Airlines: A New Operating Model - Providing Service and Coverage Without the Cost Penalty

The scene is reminiscent of a decade ago, when the airline industry struggled through the last recession and the aftermath of the Gulf War. There are too many airlines and too many hubs operating in a competitive environment where exit barriers are high. Market forces and bankruptcy protection ensure that distressed capacity does not disappear; instead it comes back, potentially at a lower cost level, threatening to trigger price wars that drive still more airlines into bankruptcy. Only this time, the situation is worse.

Financially and structurally, the U.S. airline industry is in more dire straits than it was a decade ago, and the competitive situation in Europe is much more unstable as traditional pricing discipline breaks down. The big difference is the impact of Low Cost Carriers (LCCs). Ten years ago, the LCC threat in the U.S. was limited to a regional carrier, Southwest Airlines, and some underfunded start-ups. Europe was not threatened at all. Today, LCCs, operating at half the cost levels of traditional network carriers, threaten to undermine the whole hub and spoke (H&S) system.

Clearly, a new business model is needed that eliminates the structural cost penalties of the H&S model while retaining its key service and coverage attributes — urgently in the U.S. and soon in Europe. Today's problems are not merely cyclical; they are structural and, as such, demand a structural solution. The objective of this study is to evaluate the nature and causes of this industry crisis and to propose a potential solution, drawing on experiences from other industries that have undertaken fundamental business model transformations.

Booz Allen Hamilton's Dr. Jürgen Ringbeck and Dr. Markus Franke are the authors of "Airlines: A New Operating Model — Providing Service and Coverage Without the Cost Penalty."

study posted October 2002