Chapter 5

Airline Strategy: From Network Management

to Business Models

Thomas Bieger and Andreas Wittmer

Abstract
• The only protectable strategic resources of an airline are the brand, the customer
basis and the position at a hub.
• The core of Airline operations is networks and therefore network management.
• Different strategies rely on a different extent of network effects.
• The use of network effects also differentiates business models.
• Different types of planes lead to different concepts of airlines.

5.1 Introduction

The airline sector has a reputation of not being very profitable. Over time some
years with profits followed years of losses due to a strong dependency of airlines on
economic development and impacts of technological progress. Since the airline
sector is a commodity market, where margins are very small, this is still the case.
Therefore, airline managers need to look for strategies, which allow them to
become more efficient mostly by applying economies of scale either through the
size of their own company or by cooperating with other airlines in alliances.
Networks allow to operate more efficient and to realize net effects in bigger entities.
They have an impact on the choice of airline business models which influence the
profit margin and the airplane concept of an airline.

T. Bieger
Institute for Public Services and Tourism, Center for Aviation Competence,
University of St. Gallen, St. Gallen, Switzerland
e-mail: [Link]@[Link]
A. Wittmer (*)
Center for Aviation Competence, University of St. Gallen, M€
orschwil, Switzerland
e-mail: [Link]@[Link]

A. Wittmer et al. (eds.), Aviation Systems, Springer Texts in Business and Economics, 77
DOI 10.1007/978-3-642-20080-9_5, # Springer-Verlag Berlin Heidelberg 2011
78 T. Bieger and A. Wittmer

Firstly, this chapter briefly highlights the developments in aviation strategy and
shows some airline strategy approaches. Secondly, it introduces the reader to net-
work management of airline operations by defining airline net-economies, the main
variables of airline network design and network management processes. Thirdly,
airline business models and the different concepts behind them are described.

5.2 Development in Aviation Strategy

Due to the strong regulation of the air transport industry, for a long time carriers
rarely had the need to be concerned with competitive strategy (Kangis and O’Reilly
2003). As barriers to entry and exit were high and competitors relatively weak, until
the late 1970s, the level of airline competition was relatively low or non-existent. It
was not until the US airline deregulation act in 1978, that new entrants entered the
market, challenged the status quo and gave rise to “competitive structures” in
aviation (Williams 1994). Immediately after deregulation, new airlines with signif-
icantly lower costs – largely driven by low cost non-union labour and the wide
availability of inexpensive second-hand aircrafts – entered the formerly regulated
high volume point-to-point markets of the established carriers (Chan 2000). How-
ever, the established airlines were largely able to capitalize on their size and
responded with a full range of innovative strategies. They set up frequent flyer
programs (FFP) and exploited computer reservation systems (CRS). The most
important strategic development was the adoption of the hub-and-spoke network
which allowed the airlines to dramatically reduce the number of flights required to
still being able to provide universal coverage throughout their networks. This in
turn reduced airline costs, which were passed on to the consumers in the form of
lower fares (Chan 2000).
20 years after the industry deregulation began in the USA, deregulation of airline
markets has been replicated around the world. The airline industry has become
increasingly global in its orientation and scope and much more competitive. As a
consequence, all players in the industry are increasingly searching for answers on
how to maintain their position in competition. Apart from the approaches
introduced before (FFP, CRS, and network management), other fields of strategic
orientation that have recently gained importance are the development of strategic
alliances and customer relationship management.
Since the air transportation industry still is not fully deregulated, strategic
management issues – including the range of strategic choices – are subject to a
number of limitations which prevent the industry from developing like other
industries. Mergers & Acquisitions (M&A), for example, remain a politically
sensitive matter. Contrary to other markets such as telecommunication, car
manufacturing or shipping, in which internationally organized enterprises develop,
cross-border or global mergers and acquisitions are still limited in the aviation
industry. Furthermore, the industry is often not able to act completely indepen-
dently from its respective governments. While on the one hand this leads to a
5 Airline Strategy: From Network Management to Business Models 79

certain protection of individual actors, on the other hand it may limit the indepen-
dence of the industry players and the range of strategic choices and ultimately harm
other airlines. For instance, agreements on the number and destinations of cross-
border flights can still be defined by governments in bilateral air agreements. Very
often governments take positions contrary to free market beliefs whenever these
are deemed to be against their national interests (O’Connor 2003), thus strongly
limiting competition.

5.3 Airline Strategy Approaches

Today, the airline industry is highly competitive and the various industry players
constantly strive to build up and to maintain a competitive advantage. Strategies can
be static or dynamic. Static strategies focus on protecting existing market positions
in which the brand and hub dominance play important roles. Dynamic strategies
focus on market development and move forward through learning and building up
of a knowledge database (e.g. about customers).
Porter (1996) states that airline “strategy involves a whole system of activities,
not a collection of parts. Its [the airlines’] competitive advantage comes from the
way its activities fit and reinforce one another.” While this quotation illustrates that
airline strategy cannot be reduced to single elements, but is rather a combination of
three fields with several factors, Kangis (2003) and Stoll (2004). They can be built
on the basis of market advantages, advantages in networks and advantages with
regard to resources (Fig. 5.1).

• Pricing
• Distribution channels

Market

Networks Resources

• Network structure • Customer loyalty (CRM)

