short time. It
helps take out weak performing airlines. It resets the playing board. Also,
consolidation provides opportunities for innovation. Whether from new entrant
carriers that develop innovative ways of driving value to the consumer; or by
creating global airlines that transcend international borders, the airline industry
will evolve. If managed properly, it can create stronger airlines with magnificent network depth and breadth for serving customers.
2.6 Conclusion
The airline industry in Europe has undergone a total paradigm shift after the
entry of low-cost carriers pioneered by Ryanair and easyJet. They initially entered
the market to generate more passenger demand in those segments that were shy
of flying due to the airfares of the full service carriers. However, with their overall
success, they started to take a chunk off the market shares of the larger airlines.
The 9/11 impact, coupled with issues like fuel prices, poor economy and other
factors caused the detriment of some of the larger airlines like Sabena who could
not endure this challenge. Low-costs, with their economical operating model,
survived the troubled times pretty well and are all set to lead the recovery, Thus
this is the time for Fly Light to enter the market.
All these entice some full service air carriers to change their operating model to
the low-cost one. But this does not mean the end of the road for the historically
predominant airlines. Even though IATA, AEA, ATI and other leading
organizations predict a very steady growth for LCC’s in years to come, they do
not write off the major airlines but say that both these types of airlines would
mutually co-exist. Flag carriers like Lufthansa, British Airways, Alitalia, Iberia and
others are still responsible for a large segment of the aviation market shares
individually. Air France - KLM, after their merger has proved to be one of the
most successful airlines worldwide.
As mentioned earlier, it is not economical to change the operating model of an
airline struggling to survive; rather the strategies should be oriented towards
optimizing their existing models so that they become more cost-effective. And
with the power of the modern IT systems airlines can look to restructure
themselves in an optimized way and stay ahead in the struggle for survival. Fly
Light therefore complements the LH Group Businesses.
The airline industry exists in an intensely competitive market. In recent years,
there has been an industry-wide shakedown, which will have far-reaching effects
on the industry's trend towards expanding domestic and international services. In
the past, the airline industry was at least partly government owned. This is still
true in many countries, but in the U.S. all major airlines have come to be
privately held.
Airport capacity, route structures, technology and costs to lease or buy the
physical aircraft are significant in the airline industry. Other large issues are:
Weather - Weather is variable and unpredictable. Extreme heat, cold, fog and
snow can shut down airports and cancel flights, which costs airline money.
Fuel Cost - According to the Air Transportation Association (ATA), fuel is an
airline's second largest expense. Fuel makes up a significant portion of an airline's
total costs, although efficiency among different carriers can vary widely. Short
haul airlines typically get lower fuel efficiency because take-offs and landings
consume high amounts of jet fuel.
Labor - According to the ATA, labor is the an airline's No.1 cost; airlines must
pay pilots, flight attendants, baggage handlers, dispatchers, customer service and
others.
Industry Implications: Winners and Losers
The addition of smaller aircraft to low cost carrier fleets will have significant
impacts on the aviation industry. They will enable LCCs to continue aggressive
expansion to additional markets. Legacy carriers will face additional competitive
pressures in smaller markets they may have previously considered to be “safe”.
Airports of all sizes will enjoy additional LCC service, both in terms of new
markets and additional frequencies. However, legacy carrier hubs may be
negatively affected as LCC non-stops divert connecting traffic from network
feeder markets. In addition, congested airports and air traffic regions will face
even greater capacity pressures as new regional jets are deployed.
3.0 Strategic Management Plan
3.1 Introduction Fly Light Airline plans to establish itself as a niche player in the low cost market of
air travel. By continuously focusing on the needs of the fast paced traveller, Fly
light will provide the best value proposition in the markets it serves. It will offer
customers a compelling value proposition: a fast level of service where “Free" in-
flight catering and other "complimentary" services will be eliminated, and
replaced by optional paid-for in-flight food and drink.
