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Booz Allen Hamilton Leading strategy and technology consulting firm

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Presentation on theme: "Booz Allen Hamilton Leading strategy and technology consulting firm"— Presentation transcript:

0 A New Operating Paradigm
Booz Allen Hamilton Standard Colors Colors should be used in the color pairs whenever possible. Do not mix and match colors, use pairs together as shown. Black, White and Gray can be used with any of the other colors. Purple Pantone 2765 R 12 G 4 B 79 Green Pantone 357 R 15 G 67 B 24 Blue Pantone 2 88 R 11 G 31 B 101 Pantone Cool Gray 6 R 158 G 158 B 158 Black Red Pantone 485 R 252 G 5 B 14 Yellow Pantone 3965 R 232 G 244 B 4 Aqua Pantone 319 R 126 G 204 B 189 White

1 Booz Allen Hamilton Leading strategy and technology consulting firm
11,000 employees, $2.2B Founded in 1914 Our clients in air transportation: Governments, airports, air navigation providers Airlines, logistics, GDSs, travel agencies, equipment and service providers A global team: USA, Europe, Asia, Latin America, Africa Breadth: Strategy, operational restructuring, organizational design Systems design and implementation support Policy and regulatory advice RPUS v1.ppt

2 Unit Revenue and Cost Trend Cents Per Available Seat Mile(c/ASM)
Airline crisis is unprecedented – current price levels appear consistent with long term trends Unit Revenue and Cost Trend (U.S. Industry) Unprecedented cost-revenue gap, started before 9-11 Unit Revenue (RASM) Unit Cost (CASM) Cents Per Available Seat Mile(c/ASM) (Adjusted To 2001 Dollars) CASM decline: RASM decline: 1979–1992: 1.5%pa 1979–1992: 1.8%pa CASM increase: RASM increase: 1993–1998: -1.0%pa 1993–1998: +0.6%pa Risk that revenues will revert to “old” trend line Note: CASM reduction Q somewhat overstated due to accounting effects Source: Company Financial Statements, Back Associates, BAH Analysis RPUS v1.ppt

3 The paradigm shift between point-to-point and network business models is far from over
U.S. Domestic Market Structure (O&D Passenger Trips Y2000) Low Cost Carrier Potential Low Cost Carriers (LCCs) can conservatively participate in 70% of the US market LCCs now participate in 43% of O&D market Significant growth potential remains Eastern U.S. Increased breadth in existing strongholds Increased depth in O&Ds currently served Non-Stop Service Available Non-Stop Service Not Available Total Major Hub Cities 44% 6% 50% Minor Hub Cities 7% 2% 9% Large Non-Hub 10% 3% 13% SWA Connection 6% 2% 8% Other 9% 7% 16% Total 78% 22% 100% ~ 10% Over 2,000 Miles ~ 16-18% Small City Markets RPUS v1.ppt

4 Average Yield(1) in Hub Markets
The fundamental threat to hub and spoke carriers lies in price realization Average Yield(1) in Hub Markets 60 OA Yield No SWA preserve 50 OA Yield SWA conn SWA non-stop competition reduces OA yields 25%-35% SWA one-stop competition reduces OA yields 15-20% 40 OA Yield SWA direct competition C/ASM 30 SWA Yield connect 20 SWA Yield non-stop 10 500 1000 1500 2000 2500 RANGE Note: (1) Revenue per revenue passenger mile, including PFC and taxes (2) OA: Other Airline Source: DOT Y.2000 data, BAH Analysis RPUS v1.ppt

5 The situation is complicated by an excess of hub capacity
Current Travel Structure (Passenger Trips, Y2000) Connect In USA 30% ~110 M O&D PAX International ~70% Do Not Connect in US ~60% of Domestic Trips Are Non-Stop ~410 M O&D PAX Domestic Other Connections 9% Inadequate Non-Stop Service 10% Current Domestic Connections ~40% No Non-Stop Service Available 22% Source: U.S. DOT, BAH analysis RPUS v1.ppt

6 …resulting in an unsustainable revenue positions at hub-and-spoke carriers
Competitive Composition: Typical Mainline Carrier, Pre-Crash Degree Of Price Sensitivity Non-Stop Passenger Flight Connecting Passenger Flight Low: Individual chooses airline, travels on business or rich personal travel 20% - 30% revenue 20% - 25% of revenue Medium: Corporation is principal decision maker, drives bargain 10% - 15% revenue 10% - 15% revenue High: Mostly leisure travel and price sensitive business 15% revenue 10% - 15% revenue Generally Product Advantage Significantly Higher Yields (Without LCC Price Impact) Moderately Vulnerable Product Parity Or Disadvantage Vulnerable RPUS v1.ppt

7 Network carriers have a huge cost gap vs LCCs
CASM Versus Stage Length 2000 SK AZ AF US LH BA KL Cents / ASM EasyJet IB AS AA UA NW TW AirT CO Ryanair DL AWA SWA ATA Britannia Average Stage Length (miles) Source: BAH Analysis RPUS v1.ppt

8 Note: Average Airline based on Delta, United, and US Airways
Much of this cost differential is a result of production model choices, not frills Drivers Of Unit Cost Differences U.S. Network Carriers and SWA ( : Stage Length, Seat Density and Factor Cost Adjusted, Y2000) 7.2 12% c/ASM Other 15% G&A Sales and Res 70% Schedule Pax, Bag, Cargo Handling -50% Process & Pace Ownership Costs Onboard Costs Distribution Maintenance Costs Fuel Costs Frills 3% Other Pilot Costs Baseline (SWA) Note: Average Airline based on Delta, United, and US Airways RPUS v1.ppt

9 A new business model may emerge that closes 70-80% of the cost gap and re-establishes product differentiation Random hubbing Improved asset productivity Reduce TAT and handling complexity Alter trade-off between efficient operation and optimum connectivity Restructure Network / Hub Operations to Remove Scheduling Constraints (“Below the Wing Processes”) Separate simple from complicated tasks; apply tailored process streams Reduce low-value interactions with staff Simplify reservation, ticketing, check-in Simplify Customer Interface at the Airport and in Distribution (“Above the Wing Processes”) Reduce complexity, increase pace Lower Cost Differentiated Services Viability Provide specialized services and appropriate schedule qualities Achieve pure business streams High service levels where needed or expected (local vs. connectivity) Low-cost service levels where possible (high-value vs. low-value customers) Create Separate Business Systems for Distinct Customer Segments (“Product Differentiation”) RPUS v1.ppt

10 Incremental Evolution
A new industry structure may emerge – or the next crisis will be a repeat on steroids New Business Model Incremental Evolution 2-3 new network based carriers emerge by continent 1 or 2 random hubs each Many centers of mass a la SWA Greater focus on non-stop services 1-2 low costs carriers by continent Regional carriers that perform two missions Feed for limited number of random hubs Point to point flying in business and smaller markets Network carriers stick to current business model Continued share loss to LCCs Low cost subs fail again Regional operators take over larger proportions of network 1-2 low cost carriers succeed by continent Regional carriers pick up failing routes, remain more focused on feed Next crisis is an amplification of current one RPUS v1.ppt

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