• Partnerships and alliances • Brand image
• Hub dominance
• Service level

Fig. 5.1 Fields of strategic advantages

80 T. Bieger and A. Wittmer

5.3.1 Network

• Network structure: A network can be defined as a collection of nodes and edges

(Wojahn 2008). Airline networks generally consist of air traffic connections
(edges) from one airport to another (nodes). Major characteristics that specify air
traffic networks are parameters such as size, frequency and connectivity. Airline
network management has important links to service attributes such as punctual-
ity and geographical coverage. There are two basic strategies concerning the
outlay of a network in air transportation: a hub-and-spoke system (single-hub or
multi-hub) or a point-to-point network. Airlines that operate the former try to
offer a high connectivity and many different O&D (Origine&Destination) -
connections. Carriers thereby build on economies of scale, scope, and density
that are inherent to large networks. The hub-and-spoke strategy builds on the
concentration of air traffic through the hub. In general it is possible to pursue
both a multi-hub network strategy and a single-hub strategy. In any case, the
concentration of airlines on hub operations leads to a situation in which individ-
ual airports often are dominated by a single airline. As a consequence, these
airlines frequently control a high number of slots at individual airports. With
these valuable resources they are able to build up strong hub entrance barriers.
At many airports, big international flag carriers control most slots, and by not
selling the latter, these flag carriers are able to maintain control over the access to
the hub (Chan 2000). In contrast, point-to-point traffic relies on strong and stable
individual markets which allow for a filling up of the planes without feeding
traffic. These networks can be operated with a much lower degree of complexity.
The opening or closure of point-to-point traffic does not affect the overall
network structure.
• Partnerships & Alliances: Given the strong limitations to M&A activities in the
international airline industry, Stoll (2004) states that “the formation of alliances
fundamentally reflects the airline industry’s efforts to develop its global
network-based structure within the limits imposed by government regulations.”
In recent years, with the trend towards an increasing globalization of the airline
industry, the formation of airline alliances has gathered momentum as a means
to remain competitive and to gain access to a global market which is too large to
be dominated by any existing airline. Today, most major airlines are involved in
alliance. The three big alliances – Star Alliance, oneworld, and SkyTeam –
contain almost three-quarters of the worldwide scheduled air traffic (73.1% as of
December 2008). Besides the revenue-generating functions of alliances such as
code-sharing and selling seats on each other’s flights, many alliances include
service elements like mutual access to airport lounges, pooling of frequent flyer
programs and joint marketing and thus share costs (Chan 2000).
5 Airline Strategy: From Network Management to Business Models 81

5.3.2 Resources

• Brand image: Brands serve for the identification and positioning of usually
rather homogenous service products. By serving as an element of trust and
orientation they help to reduce the risk perceived by customers. In general it
takes several years or even decades to build up a positive brand image. Once a
brand is associated with positive attributes such as quality and reliability it may
represent an important asset for airlines which can be capitalized on for example
in form of price premiums.
• Service level: The service product of an airline consists of a wide range of
different service attributes. These comprise services on the ground (such as
lounge access) and in the air (such as in-flight amenities and meals). Even
though in general services are highly cost intensive, they allow for skimming a
price premium and for a differentiation from competition and by this creating
customer perceived barriers.
• Customer relationship management: Customer loyalty does not only lead to
more frequent purchases, but also has important side effects like word of mouth
and reduced price sensitivity. As the acquisition of new customers is rather
expensive (Bieger 2007), airlines put a strong focus on the retention of existing
customers. An important element of customer relationship management is the
operation of reward systems. Frequent flyer programs [FFP] in particular repre-
sent a mechanism that allows transforming monetary value into a new “cur-
rency” which – due to its reduced transparency but increased prestige – has a
higher perceived value for the customer than a pure financial reward. While this
non-monetary award leads to an increased customer value, the associated status
systems also allow differentiating customers and providing them with personally
identifiable services. By this, FFP can be used as effective market entry barriers
(Joppien 2006).
• Hub dominance: A hub must have a minimal size (minimal number of
frequencies) in order to be attractive and through this to be able to increase
passenger market shares. With the increasing frequency of flights, especially the
attraction of business passengers also increases. The dominant airline of an
airport offers the best connections and makes it attractive to other airlines to
use the hub if there is a good selection of connecting flights. If it becomes too big
and crowded, market shares decrease again. This is the case when hub domi-
nance and crowdedness of the airport lead to increasing waiting times at check-
in and security and longer distances between gates. In such cases passengers
often mind those airports as connecting airports.
82 T. Bieger and A. Wittmer

5.3.3 Market

• Pricing: Due to the perishability of the product, pricing in aviation has – apart
from its revenue generating and positioning function – an important task of
steering demand. As a consequence, pricing is considered an important strategic
component that represents one of the core functions of an airline. Generally, two
main concepts of pricing can be distinguished. On the one hand, prices
are constantly adapted (in the sense of short term finetuning) according to
the reservation curve reflecting current and projected ticket purchases. On the
other hand, prices are set according to service and booking categories. As for the
service category, today most airlines operate a three-class system. Airlines
commonly fence service classes by service product elements (such as lounge
access, ground service, seat quality and catering). Booking classes are fenced by
booking conditions (such as minimum time for pre-booking, refunds, minimum
stay). The general aim of pricing strategies is to target each single passenger’s
maximum readiness to pay. The fencing mechanisms introduced beforehand are
used to separate markets in a way that somebody who would be ready to pay
more cannot take advantage of a lower price category. Different pricing
strategies that may be applied in the aviation industry could be the matching
or penetration strategy (match or even offer prices below those offered by
competitors) with the goal of gaining or preserving market shares or a skimming
strategy (keeping prices higher than competitors) with the goal of skimming the
market of well-paying customers.
• Distribution channels: The choice and mix of distribution channels (both direct
and indirect) are important for airlines, and can be used as a market entry barrier
(Joppien 2006). Indirect offline sales (such as specialized corporate client
programs, travel agencies) and online sales represent major distribution
channels. On the one hand, separate sales channels can be used to target different
customer groups. For example, certain tariff categories are still heavily booked
merely through travel agencies. On the other hand, it may become necessary to
distribute discounts through special channels (for example through the coopera-
tion with retailers) to avoid a cannibalization of the main market.
Competitive advantages can be achieved as a result of a focus on resources by
following a combination of a static and dynamic approach. Protecting the brand
and the dominant position at hub airport are static approaches, whereas creating
customer loyalty by using tools such as loyalty programs focus on developing a
better position in the demand market.
Combining the different factors introduced before, it is suggested that there exist
three major business models and overall strategies which are pursued in the airline
industry (Kangis and O’Reilly 2003; Joppien 2006). While specific factors may
feature a stronger or weaker forming at individual airlines, can be proposed that a
firm is able to build competitive advantages by pursuing the general outlay of one of
the following three common strategies (Stoll 2004):
5 Airline Strategy: From Network Management to Business Models 83

