3 Key Types of Airlines and Their Business Models for Success

Types of Airlines and Airline Business Models

clendar July 23, 2023

clendar 14 minutes

44318 Viewers

Summary:

Airlines operate under various business models, personalized to their target markets and operational goals. Full-service carriers (FSC) offer extensive services with a global network and loyalty programs, while low-cost carriers (LCC) focus on minimizing costs with simpler services and direct routes, often from secondary airports. Regional airlines serve smaller cities, filling gaps left by major carriers. Charter airlines specialize in seasonal or group bookings, and cargo airlines are focused solely on freight. The airline industry includes key categories such as network carriers, low-cost carriers, regional carriers, and charter airlines, each catering to different customer needs and market segments.

Airlines operate under different business models, each tailored to their target markets and operational goals. Full-service carriers, such as British Airways, offer a range of amenities, including multiple cabin classes, in-flight services, and extensive global networks. In contrast, low-cost carriers like Ryanair focus on minimizing costs, often offering no-frills services with limited extras, and frequently flying to secondary airports. Regional airlines typically serve smaller cities, providing feeder services to larger hubs. Charter airlines cater to specific group bookings or seasonal routes, while cargo airlines focus solely on transporting goods. Each model plays a critical role in the global aviation ecosystem.

Type of Airlines

Not all airlines are created equal. As in most businesses, there is a sort of stratification of airlines. In many countries, the government owns the airlines. An airline’s rank is determined by the amount of revenue it generates. There are three categories in Airlines: Major, National and Regional.

Major airlines – These are the heavyweights of the airline industry, and you will often hear about them in the news. A major airline is defined as an airline that generates more than £1-billion in revenue annually. Typically, Major airlines are also the largest employers among airlines. However, there are also some major airlines that don’t employ large numbers, which employs only 9,600 people.
National airlines – Just one step down from the major airlines, these are scheduled airlines with annual operating revenues between £100-million and £1-billion. These airlines might serve certain regions of the country but may also provide long-distance routes and some international destinations. They operate medium- and large-sized jets. Because these are smaller airlines, you can expect them to have a smaller number of employees.
Regional airlines – As the name suggests, these airlines service particular regions of a country, filling the niche markets that the major and national airlines may overlook. This is the fastest-growing segment of the airline industry and it can be divided into three subgroups:

1. Large Regional

2. Medium Regional

3. Small Regional

Large regionals – These are scheduled carriers with £20-million to £100-million in annual revenue. They operate aircraft that can accommodate more than 60 passengers.

Medium regionals – These airlines operate on a smaller scale, with operating revenues of under £20-million, and often use only small aircraft.

Small regionals – These airlines don’t have a set revenue definition, but are usually referred to as “commuter airlines.” They use small aircraft with less than 61 seats.

The airline industry is just like any other business, meaning that there are numerous types of airlines because their customers have different needs. If you are going overseas, you’re likely to use a major airline because it has more destinations overseas. A business person travelling between two small cities is likely to fly on a regional airline because he or she does not want to have to stop at a major airline hub for a layover. When flying with major airlines, it’s important to be aware of your rights regarding delays and cancellations. For instance, passengers may be entitled to tui flight delay compensation if they experience significant delays with TUI Fly Belgium

Airline Business Models

The emerging forms of business models in the airline industry are presented in terms of how the carrier generates revenue, its product offering, value-added services, revenue sources, and target customers.

The deregulation and new competitive interactions between ﬁrms always result in some adjustment of the business model to that of the competitor. Three main sets of airline business models that will be described in the next sections are:

1. Full-service carrier or FSC

2. Low-cost carrier or LCC

3. Charter carrier or CC

Full-Service Carriers (FSC)

A full-service carrier (FSC)is deﬁned as an airline company developed from the former state-owned ﬂag carrier, through the market deregulation process, into an airline company with the following elements describing its business model:

Core business: Passenger, Cargo, Maintenance.
Hub-and-spoke network: This has as its major objective the full coverage of as many demand categories as possible (in terms of city-pairs) through the optimization of connectivity in the hub.
Global player: Domestic, international and intercontinental markets are covered with short-, medium- and long-haul ﬂights from the hubs to almost every continent.
Alliances development: No individual airline has developed a truly global network. Thus the network is virtually enlarged by interlining with partner carriers and become part of multi-HS systems.
Vertical product differentiation: This is affected by in-ﬂight and ground service, electronic services (Internet check-in) and travel rules to cover all possible market segments.
Customer relationship management (CRM): Every FSC has a loyalty program to retains the most frequent ﬂyers. The frequent ﬂyers programs (FFP) have become part of a broader strategy called CRM. The general purpose of CRM is to enable carriers to better manage their customers through the introduction of reliable processes and procedures for interacting with those customers. The ﬁnal aim of the CRM is to enhance the passenger’s buying and travelling experience in order to personalize the carrier services. In this perspective, CRM is an extra tool to differentiate the airline product.
Yield management and pricing: To support product differentiation, pricing and yield management is sophisticated, with the aim of maximizing network revenues.
Multi-channel sales: Sales channels are divided into indirect off-line (intermediate travel agencies) or indirect on-line (web intermediate electronic-agents); direct on-line: the passenger buys the tickets directly via the airline’s website; direct off-line: the passenger buys the tickets directly via the airline’s call centre, the airlines city ofﬁce (CTO), or the airline’s airport ofﬁce (ATO). The FSC cover all of these channels.
Distribution system: The complexity of the distribution system described above is technologically supported by external companies called Global Distribution Systems (GDSs). Among the most diffused GDSs are Galileo, Amadeus, Worldspan, Sabre.

