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A New Operating Paradigm. 1RPUS1747-0126-011303v1.ppt Booz Allen Hamilton Leading strategy and technology consulting firm –11,000 employees, $2.2B –Founded.

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Presentation on theme: "A New Operating Paradigm. 1RPUS1747-0126-011303v1.ppt Booz Allen Hamilton Leading strategy and technology consulting firm –11,000 employees, $2.2B –Founded."— Presentation transcript:

1 A New Operating Paradigm

2 1RPUS v1.ppt 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

3 2RPUS v1.ppt Airline crisis is unprecedented – current price levels appear consistent with long term trends Cents Per Available Seat Mile(c/ASM) (Adjusted To 2001 Dollars) Unit Revenue and Cost Trend (U.S. Industry) 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 Note: CASM reduction Q somewhat overstated due to accounting effects Source: Company Financial Statements, Back Associates, BAH Analysis Unprecedented cost-revenue gap, started before 9-11 Risk that revenues will revert to old trend line Unit Revenue (RASM) Unit Cost (CASM)

4 3RPUS v1.ppt Low Cost Carrier Potential The paradigm shift between point-to-point and network business models is far from over 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 ~ 16-18% Small City Markets Total Non-Stop Service Available Non-Stop Service Not Available Total 44%6% 50% Major Hub Cities 7%2% 9% Minor Hub Cities 10%3% 13% Large Non-Hub 6%2% 8% SWA Connection 9%7% 16% Other 78% 22% 100% U.S. Domestic Market Structure (O&D Passenger Trips Y2000) ~ 10% Over 2,000 Miles

5 4RPUS v1.ppt The fundamental threat to hub and spoke carriers lies in price realization Average Yield (1) in Hub Markets C/ASM OA Yield No SWA preserve OA Yield SWA conn OA Yield SWA direct competition SWA Yield non-stop SWA Yield connect Note: (1) Revenue per revenue passenger mile, including PFC and taxes (2) OA: Other Airline Source: DOT Y.2000 data, BAH Analysis SWA non-stop competition reduces OA yields 25%-35% SWA one-stop competition reduces OA yields 15-20% SWA non-stop competition reduces OA yields 25%-35% SWA one-stop competition reduces OA yields 15-20% RANGE

6 5RPUS v1.ppt The situation is complicated by an excess of hub capacity Current Travel Structure (Passenger Trips, Y2000) Source: U.S. DOT, BAH analysis International Domestic No Non-Stop Service Available 22% Inadequate Non-Stop Service 10% Other Connections 9% Connect In USA 30% ~70% Do Not Connect in US ~60% of Domestic Trips Are Non-Stop Current Domestic Connections ~40% ~110 M O&D PAX ~410 M O&D PAX

7 6RPUS v1.ppt …resulting in an unsustainable revenue positions at hub-and- spoke carriers Degree Of Price Sensitivity Low: Individual chooses airline, travels on business or rich personal travel Non-Stop Passenger Flight 20% - 30% revenue Connecting Passenger Flight Medium: Corporation is principal decision maker, drives bargain 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) Product Parity Or Disadvantage Moderately Vulnerable Vulnerable Competitive Composition: Typical Mainline Carrier, Pre-Crash 20% - 25% of revenue

8 7RPUS v1.ppt Britannia Average Stage Length (miles) Cents / ASM CASM Versus Stage Length 2000 Network carriers have a huge cost gap vs LCCs BA EasyJet LH AF KL IB Ryanair SK SWA ATA AS AA AWA NW DL CO US UA TW AirT AZ Source: BAH Analysis

9 8RPUS v1.ppt Drivers Of Unit Cost Differences U.S. Network Carriers and SWA ( : Stage Length, Seat Density and Factor Cost Adjusted, Y2000) c/ASM % 15% 70% 3% Schedule Process & Pace Distribution Frills Other Baseline (SWA) -50% Much of this cost differential is a result of production model choices, not frills Note: Average Airline based on Delta, United, and US Airways G&A Sales and Res Other Pax, Bag, Cargo Handling Ownership Costs Maintenance Costs Fuel Costs Pilot Costs Onboard Costs

10 9RPUS v1.ppt Lower Cost Differentiated Services Viability Random hubbing Improved asset productivity Reduce TAT and handling complexity Alter trade-off between efficient operation and optimum connectivity 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) Reduce complexity, increase pace High service levels where needed or expected (local vs. connectivity) Low-cost service levels where possible (high-value vs. low-value customers) 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) Separate simple from complicated tasks; apply tailored process streams Reduce low-value interactions with staff Simplify reservation, ticketing, check-in 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) Achieve pure business streams Provide specialized services and appropriate schedule qualities A new business model may emerge that closes 70-80% of the cost gap and re-establishes product differentiation

11 10RPUS v1.ppt A new industry structure may emerge – or the next crisis will be a repeat on steroids New Business Model 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 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 Incremental Evolution 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 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


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