• The quality leadership strategy

In general, airlines that pursue a quality leadership strategy, establish a sizeable
worldwide network, building upon a critical mass at a hub or a dominant position
in a particular geographical market. The key underlying strategy is to draw on
the hub-and-spoke economies, namely economies of scale, scope, and density
(Stoll 2004) (economies of scale, scope and density are explained in Sect. 4.1).
Farkas et al. (1997) believe that sophistication in network and hub manage-
ment is not easily replicable and therefore could prove to be a permanent
competitive advantage. It could be used as an effective barrier against small
and medium-sized airlines trying to challenge a major player´s established and
well-integrated network (Holloway 1998). This holds particularly true where the
network‘s power is reinforced by infrastructural entry barriers which are caused
by congestion, e.g. the non-availability of slots at key airports. Furthermore, an
airline that is able to dominate a big hub is generally in the position to demand a
“hub premium” with regard to both leisure and business traffic (Berry et al.
1996). A disadvantage of large hub-and-spoke networks is their complex and
expensive operation, requiring a huge surplus of material, space and labour.
Airlines that pursue a quality leadership strategy usually build on a strong
brand, with a special focus on attributes such as quality and service. Since
airlines that focus on service-quality are able to build up a strong brand image
(Chan 2000), a special focus of these carriers is laid on the offering of services,
both on the ground and in the air.
Airlines that differentiate themselves on the basis of the service level are able to
partially reduce the need to compete on costs and prices. For business passengers,
who are willing to pay more for certain amenities than leisure travellers, a
superior service level is of particular importance. Services that are offered
include in-flight services (e.g. catering, in-flight entertainment) and ground
services (e.g. lounges, premium check-in facilities). Another important part of
the service level is the successful operation of a full-size network. Through this, it
is aimed to offer high frequencies and to minimize travelling time.
Regarding customer relationship management, airlines that focus on a quality
leadership strategy must have a clear understanding of their customers‘ needs
and of the investments and capabilities necessary to meet those needs, e.g.
sophisticated frequent flyer programs (Stoll 2004). Customers will reward this
uniqueness with a higher willingness to pay and an increased loyalty. Moreover,
FFPs and substantial volume-based commissions that have to be paid to travel
agents may represent an effective barrier for competitors.
Airlines that pursue a quality leadership strategy generally follow a multi-
channel distribution strategy to reach various customer segments. In this con-
text, indirect offline sales play an important role. In addition, however, bookings
via online travel agencies and company homepages are also offered. Hub-and-
spoke networks allow for a more efficient marketing and customer relationship
management due to distribution advantages through agents and an increased
attractiveness of the airlines‘ FFPs (Stoll 2004).
84 T. Bieger and A. Wittmer

In general, carriers which operate in this segment are a member in one of the
major international airline alliances and/or have close connections and financial
stakes in other companies (e.g. Air France/KLM Group, Lufthansa Group).
• The cost leadership strategy
Airlines that pursue a cost-leadership strategy strive to outperform rivals by
producing their services at a high labour and capital productivity. In this context
“standardization” is often considered the main attribute for the success of this
strategy (Treacy and Wiersema 1995). Airlines that follow a cost-leadership
strategy are often called “low-cost” or “no-frills” carriers..
Concerning the network structure, a low cost basis is achieved by offering un-
complex point-to-point transportation services on high-volume routes. The
routes are served with quick turnaround times and are operated with few or
one type of aircraft. Airports which are served by low-cost carriers are often
dominated by one company, resulting in a high bargaining power for this carrier.
Concerning the brand, low-cost airlines pursue an image strategy which
underlies their core value proposition of offering a low-cost product. Marketing
expenditures are substantially lower than compared to those of full-service
carriers and commonly are cut to a basic level.
Low-cost airlines have significantly lower input costs due to reduced service
levels. By cutting off most frills, these carriers usually do not offer free meals,
in-flight entertainment and lounges. A single-class, high density seating config-
uration is employed. Service attributes that are directly connected to the core of
the actual transport service, i.e. punctuality, reliability and offered frequencies,
however, are kept at a high level to attract passengers.
For cost-saving reasons, low-cost airlines do not maintain a sophisticated
customer relationship management, which are linked to frequent flyer programs.
Customers of these airlines are considered to be less sensitive to service-based
characteristics (Stoll 2004).
The simplicity of the low-cost business model is reflected in its simple, one-
way-based pricing structure of fares, which only makes use of minimal fencing
restrictions (Doganis 2001). Low-cost airlines generally sell their inventory on a
on a first-come, first-served basis (Stoll 2004). In general, low-cost airlines are
not members of an airline alliance, but put a strong focus on market dominance
concerning specific routes or specific regions.
• The niche carrier strategy (“focus strategy”)
Apart from the other two generic strategies, a set of niche opportunities exists
from which niche carriers may take advantage (Berardino 1998). The niche or
focus strategy is directed towards serving the needs of a limited customer group
or market segment. Stoll (2004) defines niches in air transportation as either
service related, geographically defined, or to be confined for cost advantages. In
this context, airlines are supposed to be able to gain a competitive advantage by
better serving the needs of the chosen segment and by concentrating their efforts
and activities. However, since there are a number of different approaches to
operate in a niche and airlines may focus one distinctive approach, the individual
5 Airline Strategy: From Network Management to Business Models 85

carrier´s niche strategy may not be suitable for generalizations and thus might
hardly be representative.
A typical service-related niche is focusing merely on the market of business
travellers (Shaw 2004). Corporate business travellers tend to have high product
expectations in terms of comfort and often are status-conscious. A focused
strategy might therefore strive to satisfy these needs on the basis of exclusivity
and timely implementation of processes.
Geographically defined niche carriers try to dominate a local market.
Examples are island-based airlines such as Air Seychelles or Air Mauritius.
The niche of low-yield long-haul services to holiday destinations could prove to
be sustainable as no network carrier is able to operate these routes in a profitable
way.
Regional carriers or regionally focused feeder carriers represent a further
geographically defined niche. These airlines are closely linked to major network
carriers as for example Air Dolomiti to the Lufthansa Group. These carriers
often operate on so called capacity provision agreements or by available seat
mile purchase agreements, under which the niche carrier is paid on a per-flight
basis to operate for the major carrier (Stoll 2004). The responsibility of market-
ing, revenue accounting, yield management functions is typically taken over
by the major carrier. Furthermore, on-board product and service-based
specifications are established in cooperation with and in line with the standards
of the partner.

