Air Transport Economics

Arab Academy for Science,

Technology & Maritime Transport

Guest Lecture: Dr. Ola Shawer

26/08/2023
Contents
1. Passenger and cargo Traffic

2. Airlines typology

3. Demand & supply

4. Network & fleet

5. Alliances

6. Cases from air industry

7. Airline finance
Passenger traffic by route area
Cargo traffic by route area
Top passenger airlines
Top cargo markets-2020
Contents
1. Passenger and cargo Traffic

2. Airlines typology

3. Demand & supply

4. Network & fleet

5. Airline finance

6. Alliances

7. Cases from air industry

Key industry players

• Airports
• Airlines
• Ground Handlers
• Air Navigation Services
• Governmental bodies
• Maintenance Providers
• Aircraft Cleaners
• Catering Providers
• Tour Operators
• Forwarders
• Shops at airport
Airline typology-cargo
Airline typology-passengers

• Schedule transport

➢ Legacy carriers (majors)

➢Low-cost airlines
➢Leisure airlines
➢Regional airlines

• Charter aviation
Airline Typology- passenger
Airline typology -cargo
Airline typology -cargo

1. All cargo airlines

E.g. Cargolux

2. Combination airlines
E. g. British Airways

3. Integrators
E.g. FedEX

4. Forwarders
E.g. Panalpina
The importance of cargo airports (2018)
The importance of cargo revenues for airlines
Shift towards more belly space?
The Cocktail of success

Economies
Economies Economies
Create other of density
of scale of scope
product with same
Spread fixed costs Create network
assets ( freight in
over larger volume advantages
passenger ac,
business class)

Volume
The more dense
advantages
Vertical the network, the
(purchasing
Integration bigger possibility
advantages, larger
to connect.
aircraft).

Horizontal
Integration
The Cocktail of success
Egyptair Cargo business model-Who we are?
Emirates case “EK”

• H&S
• Large size network
• Non alliance Copies
• Very selective code share
• High quality
• Premium passenger experience
• Extensive cargo operation Emirates
• International employees Etihad
• Extensive market campaigns (sport events) Qatar Airways
• Tax free environment Oman Air
• Extensive traffic rights Gulf Air
• Subsidies
Emirates case
• What is the advantage of having H&S?
To achieve economies of scope,
scale & densities

• What is the disadvantage of having H&S?

If passenger missed connection, will stay longer
Airlines have to organize all logistics for operation
• Why Emirates is not part of any alliance?
See they are not beneficial, old way to do business.
If growing, steal traffic
They are their own boss
• Should EK move to smaller aircraft?
EK focus on intercontinental network strategy
• Should EK merge with EY?
On paper, it makes sense, as there is only one hour drive between
DXB & AUH, besides, new airport DWC is opened
But it was decided to keep them separate (political issue)
Contents
1. Passenger and cargo Traffic

2. Airlines typology

3. Demand & supply

4. Network & fleet

5. Airline finance

6. Alliances

7. Cases from air industry

Demand drivers
Factors influencing the traffic development

• Liberalization
• Urbanization
• Population growth
• Growth of GDP
• Rising markets ( China-India-
Brazil-Indonesia, Malaysia….)
• Development of the LCC in Asia-
Pacific
• Rise of Middle Eastern carriers
• Fuel cost
• Globalization
• Infrastructure development
How is income influence travel?
Double income increase trips 4 times
Demand drivers
Supply drivers
Supply drivers- wide body aircraft orders
The global air cargo market
The fluctuating supply determines the price than the
limited periodic and local variations in demand
Air travel demand segments
Time elasticity of demand- passenger
Business travelers Leisure travelers

Less sensitive to time and

Very sensitive to frequency
frequency

Less responsive to prices Very sensitive to prices

Travel plan in advance, pay in
Last minute seats advance

Assumed to be time inelastic

More time elastic
Elasticity of demand- Air cargo

Three main market segments

1. Air freight ( larger size shipments, less time sensitive)

2. Air express ( small size shipments, very time sensitive)

3. Postal services ( very small size shipments, hardly any time sensitivity)
Contents
1. Passenger and cargo Traffic

2. Airlines typology

3. Demand & supply

4. Network & fleet

5. Airline finance

6. Alliances

7. Cases from air industry

Hub and spoke network operation
Fleet planning
• Fleet communality
➢Boeing versus Airbus/Embraer vs Canadair vs Comac
➢777/787 and 320/330/340/350/380 cockpit communality
➢Models itself range in payload/rang/size
➢737 CG/N/Max same type rating

