Must-know: Airline business models

Airline business models

As a result of the emergence of low cost carriers (or LCCs), after the U.S. airline deregulation in 1978, air fares have reduced and air travel has become more affordable. Southwest was instrumental in revolutionizing the industry with a differentiated business model. The point-to-point model adopted by Southwest (LUV), JetBlue (JBLU), and other low cost carriers focuses on short-distance, regional, non-stop routes between origin and destination rather than having connecting flights at hubs—as in the hub and spoke model adopted by legacy carriers like Delta (DAL), American (AAL), and United (UAL). Southwest’s point-to-point structure has facilitated more direct non-stop routes—72% of customers fly on non-stop routes. It caters to routes with shorter stage length—average aircraft trip stage length is 693 miles with average duration of 1.9 hours. Although the hub and spoke model provides broad network coverage through their large and diversified fleet size, it also adds to the complexity and cost of operation.

Airlines move towards a hybrid model

In an industry characterized by intense competition with customers expecting wider network coverage at competitive prices, airline carriers have been forced to mix competitive business models which are now called the hybrid model. This model combines the cost effectiveness of the low cost model with diversified and broader ranges of services and routes offered by legacy carriers. Many legacy carriers operate point-to-point for certain routes and also run their own low cost wing or franchise regional routes in order to gain passenger traffic and increase load factors. Similarly, low cost carriers including Southwest (LUV), Jet Blue (JBLU), and Easy jet have been providing a mix of short haul and long haul routes, inter-regional routes, and in some cases even international routes. Southwest recently launched three international routes in July this year. To learn more about the increases in air fares and narrowing cost gap between the low cost carriers and legacy carriers, continue reading the next sections in this series.