5.4 Network Management

Networks and their operation define the structure of production as well as the
product of commercial airlines. Thus, network management can be considered as
the core function of each airline. In most modern airlines, network management is
performed by a department which directly reports to the CEO.
Since net economies imply clear and obvious key success factors for the opera-
tion of different types of airline networks, airlines need a clear strategy about:
• The role of net effects in their strategy
• Their comparative advantage (e.g. market, location, capacity and restrictions of
the home airport),
• The type of network they want to offer, and
• The way how they want do develop and transform their networks.
By considering these aspects, airlines are also defining their business models.
Thus, this chapter provides an introduction into airline net economics, followed by
a presentation of main variables of the development of an airline network. Lastly,
different types of airline networks and related business models will be introduced.
86 T. Bieger and A. Wittmer

5.4.1 Airline Net-Economies

A network can be defined as the sum of elements/objects (nodes) and their

connections (edge/leg) (Bieger 2010). Thus, net economics are based on net-
effects. The latter, in turn, can be defined as effects of consequences – economically
expressed as benefits or losses – which occur due to an element‘s link to or its
integration into a network. An airport which has one link to one hub, may experi-
ence traffic growth if the respective hub strengthens its position and is able to offer
more direct connections. In this case, the smaller airport is experiencing a benefit
which is not linked to any own activities. The only reason for its growth is its
integration into a growing network.
In general, net effects tend to get stronger with increasing network size. The
example of hub effects can exemplify this (Fig. 5.2). In the case of only one leg,
there is one connection between an origin and a destination (in the sense of a
product in form of a transport connection from an origin to a destination) which can
be offered. If two legs are linked to the hub, three OD’s can be offered. Ten OD’s
may already be offered if four links exist. The number of OD’s increases
progressively.
The possibility of offering a growing number of OD’s with each new leg can be
considered as increasing economies of scope. Economies of scope are economies in
form of more variety with decreasing costs. In addition, economies of scale occur if
through a bigger operation thus an increased specialization products can be pro-
duced cheaper. This is the case at big hubs, if large maintenance or catering
facilities can be operated. Economies of density occur, if services and activities
are concentrated and thus, a higher level of productivity and quality exists. Big hubs
for example can offer improved and optimized services such as lounges and
shopping facilities thanks to a concentration of people. Overall, increasing
economies in networks constantly lead to lower marginal costs.
So far, the supply has been investigated. Significant economies, however, also
occur on the demand side. Through concentration of frequencies of flights, more
efficient and effective services can be offered to the customers (economies of scale).
A bigger network allows for more connections. This in turn, allows passengers to
choose between a larger number of direct flights (economies of scope). Further
advantages of bigger hubs and airlines are e.g. that fellows and collaborators may

H H H

Leg 1 2 3 4
Od 1 3 6 10

Fig. 5.2 Net effects arise

through “hubbing” Network = Knot + Edge
5 Airline Strategy: From Network Management to Business Models 87

use similar airlines that mileage programs can be used more efficiently or that
meetings can be conducted at the airport or on the flight (economies of density).
Considering all effects on the customer or demand side, increased marginal
returns or benefits can be observed. Each additional passenger allows for even
more benefits. Mileage programs with status systems where customers may collect
additional miles and may use privileges can be regarded as examples of this
marginal utility. The respective passenger gains additional benefits with every
flight. Continuously decreasing marginal costs on the supply side combined with
increasing marginal returns on the demand side lead to natural monopolies. Due to
these powerful network effects, whenever two networks compete, the bigger net-
work will be able to operate at lower costs and provide more benefits to its
customers. In the long term, a smaller network not being able to draw on other
strategic success factors (e.g. a monopoly on serving a specific route or airport, a
technical advantage, the geographical location of its hub), will be pushed out of the
market, if it is not subsidized. As a result the big network will dominate all others
and will be left alone as a monopolist – in line with the saying “the winner takes it
all” (Figs. 5.3 and 5.4).
However, there are some natural restrictions to the growth of hubs and their
respective airlines (Fig. 5.5). The above mentioned economies of hubs are opposed
by conflicting hub diseconomies. For example, bigger hubs with more connections
typically are more sensitive to delays. Delays pile up throughout the day the entire
network, potentially leading to a reduction of perceived quality and compensation
costs. Furthermore, the operation of hubs always leads to hub load peaks. If poor
meteorological conditions or technical reasons, such as the closing of a runway,
lead to operational restrictions, the service quality decreases and delays may occur.
Moreover, the development of a hub requires high specific investments within the

Effects on the supply side Effects on the demand side

Marginal costs Marginal utility

• more variety/
more choice of times
•Larger production
and connections
entities
• Higher specialization Positive • Consumer effects/ -nets
Net effects • Community effects
Economies
• Standards/ Image
of Scale
Economies of Scope
size of the network and Density size of the network

Net impact:
constantly decreasing marginal costs / constantly increasing marginal utility

natural Monopoly

Fig. 5.3 Natural monopoly

88 T. Bieger and A. Wittmer

Supply Side: Demand Side:

• Production: Achievable Economies • Economies of density, such as

cause lower costs per unit attractive Lounges and other services
- use of larger planes
- Batch-Production-effects • Standardised operations
- Economies of Scale of central Hub facilities

• Marketing: Effects allow a better

market coverage
- higher number of marketable O&D‘s
- higher number of frequencies
- Diversification of the customers base

• Strategy: Dominance of the hub (above

the average market share, compared
to the service share) offers sustainable
competitive advantages

Fig. 5.4 Hub economies

Supply Side: Demand Side:

• Tendency towards Marginalcost- • Time of waiting, long distances

Pricing with transfer traffic in the
competition between hubs • Partly capacity overload

• Production of Hub-Load-Peaks

• High delay-sensivity

• Sunk costs when change of strategy

(because of high investment into the
Hub infrastructure)

Fig. 5.5 Hub diseconomies

whole network. As a consequence, tremendous sunk costs might occur, if environ-

mental conditions change and the structure of the hub systems has to be modified.
Since there is a tendency towards natural monopolies in all net industries,
companies constantly strive for further growth. As a result airlines try to attract
traffic through their hubs, at whatever costs it may take. Thus, competition with
other hubs, dominated by competing airlines, requires a constant strive for cheaper
prices than competitors.
5 Airline Strategy: From Network Management to Business Models 89

