Some Legacy Airlines Success Formulas


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Some Legacy Airlines Success Formulas

By Philippe Louis

July 20, 2011 - The airline industry as a whole has made a cumulative loss during its 100-year history. It is considered as one of the riskiest industry in the economy. Despite that gloomy picture some airlines managed to post profits during most of their existence. 

What combinations of factors did they use to navigate industry storms and maintain these amazing longevities? State support is one of them but not everything. Plenty airlines with state supports have failed: Sabena, Swissair, Air Afrique and many more. 

Air France serves 20 destinations in France and operates worldwide scheduled passenger and cargo services to more than 150 destinations in 83 countries.

The airline's global hub is at Paris Charles de Gaulle Airport, with Paris Orly Airport, Lyon-Saint Exup?ry Airport, and Nice C?te d'Azur Airport serving as focus cities.  In 1990, the airline acquired the operations of French domestic carrier Air Inter and international rival UTA (Union des Transports A?riens). 

In 1990, the operations of government-owned Air France, semi-public Air Inter and wholly private UTA were merged into an enlarged Air France. Air France's acquisition of UTA and Air Inter was part of an early 1990s government plan to create a unified, national air carrier with the economies of scale and global reach to counter potential threats from the liberalization of the EU's internal air transport market. 

Explanations - Network: It enjoys a strong and balanced long haul network, a quasi-monopoly on France-Africa routes. It is more long hauls oriented. That enables it to lower unit cost. 

HUB: Air France has a strong concentration of traffic at a single mega Paris-Charles de Gaulle Airport, which creates maximum operating efficiency, far more than having multiple hubs. By this way the company benefit from preferential access to the main strategic position in the country. 

Paris is one of the 4 most influential cities in the world which is relevant in term of transit but also destination. Establishing hub in this metro area gives an important advantage to any carrier. Air France managed to limit access to this hub to competitors. The centralized nature of the country reduces the possibility for contenders to grow in importance outside Paris. 


State Support: The Company benefited from significant help from the state to create a national giant without serious opponents. The government is still a major shareholder. Air France?s French competitors (Corsair mostly which was the most credible one) have always complained of hidden actions of the government to prevent them grow in market shares. 

Class Services: The transporter offers a great class services that known from around the world for its quality. The use of Concorde contributed to enhance that reputation that last after the retirement of the aircraft.

The British Airways Group was shaped on September 1974 through nationalization. BA was formed from two large carriers, BOAC and BEA, and two much smaller regional airlines, Cambrian Airways Cardiff and Northeast Airlines Newcastle upon Tyne. All four companies were dissolved in 1974 to form British Airways. Thirteen years later, in 1987 the company was privatized. 

Explanations - State Support: The carrier was state-owned, which created a competition bias. After privatization, it naturally inherited from the state favorable policy and from a situation that liberalization will never reverse. Since UK is small in land area and also highly centralized nation like France, everything turns around London, it involved the impossibility to substitute London in the air transport system and thus to have a real competitor. 

HUB: BA also operates a single mega hub which is greatly effective for a Full Service Network Carrier (FSNC) that offers long and short haul flights. Owing to the prominence of London in the world?s business and financial system, BA directly takes advantage of that situation. 

Network: Its long haul network is far more developed than its short haul?s one, which enables it to lower seat cost. It has one the biggest Boeing 747 fleet in the world. BA?s presence in the USA is the largest than any non-US carrier. 

Class Services: British Airways enjoys a great class service image, very premium-oriented. The importance of London in the world?s economy requires a focus on class services and mostly premium. BA did also operate the Concorde which contribute to build its class service reputation. 

Emirates Airlines is a subsidiary of The Emirates Group, which is wholly-owned by the Government of Dubai. In 2008, Emirates moved all operations at Dubai International Airport to Terminal 3, a new terminal entirely dedicated to Emirates. The airline ranks amongst the top 10 carriers worldwide in terms of revenue, passenger-kilometers, and has become the largest airline in the Middle East in terms of revenue, fleet size, and passengers carried. In 2009 airline in the world in terms of passengers kilometers ca and 4th-largest in the world in terms of scheduled international passenger-kilometers flown.

