Understanding Airline and Passenger Choice in Multi-Airport Regions (2013)

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15 Airlines choose to serve markets based on the perceived potential contribution to system revenue and ultimate profit- ability. In that context, various factors influence airline choices in multi-airport markets, including revenue, yield, strategic compatibility, and risk. Strategic compatibility of service in a multi-airport market depends on how that market fits within the airline’s business plan and its business model. Is there a market opportunity that can be profitably served at one or more of the airports in the multi-airport region with the product, price, and service offering of the airline? If so, is the revenue potential of the service opportunity of a sufficient size to warrant the selection of the service over other market opportunities available to the airline? A multi-airport market’s strategic compatibility with an air- line’s business model is dependent on such market character- istics as economic and demographic profile, leisure/business market traffic split, and the region in which it is located. A valid analysis requires a sound understanding of each airline’s busi- ness model, and how the airline’s planners will analyze and evaluate airport choice factors. Ideally, airline planners seek to make decisions that are compatible with, and complementary to, the airline’s business plan. The review of pertinent literature presented in Chapter 3 did not identify research that addressed considerations relating to airline choice. Because airline decisions are made as private business decisions in the context of unique busi- ness models and competitive market environments, they are not transparent to external researchers. While the success of a strategy or decision can ultimately be judged by whether the result was profitable and sustainable, it is much more difficult for an observer or researcher to understand and explain the interplay of choice factors and options that were considered. As a result, this study has taken the approach of focusing on the airline business model as the basis for understanding airline choices in general, their relationship to multi-airport markets, and their relationship to passen- ger choices. Airline Business Models All commercial enterprises use business models that define objectives and specify the approach to achieving business objectives. Airline companies operate in complex, diverse, and competitive market environments, and have relatively mobile factors of production (such as aircraft and person- nel). Although there are many elements that are common to all airline business models, there are significant differences among airlines regarding their objectives and strategies, and the operating and competitive model used. The relative flex- ibility of airline business enables each company to use a busi- ness model tailored to its particular markets, circumstances, and objectives. History and Evolution The past 100 years have witnessed an extraordinary trans- formation of commercial aviation, from the initial contract mail carriage flights that accommodated passengers as an afterthought, to today’s high-capacity and high-technology global airline networks. The airline industry also has evolved in other dimensions as follows: • From government-owned or sanctioned “flag carriers” to private competitive companies; • From extensive economic regulation to widespread deregulation; • From individual companies to transnational conglomer- ates and alliances; • From travel agent product sales networks to direct and third-party internet sales delivery; and • From static pricing to real-time revenue/inventory man- agement systems. The diversity of business models now being used in the commercial airline business is unprecedented, reflecting C H A P T E R 5 Airline Choice Factors

16 the complexity and segmentation of the passenger air travel market, and the intense competition that is often a key fac- tor as well. Airline business models adapt to different conditions in each market area. Regions with high traffic growth rates, intense competition, or government protection of airline markets, will each require different responses from each of the airlines involved. In the United States in recent years, airlines have been adapting their business models to meet the challenges of a mature industry that is experiencing consolidation in some sectors, but is also experiencing growth and competition in other sectors. The interplay of these factors in markets served by multiple airports creates another layer of complexity. The choices that an airline makes about service and pricing at an airport in a multi-airport market reflects its business model, the business models of each of its competitors in that market, and how each airline’s choice impacts the choices being made by passengers. Structure At its highest level of generality, any airline’s business model will apply the same basic elements in its evaluation of choices in multiple airport markets, as follows: • Business objectives, and strategies for achieving them, in the context of the market opportunity; • Estimation and forecasting of market demand in the region (revenue); • Evaluation of competitive air services in the region; • Estimation of appropriate levels of service (aircraft type, frequency, capacity) and the cost of providing different levels of service in the region; • Evaluation of airport alternatives in the market; • Forecast of financial performance of alternative service plans; and • Comparison of alternative service plans with alternative uses of airline’s resources. Fundamentally, airlines choose to serve markets based on their contribution to system revenue and profitability (see Exhibit 5-1). In regions served by multiple airports, the choice of which airport(s) to service revolves around several key considerations: • Is there an opportunity that can be profitably served at one or more airports in the multi-airport region, based on the product, price, and service to be offered? • If so, is the revenue potential of this service opportunity of a sufficient size to warrant the selection of the service over other service opportunities being considered by the airline? • If so, which airport(s) in the multi-airport region provide the optimal opportunity (or opportunities) for service and network profitability? These considerations are applied to the peculiarities and dynamics of each market. Airlines apply airport choice fac- tors in different ways, based on their business model. At the same time, the airport choice factors considered by airlines are interdependent with choice factors considered by passen- gers. For example, many passengers will often seek the lowest price service for a particular service. An airline, on the other hand, typically will seek the highest level of revenue contribu- tion to its system. Nonetheless, the airline must compete in the market at a price that meets its need for revenue and the passenger’s need for affordability. Passenger choices within a multi-airport market are closely related to airline choices (see Exhibit 5-1), especially with regard to such key factors as price and level of service. Primary Drivers of Demand The demand for passenger air transportation is the driv- ing force for business decisions in the airline industry. Pas- senger air travel demand is the sum of individual decisions by potential air travelers, aggregated to a level that provides sufficient revenue to support the sustainable and profitable Exhibit 5-1. Airline choice steps.

