Airline Business Model Convergence in Europe

01.09.2015
By Sascha Albers

Airline business models are converging, not only in Europe. Anecdotal evidence on this development has been repeatedly cited over the last years: Air Berlin joins Oneworld, Vueling offers interlining, and Easyjet publishes its fares in global distribution systems. KLM charges for checked baggage on its European routes, and Air France is cutting down its air cargo business. Lufthansa bickers with the reconfiguration of its “low cost” and full service business in-house: it hands over its European non-hub traffic to its low-cost subsidiary Germanwings, and simultaneously positions that subsidiary as an innovative high quality low-cost airline. But whereas the general convergence trend is undisputed, there is comparatively little understanding of how it unfolds and what consequences it involves for airlines. I will offer a clearly biased summary of the main causes, forms and potential effects of the convergence trend among European airlines’ business models.

Why? Convergence Causes. The spreading of the low cost carrier (LCC) model can be interpreted as the diffusion of a radical (strategic and organizational) innovation in a mature industry. The European “innovators”, i.e. the early low cost carriers such as Ryanair and EasyJet, tapped new customer groups that provided the momentum for these airlines’ rapid expansion. With the saturation of these market segments, LCCs started to penetrate the traditional full service market. Most European full service carriers (FSC) underestimated the thrust that the LCCs were developing, also in “re-educating” airline customers, and initially attempted to block their LCC rivals’ expansion halfheartedly: They established low cost subsidiaries (e.g. British Airways’ Go and KLM’s Buzz) that were, after a few meager years, often sold to (low cost) competitors. The shakeout among LCCs in the latter half of the 2000s notwithstanding, the LCC competitive wave reached a sensible part of the FSC’s core business, their continental passenger operations, and led FSCs to redouble efforts in experimenting with selective product unbundling, process redesigns, and new pricing and distribution methods. For all players in the industry, this was an effective, yet for some also a painful way of exploring customer preferences and their willingness to pay for individual service components (e.g. seat allocation, drinks, baggage) in more depth, as these were hidden by the traditional product and service bundles.

How? Convergence Form. A variety of recent studies confirms that European airlines become more similar across the full spectrum of their strategies, activities and asset configurations. The convergence of business models can come in at least two forms: (1) two initially distinct models evolve into one hybrid, i.e. showing features of both initial forms, or (2) one business model will transform into the other. The first form applies to the European airline industry: both, FSCs and LCCs adapt their principal business model components. It is neither the FSCs that selectively and continuously adopt LCC ideas and practices, nor the LCCs that include yet another additional service feature from their FSC competitors. In fact, the only “stable” airline over the last 10 years was Ryanair which consistently kept its original low cost model – but even Ryanair has started to budge recently, introducing allocated seating, operating from primary airports and selling tickets via global distribution systems.

So what? Convergence Consequences. The industry-wide development towards such a hybrid model implies that all players target (more or less) the same customer groups with (more or less) the same strategies, structures and assets. This is an almost natural tendency in mature markets, but consequences are known and are usually not attractive. The intensity of competition increases, as the remaining players fight with equivalent or even almost similar weapons and armory portfolios – a typical “Red Ocean” setting. The hybridization of business models implies that airlines now target a broader customer spectrum, i.e. they have widened their competitive scope. This increased similarity of most airlines provides strategic maneuvering space for the few that maintain their original business model. When all others become more similar, those that remain unchanged passively evolve into differentiators. Ryanair has followed this line for quite a while, and is now only slowly adjusting selected features of its model to evolving customer preferences and remaining growth pockets. And the agglomeration in the “mainstream middle” provides opportunities for new entrants that specialize, and focus on particular market segments off the middle, as the emergence of ultra-budget airlines illustrates.


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