EEAVN4010: AIR TRANSPORT ECONOMICS

Introduction
The paper emphasizes on type of business models airline companies are working on.
Among them three mentioned business models are Low cost, Full Service and Hybrid models are
the dominant ones. Working in such a dynamic environment airlines usually shifts from one
model to another depending on the need of time.
Low Cost Business Model
Airlines which are following this model are known as Low Cost Carriers. These airlines
usually offer low fares and discounts and thus eliminate many traditional services. Firstly this
model was introduced in Europe and UK with the introduction of easyjet and Ryanair back in
1995 companies which are working on this model keep the things simple and don’t bother to
bring innovation and new marketing strategis into the business (Dobruszkes, 2006). They keep
the business at low cost by not offering different classes, use single class airbuses, ensure the
maximum usage of planes, don’t offer high salaries to their employees and only work on
secondary airports (Dobruszkes, 2006).
Some renowned names following this model are as follow.
 AirAsia.
 Norwegian.
 WestJet.
 Jetstar Airways.
 IndiGo.
 EasyJet.
 AirAsia X
 Southwest Airlines.

Full Service Airline Business Model

Full Service airline is the one offering all the services on board in most of the cases which is
national airline which later on get privatized to some extent. Also known as legacy airlines
usually have the large fleet and updated airbuses, diversified routes and operational to long haul
as well as short haul regional flights (Bieger and Agosti, 2017). These airlines are probably
working since the establishment of this industry. Moreover airlines working on this model are
most likely to have shares in other aviation service including maintenance facilities, hub airports
and catering businesses. At first glance it seems very profitable but managing all this is very
difficult for the management (Bieger and Agosti, 2017).
Here are the main characteristics of full service airlines (Bieger and Agosti, 2017):
 Broad network of connecting flights permitting long haul routes with one ticket on
single airline.
 Reputable position in the mind of customers.
 Value added services by offering on board meals, baggage services, and
entertainment services.
 Diversified fares starting with very low from last minute to the first minute tariffs’ to
the very expensive first class services (Bieger and Agosti, 2017).
 Loyalty programs for retaining the customers base and awarding them for travelling.
 Offering decent security services to the passenger specially at the time of flight
transitions (Bieger and Agosti, 2017).
Hybrid business Model
There exists as many as business models one could think. Hybrid business models are the
ones which make necessary amendments in their existing business models depending upon the
customer’s requirement and profitability (Endrizalová, Novák and Kameníková, 2017). In hybrid
model full service model airline may start transporting cargo to some destinations,
franchising/outsourcing their regional routes to other airline service provider and working as low
cost carrier to attain feeder traffic. Renowned Low cost business airline models which can be
considered as hybrid models are Germanwings, Easyjet and Norwegian airlines (Endrizalová,
Novák and Kameníková, 2017). In a nut shell there isn’t any ideal airline business model. So if
the net profits are more than the operational and other costs incurred the business model
working on is the right one.
Comparison of Airline Business Models
 Meaningfully analyzing and differentiating among the airlines business is not easy task
because the nature of this particular industry is highly dynamic. Fe w comparisons on the basis
of services being offered are as follow.
Products/Services offered
Comparing the Low cost business model with Full service there are distinct features of
both. It is not uphill to differentiate the both on the basis of products/ services they offer.
Low cost business model offers the basic and cheaper services whereas full service
models airlines are bit expensive. With basic facilities the low cost is offering only single class
services whereas the other have two or more depending upon the customer’s requirements
(O’Connell and Williams, 2005). There are no meals and entertainment services in low cost
airlines on the other hand legacy airlines provide on board meal and entertainment services.
Value added services like Wi-Fi are being offered in legacy services whereas in low cost services
only basic facilities are offered.
