Value Creation In The Airline Industry

The basis for Value Creation of a classical hub-organised airline consists of its operating hub and spoke strategy. This system implies that all flights move along spokes connected to a hub placed at the centre. In fact all long-haul flights depart from the hub, to which all passengers are flown in the first place. Therefor it is necessary to own a heterogeneous fleet to secure an outstanding efficiency of the long distance flights. To have an attractive and used to capacity hub at one’s disposal is the linchpin of the entire operation. For this purpose it is extremely important for the airline to possess a high percentage of the airport’s available slots and gates which represent a distinctive key resource in this dynamic industry. Some of the major flag carriers own their capacities for decades through the protection by the grandfather rule which signifies a competitive advantage in this infrastructure restricted industry. Besides this, human capital can be seen as another crucial resource. This relates on the one hand to a capable and motivated workforce and on the other hand on the management. Foremost to cope with the extensive scheduling of a hub demands a high degree of management skill which decides of the success or failure of the operations. In addition the fact that hub-organised airlines control such a significant number of slots leads to a high negotiation power with this airport. Furthermore customer retention and loyalty is of great importance for a flag carrier, because their passengers are normally less price sensitive than low-cost carriers’ customers and are consequently able to fly more often. This goal can be achieved for instance by excellent customer service, frequent flyer programs and strong brand reputation. The mentioned capabilities apply best to long-haul traffic and business travel. The reasons therefor are that business passengers are willing to pay higher prices for more convenience and service on board which is also true for long distance flights where entertainment, food and service in general get more important. Accordingly this leads to higher yields for the airline. This does not fit for price-conscious customers, because they prefer cheaper flights.

Contrariwise low-cost carriers need to have a very low cost structure to act successfully and create value. For that reason it is indispensable to cut costs wherever possible. Consequently low-cost airlines should offer point-to-point routes with no frills and no class discrimination. Additionally low-cost carriers tend towards secondary and underutilised airports due to the inaccessibility of the major airports by virtue of the grandfather rule and even more importantly due to lower fares and less traffic as well as available slots and gates.