Strategies for the Airline Industry

The airline industry is intensely competitive. The global economic downturn created a thriving market for low-cost, no-frills airlines, pressuring more up-market airlines into looking for new strategies for differentiating their service. This has led to the consolidation of four main business models for airlines.

Travelers are very sensitive to cost, particularly for short flights. No-frill airlines can offer very low prices by eliminating unnecessary luxuries, like in-flight meals or business-class seating. Given the high level of congestion at most hubs, low-cost airlines can also take the less expensive late-night and early-morning slots to further drive costs down.

Network airlines and mainline carriers follow a more traditional strategy, offering comfortable flights with a relatively high level of amenities. What customers value in an airline depends considerably on the length of the flight, and mainline carriers may be perceived as a better proposition for long-distance flights. Network airlines that decide to cut costs by reducing the quality of in-flight amenities and service risk becoming stuck in an undifferentiated middle ground. But at the same time, cost reductions can be achieved by means of improvements in processes and logistics. For example, in a hub and spoke system, services from smaller airports are fed into a central hub, increasing coverage and seat utilization while keeping costs down.

Regional airlines can compete by providing service in areas where there is not sufficient demand to attract service from major network or no-frills airlines. Those carriers tend to operate shorter sectors using low-capacity aircraft. They can either deliver passengers to the hubs of major airlines or fly in mainline markets during times and days where the demand does not warrant the use of the larger planes operated by mainline carriers.

Charter airlines tend to differentiate by using a vertical integration strategy. Their low-cost flights are integrated to a chain that includes travel agencies, hotels and ground transportation providers. While some can compete directly with low-cost carriers, most will use their vertical integration to generate demand in areas where seat-only service would not be competitive.