Marketing & Distribution
Airlines following legacy model are spending much on the marketing and distribution,
their customers are conscious about the brand and the services they offer on the other hand low
cost airline customers are easy switcher from one airline service to other depending upon the
availability and the fare offerings (Huse and Evangelho, 2007). Full service airlines are selling
tickets via various channels / distributors and agents whereas low cost service provider are
selling tickets online only. Legacy airlines are with coordination with other airlines whereas low
cost are operational only in short haul so they don’t do so. Full Service provider are spending
much on advertisement and promotions while low cost airlines don’t spend on it (Huse and
Evangelho, 2007).
Cost Structure
Legacy airlines have high cost of labor and they are paying much to their workforce
unlike the low cost service airlines incur low costs on employees and paying lesser salaries.
Legacy services offer the all-inclusive packages so they don’t charge for baggage as its cost is
already included in the ticket but in low cost services there is no baggage transfer as they
operational only on short hauls (Papatheodorou and Lei, 2006). Legacy airlines are operational in
diversified areas so they have significantly extensive fleet of airbuses so the operational as well
as fuel cost is much higher than the low cost airlines which are working on shorter destinations
and have limited no of airbuses.
Revenue/Pricing
Pricing structure of low cost business models is very simple as the product offering is not
complex. Low cost airlines have the regional connections with local airports give revenue
benefits to the low cost airlines which is not possible in case of legacy airlines. Low cost airlines
are not offering baggage service so this way they are not yielding anything from this segment
whereas legacy airlines are earning good in this regard (Huse and Evangelho, 2007). Legacy
airlines have shares in other businesses like catering and maintenance services as they are
operations in longhaul routes in this way they are generating revenues this way as well whereas
only limited to short hauls low cost airlines are only into the airlines business.
Long Haul Low Cost Product
The airline industry is considered to be the most instable and unpredictable, earlier the
low cost models were the one generated significant financial gains but due to changing situation
companies started observing saturation (Wensveen and Leick, 2009). This way companies
started looking for the new strategies and models, long haul low cost is the one of that strategy.
In order to comply with changing conditions airlines choose the cost reduction policy by
cutting different operational costs including capacity, on board amenities and managerial
expenses. In this was passengers started picking those airlines which are effective in terms of
cost. This low cost was emerged in 1970 and adopted by Southwest Airlines and thus inspired
other companies to follow this approach (Wensveen and Leick, 2009). Due to the profit
generating response of the model in short haul the low cost companies converted the same
business for long hauls. Although the idea of low cost long haul is not that new as it was earlier
tried by Laker’s Skytrain which offered £59 ticket from London to New York. In low cost long
haul there is possibility of 20 to 25 % cost advantage if the tickets are sold online to cut down the
distribution cost and the connecting flights arranged by the individual passenger. In addition
secondary airports cannot be used for the landing of large size airbuses due to the limitations of
cost and time (Wensveen and Leick, 2009).
Part B
Economic Impact of the Air Transport
 The aviation industry contributes $2.7 trillion to the world’ GDP that cumulatively
counted as 3.6% (Economics, 2014). Yearly airlines transport about 4 billion passengers and
freight nearly 62million tons. Generating jobs 10.2 million direct jobs in the aviation industry.
Comparing the contribution of the airline industry with other leading businesses and their GDP
participation, global air transport industry is larger than pharmaceutical and automobile industry.
Considering the economic position of the industry if air industry were a country it would be
standing at 20th position in the world economy like Switzerland or Argentina (Economics, 2014).
Airline industry have $ 637.8 billion indirect GDP impact including employment and
various activities of the suppliers, for an instance construction companies that are into building
airport and related buildings, aviation fuel suppliers, distributors or suppliers of components
used in aircrafts, products that are sold on airports and the franchises of edible items used on
board, and variety of activities involved indirectly like in bound or outbound call centers , IT
support and accountability (Economics, 2014).
Those who are directly or indirectly employed in this industry including retail outlets,
companies manufacturing consumer goods and other range of industries. $454 billion induced
GDP is contributed by the airline industry employees who are directly or indirectly participating
in induced GDP using their incomes earned through aviation industry for their consumptions. In
tourism industry the major role is played by the airline industry and an analysis suggested that
aviation contributed about $896.9 billion in tourism economy (Economics, 2014).