Due to this, transfer flights very often are cheaper than direct flights. For
example, a flight from Prague via Zurich to New York in tendency is cheaper
than a direct flight from Prague to New York. In a competitive situation between
hubs, for airlines– at least for a transitional period – it can pay off to lower their
prices down to marginal costs. This approach, however, may imply serious financial
risks in the long term.
Due to these net effects, special problems and questions occur not only on a
company’s level, but also for aviation policy and regulation. Typical questions are:
Should a smaller airline be subsidised or given special rights to assure competitive-
ness and to avoid a natural monopoly? How should the transformation process
towards a consolidation of the industry be governed? Marginal cost pricing puts
severe economic pressure on airlines, will this also affect their investments in safety
and security?
An important economic effect of hubs is the so-called S-Curve or “domination
effect.” The higher the share of an airline’s connection at a certain airport, the
progressively higher is its market share. This effect is closely related to an increase
in consumer benefits, for instance more connections to choose from and a better
ground infrastructure. As a result of this effect, there is hardly any airport in the
world which is home to more than one hub carrier (see Fig. 5.6).
Considering all these effects the optimal size of a hub is defined by:
• its natural home market: the bigger to home market, the higher the number of
sustainable flights, the higher the absolute number of transfer passengers that can
be serviced; an excessive share of low revenue transfer passengers reduces the
airlines yield,
• the cost of operations; lower operating costs allow for a higher share of low
paying transfer passengers,

Market share in % amount of the Passengers

100

90
BER
80 MUC BCN
70 MAN LYS
ATH
60 CDG
AMS IST
LHR HAM
50 CPH
FRA
40

30

20

10

Frequency share in %
10 20 30 40 50 60 70 80 90 100 (Amount of flights)
S-Curve

Fig. 5.6 S-Curve (Source: D€

oring 2006)
90 T. Bieger and A. Wittmer

• the runway capacities influenced by the runway infrastructure and organisation

as well as approach regulations, which defines the slot capacities and
• the organisation of the terminals and thus the minimal connecting time, which
defines the timeframe usable for transfers.
Network effects not only function in aviation networks, but also in railway or
telecommunication networks. However, a difference has to be made between
competition within or between networks. The aviation industry can be considered
as one network. Competition between airlines therefore is competition within the
net. In contrast, competition between the railway and the aviation networks is a
typical example for competition between networks. In the case of competition
between networks, the larger network usually has certain advantages due to its
network effects.

5.4.2 Main Variables of Airline Network Design

Due to the powerful hub economies introduced above, most airline networks are,
today, constructed around hubs. However, this has not always been the case. Many
airlines started their operation with single routes. In the 1920’s, for example,
Swissair offered transportation from Zurich to Basel continuing to Frankfurt, to
Cologne and to Amsterdam. Today, this type of “milk can flight” can still be found
in remote areas. For a long time Aerolinas Argentinas or Lan Chile offered this type
of service along their vast coastlines. After about one hour of flight time, the next
airport was reached, and passengers, mail and cargo were loaded and unloaded. A
special form of these “milk can flights” are triangle-flights. They can still be found
in charter operation; for instance flights to the Western Canadian Tourism Centers
Vancouver and Calgary are often linked by triangle-flights (Fig. 5.7).
The network operated by Low Cost carriers or traditional carriers, like Lufthansa
or SWISS, form their peripheral airports, such as Hamburg or Basel, is based on

Fig. 5.7 Forms of airline networks

5 Airline Strategy: From Network Management to Business Models 91

single routes from one centre. Carriers assign a number of airplanes to an airport,
which are used on a quite independent production bases. In these cases, rather than
“hubbing” by offering transfer connections, the airlines aim to internalise
economies of scale and to reduce complexity through independent production
bases. Basel airport, for example, is used by SWISS as a production centre. Three
to four Avro Jets are stationed on this airport to serve routes to London and other
places in Europe. At the same time EasyJet has stationed aircrafts at Basel airport to
provide an independent low-cost operation including connections to Barcelona and
other cities mainly in Southern Europe.
One hub strategies are pursued, for instance, by British Airways and Air France.
Both airlines have their main hubs in the capital of the respective home country. For
both countries this strategy makes sense because both, France and to a lesser extend
the UK, are dominated by one important political, cultural and economic centre, the
capital. This type of network structure requires large and efficient airports, such as
the biggest airport in Europe, Charles de Gaulle in Paris. Through one hub the
respective airlines theoretically are able to internalise a maximum of hub effects.
Hub operation concepts have already been developed further. New concepts are
multi-hub networks; for example the network consisting of three main hubs (Frank-
furt, Munich and Zurich) operated by the Lufthansa Swiss Group. An advantage of
that system is a good combination of the internalisation of hub economies and
reduced dependency and redundancy through a multitude of hubs. If, for example,
one hub has to be closed for metrological reasons, business passengers can be de-
routed to one of the other hubs. Also, passengers can plan their trips according to
the best travel times by combining flights through different hubs. This system is
very useful for more decentralised regions with a number of strong business and
political centres and the absence of a natural hub.
Another development is the so-called continuous “hubbing.” Several
North American hubs are operated in this way. On airports which have high
capacities thanks to an extensive runway system, like Chicago O’Hare which has
four parallel runways, continuous “hubbing” can be arranged. By serving all major
routes on an hourly – or at least two hourly – basis, long waiting times for transfers
and other elements linked to traditional “hubbing” can be avoided. Passengers just
arrive at a certain time at the airport, proceed to the gate where their connecting
flight is supposed to leave from, and wait for the next available flight. This
procedure reduces complexity and improves punctuality, and it also increases the
convenience for passengers.

