The adage, "How do you make a small fortune in aviation? Start with a very large fortune." would probably have a lot of people scratching their heads wondering why people would want to start a business in aviation. It is very true that to make any money in aviation industry, you must first spend a great deal of money to get started and then hope that your business can sustain for long enough to turn a profit over time. I think that this phrase came about from people realizing the fact that in order to start an aviation business, it takes a very large amount of money and a lot of times it does not work out in the end. If it does work out, the money that you make may not seem to be worth all of the work in the end.
In the commercial aviation industry, there are six different types of business models out there. You have the full service network carries (legacy carriers), low cost carriers, regional, traditional freight, integrators and hybrid carriers (German Aerospace, 2008). I will give a brief overview of each one and then name two examples of each, one success and the other not successful.
The full service network carriers are also known as the legacy carriers and are airlines that focus on providing customers with many pre-flight and onboard services. Most legacy carriers operate off of a hub-and-spoke system. They usually have different types of aircraft ranging from large to small and operate both domestically and internationally (German Aerospace, 2008). United airlines is an example of a legacy carrier that is still operating and is the first U.S. network carrier to fly the Boeing 787 (Chandler, 2012). TWA is an example of a legacy carrier that is no longer in existence (Harrison, 2012).
Low cost carriers focus on reducing their costs so that they can use a price leadership strategy on the markets they serve. Low cost carriers typically use a young and homogeneous fleet of medium sized aircraft which allows less fuel burn, maintenance, staff and overheads. These aircraft are usually configured to seat as many people as possible. Low cost carriers reduce ground times and delays by utilizing smaller, less congested airports and by using point to point flights without connections. This strategy allows the carrier to maximize the number of hours in and day and the aircraft that they have. These carriers usually do not offer free inflight services, and instead charge passengers if they would like these services. More strict baggage fee structures are implemented, as well as other fees to help these companies earn a profit (German Aerospace, 2008). Allegiant Air is a low cost carrier that is still in operation today and is doing quite well (Burkey, 2012.) ValuJet is an example of a low cost carrier that is no longer in operation (AvStop, n.d.).
Regional carriers, also known as commuter airlines or feeder airlines, typically use smaller aircraft with seating for 20-100 passengers and limit their flight routes to a geographically restricted area. Some regionals operate independently while others work as feeder airlines for legacy carriers connecting their partner airlines hub with smaller regional airports (German Aerospace, 2008). Mesa Airlines is a regional carrier that currently provides services for Delta Airlines (Grossman, 2009). Colgan Air is a regional airline that is no longer in operation (Peterson, 2012).
Traditional freight carriers typically work closely with freight forwarder companies and schedule cargo capacity with the company scheduling pick-up and delivery services on the ground. There are a few different types of traditional freight carriers and not all carry solely cargo. Some passenger airlines also actively market the belly of their aircraft for cargo services. Other airlines offer both passenger and all-cargo operations utilizing different aircraft. All-cargo operations often fly international routes delivering goods with the use of large aircraft such as Boeing 747s to carry out their duties. There are also smaller on demand cargo companies that operate smaller aircraft and provide short notice pick-ups and deliveries (German Aerospace, 2008). Delta Airlines has an all cargo operation that is still in existence in the U.S. today (Skyteam, 2013). Air Alaksa Cargo was an all cargo operation that is no longer in existence (Airlinehistory, n.d.).
The integrators are also cargo based operations, but offer hardly any ground services and focus primarily on selling air transport capacities to forwarders. Integrators use door-to-door services to control all aspects of the sales channel and the transportation process. Unlike the traditional cargo carriers, integrators do not transport all kinds of products. Instead they focus on time sensitive transportation of documents and smaller goods to ensure worldwide delivers in short, pre-defined time frames. Integrators typically operate using the hub-and-spoke network and nightly hubbing is crucial to their timely operations (German Aerospace, 2008). DHL is an active integrator type operation that is currently in existence (Rodrigue, 2013). I was not able to find a defunct U.S. integrator airline that I was sure operated under the integrator business model.