As per the experts at Arab Aviation Summit, this is anticipated that this segment will
contribute about Dh200 billion to the UAE economy by 2020 creating job 750,000 opportunities.
The aviation sector is significant economic pillar of Dubai contributing 27% of Dubai GDP. As
quoted by the Oxford Economics (Economics, 2014). This is expected that it will increase by
37.5 percent in 2020. As per Jeff Johnson , vice president of Boeing international and president
of Boing Middle East in upcoming 20 years the UAE’s aviation industry will be close to the
airline industry of United States and China (Economics, 2014).
Impact of economic environment on the Air transport industry
Among external environments, economic environment has remarkable impacts on the
industrial growth. Like any other industry PESTEL has the dominant impact on the airlines
industry. Paradigm shift of long haul low cost is evident fact that economic condition of the
passenger is the key indicator to shape the decisions. Before that people has the limited options
or else they were expensive (Oktal et al., 2006). This model was basically driven by the
economic environment.UAE economic environment depicts the positive figures for the aviation
industry as it has the high per capita income in world and one of the best welfare system. The
rate of unemployment is as low as 1.7% and adjusting the foreign labor which counts about 85%
of entire workforce (Oktal et al., 2006).
Air Deregulation
In 1978 airline deregulation act was introduced after which there was paradigm shift or
air travel from political to the market environment. Before that Civil Aeronautics Board (CAB)
had the complete control over pricing of air tickets, entry and exits, mergers, inter carrier service
agreements and dealing all the customer’s issues, it was waved out after its official expiry on
31st December 1984 (Button, 2017).
Economic liberalization of aviation industry was part of deregulations as previously the
politically controlled economy have generated nothing in public interest. This deregulation was
the sequel of global airline liberalization trend particularly in Latin America, Asia and European
union.
Deregulation Act was one of the most important move in this industry, previously the
routes were established by the CAB (Button, 2017). In that period airlines completely relied on
the mail to survive, and it was the decision power of federal government to decide who will carry
the mail and at which price. Later on the federal government loosened its control over the flight
operations, routes and fare structures. This way the airlines started working more autonomously
thus the competition among them get enhanced (Button, 2017). After that airlines were not
bound to stay operational on those routes which were not generating profit. They started
analyzing the new strategies an opportunities which are in the best interest of company. With this
development new airlines also entered in the market to explore this industry.
The International Air Transport Association (IATA)
The international Air Transport Association is the trade organization for world’s airlines
representing about 82 % that makes 290 airlines (IATA, 2019). IATA provide technical support
to assist in formulation of industry policy and regulations. IATA philosophy is Global
Development and Regional Delivery which means the head office will be development oriented
whereas the regional and country offices will be delivering the services (IATA, 2019).
Vision
“Working together to shape the future growth of a safe, secure and sustainable air transport
industry that connects and enriches our world” (IATA, 2019)
Mission
“IATA’s mission is to represent, lead, and serve the airline industry” (IATA, 2019)
Objectives
Some of the key objectives of the IATA are (IATA, 2019)
 Work on reducing the ANSP and Airpot charges
 Bring betterment in Legal and Regulatory Environment
 Implement a global agreement ICAO for CNG2020
 Eradicate hurdles in the commercialization of Sustainble aviation fuels.
 Ensure the safety audits.
 Work on bringing more membership and customer satisfaction.
Functions
IATA plays significant role in the delivery of validation materials and trainings for
airlines and other industry related businesses for processing, safe keeping, management of
revenue and air safety for both the passenger and the airline (Arvidson, 2019). Other major role
of IATA is presenting the airline and its common interest to the unexplored markets where IATA
usually work as adjudicator (Arvidson, 2019).
Organizational Structure
Source: IATA (2019)

Conclusion
All in all the aviation industry is dynamic in nature and things are getting change with innovation
and demands of customers. Business models are made to respond this and cater the transition in
business environment.
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