The Key Success Factors
Fly Light believes that the following factors will be key to the company's success:
Management and Culture
Fly Light has hired experienced airline professionals in order to ensure the
operations are well managed. Blending experienced airline professionals with a
young creative management team will be a successful combination which will
continuously look for innovation while maintaining a high level of professionalism.
Getting the right combination will be key in executing this venture successfully.
The company will also focus on building a strong corporate culture that will help
to differentiate itself from the competition and sustain a high level of motivation while maintaining cost control.
Superior Product and Service
Boarding and disembarking will be much faster given the low number of luggage.
Fly Light will reduce the overall travelling time for passengers flying to and from
the operating airports. Providing a fast flight and light experience is key in
retaining customers and getting repeat business. A strong emphasis will be
placed on this aspect of the business: particular attention will be paid to the
design of the cabin, the technology available, efficiency of processes, and quality
of service offered by the cabin crew. Fly Light will continuously innovate and have
the ability to introduce new products to market in a shorter timeframe than its
competitors.
Strong Sales team
Fly Light will market its services to companies directly. Its ability to acquire
corporate clients will be extremely important to the success of the venture. Fly
Light will offer discounts for volume travel and will also partner with select hotels in order to offer all-in packages.
Low Cost Operation
As a new airline, Fly Light will have a significant cost advantage over the existing
airlines that have large overhead expenses. By focusing on a single type of
aircraft, a single class of travel, and initially a single route, systems will be simple
and costs will be kept to a minimum. Fly Light will continuously focus on maintaining a low cost base in order to keep this advantage.
Low Break-Even Point
By operating the B737, Fly Light will have lower operating costs and a low break-
even point (40 passengers/50 percent load factor) significantly reducing the risks
associated with traditional airlines. With such a low break-even point, Fly Light
will be able to make it through economic downturns with less pain than its
competitors. It will also enable Fly Light to consider medium and low density
routes on a long-haul basis offering more point to point services.
The Internet
Maximizing the potential of the Internet will be key in keeping low distribution
and administrative costs. Fly Light will have a strong Internet presence and will use the Internet for customer interaction as well as internal functions.
3.2 Strategy
Operating Strategy: One type of aircraft, one class of service
Fly Light will operate a single type of aircraft: The Boeing 737. By operating this
aircraft type on the transatlantic route, Fly Light will have significantly lower
operating costs per trip. The trip cost for the B737 will be approximately £25,000
one way as opposed to £75,000 for a B747 operated by existing carriers. This
demonstrates the lower risk associated with this operation. It will also enable the
company to offer direct services where others offer indirect services. Moreover, it
will be able to offer greater frequency than competitors operating larger aircraft.
Focusing on a single aircraft type enables the company to minimize the costs of
training and maintenance. Fly Light will offer only one class of travel which
facilitates processes (marketing, purchasing, training, systems, etc.). In order to
provide a high quality service to its customers, Fly Light will implement
productivity and profit-based incentives for personnel.
3.2.1 Pricing Strategy
This pricing structure will be very attractive for the small and medium enterprises
(SME) who do not have access to large volume corporate discounts with the
major carriers.
Simple and Transparent Fare Structure
Fly Light will not need sophisticated yield management systems to determine the
price of each ticket. However, Fly Light will hire an experienced yield analyst in order to maximize revenues.
Fly Light will use a simple yield management system to determine the best price
for each single seat in the aircraft. Fly Light will have a simple fare structure with
three different fares. Fly Light will monitor the purchasing patterns and will be able to restrict the amount of discounted fares on certain flights.
Fare
Type Restrictions
One way
Fare Round-trip Fare
Flexible
This fare is designed for business travellers who make travel plans at
the last minute and who often have to change their travelling plans. It
is fully changeable and refundable without any fees nor restrictions.
This fare is 50 percent cheaper than current published business class
fares.
Advance
This fare is designed for the business traveller who has fixed
engagements and is price conscious. This ticket is equivalent to a
premium economy fare on Virgin.