Emirates Airlines has gradually taken the traffic from South Asia to North America, allowing passengers to bypass the traditional hubs of London Heathrow, Frankfurt, and Paris-Charles de Gaulle Airport; with a transit stop at Dubai International Airport instead. The established network carriers in Europe and Australia perceive Emirates' strategic decision to position itself as a global carrier and to make Dubai the new stop between Europe to Asia, and Asia to North America as a major threat. South Asia is also an important region for the Emirates network. Emirates also vies with British Airways, Cathay Pacific, Qantas, Singapore Airlines, Thai Airways International on the lucrative Kangaroo route: London-Sydney. 

Explanations - Services: Emirates Airlines has built up a strong brand name as an innovator in the air transport aviation industry, chiefly in terms of service excellence, with consistent profitability. In 2009, Emirates was voted the fifth best airline in the world by research consultancy firm Skytrax. The carrier was the first airline to introduce the completely private suite in first class. 

HUB: Dubai International Airport's Terminal 3 was built exclusively for the use of Emirates at a cost of $4.5 billion and opened in 2008. Terminal 3 is the largest building in the world by floor space. Some industry analysts believe the airline is second only to Ryanair for seat cost basis due to lower operating costs at its Dubai base. Since Dubai International Airport does not have any night flying restrictions, Emirates achieves a higher utilization of its aircraft than competitors. 

Fleet: Emirates is 1 among 9 airlines to operate an all wide-body aircraft fleet. This involves lower unit costs compared to other large airlines operating mixed narrow and wide body fleets and allows the airline to use the aircraft's cargo capacity to increase its revenues and total profits. The centerpiece of the airline's fleet is the Boeing 777-300. It will progressively share that role with the Airbus A380. It is actually sending to retirement the smallest elements of its fleet (Airbus A330-200 and Airbus A340-300) to focus on bigger aircrafts (Boeing 777-300, Airbus A380-800, and Airbus A350-1000) that will again drop unit cost. 

State Support: The transporter clearly benefits from state supports. Privileged airport access to build the service quality and the brand is one of them. Both the airport and the carrier belong to the state. Other indirect supports include the strikes ban that the airline benefits from since it hasn?t reached size maturity yet. Financial supports are not evidence but observers believe that the carrier has enough operating elements to justify its performance without subsidies. Its model is much closer to another successful Asian carrier: Singapore Airlines. 

Labor: The carrier has a flat organizational structure that allows it to maintain low overhead costs. It also has fewer legacy costs than longer established rivals, and it helps that all forms of strikes are banned in the United Arab Emirates. Moreover, the labor cost is lower. Owing to the portion of labor expenses in an average airline it?s considerably advantageous.  

Marketing: The airline is running a powerful international marketing campaign. Its brand is associated in many western and non-western sport tournaments: in soccer (the FIFA world cup), cricket, rugby, tennis, horse racing, etc. It also sponsors clubs: Arsenal, Hamburger SV, Paris Saint-Germain FC, etc. That play a part to build a reliable and robust global name as it?s building its fleet and network and in preparation to become the world?s largest carrier by 2025 for many observers. 

Lufthansa?s parent company (Deutsche Lufthansa AG) is the largest airline holding in Europe in terms of overall passengers carried and the largest in the world in sales. The airline itself is the world's fifth-largest airline in terms of overall passengers carried, operating services to 18 domestic destinations and 187 international destinations in 78 countries across Africa, Americas, Asia and Europe as of February 2010. It does not serve Oceania currently. 

Explanations - HUB: Lufthansa maintains 2 hubs: 1 giant hub at Frankfurt Airport and another one, less big than Frankfurt but still important in size at Munich F Joseph Strauss Airport. That situation is a little bit different than Air France and British Airways. 

Network: The airline takes advantage from the geographical position of Germany which is in the center of Europe and which is the closest to Asia among the Western European countries. Thus it outranks among the European Big three for number of European and Asian destinations and is the last in number of destinations to the Americas (which is the downside of the 2 primary advantages).

It also outranks Air France and British Airways for total destinations. That is explained by the size of the German economy. Like Air France and BA, Lufthansa is more international and intercontinental oriented than its US counterparts, but at a less extent than Singapore Airlines, Emirates and Cathay Pacific. This enables it to operate in high volume of output using a high percentage of wide body aircrafts. 

