Airline Business Models Jagoda Egeland Strategy Policy Manager

Airline Business Models Jagoda Egeland Strategy & Policy Manager Airports Commission Briefing London, 17 March 2014 1

The global aviation sector: Two parallel trends • Consolidation, partnership & network integration (legacy carriers) • Budget travel, mostly offered by new entrants (low-cost carriers = LCCs) 2

Legacy carriers vs. low-cost carriers Legacy carriers Low-cost carriers Hub-and-spoke networks Point-2 -point connections on the thickest or previously unserved routes A range of different aircraft (from 737 to A 380) Small, efficient aircraft (737, A 320) Based at hub airports, often close to large agglomerations Based at primary or secondary airports Branding, extensive route network, loyalty programmes Affordability, availability at secondary airports Short-haul and long-haul Predominantly short-haul Business and leisure Predominantly leisure 3

Currently, the three major alliances hold over half of global seat capacity… 4

…but most growth over recent years has been due to LCC expansion Passengers at UK airports by ELFAA membership, 1990 -2012 Source: Df. T analysis based on CAA airport statistics 5

This picture is constantly changing The AC is looking into factors that are driving that change • Regulation • New aircraft technology • Behaviour of aviation users 6

Regulation: Further consolidation or further expansion of LCCs? • Will restrictions on foreign ownership of airlines be relaxed over time and hence strengthen the alliances? • A global EU-US Open Skies agreement will be a chance for low-cost carriers to expand? 7

New aircraft technology: A long-haul low -cost revolution? • Will Boeing 787 and Airbus A 350 facilitate low-cost dominance in the long-haul market or will they simply reconfirm the position of legacy carriers? Source: Norwegian Air Shuttle, n Magazine, March 2014. 8

Why LCCs may not want to fly long-haul? Low-cost carriers’ input-cost edge is larger for short-haul flights than for long-haul ones Source: Mc. Kinsey Quarterly, Budget carriers face difficult odds moving into the most profitable sector of the airline industry. 9

Will LCCs and legacy carriers reach into each other’s business models? • Business travel with LCCs • Asian consumer will dominate route networks in 2030 • Self-connecting • LCC model predominantly on short-haul and the thickest longhaul routes • Legacy carrier model serving the majority of long-haul connections 10

The AC is looking into potential scenarios for each short-listed scheme • What will the potential airport charges be? – How affordable is the proposal to airlines? – New entrants? • What kind of airline business models could different levels of charges attract? – Scenarios and their plausibility – What is the potential competitive impact on the UK airport system in each case? – What connectivity can potentially be delivered? 11

Airline Business Models Jagoda Egeland Strategy & Policy Manager Airports Commission Briefing London, 17 March 2014 12