One
month
This fare will be used to stimulate leisure travellers to travel on
Saturdays or to book one month in advance. It will be very difficult for
business travellers to get access to these fares because of their
booking and flying patterns.
Flexible Changeable and Refundable
No Fee £900 £1,800
Advance
2 weeks advance booking
Nonrefundable
Changeable with Fee
£700 £1,400
One
month
advance
For travel booked 1 month in
advance
Nonrefundable
Nonchangeable
£500 £1,000
In order to attract large corporations, Fly Light will offer one way fully flexible
tickets between £1,400 and £1,700 depending on the volumes involved. While
large corporations already get deals at around £1,000 one way, small and
medium enterprises (SME) have no means to achieve any significant discount
from the full fare business class (£3,580 rtn) Fly Light will offer very attractive
alternatives for the SME market.
Fly Light will use special promotions in the first months of operations in order to
attract as many customers as possible and get them to experience the service.
The initial objective is to focus on load factors rather than yields in order to penetrate the market and stimulate product trial.
3.2.2 Sales, Marketing, and Distribution Strategy
Marketing and Sales Strategy
In order to be successful in the market of business travel, Fly Light needs to
convince two decision makers: 1.) the travel manager or person who makes the
travel policy for a company and 2.) the traveller himself. The travel manager and
the traveller make decisions based on different criteria and it is important to satisfy both decision makers in order to ensure success.
The travel manager is mainly driven by price and his objective is to negotiate the
best deal for his company. On the other hand, the traveller is driven by frequent
flyer programs, comfort, convenience, and lifestyle. Fly Light will have a sales
team that will focus on travel managers of large and small companies and will
have a conceptual and lifestyle driven communication strategy that will appeal to
the traveller.
Sales and Distribution
Large Volume Companies (1000+ sectors per annum)
Fly Light will target the large financial institutions and other companies with a
major presence Europe. In the city of London and in Canary Wharf there is great
concentration of London-New York premium class traffic. The Top 20 London-New
York spending companies account for close to 100,000 premium sectors per
annum (sectors: one-way ticket). These companies are able to negotiate
discounts of up to 50 percent off published fares and are often tied in to global
deals with the major airlines. While Fly Light can still offer more attractive deals
to these large corporates, it does not anticipate obtaining primary carrier status.
Fly Light will most certainly get secondary or tertiary status therefore capturing
up to 20 percent of these companies' volumes. It will sign commercial agreements with these companies.
Medium Volume Companies (50-1000 sectors)
Fly Light has already identified over 200 companies in this category. These
companies are the most attractive for Fly Light because they have a weaker
purchasing power than the large volume companies and therefore do not get discounts in excess of 30 percent off published fares.
Small and Medium Enterprises (up to 50 sectors)
Fly Light will also target the small and medium enterprises (SMEs) market. The
Stansted catchment area of London, North London, Essex, Cambridgeshire,
Hertfordshire, Essex, East Anglia, and the Southern Midlands has a proliferation
of SMEs. Fly Light will offer a compelling value proposition to these SMEs based
on corporate discounts from an already competitive pricing structure. British
Airways and other major transatlantic airlines do not offer corporate discounts in
the SME market.
Fly Light will hire a strong sales team that will target companies directly. Fly Light
will also team up with a major credit card company and large business travel
agencies that will give Fly Light access to a large number of SMEs. Fly Light
believes that getting companies enrolled will be a critical success factor and will
ensure that its value proposition is well communicated to the businesses likely to use the service.
Electronic Ticketing
Fly Light will offer customers quicker, easier, more convenient ways to arrange
travel through the use of e-ticketing or "ticketless travel." An e-ticket entitles a
passenger to all the same conditions of a conventional paper ticket, however
instead of being printed, the e-ticket is stored in the Fly Light e-ticket database.
The customer simply receives a paper itinerary/receipt for Customs and Immigration.