The last type of business model is the hybrid carrier model. The idea behind this model is to offer low cost flights that are not just point to point along with offering connections flights also. These type of airlines also offer services for an additional fee if the passenger choses to purchase them such as seat reservations, catering and frequent flyer programs. Some hybrid carriers offer passenger services during the day and commence cargo operations at night by utilizing convertible quick change aircraft. This allows them to get as much use out of their aircraft as possible (German Aerospace, 2008). JetBlue is a U.S. airline that uses the hybrid business model and is currently in operation (Winship, 2004). I was unable to find a defunct hybrid air carrier company, I believe this is due to the fact that this type of business model is pretty new and hard to differentiate from low cost carries at the current time.
I believe that new start up businesses would be wise to follow the low cost carrier or hybrid model of business. Some of the most successful, current businesses are low cost carriers and hybrid carriers. I believe that these models are so successful because they offer the customer many options at a very low base cost. I think that these two business models are the most progressive at the time and will continue to change to stay ahead of the pack.
References
Airlinehistory. (n.d.). All of the inactive airlines in the USA. Retrieved March 31, 2013, from, http://www.airlinehistory.co.uk/americas/usa/Extras/Defunct.asp
AvStop. (n.d.). History of ValuJet airlines. Retrieved March 31, 2013, from, http://avstop.com/history/historyofairlines/valuejet.html
Burkey, B. (2012). Low-cost carrier Allegiant Air coming to HIA. Retrieved March 31, 2013, from, http://www.centralpennbusiness.com/article/20120816/CPBJ01/120819853/Low-cost-carrier-Allegiant-Air-coming-to-HIA
Chandler, J. G. (2012). U.S. legacy carriers strike fleet update balance. Retrieved March 31, 2013, from, http://www.aviationweek.com/Article.aspx?id=/article-xml/AW_11_05_2012_p50-508587.xml
German Aerospace Center. (2008). Analysis of the European air transport market. Airline business models. Retrieved March 30, 2013, from, http://ec.europa.eu/transport/modes/a ir/doc/abm_report_2008.pdf
Grossman, D. (2009). Regional airlines thrive while big boys cut back. Retrieved March 31, 2013, from, http://usatoday30.usatoday.com/travel/columnist/grossman/2009-11-03-regional-airlines_N.htm
Harrison, J. S., Kalburgi, S., Reed, C. K. (2012). American airlines 2012: Bankrupt, like every other legacy airline. Retrieved March 31, 2013, from, http://robins.richmond.edu/d ocuments/cases/AmericanAirlines2012.pdf
Peterson, K., Prasad, S. (2012). Pinnacle airlines files for bankruptcy in US. Retrieved March 31, 2013, from, http://www.reuters.com/article/2012/04/02/uk-pinnacleairlines-idUSLNE83102K20120402
Rodrigue, J. P. (2013). Hubs of major air freight integrators. Retrieved March 31, 2013, from, http://people.hofstra.edu/geotrans/eng/ch5en/appl5en/upshubs.html
SkyTeam. (2013). Delta cargo. Retrieved March 31, 2013, from, http://www.skyteamcargo .com/en/About-us/Our-members/Delta-Cargo/
Winship, T. (2004). JetBlue's hybrid model has potential, problems. Retrieved March 31, 2013, from, http://www.smartertravel.com/travel-advice/JetBlue-hybrid-model-potential.html?id=11627
What do you think is the main cause for the businesses that failed to make a profit? Do you think it is just one aspect of the business model, or do you think it has to do with timing of their business in the market? It seems strange that say Southwest is an airline that does very well while Valujet ceases to exist.
ReplyDeleteI agree with you that, if someone were to want to break into the commercial airline industry, their best bet would be to go with one of the low-cost carrier model. Even with that model, there is no guarantee of success, but it seems to be the safest route. Ultimately, there has to be a need in the industry and, with airlines like Delta and American cornering their aspect of the market and Southwest pretty much cornering the low-cost end, I think it would be difficult for anyone to break in.
ReplyDeleteKyle, do you think that most of the companies that have failed to turn a profit in small startup business failed because the timing wasn't right. Although i think Hybrid low cost business models would part of the step in the right direction, companies light value jet and dayjet seemed to fall short due to down times in the economy.
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