[Link] The Location of a Hub

The location of hubs has to be selected based on market as well as technical criteria.
As mentioned above, profitable traffic with high yield results from point to point
traffic. Hubs located in strong economic areas can, therefore, offer a larger network
fueled solely by their domestic market. Transfer passengers, by contrast, seldom
cover the full costs of their flight. Accordingly, for profitability reasons, the share of
92 T. Bieger and A. Wittmer

transfer passengers that is acceptable for an airline is limited. Therefore, many

airlines define strategic goals for the share of transfer passengers; for instance
SWISS aims at achieving a share of no more than 40% at its Zurich hub. This
said, hubs can accept higher shares of transfer passengers if
• they are comparably inexpensive to operate. Reasons for this may be cheap
labour costs, subsidised fuel, or low airport fees. Airports and airlines in the
Middle East (such as Emirates Airlines flying out of Dubai) can consequently
accept a considerably higher share of transfer traffic than their North American
or European counterparts.
• the hub is centrally located in a continent or important business area, allowing
for relatively short and usually cheaper connecting flights.
Importantly, the efficient operation of a hub requires a runway and gate capacity
large enough to allow for the operation of “waves.” The more arrival or departure
flights an airport can handle in an hour, the more efficient are the connections that
can be offered in a wave.

[Link] Defining Connectivity

Connectivity is an important factor for hub-based airline networks. Generally,

connectivity can be defined as the number of connections (or hits) per inbound
flight. As a rule of thumb, an increased connectivity (and thus larger passenger
streams) results in a higher potential to feed outgoing flights. The backbone of
connectivity patterns are always long-haul connections. The long-haul planes
(usually wide-bodies) have to be fed by enough incoming connecting flights. As a
special form intercontinental “hubbing” can be very profitable, particularly on those
routes where long distances do not allow for direct flights, like, for instance,
between Europe and Oceania (Fig. 5.8).

Inbound Outbound

Hit

t
MCT = 40 min Hit-Window = 60 min Mishit

7 Hits
Connectivity-Index = = 7 (max!)
1 Inbound

Fig. 5.8 Connectivity – key figure of “hubbing” (Source: Jaeggi 2000)

5 Airline Strategy: From Network Management to Business Models 93

The “connectivity” is technically defined by the maximum transfer waiting time

acceptable for passengers (normally, the shortest connections are shown first in
the international booking systems; therefore, flights with short connecting times
are easier to sell) – the minimal connecting time (this is the technical time defined
by the airport infrastructure and services which allows a proper transfer of
passengers and baggage from one plane to the other) – and the runway capacities.
Today, the minimal connecting time is often around 30 min. At most big hubs it is
around 35 min; at smaller hubs, like Vienna, it can be as low as 20–25 min. The
maximum acceptable transfer time is believed to be around 2 h. If the runway
capacity is one plane per minute, there are consequently about 1.5 h left to be shared
between inbound and outbound flights. Theoretically, 45 incoming flights could
feed 45 outbound flights (Fig. 5.9).
Due to these patterns, the traffic of a typical hub is usually organised in a so-
called “wave structures.” A wave of incoming planes is followed by a wave of
outbound planes. The definition of the wave structure is crucial for the operation
of an airline. Also, potential intercontinental “hubbing” has to be bundled. The
example of the wave structure of SWISS at Zurich airport in Fig. 5.10 shows this
pattern. At 6 a.m. there is an incoming wave of intercontinental planes feeding the
outgoing 7 a.m. wave. In this wave, transfer passengers meet business passengers.
Wave structures in a multi-hub-system have to be coordinated. Ideally, a multi-
hub-system allows for a

Pacing Spoke
Spoke A
MTT
MCT = Minimum Connecting Time (Pax)
Spoke B MTT = Minimum Turnaround Time (A/C)
MTT SP SP = Surplus

Stage Length 1

MCT MCT

Hub Out In Out In Out In Time

Hub Repeat Cycle Hub Repeat Cycle Hub Repeat Cycle

Stage Length 2

MTT SP
Spoke C
MTT

Fig. 5.9 Configuration of the hub cycles/waves (Source: Jaeggi 2000)

94 T. Bieger and A. Wittmer

Hub Zurich –Network of long and short distance flights

40
amount of departures

30

20

10

0
amount of arrivals

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
10

20

30
Intercontinental flights
time of day
Europe flights

Fig. 5.10 Swiss wave structure (Source: Swiss, Reto Schmid, Public lectures CFAC 2010)

• redundancy, in the sense that if one hub is affected by bad weather or technical
problems (like some years ago the failure of the luggage system in London
Heathrow), at least the well-paying business passengers can be transferred to
other, still functioning hubs.
• better coverage of different market segments. One hub could be developed into a
more mass passenger type of hub where bigger airplanes operate and lower
ticket prices can be offered. Clearly, with this kind of operation all hubs should
provide all available class types and product categories to guarantee the net
effects.
• coordinated wave structure at the different hubs which provides more time
flexibility, as different departure times can be offered. On North Atlantic routes
where the usable time frame for passenger flights is quite long, one plane could
leave from the first hub, for example New York, at 9 a.m., from the second airport
at 11 a.m. and from a third one at 3 p.m. This would allow business travellers to
choose the departure time that best suits their needs. However, such a variety of
departure times cannot be offered for destinations at which the productive time
slot for intercontinental flights is relatively small, for instance flights from South
East Asia to Europe. On these routes, it makes only sense to leave late at night and
arrive early in the morning because of the time differences and the flying time.

5.4.3 Network Management Processes

Network management includes the analysis of markets, route planning, flight

management, slot management, capacity management, and demand management
5 Airline Strategy: From Network Management to Business Models 95

through sales/distribution and pricing. The goal is to plan, coordinate and manage a
network at the highest possible profitability.
Network management is a process which starts 2–3 years before a new flight is
introduced. At that time decisions about routes and markets are being determined.
Shortly before the actual flight mission, the plane is subject to capacity management
and seat load factor optimisation (for instance through tools like price rebates and
standby passengers). Each step of this integrated process consists of important
decisions. At the beginning, route planning decides about the destination mix and
the routes that will be operated. Next, fleet management has to decide about the
optimal aircraft assignment to each route. In the long run, fleet management also
has to decide about the type and number of aircraft to be purchased and operated.
Scheduling has to deal with issues like slot management. This includes, for exam-
ple, making necessary slots available by administrative application process or even
by buying them. Based on the scheduled timetable, capacity management optimises
sales and prices from the publication of the airline’s timetables until shortly before
the actual flight. The most important instruments of capacity management are:
• Yield management
• Fleet assignment (for example short-term change of aircraft size)
• Distribution and sales, e.g. special campaigns
Each airline assigns its own specific processes within network management,
since all the decisions that need to be taken are interdependent. For instance, a
decision about the reassignment of a smaller airplane on a specific route will have
consequences on the price structure of this route. The way in which these decisions
are taken and how the process of network management is operated is fundamental
for the overall success of an airline.