17 provision of air service in a market. Passenger airlines seek to tailor their business models to both accommodate this demand and drive the resulting revenue. Fundamental to any airline consideration of air service in a market is its evaluation of the underlying size and nature of air travel demand. Such evaluation will address the following: • Size of the overall market; • Nature of the market (business vs. leisure, propensity to travel, disposable income, etc.); • City-pair market sizes (past and current); • Market demand, traffic trends, and causality (growth, stag- nation, decline); • Specialized business demand drivers (corporate headquar- ters, production facilities, etc.); • Inbound leisure demand (resort destinations, seasonal traffic, special events, etc.); and • Ethnic and cultural market affinities (diaspora, family visi- tation travel, etc.). These primary characteristics of air travel markets are quantified, evaluated, forecast, and applied to potential air service scenarios as part of airline route planning efforts grounded in the airline’s business model considerations. The most prominent drivers of demand that are inherent in service opportunity evaluation are discussed in the remainder of this section. Service Networks The strategy, structure, and purpose of commercial airline networks—and how they drive demand—vary considerably across the range of existing business models. Most full-service carriers operate robust hub-and-spoke networks that offer service to hundreds of destinations around the world, and often have developed over the course of decades. These oper- ations tend to serve primary airports across most key mar- kets. Other mainline carriers transport passengers via more nonstop/point-to-point or linear traffic flows. Regional car- riers have historically fed passengers from smaller markets into larger hub-and-spoke networks, although that profile has evolved over the last 10–15 years—primarily due to the introduction of longer range, smaller jet aircraft. Finally, spe- cialized networks continue to exist for purposes such as effi- ciently transporting large numbers of passengers to leisure destinations or providing short-term capacity for purchase by specialized commercial entities. Alliances/Partners An extension of each carrier’s network strategy involves their portfolio of marketing and operating alliances (with other carriers), and how these allow carriers to drive demand outside of their core networks. The most prevalent agree- ments for traditional carriers include • Partnerships with regional airlines, in which the regional operator provides service (typically branded as the main- line carrier) as an extension of the primary airline’s net- work, and • Marketing/operating partnerships with international car- riers, which are typically used to expand the base carrier’s network to international destinations too small to be oper- ated profitably. These international agreements have resulted in the for- mation of global airline alliances in which large groups of carriers around the world effectively operate as global virtual single carriers. Carriers utilizing other business models tend to operate as stand-alone entities, although there are several exceptions. Fleet/Aircraft Type An integral component of network and demand strate- gies is the selection of aircraft type(s). The largest fleets— typically operated by full-service carriers—consist of hun- dreds of aircraft spanning a wide range of aircraft sizes and types to best fit the mission of providing service across various markets and customer profiles. Other mainline operators— often those operating more point-to-point or linear networks—use fleets with single aircraft types (or at least manufacturers), which tends to reduce operating costs and is more consistent with their network profiles. Regional airline fleets are often microcosms of the mainline networks they support, with a range of aircraft types to best serve their vari- ous network missions. Specialized and niche carriers typically have limited fleet profiles that best fit their limited mission. Cabin Configuration Cabin configuration options, and how they drive demand, also vary across business models. Many mature, full-service carriers with large international networks use various con- figurations, ranging from single-cabin regional aircraft to two-cabin domestic models—to two-to-three cabin long- haul international aircraft. Some of these full-service carriers have recently introduced “economy-plus” products on long- haul international aircraft, resulting in up to “3½” cabins. Many less traditional mainline operators employ single-cabin configurations across their entire fleet, although some have introduced two-cabin models. Likewise, most regional air- craft are operated with single-cabin configurations, although

18 two-cabin regional models have begun to appear in some large regional jets. Pricing Although base pricing strategies share a lot in common across the majority of commercial business models (primar- ily in that carriers often match lowest competing fares at an O&D level), there remain high-level differences across the business model spectrum. Many full-service carriers still aggressively attempt to maximize supply and demand oppor- tunities within individual O&Ds, time periods, and passen- ger types—resulting in a wide range of price points and often higher fares for passengers purchasing at the last minute and/or in less competitive markets. Many less traditional domestic carriers use more basic, mileage-based fare struc- tures, while still selectively capitalizing on “upcharge” oppor- tunities. Many niche and tour/leisure operators primarily use flat-rate pricing, and tend to avoid much of the daily variation in the traditional pricing model. However, across virtually the entire spectrum, individual carriers institute temporary price discounting (fare sales) to support revenue and booking weakness, particularly throughout slow demand periods in the low and shoulder season. Revenue Management In tandem with their tactical, O&D-specific pricing strat- egies (as described above), full-service carriers also tend to employ sophisticated, aggressive revenue management tech- niques to best maximize aggregate demand. From a con- sumer perspective, this can result in a wide range of available fares within a given O&D across various dates, days of the week, and times of day—even within an individual flight. Less traditional domestic carriers typically undertake similar efforts—albeit usually on a much smaller, less tactical scale. Many niche carriers and/or tour operators tend to keep con- sistent with their macro pricing model by maintaining flat- rate pricing or using a very limited number of price points. Distribution Although product distribution has evolved considerably over the last 20 years, major elements remain in place within individual business models. Most full-service carriers still maintain global distribution system (GDS) partnerships that allow them to distribute their products through various tra- ditional and online portals, as well as through internal chan- nels (however, due to cost pressure, even these full-service carriers have essentially eliminated the travel agent model over the last two decades). Less traditional domestic carriers tend to distribute their product exclusively through internal channels, although some start-ups have established GDS rela- tionships for purposes of brand awareness and broad prod- uct offering. Niche and specialized leisure operators tend to operate through internal and marketing partner channels— although a few in this subset use the traditional GDS outlet. Scheduling Scheduling patterns vary across business models primarily in how they fit with each model’s target customer base and demand profile. Full-service carriers typically offer frequent daily service to key business destinations from their primary hubs to serve the time-of-day coverage needs of their business passengers as well as to offer enough total capacity for their aggregate customer base. Less traditional mainline carriers tend to offer thinner service patterns in major O&Ds, although there are tactical exceptions to this. Regional carriers—particularly those that provide feeder service to traditional partners—tend to operate service patterns that mimic these partners, although usually without the shuttle-type operations that full-service partners sometimes provide in key markets. Finally, niche and specialized leisure operators tend to offer thin service patterns—often times dropping below daily frequency depend- ing on the particular market or mission. Loyalty Programs Loyalty programs in the airline industry have evolved from one-dimensional frequent flyer programs to complex incen- tive and awards programs that involve much of the travel and consumer products sectors. These programs typically involve airline alliance and other travel industry partners. Their importance in driving demand, and more specifically for the selection by an air traveler of a particular airline, will vary by market and air traveler sector. Frequent business travel- ers value the class of service upgrades and other preferences that come with high status in airline loyalty programs. Lei- sure travel has close links to loyalty programs through awards travel and companion travel opportunities. Secondary Drivers of Demand In addition to the primary drivers of demand discussed, several other demand drivers vary significantly across busi- ness models. Although these are all key passenger experience items, the study team considered them secondary in regard to driving significant passenger demand. Direct Marketing Traditional approaches to marketing airline services, such as electronic media advertising, direct mail advertising, bill-

19 boards, etc., continue to be widely used. These initiatives are often tied to loyalty programs, enhancing the expo- sure and awareness of loyalty program benefits to targeted audiences. Airline-Specific Airport/Check-in Experience Substantial investment has been made by airlines (espe- cially full-service legacy airlines) in improving the check-in and customer service experience at airports. The use of tech- nology, through check-in kiosks and other improvements, is a major contributor to progress in this regard. Onboard Product The quality of the onboard product can be a demand driver, particularly on long-haul services and in first class or business-class cabins. Many international markets are served by airlines that place a high priority on onboard product, which tends to drive a competitive environment in some markets. Aircraft Condition/Age Fleet condition and age can be a positive demand driver (when new aircraft types are introduced into the fleet) and a negative demand driver (when average fleet age results in the perception of lower standards of service). Revenue Generation Considerations The application of the demand-related elements of an air- line’s business plan directly impacts the generation of reve- nue (see Exhibit 5-2). Several key considerations are involved in this regard. Pricing and Fees In addition to implementing aggregate pricing strategy drivers previously discussed in relation to demand, carriers across several business models have recently been successful at unbundling pricing for various components of the air trans- portation product in an effort to generate additional revenue. This new pricing scheme has resulted in incremental pricing for items such as checked baggage, premium seat assignments (even within economy class seating), and advance boarding priority. Meanwhile, some carriers have maintained a tradi- tional “all-in” pricing structure and others have unbundled more items, charging for such items as printed boarding passes and carry-on baggage. The range of various a la carte price/ product models does not necessarily conform to traditional business model definitions. Revenue Management Full-service carriers invest heavily in extensive revenue management processes, in an effort to serve and optimize their Source: US DOT Form 41 YE 3Q 2012, via Diio online portal. Exhibit 5-2. Airline revenue sources (U.S. domestic carriers).

