Strategic Management Business Model in the Airline Industry -Traditional Network Business Model versus “Low-Cost” Business Model

Abstract

The powerful economic crisis in the airline industry, badly hit the traditional network airlines. Known as network carriers, national airline, flag carriers, traditional airlines has been developed historically, based on the well known “hub-and-spoke†business model. The hub was located in the country of origin, assigning the national identification to the airline. The crisis in the field started in around the years ’90 and continued to grow in intensity after the terrorist attack from September, 11, 2001.The history of commercial aviation shows us the fact that the airline business industry historically generated important profits, resulting in huge overcapacities. After the ’90, the economic crisis and the fear of terrorist attacks resulted in huge overcapacities and modest revenues reflecting an economic decline to be present for a long time in the airline business industry. Surprisingly, at a first look, the “low-cost†carriers have been helped by the economic crisis. They have been seen as the economic alternative of air transport on a specific destination, meant to reduce the airline travel budget of the individual and corporate clients. This “low-cost†option proved to be very convincing at that time when passengers started to avoid high fares charged by network carriers, developed on expensive hub models. Now, on the medium-haul routes, the “low-cost†airlines provide 80% of the airline service quality at less than 50% of the network airline cost. Therefore, “low-cost†carriers, touch more than 70% of medium-haul flights in the US and Europe, separating them from the origin of the business concept of “niche carriersâ€. However, for the most long-haul intercontinental flights, hub concentration stays a mandatory condition. For the network carriers the challenge consists on reinventing their traditional business model. If they would be able to provide the same service level at dramatically lower costs, the network carriers will consolidate their market position and they will promote the entire industry toward a new level of efficiency. This paperwork analysis the transition constraints and outline the vision of a new business model in the global airline industry, who eventually will lead the industry at a new equilibrium period.

 

Keywords: Strategy, network carriers, « low-cost » carriers, global alliances, commercial aviation industry, new business model.