Successful airlines are able to identify, create, and monetize niches in their flight network (Exhibit 5). Every carrier’s network of flights has some privilege. When it comes to origin-and-destination (O&D) pairs, an airline enjoys privilege when it’s able to provide passengers with a unique itinerary that others don’t. Secret four: High-performing airlines create pockets of privilege in their flight network
Aisle seats, premium meals, reserving overhead space, and private-car transfers at the point of destination are just a few examples.
In economy class, for example, many high-performing airlines are actively innovating new ancillaries and selling them at the right moment in the customer’s journey. Thus, ancillaries are a way to delight passengers by offering additional or unexpected value, for instance, by auctioning off otherwise empty business class seats before a flight.Īirlines may offer price-sensitive passengers a low base fare to give them a great sense of value, and then entice them with a range of add-ons. They are less price sensitive for the add-ons they want compared with base fares. With more options, customers enjoy greater control of their travel experience. Margins for ancillaries are generally high and without them, many airlines would fail to return their cost of capital.īoth passengers and airlines benefit when airlines unbundle priority services and expand their range of ancillaries. Carriers whose passengers each spend at least $20 on ancillaries generate 8.2 percent ROIC on average, which is more than five percentage points higher than it is for airlines whose passengers spend less than $5 on ancillaries.īefore the pandemic, airlines generated around $110 billion in revenues from the sales of ancillary products, which is about $67 billion more than the industry’s absolute operating profits of around $43 billion. Our analysis reveals a mildly positive relationship between ancillary sales performance and ROIC. Secret three: High-performing airlines give customers choice through ancillariesĪncillaries are an undertapped channel of value for many airlines. While explicit capacity control with other industry players is forbidden by antitrust regulation in most markets, airlines should be able to model how their capacity additions would likely affect returns. Even airlines in rapidly expanding markets can improve returns by reassessing capacity addition. After all, whether a carrier is in a fast- or slow-growing market is beyond its control. Performance: Average operating margin 2017–19Ç, Structure: Share of seats of top 5 carriers in 2019 Before the pandemic, the Asian market became less consolidated, and stiff competition has badly bruised many of the airlines there. The Asian market, which is the lowest-performing region, is a case in point. As new planes are rapidly added in anticipation of demand growth, ticket prices fall. Fast-growing markets attract many new entrants.
Our analysis has shown that airlines based in slow-growing home markets outperform their peers in high-growth markets (Exhibit 3). Secret two: High-performing airlines know that conduct matters more than market structure The older fleet, with significantly lower ownership costs, flies when there’s sufficient demand at the right yields. The new, efficient modern fleet flies more than 12 hours, on average, every day. One low-cost carrier, for example, separates its aircraft internally into two subfleets. However, if an aircraft is properly serviced and maintained, there’s no correlation shown between its age and safety. As capital assets, airplanes are subject to depreciation. Airlines that do this may capture revenue peaks while lowering asset costs. If airport regulations permit, airlines could complement such flight activity with the potential deployment of depreciated aircraft, especially on popular routes. Ideally, new planes should be in the air for ten to 12 hours a day for narrow bodies and 14 to 15 hours a day for wide bodies. Regardless of aircraft type, airlines that buy newer, more expensive aircraft will have to manage the large weight on their balance sheets by maximizing utilization. Because a narrow-body aircraft is deployed on shorter flights, it can complete five or six flights per day compared with one or two trips for wide-body aircraft. A narrow-body Boeing 737-800 is three to four times cheaper than a wide-body aircraft such as the 777-300ER. A narrow-body aircraft generates a higher capital turnover than a wide-body plane because of cost and usage.
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