Singapore Airlines runs a hub at Singapore Changi Airport and has a large presence in the Southeast Asia, East Asia, South Asia, and Kangaroo Route. Its wholly-owned subsidiary, Silk Air, operates regional flights to secondary cities. To respond to the threats posed by the low-cost sector it invests a 49% stake in Tiger Airways. It ranks among the top 15 carriers worldwide in terms of revenue passenger-kilometers and 6th in the world for international passengers carried.

The carrier had encountered many protectionist attitudes in the past when it was shut out from the Toronto market after complaints from Air Canada, and was forced to stop flying Boeing 747-400s into Jakarta in the wake of protests from Garuda Indonesia when it could not use similar equipment to compete. Singapore Airlines has diversified into other sectors such as ground handling, aviation engineering, air catering, and tour operations. 

Explanations - HUB: Singapore Airlines operate the perfect single hub model. That gives to it full advantage in terms of operating coordination, flexibility, schedule planning, aircraft dispatching, maintenance, etc. It can better standardize its operations and apply policy of volume. Airline industry is an industry of capacity costs, and high fixed cost. Standardization and operation by high volume of output is the best way to avoid additional costs and to cover the fixed cost themselves. The nature of the country: city-state renders difficult to have a competitor. 

State Support: Since the state is an owner of the airline via its holding Temasek (54.39%) we can imagine that it benefits from many hidden advantage: airports access, etc. 

Network: Its geographic risk is greatly diversified due to its sole destination in domestic market. Owing to the relative geographic isolation of Singapore, the airline has to fly its aircraft longer to reach the nearest regional market. Also geographically Singapore is on the equator. To reach  the world?s economic centers (and also reach their markets) which are mostly in the north: Tokyo, Shanghai, Beijing, Seoul, New York, Chicago, London, Paris, Frankfurt, etc, it has to fly longer in average than British Airways, Air France, Japan Airlines, Air China or Delta Airlines have to fly to do the same.

That geographical inconvenience forces the transporter to maintain its fleet longer in the air, which every air carrier looks to do. This is good to lower fixed cost like aircrafts, ground personnel, airports charges. The airline charges the passengers for the additional hour flown, but it does not provoke additional costs for these categories of charges. 

What we can see on this table is that at least 34 % of the destinations are at least 11 hours of flight from Singapore (Africa, Europe, Americas). In Asia-Pacific, Middle-East countries, Japan and Oceania still require wide body aircrafts to be served. Moreover, Singapore Airlines managed to have the regional network covered by Silk Air, thus it can focus entirely on the long destinations. The network layout of Singapore Airlines is different from US legacies? ones. The explanation is geographic and it?s mostly advantageous to the Asian carrier. 

Fleet: Singapore Airlines operates a wide-body aircraft fleet from five aircraft families: Airbus A330, Airbus A340, Airbus A380, Boeing 747 and Boeing 777. This all wide body fleet enables it to preserve a low seat cost. Over years, it also follows its policy of maintaining a young fleet, which stands at an average of 6, 54 years as of July 1st 2010. The airline renews its fleet frequently to maintain this low age. 

Airlines Brand Independence: The group operates medium haul destinations under Silk Air, the 2 companies operations are independent and are not under constraint of each other. Moreover Silk Air hub is also at Singapore Changi Airport which makes things much easier. This strategy is opposite to North American and European majors ones which combine long haul, medium haul and short haul under a single operating structure. 

Class Services: The Company offers great class services. It is among the best in the world. The Singapore airlines business class seat is currently the world?s largest. The first class suite is also presently the more spacious. Its class services policy enables it to retain its customers at a higher rate and to attract and keep premium travelers who bring higher yield.

Conclusion - Despite being a perilous business with countless failures and bankruptcies, some airlines managed to create shocking streamline of profits. Repeated fuel rise, high fixed costs didn?t hold back these carriers (Singapore Airlines and Emirates above all).

Opportunistic and tailored strategies proved us that it is possible to do build great airlines with significant seat margins without being a flag carrier of an economic superpower which naturally attracts world?s traffic flows (Air France, British Airways, Lufthansa). Singapore, United Arab Emirates are not more economically powerful than Belgium and Switzerland or Italy of which flag carriers performed poorly during the last decade.

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