As with any business, the main thing to consider when looking at airline business and airline management are the most commonly used airline business models. The business model, in general, determines the way one intends to make money with the airline. There are various possibilities and the ones outlined below only show a generic and most common set of business models available.
There are really 5 main airline business models which are being used by the majority of airlines around the world. Of course, those airlines tend to add their own tweaks to each model in hope to get ahead of competition, but still – the framework remains within one of those 5. I have also added a sixth airline business model, which I called a hybrid model, as some airlines lean towards combining two or more of the available models to their benefit.
I’ll present the list of typical airline business models here, and later on I’ll try to explain a bit on how they work and where they see possibilities of obtaining the revenue they need to make money and continue profitable operations. So those are the five models (+ the hybrid):
- Legacy airlines (also known as Full Service Network Carriers)
- Low cost airlines (Low Cost Carriers)
- Charter Airlines (Holiday Carriers)
- Regional Airlines
- Cargo Airlines
- Hybrid Airline
A Legacy Airline is, at least in Europe, most often a former national airline which has been privatized to some extent over the years. Those airlines have generally a fairly large fleet, which is quite diversified as they are operating all sorts of routes, starting with long haul through medium range (short haul) and regional flights. Those airline business models have been around probably ever since airlines existed.
Legacy airlines have also the benefit of owning (at least a share) of relevant other aviation services such as handling companies at their hub airports, maintenance facilities, catering companies and the like. This may seem a benefit at first glance, but doesn’t always turned out to be one. I will write a bit more on why that is later.
Here are the main income drivers for legacy airlines:
- Good reputation, which provides for good business with corporate and governmental clients
- A broad set of connecting flights, allowing for long haul journeys from small airports on one ticket, with one airline
- Increased comfort through on board meals, baggage charges which are included in the main fare and airport lounges for business and first class passengers
- Very diversified fares, starting with almost low cost “last minute” or “first minute” tariffs and ending with really expensive business class and first class seats
- Convenient loyalty programs which offer reasonable rewards for travelling with a given airline (or, more frequently, with a given airline alliance)
- Reliable and slowly changing timetable, leaving passengers with a decent level of security with respect to flight connections they require
In general, legacy airlines and similar airline business models can be thought of as reliable, having good customer service, predictable and fairly decent on board service and on board entertainment and leaving some benefits in the form of loyalty programs for frequent flyers.
Low Cost Carriers
The idea of Low Cost Carriers started in the United States, but it’s certainly experiencing a rapid development in Europe at present. I can’t think of a single European who does not remember the advertisements of flights offered per 1 Euro before the legislation on advertising really kicked in on the LLCs. As the name suggests, Low Cost Carriers are huge on reducing costs to the bare minimum and making people believe (rightfully, in most cases) that they are being offered the lowest fare possible on a given route.
The low cost business models assume that price sells itself while, of course, being quite generous on advertising campaigns as the passenger needs to know that the given low fare is actually available on the market.
As all Low Cost Carriers need to comply with the airline regulations which apply to all airlines, regardless of airline business models used, they do not save money on things like maintenance (although they do to a certain extent in a legal way, which I will write about in a different post). Therefore, they need to save on other things. The savings are generally based on passengers not getting expected benefits from their ticket, but having to pay for them instead. This fact changes the way we perceive flight ravel quite dramatically, but again, this will become the subject of a different post.
Here’s what will generally not be included in a standard airfare and charged extra from passengers who actually need the service:
- In-flight meals. There will be none served “for free” (meaning included in the airfare). Rather, many meals and drinks, including alcohol, are available for purchase during flight at prices significantly exceeding typical market value.
- Reserved seating. Low cost airline business models generally assume what is called “free seating”, which means that the first passenger in gets the best seat. This means savings on the reservation and boarding system as well as additional income, because many Low Cost Carriers offer paid “priority boarding” which means that passengers who pay additional fees are allowed to board the aircraft before the other ones.
- No baggage (or very limited baggage) included in the airfare. This means that passenegers generally need to pay additional fees to have their luggage transported with them.
