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Airline business Process Modeling

Flight for Survival: A New Business Model for the Airline Industry

To pare down their colossal operating costs, giant U.S. and European carriers must restructure the hub-and-spoke system and eliminate complexity.

Since the 1970s, traditional market leaders in industry after industry, saddled with complex, high-cost business models, have been under attack by companies with new, simpler ways to manage their operations and contain costs.

Illustration by Peter Kramer

This scenario occurred in the steel industry when minimills took on traditional smelters; in automobile manufacturing when more standardized Japanese cars won out over customized U.S. vehicles; and in retailing when superstores overtook conventional grocery stores. In each instance, the established companies struggled, often in vain, to rationalize operations and still deliver products and services to satisfy customer desires, defend their market positions, and reestablish profitability.

The lesson is fundamental: As markets mature, incumbent companies that have developed sophisticated, but complex, business models face tremendous pressure to find less costly approaches that meet broad customer needs with minimal complexity in products and processes.

The trouble is, many companies — manufacturers and service providers alike — have increased the scope and variety of their products and services over the years by layering on new offerings to serve ever larger and more diverse customer bases. Although each individual business decision to enhance a product line or service can usually be justified on its own, the result often is a cost structure that is sustainable only if the principal competitors take a similar approach. More often than not, though, as incumbents expand the breadth and depth of their offerings, leveraging their sophisticated business infrastructure, they are undermined by smaller, nimbler competitors that supply a more focused product, usually to a specific set of customers, at a substantially lower cost. In these situations, the incumbent may know that the cost of complexity is dragging it down, but finds changing its business model easier said than done.

No companies illustrate this dilemma more vividly than the large U.S. and European hub-and-spoke airlines. Their business model — essentially designed to seamlessly take anyone from anywhere to everywhere — was a great innovation. But this model is no longer competitively sustainable in its current form. Tied to massive physical infrastructure, complex fleets of aircraft, legacy information systems, and large labor pools, the major carriers in both regions now face a double whammy: some of the worst economic conditions in the industry’s history, and low-cost carriers that dictate prices in large and growing parts of the market.

Uh Oh: Airlines' Premium Traffic Falls

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As if oil just a whisper under $130 isn’t enough to make an airline executive cry, another stroke of bad news emerged that is potentially even more worrisome. Premium traffic, the folks who populate business and first class, dropped 3.9% in March – the biggest amount in five years, according to data released May 20 by the International Air Transport Association.
In fact, if corporations and the well-heeled decide to spend less on flying, for whatever reason, this rapidly becomes the worst-case scenario for major international network carriers. Airlines the world over, and nowhere more than in the U

McGraw-Hill Relentless Innovation: What Works, What Doesn’t--And What That Means For Your Business
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