Distribution and Revenue Management
Fly Light will use an integrated ticketless software (Open Skies by HP) which
offers an online booking engine as an alternative to traditional airline distribution
through Computer Reservation System (CRS). Open Skies also offers streamlined
revenue accounting, airport functionality, and a customer database function. The
Open Skies system is currently used by Go, Easyjet, JetBlue, Buzz, CityBird, and many others.
Travel Agency
Fly Light will form relationships with the key European business travel agents
giving them an opportunity to increase their commission by taking some of the
risk. Travel agents will be able to buy in bulk in advance and get higher commissions than if they simply book tickets on an ad hoc basis.
Travel agents' commissions in the U.K. have declined from 9 percent to 7 percent
in recent years and are set to reduce further in 2009. Fly Light will offer attractive
returns for agency partners—well above U.K. industry standards.
Call Centres
Fly Light will operate an efficient, customer oriented call centre open 24 hours a
day in order to serve individuals, corporate clients, or travel agents. Fully trained staff will also be able to handle website enquiries.
Direct Sales through the Internet
Harnessing the power of the Internet will be key to the success of Fly Light. It is
the most cost effective distribution method and Fly Light will heavily promote its
website to attract direct passengers. A user friendly website will be set up to sell
tickets, select seats, choose meals, check punctuality, etc. In addition, the
website will enable passengers to choose connecting flights with European low
cost airlines (Ryanair, Go Fly, Virgin Express, Easyjet, Buzz) and also with U.S.
low cost airlines. This will enable Fly Light to expand its target market by capturing connecting passengers as well as point-to-point passengers.
An extranet corporate booking tool will be developed for use by corporate clients.
Fly Light will form strategic partnerships with leading travel, luxury goods, and financial websites targeting similar audiences with hyperlinks between websites.
Advertising and Communication
Fly Light‘s customer base is well defined which will enable Fly Light to focus its
advertising efforts to specific locations and specific newspapers and magazines.
3.2.3 Growth Strategy
Fly Light will initially target the high volume routes in which it will only be a small
player and not be perceived a real threat to the larger airlines. However, the
medium term objective is not to increase capacity on the large routes but rather
to focus on medium to low density routes where competitors flying wide-body
equipment will not be able to operate profitably. London to Bradley Airport (Hartford, Connecticut) is a perfect example of such a route.
Phase I: Market Penetration in high density routes
Fly Light will initially target the densest transatlantic market. By targeting very
dense markets, Fly Light will only need a small portion of the overall market in
order to be profitable.
Phase II: Extend service to medium/low density long haul routes
We see much larger potential in medium to low density long haul routes where
the traditional airlines are not present today. These destinations include Stewart
Airport or Whiteplains Airport which are located in New York state but within easy
reach of Greenwich and Stamford (Connecticut) which are key business centres.
Passengers will be able to bypass the large hubs for long haul flights in the same way the regional jet is able to bypass hubs on short haul flights.
Other Opportunities
Fly light will take advantage of opportunities in the high-end segment of the
leisure market where we are seeing strong growth. Such opportunities could fit in
nicely with the business travel which tends to be low at weekends and during the
summer season.
Fly light will also consider ad hoc charters and corporate charters on a case by case basis.
3.2.4 Operations
Air Operator's Certificate and Operating License
In order to conduct commercial flights, Fly Light will need an Air Operator's
Certificate (AOC) and an Operating Licence which are granted by the U.K. Civil
Aviation Authority. In order to get an AOC and an Operating Licence, the
company has to comply with safety, financial, and other requirements laid down
by the CAA/JAA. The application process can take over 12 months to complete. In
order to avoid relying on this process to start operations, Fly Light will use the
AOC and operating license of LH in the first year of operations. By using an
existing airline, Fly Light significantly reduces the risk of delays in the start-up
phase. Fly Light will in effect outsource the operations to this existing airline for
the first 12 months which will enable Fly Light to focus on the commercial aspects
of the business. From the passenger's perspective, LH will be invisible. The crew
will have Fly Light uniforms and the aircraft will have Fly Light livery. LH has
tremendous experience with B737 ETOPS (Extended Twin Operations) operations and is viewed by many as the best quality charter airline in Europe.