20 expansive route networks, myriads of aircraft types, and broad customer bases. This investment typically includes multi- million-dollar technology as well as large departments of analytical personnel. Less traditional mainline carriers typi- cally engage in a moderate level of revenue management— although their more limited fleet profiles and range of target customers reduce the need for the massive investment described above. Regional carriers that operate as service pro- viders to full-service airlines typically end up incorporated into the process of their respective partner carrier. Finally, niche and leisure-specific carriers typically invest minimally in revenue management, because their business models tend to rely more on filling seats at a limited number of price points. Cargo The variety of cargo revenue strategies tends to correlate more to a carrier’s fleet than its business model, although often there is significant overlap between the two. Mainline carriers possess the capacity to carry cargo, mail, and freight within the context of their existing passenger network, and this pro- vides the carrier a secondary revenue stream. Note, however, that cargo revenue is very rarely a driver of scheduling or network decisions. Small regional carriers have less ability to provide these services given the size of their equipment, but can still take advantage of tactical opportunities to carry small items, including mail and freight. Carriers across the spectrum have the ability to offer an express package service product, although full-service carriers tend to do so more frequently. Sales Distribution Although the various methods of product distribution were discussed previously in the demand section, it is worth noting their impact on revenue generation. Full-service carriers tend to distribute their products through as many channels as economically feasible in order to maximize rev- enue generation across their broad networks. Low-cost and niche-market carriers tend to focus on distribution through their own internal sales booking systems. Such carriers focus aggressively on cost containment, and have a less pressing need to distribute to a wide range of target customers. Primary Drivers of Supply Providing the right level of supply to accommodate antici- pated demand drives the cost of providing air service. An essen- tial element of sustainability is establishing the proper balance between the revenue that can be derived (based on demand characteristics of the market) and the cost of providing the air service. The primary drivers of supply, and therefore cost, are described in the remainder of this section. Air Service Capacity The approaches to supplying capacity to the competitive marketplace vary significantly across business models. Full- service carriers tend to use a wide array of aircraft types, with the goal of optimizing supply with demand at an individual route level. Many less traditional mainline carriers tend to use a single or limited number of fleet types, with a heavy focus on minimizing their overall network cost structure. Regional carriers (which serve mainline partners) tend to operate with a hybrid of these previous two strategies, as they require fleet flexibility to offer options to their mainline partners and at the same time have to remain cost competitive. Once a fleet profile is established, network and scheduling choices drive further variability across models. Traditional carriers operate large hub-and-spoke operations, which result in large amounts of capacity (as well as assets and employees) concentrated in a limited number of markets. Less traditional mainline carriers tend to offer more linear networks while still focusing on several key markets for marketing and com- mercial purposes. Regional networks that feed large carriers tend to mimic the network profiles of those large carriers, while niche and leisure operators use less defined capacity strategies that primarily chase consumer demand. Additionally, most large full-service carriers “virtually” expand their networks through their participation in global alliances (in addition to their regional alliance partners). Over the last 15–20 years, these alliances have grown from tactical codeshare agreements to broad world-wide alliances providing carriers with truly global networks. Regional car- riers that function as feeders sometimes implicitly belong to multiple global alliances if they offer capacity to mul- tiple full-service carriers. Less traditional mainline carriers have begun to form tactical codeshare alliances with indi- vidual inter national operators to provide limited extension of their capacity offerings without joining the full global products. Air Service Quality Although air service quality is a key component of a car- rier’s overall capacity offering, this metric is no longer strongly correlated with a particular business model. While full-service carriers typically offer more amenities such as premium class seating and elite member club access, some still operate older aircraft with limited economy class seat pitch. Many less tra- ditional mainline carriers—historically known for offering a scaled-down product—now operate newer aircraft with

21 upscale onboard amenities, particularly in economy class. This trend has begun to extend to regional carriers, as larger regional aircraft have allowed for expanded product offer- ings, which in some cases include premium class seating. In addition, operating-related quality metrics such as on-time performance, lost baggage, and others show very little cor- relation with a carrier’s business model. Labor and Staffing Although capacity decisions are driven primarily by commercial opportunity, existing staffing levels can heav- ily influence network and planning decisions—particularly at established full-service carriers. For instance, a carrier that has a large number of personnel at an existing location can significantly alter the economic equation when making short-term or seasonal decisions about a particular route— particularly if the carrier is contractually limited in its ability to reduce local staff. For major carriers, another key driver includes pilot agreements that may prohibit or limit the abil- ity to contract flying to regional operators. These limitations can range from macro-level, fleet-wide limitations to market- specific situations. Although these issues may be present across the spectrum of business models, they tend to be more preva- lent with full-service carriers. Airport Real Estate/Ground Handling Airport real estate