Airlines will need a new business model path

This article appeared originally in Gulf News: link to original article

Airlines with a massive domestic market were always the lucky ones. In the US, Pan American World Airways and Trans World Airlines competed and lobbied for rights to fly over the Atlantic. Today, American, Delta, and United Airlines are among the top five airlines in terms of market value and fleet size.

Emirates airline, in another corner of the world, started with a loan and a few leased planes. Today, Emirates is among the top five airlines according to Skytrax and TripAdvisor’s Travellers’ Choice awards.

Moving forward, different airlines have followed different expansion models. For instance, Emirates airline is part of Emirates Group with multiple aviation-related companies in in-fight catering and airport handling, to name a few.

British Airways is owned by the International Airlines Group (IAG), which owns four other carriers, with a total of “547 aircraft flying to 268 destinations and carrying around 105 million passengers each year”, as described on IAG’s website.

So, in light of all the different models above, what can be considered an ideal airline business model? And how will these models evolve in the future? Can any of them be internationally dominant?

Simply put, there isn’t an ideal airline business model. And usually, the main objective in establishing an airline business is to promote the country as a touristic destination or to turn one of its cities into a regional hub. With that in mind, such a transformation for a country or any of its cities bring prosperity to other businesses directly or indirectly linked to the airline business.

The end result is more economic diversification and a healthy growth in the tourism sector. This however will be undermined if the country’s airline is a drag on the government’s coffers, when the net result of keeping a national carrier must be a positive one on the country’s tourism sector and its overall economy and not the other way around.

So, as long as the net benefits exceed the operational and other costs of keeping the national carrier up and running, then that’s the right call.

The answer to the second question can be split into two parts. In the near future, the airline industry will probably follow suit other industries that underwent mergers and acquisitions, especially after the 2007-08 financial crisis. The airline business, in terms of operations, is very expensive to run.

Therefore, economies of scale can be achieved through large but efficient operations, which can be attained by either expanding the airline’s own into different hubs and businesses, like IAG’s or Emirates’ case, or by mergers and acquisitions.

Ultimately, there will be further consolidation in the airline business, with more efficient operations leading to less expensive air travel. Air travel, in the context of transportation, is yet to achieve the efficiency and cost effectiveness of other transportation methods, such as on water and land.

In the distant future, and to answer the third question as well, it is difficult to see a single airline company dominating the international scene. Instead, the dominance will be regional, which questions the survivability of airlines operating hubs that are proximate to one another, such as in Europe or in the Arabian Gulf.

To conclude, there is no single ideal airline business model. A working airline business model is either one that started from a big domestic base or one that capitalises on a strategic geographical location.

Future-wise, however, there will be further consolidation in the airline business towards increased operational efficiency. This will either be through increased capacity by flying a bigger fleet and operating additional hubs; through expansion into other aviation-related industries; or through mergers and acquisitions.

The last thought that I want to leave you with: will countries forecasted to be the most populous and the richest by 2050, in purchasing power parity, be more protectionist towards non-national airlines?