- Additional charges for things such as payment by credit card online. These things often seem obvious to airline passengers, but they are charged additional fees in low cost airline business models.
As you can see, as the result of the actions mentioned above, the overall cost of a transfer may not be too much different to that presented by legacy airlines. However, quite often this is still beneficial to most passengers as people are likely to resign of additional service for the purpose of a lower fare.
Most low cost airline business models also take advantage of other savings possibilities, which are not entirely associated with charging passengers for services, which for quite a long time have been considered as naturally included in the fare. Those savings come from:
- A very unified monotype fleet, which allows for saving coming from maintenance, employer costs associated with type diversification and major discounts from aircraft manufacturers on new aircraft (which can be sold used for a price similar to the price of purchase)
- Very extreme contracts with maintenance providers forcing them to pay penalties for many delayed or cancelled flights, regardless of what actually caused the technical issue
- No connecting flights. The low cost airline business models assume that the only connection that is being offered is point to point. Passengers wanting to take advantage of connecting flights must re-check-in at their transit airport. This saves much on reservation software and check-in fees as well as reduces costs associated with delays and passengers who missed their connecting flight.
- Special arrangements with regional or low cost airports, which gives the Low Cost Carriers a dramatic advantage in landing fees and other associated costs. This is possible due to the volume of passengers they are forwarding to and from those airports.
The low cost airline business models have caused a dramatic shift in the way air transport is being perceived today. They are a very important factor of local economics, assuming that by local we mean an area the size of the European Union.
Charter (Holiday) Airlines
Charter airline business models dwell on holiday excursions offered by several companies offering holiday trips all over the world. In most cases, they do not sell individual tickets. Rather, they sign appropriate contracts with travel agencies for the transport of a given number of passengers to a given location throughout a year. It becomes the travel agency’s responsibility to fill the aircraft with passengers.
In some cases, one aircraft may be chartered by more than one travel agency if the destination is rare enough to cause one tour operator not being able to fill the aircraft. However, also in that case, the charter airline is secured as the entire aircraft is being sold.
There are several advantages to such airline business models, such as:
- No direct sales, which makes making investments into marketing and reservation systems unnecessary.
- Secured cash-flow provided appropriate agreements with tour operators are signed before each fiscal year
- Low cost customer service issues, as the charter operators often use the techniques applied by low cost airline business models such as no included meals on board or payment for additional luggage.
The main problem of charter carriers is to obtain proper contracts with tour operators. Supply quite often exceeds demand in this market, although this varies from country to country and is highly dependent on the travel characteristics of the given nation.
Regional airline business models, as the name suggests, aim at transporting people from smaller, regional airports to larger hubs or between those airports and thereby improving the given countries overall social movability.
The regional airlines tens to find their income streams from:
- Tickets sold on minor routes with frequent travelers, especially in areas where alternative means of transport are difficult, costly, inconvenient or a mix of all of those attributes
- Agreements with large companies which need to provide their employees with a viable means of transport from home to work
- Government subsidies for local areas which need to be connected with the rest of the world despite of it being economically unviable
- Flying in a franchise for other carriers (mainly legacy airlines) and “feeding” passengers to their hubs for further travel, especially on long haul flights.
It also needs to be said that those airlines generally encounter slightly smaller operating costs due to the usage of smaller aircraft, cheaper regional airports and a significantly smaller number of passengers which translates into much lower booking and ticketing costs.
Cargo airline business models are pretty self-explanatory. Those are airlines which make their living out of transporting good for forwarders or big shipping companies. Those airlines generally operate at night and do not have any costs associated with the transport of people. However, they are highly dependent on proper contracts with forwarding and shipping companies, which generally require a very high level of service. This in turn means for the cargo airlines additional costs associated with ensuring absolutely perfect reliability.
There are about as many hybrid airline business models as one could possibly imagine. Those include legacy airlines transporting cargo to their destinations, offering their own low cost carriers or franchising out their regional routes to other airlines in order to achieve proper feeder traffic.
There are still many options for new and unexplored airline business models. Let me know of any ideas you might have or other models which you have experienced and which do not fit to any of the ones described above.