Slots and Airports
Through LH, Fly Light has obtained landing and takeoff slots at all airports in
which LH operates.
In order to maintain a high level of customer service, Fly Light will either employ
its own staff or ensure the ground handling agent has dedicated staff for all
aspects of airport handling involving contact with customers. For other aspects of
ground handling, Fly Light will initially outsource its needs until critical mass has been established. Fly Light will lease space in each airport for lounges and offices.
Maintenance and Training
Heavy maintenance and training will be outsourced, initially to LH.
Management
The management of LH group is highly experienced. There is no one on the
management team who has not already performed his or her function for another
airline. We are not in the business of training key people. We intend to hit the ground running with a highly qualified and experienced management team.
During the start-up phase, the operations side of the business will be outsourced to LH reducing management needs and ensuring a timely launch.
Our aim is to achieve a good balance between senior airline professionals and creative young managers.
Convenience
Fly Light will focus on offering a high quality service from the time of booking
right to the time at which the passenger arrives at hotel/home in the destination
city. Passengers will have the choice of booking a seat through the Internet, a call centre, or a travel agency.
e-tickets: Tickets will be 100 percent electronic and the passenger will only need
their passport and confirmation number in order to access the aircraft. They will
be able to print a copy of their itinerary from the website or will get confirmation
numbers from the call centre.
Frequent Flyer Program
Major airlines have been successful at retaining customers by giving them
frequent flyer miles each time they travel. As customers get more miles, they
gain privileges which include access to airport lounges, upgrades, free flights, and
other benefits. In addition, major airlines, through global partnerships are able to offer these programs on many different airlines.
Fly Light will introduce a frequent flyer program of its own which will be very
simple and easy to understand. Most airlines have very complicated programs
which often make it difficult for customers to redeem their miles. Fly Light will
offer frequent flyer Internet cash/points that customers will be able to spend on
specific websites. Fly Light will partner with selected ecommerce sites in order to
provide this service. Fly Light believes that its value proposition combined with
good service and a simple and innovative frequent flyer program will be sufficient
to retain customers.
3.2.5 Organizational Structure
The company will be organized into the following major operational areas as
derived from the LH Group and Fly Light will rely on the member(s) of the LH
Group for decision making and financial investing when needed:
Business Development and Strategy
The organization is responsible for the company's Corporate Development
function, which includes responsibility for directing M&A activities within the
company, including acquisitions, divestitures, mergers, equity investments and
joint ventures
Communications
Communications plans and executes the strategic deployment of Fly Light
messages with its stakeholders -- employees, shareholders, governments,
partners, customers and communities -- on a global basis. It strives to be the
first source of credible, timely news and information for employees about the
company, its business plans, and the important work employees are doing to ensure a healthy, competitive future.
Engineering, Operations & Technology
EO&T is responsible for defining and implementing corporate strategies for
attaining and maintaining functional and technical excellence, including enhancing
the yield of Fly Light's technology investments across the enterprise. The
organization comprises the Engineering, Operations, Supplier Management and
Quality Assurance functions as well as the Information Technology, Phantom
Works, Intellectual Property Management, and Environment, Health and Safety
operating units.
Finance
The Finance organization is responsible for developing and maintaining the
financial management systems and processes the company uses to conduct
business. Led by the Chief Financial Officer, the organization is composed of the
Office of the Controller, Contracts and Pricing, Financial Planning and Analysis,
Investor Relations, Treasury Operations, and the Tax and Corporate Audit
departments. Finance also oversees the Shared Services organization, which is
responsible for providing common infrastructure and services to Boeing businesses.
Human Resources and Administration
Labor relations, leadership development, executive protection and security
investigations, diversity, corporate contributions, global corporate citizenship, and executive flight operations are part of Human Resources and Administration.
