Evolution of Airline Business Models
Siddhi Rajaram Dhole
Literature Review
1. Pegasus Airlines
The aim of this study is to examine the change of business model of Pegasus Airlines, which has been operating in airline industry in Turkey since 1990. For this purpose, a single case study approach was designed to allow in-depth analysis of the airline business model. Semi-structured interviews were conducted in 2019, supported by data gathered from multiple sources. The results confirm that the change of regulations and perspectives, geographical advantages of the airports and the state support could serve as catalysts to the ability to change the airline business model.(Leyla,2020)
2. Evolution in US
A consistent split of the analysis in network carriers and low cost carriers is introduced. In general, the competitive interaction between network carriers and low cost carriers increased substantially throughout the last decade and must be considered as the main driver of competition in the domestic U.S. airline industry.(Kai & Kathrin,2011)
3. Alliances
The international aviation market is subject to regulation, and airlines may only have the opportunity to extend their networks to foreign countries by entering an alliance agreement with a foreign airline. But also in fully liberalized aviation markets, airlines are likely to enter alliance agreements. The literature shows that passengers are likely to be better off if airlines enter alliance agreements.(Pels,2001)
4. Airline Mergers
Low cost carrier whose nonstop service competes with its one-stop service. The merged airline’s profit is maximized by withdrawing the competing one-stop (nonstop) service when the hub carrier’s operating cost and connecting passengers’ hub-through additional time costs are large (small).(Kawamori & Lin, 2013)
5. Airline Consolidation
The service-enhancing effects of employing large-scale hub-and-spoke networks have outweighed the price-increasing effects of having a smaller number of competing national airlines. Thus, a welfare gain has accrued to consumers as a result of the more consolidated market structure. Public policymakers should exercise antitrust and bankruptcy authority in a manner which does not impede welfare-enhancing consolidations in the airline industry. (Elizabeth & Dong, 1995)
6. Innovation
An increase in the market value is significantly found when an airline announces an innovation. Not all innovative actions are equal; while innovations related to advanced customer segmentation and new technologies bring about similar gains, thereby having the same effects on the airline value, when compared to the innovative new business models, the formers significantly outperform the latter.(Nicolau & Santa-Marìa, 2012)
7. Market Concentration
Increase in competition that occurred during the first years of deregulation and the subsequent decreases can be explained by two structural changes experienced in the US airline industry: the numerous mergers of large carriers during the late 1980s and, more important, the development of extensive hub and spoke networks by virtually all airlines. (Belobaba & Van Acker, 1994)
8. Boarding Problem
The best strategy is to use a non-traditional methodology of outside-in or some modification thereof. The findings suggest that airline managers should consider issues related to evenly distributing boarding activity throughout the aircraft, developing more effective policies for managing carry-on luggage, and using simultaneous loading through two doors. (Nyquist & McFadden, 2008)
9. Passenger Traffic
Increased openness is associated with higher enplanement and lower fares. Code-sharing agreements are associated with higher enplanement and higher fares. Given the complementary nature of such agreements for Emirates, this suggests potential collusive behavior. While these findings are specific to Emirates, they are regionally relevant as most carriers in the Gulf operate in an environment that is similar to Emirates. Thus, further liberalization of the passenger airline markets of UAE and other Gulf carriers – which includes the elimination of code-sharing-related collusive agreements – would likely result in increased expenditure on air travel and lower production costs (from ensuing competitive pressures). Such outcomes can potentially yield net welfare gains for the UAE and other Gulf countries. (Squalli, 2014)
10. Growth
Full-service network carriers are faced with a trade-off between growth and operating profits, whereas low-cost carriers are able to simultaneously pursue growth-oriented strategies whilst improving profitability. The key differences in the business models that drive these results and expect that short-term effects of COVID-19 travel constraints will impact different airlines in distinct ways.(Maung & et al, 2022)
11. Conclusion
A new set of non-stop short and medium distance flights could be offered from non-hub airports, there would be a market for travellers to purchase those flights. The expenditure will likely be increased if the airline market includes code-sharing flights.
References
1. Belobaba, Peter P. & Van Acker, Jan, 1994. “Airline market concentration,” Journal of Air Transport Management, Elsevier, vol. 1(1), pages 5-14.
2. Elizabeth E. Bailey & Dong Liu, 1995. “Airline Consolidation and Consumer Welfare,” Eastern Economic Journal, Eastern Economic Association, vol. 21(4), pages 463-476, Fall.
3. Hüschelrath, Kai & Müller, Kathrin, 2011. “Low cost carriers and the evolution of the US airline industry,” ZEW Discussion Papers 11-051, ZEW – Leibniz Centre for European Economic Research.
4. Kawamori, Tomohiko & Lin, Ming Hsin, 2013. “Airline mergers with low cost carriers,” Economics of Transportation, Elsevier, vol. 2(2), pages 63-71.
5. Leyla Adiloğlu-Yalçınkaya & Senem Besler, 2020. “Evolution of Airline Business Models: The Case of Pegasus Airlines”, Contributions to Economics, in: Alexandra Horobet & Persefoni Polychronidou & Anastasios Karasavvoglou (ed.), Business Performance and Financial Institutions in Europe, pages 57-67, Springer.
6. Maung, Yun Shwe Yee & Douglas, Ian & Tan, David, 2022. “Identifying the drivers of profitable airline growth,” Transport Policy, Elsevier, vol. 115(C), pages 275-285.
7. Nicolau, Juan Luis & Santa-Marìa, Marìa Jesús, 2012. “Gauging innovation worth for airlines,” Journal of Air Transport Management, Elsevier, vol. 20(C), pages 9-11.
8. Nyquist, David C. & McFadden, Kathleen L., 2008. “A study of the airline boarding problem,” Journal of Air Transport Management, Elsevier, vol. 14(4), pages 197-204.
9. Pels, Eric, 2001. “A note on airline alliances,” Journal of Air Transport Management, Elsevier, vol. 7(1), pages 3-7.
10. Squalli, Jay, 2014. “Airline passenger traffic openness and the performance of Emirates Airline,” The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 138-145.