• Ultra long-range aircraft

• Long range narrow body aircraft- A321LR and 737 Max
• Trend towards leasing
➢Dry lease
➢Damp lease
➢Wet lease
➢Ad hoc charter
Fleet type and aircraft orders

Airlines Current On order

Ethiopian Airlines
142 1

Emirates
264 12

Egyptair
78 3

www.planespotters.net
August 2023
Network- EK

https://www.flightradar24.com/
Contents
1. Passenger and cargo Traffic

2. Airlines typology

3. Demand & supply

4. Network & fleet

5. Alliances

6. Cases from air industry

7. Airline finance
Typical Alliance Legal Forms

Non-
Equity
equity Joint
corpora-
corpora- venture One pot,
Airlines work tion Objective are
tion aligned
together not aligned
objective

Not allowed
Coordinate Allowed to
to discuss
network discuss prices
prices

More More easy to

complicated manage

Ex: Alliances EX:

EX: Etihad Airways
LH & Swiss
Ethiopian Airlines
AF/KLM
BA & Transatlantic
Airline Alliances
Ethiopian airlines equity corporation

ET equity shares

Asky Air Malawi

40% 49%

Guinea Airlines Chad Airlines

49% 49%

Zambia Airways
45%

39
 Atlantic JT- Revenue Sharing Model

British Airways, Iberia, Aer

Lingus, Vueling, and LEVEL,
IAG Cargo
Motives for building Alliances in the air
industry
Motives for building Alliances in the air industry

Competition& regulation
Marketing advantages Cost advantages
aspects

Connect t hubs with high Decrease costs by sharing Reduce or limit competition
frequency fixed assets, joint
Make your hub stronger purchasing Bypass international
Increase presence of Increase frequencies (EOD) regulatory barriers
partners
Rom regional to world Enlarge network (EOD Support hubs
access
Loyalty program
Airline Alliances are built upon a broad
set of components and activities
Airlines practices

ET
MH AH C
ET
MS
SA A
KQ
X B MH
EK V
LH A
CX
ET BA EK
LH

Codeshare Joint venture Joint business

ET
ET

LH BA
CX EK
EK
LH AV BA
AV
LH CX CX

Merger and acquisition Intermodal

Multi-hubs strategy integration
Alliance Lifecycle
Contents
1. Passenger and cargo Traffic

2. Airlines typology

3. Demand & supply

4. Network & fleet

5. Alliances

6. Cases from air industry

7. Airline finance
Warm up- what went wrong??
Previous positioning of the airlines Merger of brands and business model in
in the S’Air Group the S’Air Group
Positioning of airlines in the AF-KL Group
Etihad Airways case

In 2011, Etihad Airways CEO James Hogan

entered into an equity alliance with several
airline companies globally to counter the
growth of its Persian Gulf rivals of Emirates
Airline and Qatar Airways. This strategy led
to Etihad holding interests (mostly minority
interests) in eight other airline companies
principally from Australia, India and Europe
(five from Europe). Etihad encountered
more failures than successes with these
investments, which ultimately led to the
departure of CEO James Hogan in 2017.
Etihad Airways case
• How did Etihad select airlines?
EY looks at big markets :
• Germany : could not beat LH)
• Italy : very fashionable
• India : big market
• Australia : big market to AUH

What went wrong??

• Etihad looks at big markets when selecting the partner airlines.
• Etihad tried to buy EOD without achieving EOS.
• There were no fleet communality, no single platform, no synergy between
partners, different strategies in place.
• The selection was not the best, all bankrupted one after the other.
Contents
1. Passenger and cargo Traffic

2. Airlines typology

3. Demand & supply

4. Network & fleet

5. Alliances

6. Cases from air industry

7. Airline finance
Direct Operating Costs
Flight
operations Maintenance and
Overhaul Costs
Flight and cabin
crew expenses

Depreciation
Fuel
and
Amortization
Airport and en-
route charges

Aircraft
insurance costs

Other (Crew
training, leasing
charges…)
Indirect Operating Costs

Station and Ground handling costs

Passenger service costs ( catering/expenses due to delay

or cancelled flights)

Reservations, sales and promotion costs

General and administration costs

Non-operating Costs and Revenues
Gains and losses arising from retirement of property
equipment

Bank interest charges

Profits and losses from airline’s affiliated companies

Foreign Exchange profits and losses

Direct government subsidies or payments

Operating cost airlines (2018)
Airline P&L
Total Revenues
•Passengers
•Cargo

Minus total Direct Operating Costs (DOC)

Minus total Indirect Operating Costs (IOC)

= Total Operating Profit

Minus Non Operating Costs (NOC)

Plus Non Operating Revenues (NOR)

= Total Profit/Loss (before tax)

 Thank you
Any questions??