Internal Governance
Internal Governance has responsibility for Internal Audit, Ethics, Import-Export
Compliance, Foreign Sales Consultants, and Sarbanes-Oxley governance requirements.
Law Department
The Law department is responsible for the delivery of all legal services for Boeing
throughout the world. In addition to the Corporate Offices group, the General
Counsel's office includes the legal staffs at each of Boeing's operating segments.
3.2.6 Values and Culture
We exist to provide a valuable service to our customers, a rewarding opportunity
for our employees, and profitability to our shareholders. We believe that success
in this endeavor depends on our employees. Satisfied employees lead to satisfied
customers, which lead to satisfied shareholders. To achieve this, we enable our
employees to act with an entrepreneurial spirit, and we value those willing to take
responsibility for their actions and the consequences of those actions. We treat
employees as family, which fosters intimacy, informality, strong relationships,
caring attitudes, and it makes work more fun. We give employees the opportunity
to become shareholders and to participate in the financial benefits of ownership.
People take better care of things they own. We treat employees with respect,
which encourages them to treat each other and every customer with respect. We
want our customers to experience legendary service that makes a lasting
impression. Providing exceptional value to customers requires hard work and
concentration. Hard work is most effective when processes are simple. Simplicity
reduces costs and speeds processes. We do not cut corners. We believe in doing
things right the first time. We take pride in our efforts as well as the rewards. Throughout this endeavor, safety will be the overriding force behind any decision.
Culture
At Fly Light we'll constantly re-examine our strengths and processes to build a
company as strong and vital as its heritage.
Our future success is based on a three-pronged strategy:
Run healthy core businesses
Leverage our strengths into new products and services
Open new frontiers
In order to put this strategy into action, we consider where we are today, and
where we would like to be tomorrow.
Fly Light's core competencies are:
Detailed customer knowledge and focus
We will seek to understand, anticipate and be responsive to our
customers' needs.
Lean enterprise
Our entire enterprise will be a lean operation, characterized by the
efficient use of assets, high inventory turns, excellent supplier management, short cycle times, high quality and low transaction costs.
Values
At Fly Light, we are committed to a set of core values that not only define who we
are as the LH group, but serve as guideposts to help us become the company
we'd like to be. We’ll truly live these values every day:
Leadership
We will be a world-class leader in every aspect of our business -- in developing
our team leadership skills at every level; in our management performance; in the way we design, build and support our products; and in our financial results.
Integrity
We will always take the high road by practicing the highest ethical standards and
by honoring our commitments. We will take personal responsibility for our actions and treat everyone fairly and with trust and respect.
Quality
We will strive for continuous quality improvement in all that we do, so that we will
rank among the world’s premier airlines in customer, employee and community satisfaction.
Customer satisfaction
Satisfied customers are essential to our success. We will achieve total customer
satisfaction by understanding what the customer wants and delivering it flawlessly.
People working together
We recognize that our strength and our competitive advantage is - and always
will be -people. We will continually learn, and share ideas and knowledge. We will
encourage cooperative efforts at every level and across all activities in our company.
A diverse and involved team
We value the skills, strengths and perspectives of our diverse team. We will foster
a participatory workplace that enables people to get involved in making decisions
about their work that advance our common business objectives.
Good corporate citizenship
We will provide a safe workplace and protect the environment. We will promote
the health and well-being of Boeing people and their families. We will work with
our communities by volunteering and financially supporting education and other worthy causes.
Enhancing shareholder value
Our business must produce a profit, and we must generate superior returns on
the assets entrusted to us by our shareholders. We will ensure our success by
satisfying our customers and increasing shareholder value.
Fly Light is a company of great people in one of the most exciting industries in
the world. We will position to be the best in the world. Together, working according to the principles we believe in, we will be the best in the world.
3.2.7 Financial Plan We want to finance our operations through cash flow from our flight routes. Important Assumptions
The financial plan depends on the number of revenue hours flown each month on our routes.
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