strategies and holdings vary across busi- ness models and also can impact capacity decisions. Full- service carriers often maintain multi-million-dollar facility investments at their hub locations, which can make it difficult to economically justify significant short-term capacity reduc- tions. Newer mainline carriers have tended to stay away from these large levels of investment (in part due to their more lin- ear route networks), providing more near-term flexibility in making network decisions. Regional networks often are able to use the airport agreements of their full-service partners, while niche/leisure carriers tend to operate under more vari- able agreements. Ground handling arrangements often vary significantly, although this tends to correspond more to a carrier’s overall presence at a particular airport than their macro-level busi- ness model. Full-service carriers will always have internal staff from the ticket counter to the ramp at their hubs and large “spoke” facilities (to best maintain their customer service and product). However, at small outstations, even the largest car- riers will occasionally contract personnel from third-party providers (often other carriers). Regional carriers tend to follow a similar model, while traditional and niche carriers usually purchase these services on a variable basis. Secondary Drivers of Supply In addition to the items in the previous section, several other supply drivers vary significantly across business mod- els. Although these are all key items in the airline capacity equation, the study team considers them secondary in terms of actually driving capacity decisions. Aircraft Maintenance The delivery of planned and scheduled capacity requires well-planned and implemented aircraft maintenance pro- grams. Disruptions in the maintenance program can limit the number of deployable aircraft and the amount of air service capacity. Airport Facility and Service Quality Each airline’s operation at each airport requires suitable facilities and services. Deficiencies in this regard can limit ser- vice expansion and place an airline in a less competitive posi- tion. In addition, the capital and operating costs of airport facilities that are considerably in excess of what is needed to accommodate the airport’s level of air service also can impact airline service expansion. Airlines consider such metrics as “cost per enplaned passenger” when evaluating the cost- effectiveness of an airline station. Although a relatively small percentage (3-5%) of total airline costs, airport costs undergo ongoing scrutiny and are an aspect of each airline’s business model. Hub and Market Share Protection The concentration of services at legacy airline hubs and gateways typically creates a tendency for the protection of local market share. This tendency toward protection can become a consideration in decisions affecting levels of capacity. Expense Considerations The approach to the provision of air service directly impacts the generation of revenue. Several key considerations are involved in this regard as shown in Exhibit 5-3. Fuel Fuel expense is a major element of each carrier’s expense base. Although the impact and management of fuel expense does vary significantly between carriers, these variations are not the result of the business model being used by the

22 carrier. The largest issues driving variances in fuel expense between mainline carriers are aircraft/engine type(s) and aircraft/engine age. Network structure also plays a role. The smaller aircraft size inherent with regional aircraft drives an additional burden for these carriers, because many of these aircraft suffer from higher per-seat fuel expense than their mainline peers. Carriers operating large numbers of 50-seat aircraft take a particularly large hit during periods of high fuel prices. Carriers with significant financial resources can typically hedge against fuel price exposure. Most carriers choose to hedge only a portion of their future fuel obligation, as there is downside economic risk to hedging during periods of fall- ing fuel prices. Labor Labor expense comprises a large percentage of a carrier’s expense base, and is only partially controllable. However, unlike fuel, the level of labor expense tends to directly relate to the type of business model being used by the carrier. Tra- ditional full-service carriers employ multiple large and estab- lished unionized work groups that drive the majority of each carrier’s labor expense budget. Because union contracts are typically several years in duration, carriers do not have the full ability to adjust labor expenses downward during periods of soft demand. In addition, many union agreements contain scope clauses that limit the ability of carriers to contract out labor to other carriers or vendors. Less traditional mainline carriers tend to have more flexible employee agreements, in many cases due to their shorter history. Regional carri- ers often experience a hybrid of the two scenarios—in many cases, the regional carrier is dependent on its relationship with its parent carrier. Equipment (Aircraft and Other) Operating equipment (aircraft, maintenance, ground, etc.) typically drives two types of expense impact—acquisition and operating. Although aircraft acquisition strategies vary by carrier, these approaches do not always correlate to business model. Some carriers (across all models) choose to purchase aircraft, although major volume purchasers tend to get bet- ter discounts from key manufacturers. Other carriers lease aircraft depending on their own financial situations, strate- gies, and operating needs. From an operating expense per- spective, newer generation aircraft typically provide lower expense profiles—but, again, this decision does not typi- cally vary across business model. However, some niche lei- sure providers do purposely acquire older, cheaper (but less efficient) aircraft as a means to minimizing fixed cash-flow requirements. The need for large amounts of non-aircraft equipment does tend to correlate better with business model, because large mainline and regional carriers tend to have large inter- nal ground staffs, as well as more developed internal mainte- nance facilities. Overhead Management overhead and infrastructure correlates quite well with business model. Traditional full-service carriers usu- ally operate with large management organizations (often built over a period of decades) to manage their complex operating Source: US DOT Form 41 YE 3Q 2012, via Diio online portal. Exhibit 5-3. Airline expense sources (U.S. domestic carriers).