5.5 Airline Business Models

A business model in the aviation industry can be defined as a simplified plan on how
companies design and operate their networks. This plan may include different
dimensions (Amit and Zott 2001; Bieger 2002). In principal, two main types of
business models can be identified in the aviation industry: the traditional network
carrier model and the point-to-point model (Fig. 5.11).
Most structuring approaches for business models include dimensions like:
• the type of markets and production applied,
• the type of revenue and pricing systems applied, and
• the type of coordination of the value chain or network.
The business model of a network carrier usually aims at servicing customers
based on a large variety of different OD connections. Consequently, these carriers
intend to take advantage of as many network effects as possible. As pointed out
earlier, yield management and demand-oriented pricing are necessary to attract
96 T. Bieger and A. Wittmer

Fig. 5.11 Development of Market Share in %

market shares between the 100
different business models
(Source: Delfmann 2005) 90 Traditional
Major
80 Carriers
70

60

50
40

30
Low-Cost Regional
20 Carriers Carriers

10

0
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
transfer passengers. In competition with other network carriers, the brand image
and the services offered play a major role for the success of an airline. Strategic
alliances, cooperation, or even mergers are essential to keep up with the necessary
growth of the network in the competition with other airlines and airline systems.
The point-to-point traffic model targets individual markets with a limited num-
ber of OD products. Network effects do not play an important role. Companies
operating such a business model enter markets with an attractive – i.e. strong and
stable – traffic flow, such as routes from the UK to destinations on the Spanish coast
or between major cities. These companies have to be flexible enough to open up
new routes where new opportunities occur or to close routes in case stronger
competitors enter the market or network carriers with their brand and service
quality push them out of the market. The main competitive advantage lies in
the ability to reduce complexity, to save costs, and to develop new sources of
income (for instance additional fees for certain services).
In summary, typical airline business models include the traditional network carrier,
regional carriers, charter carriers, and point-to-point (low cost) carriers (Fig. 5.13).
• Traditional network carriers optimise network effects by designing optimal hub
and network structures. They try to offer integrated products at comparably high
quality in form of attractive OD’s throughout the world. As an instrument for
increasing the reach of their networks they make extensive use of alliance
strategies.
• Regional network carriers serve geographically limited networks within
alliances. They might operate regional hubs; but they mainly serve the
main hubs of the alliance. Examples for this type of airline are SAS or Austrian
Airlines. They only serve short to medium haul routes or operate their main
share of flights on this type of routes, therefore face strong competition from
5 Airline Strategy: From Network Management to Business Models 97

low-cost carriers and have to try to match their cost structures. Regional carriers
are somehow torn between getting integrated into large networks or developing
into a low-cost type of business model.
• Charter airlines: A special form of a point-to-point business model is the charter
model. Charter airlines fly point-to-point traffic, very often just with weekly
rotations to tourist destinations. According to old airline regulations, charter
airlines were traditionally not allowed to sell single seats. Seats had to be sold to
tour operators, which packaged them into integrated travel products. The com-
parative advantage of charter airlines lies in their cheaper cost structure resulting
from less complex operations and rather lower costs. Many charter airlines were
able to successfully establish a brand with a strong image in the holiday and
leisure market. For a certain time, beginning in the 1990ies until the end of the
first decade of the new millennium, the strategic success factor of charter airlines
was considered to be their integration into tour operators. Minimal transaction
costs and very flexible scheduling and capacity control allowed for a higher
usage and seat load factor of planes. However, with the transformation of the
tour operating sector, as a result of the increasing importance of direct booking
via internet, tour operators were forced to reduce their risks and capital exposure.
In addition, new software systems allowed for a better inventory and capacity
control. As a result, many tour operators were no longer interested in owning
their own charter airlines.
• Most of the so-called low-cost carriers operate point-to-point business models.
Their main strength is their lean cost structure which is the result of less complex
operations that enable short turnaround times and by this intensive aircraft
utilisation. The main savings of low-cost carriers compared to network carriers
are illustrated in Fig. 5.12: Nevertheless, these strategic success factors also limit

12
0.5
1.5
10

2.3
Euro cents per ASK

6 2.6
11.8

1.1
4

2 3.8

0
Top 3 Average Labour Aircraft and Infrastructure Product, Seat Density Ryanair
Fuel Distribution, Adjustment
Overhead

Fig. 5.12 Cost differences from legacy to low-cost carrier (here: Ryanair) (Source: IATA
Economic)
98 T. Bieger and A. Wittmer

Fig. 5.13 Airline business

models (Source: Bieger,
Wittmer, Lecture notes 2010)

the scope of operation for these companies. Short turnaround times only play a
role if a plane has to be turned around 5–8 times a day. Therefore, even today, on
routes from Continental Europe to the Canary Islands low-cost carriers still play
only a minor role. These routes require a flight time of approximately 4 hours
which only allows for one turnaround per day.
• Business aviation includes corporate aviation and air taxi services which repre-
sent a growing market. There are two models within the business aviation
market: the traditional business aviation with traditional business jets, which
can be operated on short- and long-haul routes, and Very Light Jet Air taxi
models, which operate with smaller Very Light Jets shorter routes. These
aircrafts need less airport capacity and can land on smaller airfields. Instead of
the new Very Light Jets, turbo prop planes (e.g. PC 12) are frequently used
today.
A certain conversion between the three main types of business models can
nowadays be observed. Some network carriers sell seat capacities to tour operators,
especially on long-haul flights. Increasingly, these carriers also try to operate on a
point-to-point basis – at least partially. For example Lufthansa deploys a certain
number of Boeing 737 at airports like Hamburg where they are operated on a very
flexible route-to-route basis. Low-cost carriers try to attract also transfer passengers
by making use of their “natural hub” which is the operational basis of their fleet.
Furthermore, they increasingly open routes to tourist destinations. Charter airlines
have started to sell single seats, permitted by the ongoing liberalisation of the airline
sector.
Current developments concerning the emergence of new business models are:
• The competition between airports and the emergence of new airports, mainly
through the transformation of former military airports. These airports try to
attract traffic. Very often they employ active marketing in order to encourage
point-to-point carriers to fly into their airports. An example for this is Frankfurt
Hahn which developed into a Ryanair “hub” in Germany.
5 Airline Strategy: From Network Management to Business Models 99