23 networks and commercial functions. Less traditional main- line carriers tend to operate with less overhead, because their network structure and commercial strategies do not require as much active management. Regional carriers tend to operate with even smaller staffs, because much of their commercial overhead function is often absorbed by their commercial part- ners. Niche and specialized leisure carriers typically operate with minimal management staff. Distribution As discussed in the section on demand, distribution strate- gies vary significantly across business models, driving various impacts to a company’s expense base. Although full-service mainline carriers tend to use a wide variety of internal and external distribution sources, less traditional operators have tended to focus on internal outlets—resulting in lower dis- tribution expenses. Regional carriers are often marketed in conjunction with their partner (major) carrier, resulting in an implicitly common distribution strategy. Airline Business Models Each airline seeks to apply a business model that is uniquely suited to its objectives, strategies, and opportunities. How- ever, for the purpose of understanding how this variability is actually projected into markets, airline business models can be categorized into eight types, as follows with examples of the airlines in each business model type. Each type of busi- ness model is summarized in Exhibits 5-4 through 5-11. • Legacy network (hub/spoke): American, Alaska, United, Delta, US Airways; • Legacy point-to-point (traffic flow): Southwest; Exhibit 5-4. Legacy network. U.S. Airline Examples American, Alaska, Delta, United, US Airways Network Structure Primarily hub and spoke, with gateways for international services and connections to alliance and other codeshare partners. Alliances Extensive coordination with alliance partners through formal alliance organizations. Variety of arrangements with other partners for regional feeder services, codeshare partners, interlining agreements, and prorate agreements. Fleet Typically consists of hundreds of owned or leased aircraft. Mainline aircraft (more than 100 seats) dominate. Smaller regional aircraft used through subsidiary regional airlines or service agreements with independent regional airlines. Capacity Variety of equipment and operational scope enable adjustment of capacity in relation to variable traffic demand (i.e., seasonality, competitive conditions). Pricing Strategy Wide range of price points, including traditionally high “walk-up fares” where competitively feasible. Priority to maximize onboard revenue, using revenue management and inventory control models. Services and amenities bundled and unbundled in various ways. Sales Distribution Use proprietary web sites, as well as GDSs (i.e., Expedia, Travelocity, etc.). Leisure products also distributed through proprietary web sites, tour operators, and retail travel agents. Scheduling Business travel schedule typically used for services in major markets, often resulting in high frequency of service. Hub/spoke services scheduled to maximize connectivity at the hub when possible, in close relation with major market business travel schedules. Cargo Focus on belly cargo as additional revenue, especially on larger aircraft services in suitable markets. Labor/Staffing Large and complex operation requires labor specialization. Typically highly unionized over many key workgroups. Airport Real Estate Signatories to airport use/lease agreements, often with extensive real estate commitments at hubs and major market stations. Ground Handling Self-handling at major stations; may be handled by another airline at smaller station.

Exhibit 5-5. Legacy point-to-point. U.S. Airline Example Southwest Network Structure Extensive point-to-point services, with focus cities for operational support and traffic flow capabilities over multi-stop itineraries. Alliances Minimal, if any, partnering for access to markets not served by network. Regional feeder services typically very limited, if any. Fleet Typically consists of hundreds of owned or leased aircraft. Mainline aircraft (more than 100 seats) dominate, enabling lower cost per available seat mile (CASM). Capacity Mainline equipment predominance, coupled with very limited variety of aircraft, limits ability to adjust capacity except through frequency adjustments. Pricing Strategy Several price points, distinguished by levels of service. Priority to maximize onboard revenue, using revenue management and inventory control models. Competitive pricing structure often stimulates market demand, providing incremental revenue with lower average price. Sales Distribution Proprietary web site used as predominant sales channel. Scheduling High frequency of service designed to serve major markets and reduce non-productive aircraft time. Cargo Focus on belly cargo as additional revenue, especially on larger aircraft services in suitable markets. Labor/Staffing Large and complex operation requires labor specialization. Typically, highly unionized over many key workgroups. Airport Real Estate Signatories to airport use/lease agreements, often with extensive real estate commitments at hubs and major market stations. Ground Handling Self-handling. Exhibit 5-6. New model low-cost carrier. U.S. Airline Examples JetBlue, Virgin America Network Structure Selected point-to-point services, with focus cities for operational support, product marketing, and sales benefits, and modest traffic flow capability over multi-stop itineraries. Alliances Selective partnering for access to markets not served by network, especially for international markets. Regional feeder services typically very limited, if any. Fleet Owned or leased aircraft. Count based on requirements for point-to-point operations. Mainline aircraft (more than 100 seats) dominate, enabling lower CASM. Capacity Mainline equipment predominance, coupled with very limited variety of aircraft, limits ability to adjust capacity except through frequency adjustments. Pricing Strategy Several price points, distinguished by levels of service. Priority on maximizing onboard revenue using revenue management and inventory control models. Competitive pricing structure often stimulates market demand, providing incremental revenue with lower average price. Sales Distribution Proprietary web site used as predominant sales channel. Scheduling At least daily frequency of service designed to serve major markets and reduce non-productive aircraft time. Cargo Focus on belly cargo as additional revenue, especially on larger aircraft services in suitable markets. Labor/Staffing Less complex operation requires less labor specialization. Airport Real Estate Signatories to airport use/lease agreements in order to provide full services to passengers. Ground Handling Self-handling.

Exhibit 5-7. New model ultra-low-cost carrier. U.S. Airline Examples Allegiant, Spirit Network Structure Selected point-to-point services, with focus cities for operational support and enabling modest traffic flow over multi-stop itineraries. Alliances Minimal, if any, partnering. Minimal, if any, regional feeder services. Fleet Owned or leased aircraft. Count based on requirements for point-to-point operations. Mainline aircraft (more than 100 seats) dominate, lower CASM. Capacity Mainline equipment predominance, coupled with very limited variety of aircraft, limits ability to adjust capacity except through frequency adjustments. Pricing Strategy Several price points, distinguished by levels of service, offer simplified pricing. Priority to maximize onboard traffic with lowest possible pricing, enabling sale of other ancillary services and travel products to passengers. Competitive pricing structure often stimulates market demand, providing incremental revenue with lower average price. Sales Distribution Proprietary web site used as predominant sales channel for air and ground elements of trip. Scheduling Frequency typically daily or less, with time of day dictated primarily by availability of aircraft. Cargo Focus on belly cargo as additional revenue, especially on larger aircraft services in suitable markets. Labor/Staffing Less complex operation requires less labor specialization. Airport Real Estate Typically not signatories to airport use/lease agreements, in order to have flexibility to enter and exit markets and keep overhead cost low. Ground Handling Some self-handling, but also extensive third-party handling. Exhibit 5-8. Regional feeder. U.S. Airline Example Skywest Network Structure Selected point-to-point services to/from partner airline’s hubs on a fee basis, providing traffic feed to the hub carrier and to other feeder carriers. Operational support centers typically at hubs and selected spoke-airport locations. Dimensions of feeder services governed by agreement with partner airline. Alliances Partnerships are essential aspect of business model, because revenue is tied to service agreements. Fleet Owned or leased aircraft. Count based on requirements for contract flying. Regional aircraft (less than 100 seats) dominate, resulting in higher CASM. Capacity Regional equipment predominance. Variety of aircraft sizes enables adjustment of capacity through gauge-change as well as frequency adjustments. Pricing Strategy Price in the local and connecting markets set by mainline carrier partner, designed to maximize onboard and network revenue. Sales Distribution Uses partner carrier’s sales channels as part of codeshare agreement. Scheduling Frequency typically several times daily, as planned by the mainline carrier partner. Scheduling closely tied to connecting banks of the hub, as well as local business travel market preferences. Cargo Minimal impact due to smaller aircraft. Labor/Staffing Complex operation requires labor specialization, especially for companies with large fleets operating significant network feeder systems. Airport Real Estate Typically, signatories to airport use/lease agreements in order to provide range of services to passengers as part of the partner airline’s system. Ground Handling Some self-handling, but also extensive third-party handling.