• The emergence of Light Business Jets and Business Jet traffic. Many traditional
airlines, like Lufthansa, try to integrate services of these jets because they want
to be able to provide their customers with integrated travel products, like an
intercontinental flight in First Class combined with a connecting flight to some
smaller city served by Business Jets.
• The differentiation of network carriers. Many network carriers develop into so-
called mega-carriers, in most cases as part of an airline alliance. The remaining
carriers need to focus on specific regions; a typical example in this context is the
Star Alliance: Lufthansa and Air France are mega-carriers within their alliance
and SAS with its main hub, Copenhagen-Kastrup, is the regional carrier of
the Star Alliance system in Northern Europe.
A further convergence of airline business models is possible as network carriers
(NWC) implement some of the low cost carriers processes and strategies and low
cost carriers start to increase service levels at extra cost. Furthermore, LCC’s and
NWC’s do serve charter operators in high season and on weekends.

5.6 The Fight for Concepts – A380 and B747 vs. B787 and A350

On the one hand, new extra-large airplanes, such as the Airbus A380, have been
introduced to the airline market. Fuel efficiency per passenger, economies of scale
and scope, and mega “hubbing” are the key reasons for an airline to invest in
such an airplane. On the other hand, new airplanes, such as the Boeing 787
Dreamliner and the Airbus A350, are in construction and will enter the market in
the next few years. Efficient engines and lower weight thanks to carbon fibre
construction will enable a larger range of intercontinental point-to-point
connections. Moreover, new technologies concerning air pressure and air humidity
in the cabin will lead to more comfort for passengers and will therefore increase the
customer value resulting in a readiness to pay a higher price for air travel.
The A380 is an ideal plane to connect mega hubs in big markets on different
continents. Flights from London to Singapore, from Frankfurt to New York, from
Sydney to Singapore, or from Singapore to Dubai represent suitable routes for this
extra large plane. The Boeing 787 and the Airbus A350, which are smaller aircraft,
will be more efficient connecting hubs and secondary hubs on different continents
and focusing on direct point-to-point connections; e.g. from Zurich to Atlanta or, in
the future, even from a European hub airport directly to an Australian hub airport.
Due to lower fuel consumption, thanks to less weight, longer distances can be flown
non-stop by these aircraft. Passengers will no longer need to change planes on very
long routes, they will be able to get to the final destination with just one flight. Both
types of aircraft are so called wide-body airplanes. They are large airliners with a
fuse of 5–6 m in diameter, two aisles and 7–10 passenger seats per row. Design
considerations for wide-bodies include, for instance, the lower ratio of surface area
100 T. Bieger and A. Wittmer

Table 5.1 Implication of new wide-body airplanes

Influence of large Influence by new small
Success factors network/hub airlines wide-bodies wide-bodies
Extensive market coverage/market
share and growth (through
network effects) Long range Longer range
Economies of scale Connecting hubs and secondary
Alliance and scope airports
More passengers
Less fuel consumption
More freight
Convenience
Ability to adapt good and Point to point
homogenous processes Customer value
and qualities Mega “hubbing” Readiness to pay

compared to the volume of the fuselage. Table 5.1 shows the implications of the
new wide-body airplanes.
Case: Austrian Airlines Austrian Airlines was founded in 1957 (“Österreichische
Luftverkehrs AG”). After many years of cooperation with SAS and Swissair, which
even lead to a first strategic alliance – the so-called Qualiflyer group in the 1990s –
Austrian Airlines joined the Star Alliance in 2000.
Since 2009, Austrian Airlines has been operating 10 long-haul airplanes,
together with 32 short- and medium-haul airplanes and 56 regional airplanes. The
airline’s loss in the first half of 2009 was about EUR 167 million after a record loss
of EUR 430 million in 2008.
Austrian Airlines operates a limited number of intercontinental connections with
a comparably high share of tourist traffic which has increased further with the
acquisition of the former charter carrier Lauda Airlines in 2004. The network
focuses on links to Central-Eastern European countries. Today, the airline offers
services to an impressive variety of destinations in Eastern Europe and Central
Europe. Within this concept, Vienna is meant to develop into a hub for Eastern
Europe. At the same time, the airline’s intercontinental fleet was reduced from
15 long-haul planes in 2004–10 long-haul airplanes in 2010.
In recent years, Austrian Airlines has made substantial investments in its prod-
uct. The Business Class – Austrian does not feature a First Class product – is known
for its top cuisine. Austrian describes the credo that guides its actions accordingly as
([Link]):
• Charming Naturalness,
• Austrian Agility,
• Refreshing Harmony, and
• Enthusing Little Extras.
Several important external developments hit and challenged the network strat-
egy and the business model of Austrian Airlines between 2006 and 2008. The
5 Airline Strategy: From Network Management to Business Models 101

Fig. 5.14 Route map of Austrian Airlines (Routes covered by Austrian Airlines: grey connection;
code share routes: white connections) (Source: [Link])

intercontinental network was cut down to some Asian and North American
connections served mostly by Boeings 767. Furthermore, its former competitor,
Swiss International, was integrated into the Star Alliance and became a daughter of
the strong Lufthansa group. Zurich was developed into the third intercontinental
hub in the Lufthansa system, which left less room for the development of Vienna as
a regional hub (Fig. 5.14).

Review Questions

• Explain the difference between network, regional, charter and low-cost carriers.
• What concepts exist in the business aviation sector?
• What are elements of airline strategy?
• How do airlines create value in networks?
• What are economies of scale?
• What are economies of scope?
• What are economies of density?
• How can a so-called natural monopoly appear?
• What are hub economies?
• What are hub diseconomies?
• What is the problem if a hub becomes too big?
• Is a hub constantly at maximum capacity?
• What are instruments of capacity management?
• What are success factors of large wide-body airplanes (A380) for network carriers?
• What are success factors of new small wide-body airplanes (B787) for network
airlines?
102 T. Bieger and A. Wittmer

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