26 Exhibit 5-9. Regional at-risk. U.S. Airline Example Express Jet Network Structure Selected point-to-point services, based on local market demand. Operational support centers at home base. Alliances Partnerships are typically unrelated to “at risk” flying. Fleet Owned or leased aircraft. Count based on availability of aircraft after requirements for contract flying. Regional aircraft (less than 100 seats) dominate, resulting in higher CASM. Capacity Regional equipment predominance. Variety of aircraft sizes enables adjustment of capacity through gauge-change as well as frequency adjustments. Pricing Strategy Price in the local market designed to maximize onboard and network revenue. Sales Distribution Uses its own proprietary sales channel, or other GDS. Scheduling Frequency varies, depending on nature of the market and local business travel market preferences. Cargo Minimal impact, due to smaller aircraft. Labor/Staffing Less complex operation requires less labor specialization. Airport Real Estate Typically, signatories to airport use/lease agreements in order to provide range of services to passengers. Ground Handling Some self-handling, but also extensive third-party handling. Exhibit 5-10. Tour operator. U.S. Airline Example Apple Vacations Network Structure Selected point-to-point services, based on charter programs organized and sold in the leisure sector. Alliances Partnerships among tour operators, receptive tour operators, and travel agents are common in order to structure and sell program packages. Fleet Primarily use ACMI lift providers, although some large tour operators have their own leased or owned aircraft. Typically use mainline aircraft (100 or more seats) with medium- to long-haul capability. Capacity Mainline equipment predominance, suitable for medium- to long-haul services. Pricing Strategy Pricing based on cost-plus-margin required for air and ground elements of program packages. Sales Distribution Uses its own proprietary sales channel, travel agencies, or other GDS. Scheduling Dictated by charter program package requirements. Cargo Minimal impact, due to schedule and itinerary requirement of charter programs. Labor/Staffing Primarily focused on development and sale of program packages. Air and ground elements typically outsourced or provided by lift provider. Airport Real Estate Typically operate as non-signatories to airport use/lease agreements because of the itinerant nature of operation. May enter into marketing and operational agreements with airports and communities at program destinations. Ground Handling Typically handled by third-party.

27 • New model LCC: JetBlue, Virgin America; • New model ultra-low-cost carrier (ULCC): Allegiant, Spirit; • Regional feeder: SkyWest; • Regional at risk: ExpressJet; • Tour operator: Apple Vacations; and • Aircraft, crew, maintenance, and insurance (ACMI) lift provider: Pace, Global. Application of Business Models in Multi-Airport Regions Each airline’s business model is market-facing, and deci- sions about air service are largely driven by whether the pro- vision of air service can be expected to tap market demand that is sufficient to generate acceptable levels of revenue. Because each airline’s business plan objectives and approach are different, and each airline’s capability to provide service and compete is different in each market, the choice options available to each airline will vary significantly. Choices are more complex in multi-airport regions, because each ser- vice option is driven by its interface with each airline’s busi- ness plan and its service capability at any given time, in the broader context of industry-wide and regional circumstances at the time of the service decision. Examples of the choices typically involved in an airline’s decision regarding application of its business plan in a multi- airport region are as follows: • Should the region by served? • What city-pair market(s) should be served from the region? • What level of air service (capacity, frequency, aircraft type, classes of service, and schedule) should be offered in each city-pair market to be served? • What price structure and level should be offered in each city-pair to be served? • Which airport(s) in the region should be served? • If more than one airport will be served, what mix of air service and pricing should be offered at each airport? • What level of facility and station support will be needed at the airport(s) to be served? • What business relationship should be established with the airport(s) to be served? • What relationship should be established with the community? Airlines with relatively less complex business plans (i.e., ULCCs or lift providers) will make decisions regarding such choices somewhat more easily. Many of the choices may already be clearly defined, based on the relatively narrow business objectives, capabilities, and/or market niche of the airline. In Exhibit 5-11. Lift provider. U.S. Airline Examples Pace, Global Network Structure None specific to airline. Selected point-to-point services as determined by charter agreements. Services typically include provision of ACMI. Alliances Fleet None. Provide a variety of aircraft types, as needed to provide specific types of services. Capacity Mainline equipment predominance, suitable for medium- to long-haul services. Pricing Strategy Pricing based on cost-plus-margin required for air element of the program packages. Sales Distribution Sale of air travel handled by charter program provider (i.e., tour operator). Scheduling Dictated by charter program package requirements. Cargo Minimal impact due to schedule and itinerary requirement of charter programs. Labor/Staffing Complex operation (requires labor specialization in areas of primary activity focus on flying and maintenance). Airport Real Estate Typically operate as non-signatories to airport use/lease agreements because of the itinerant nature of operation. Ground Handling Typically handled by third-party.

28 such situations, the choice of which airport, among several, to serve may be the most significant, because it may be one of the few choices regarding service in the region once the decision to serve the region has been made. Airlines also must adapt to changing conditions in the markets they serve. All of the decisions made in the ini- tial implementation of service to a region are continually re assessed based on the historic and forecasted performance of the services. Among the factors that will impact these ongoing re assessments are • Financial performance of the services; • Changes to the airline’s overall business plan; • Competitive environment, including – Competitive conditions in the industry, – New competitive services in the region, – Pricing environment in the region, and – Competitive responses to new services in the region; • Economic conditions in the region and the industry; and • Operating and business environment at the airport(s) served. The case studies that follow in Chapter 6 illustrate how the dynamics of airline choice, and resulting passenger choice, interface in the context of five very different multi-airport regions.