Low-Cost Carriers (LCC)

The concept of ‘low-cost carriers’ or LCC originated in the United States with Southwest Airlines at the beginning of the 1970s. In Europe, the Southwest model was copied in 1991, when the Irish company Ryanair, previously a traditional carrier, transformed itself into an LCC and was followed by other LCCs in the United Kingdom (e.g. easyJet in 1995). An LCC is deﬁned as an airline company designed to have a competitive advantage in terms of costs over an FSC. In order to achieve this advantage, an LCC relies on a simpliﬁed business model (compared with the FSC), a model which is characterized by some or all of the following key elements:

Core business: This is passenger air-service despite the ancillary offers are increasing and becoming part of the LCC core business.
Point-to-point network: The network is developed from one or a few airports, called ‘bases’, from which the carrier starts operating routes to the main destinations. Destinations are only continental within the Europian Union or the United States of America. No connections are provided at the airport bases, which function as aircraft logistics and maintenance bases.
Secondary airports: City-pairs are connected mainly from the secondary or even tertiary airports—such as London Luton—that are less expensive in terms of landing tax and handling fee and experience less congestion than the larger ones, such as London Heathrow. Small airports will strive to gain the LCC’ operation and the usual way is to reduce airport charges. Similarly, air transport activity generates welfare that is a multiple of the airports’ activities, inducing regional economic and social development. Local authorities recognize that the LCC operation is a potential driver for social and economic developments, and are willing to provide ﬁnancial help (for example tax exemption, marketing support while LCCs start a new connection). The reduced airport fees can be understood as an incentive, as most of these secondary airports are public. These incentives can be quite relevant and can be deemed to contravene the European Union’s competition rules.
Single aircraft ﬂeet: In general, the LCC operates with one type of aircraft, such as the Boeing 737 series with a conﬁguration of 149 seats. The ﬂeet composition also depends on the fact that they operate on only short- or medium-haul routes.
Aircraft utilization: The aircraft is in the air, on average, more hours a day compared with FSCs that have to respect the connectivity schedule.
No frills service: The product is not differentiated as they do not offer lounge services at airports, choice of seats, and in-ﬂight service, and they do not have a frequent ﬂyer program. Fare restrictions are removed so that the tickets are not refunded able and there is no possibility to rebook with other airlines.
Minimized sales/reservation costs: All tickets are electronic and the distribution system is implemented via the Internet or telephone sales centre (only direct channels). Passengers receive an e-mail containing their travel details and conﬁrmation number when they purchase. The LCC does not intermediate the sale with travel agents and nor does it outsource the distribution to GDS companies.

Ancillary services: LCC increasingly have revenue sources other than ticket sales. Typical examples are commissions from hotels and car rental companies, credit card fees, (excess) luggage charges, in-ﬂight food and beverages, advertising space. The potential growth of this revenue comes from telephone operations and gambling on board. Ryanair’s revenue from sources other than ticket sales contributed £259 million to its 2005–06 net proﬁt of £302 million. Those revenues already represent 16 percent of the carrier’s total revenue. For easy Jet, that kind of income originally represented only 6.5 per cent of the airline’s total revenue, but it increased by 41.3% from 2004. Not every low-cost airline implements all of the points mentioned above. For example, in 2005 Air Berlin started the UK domestic services as feeders to its German services out of Stansted, exploring the hub-and-spoke operations. The differences between the FSC and LCC business models are multifaceted. The signiﬁcant structural cost gap between the two models results from these fundamental differences.

The table breaks down the cost gap between the FSC and the LCC business models. Overall, the LCC model can operate at 49% of FSC costs. In particular, 37% out of a total 51% of costs difference can be attributed to explicit network and airport choices (or business place and process complexity); another 9 per cent of the LCC cost advantage comes from the distribution system and commercial agreements (costs which are narrowing with the elimination of commissions and GDS).

A remarkably small proportion (13%) of the cost differential is product/in-ﬂight service related. The relative simplicity or complexity of their business models distinguishes the LCCs from the FSCs. LCCs have successfully designed a focused, simple operating model around nonstop air travel to and from high-density markets.

On the other hand, the FSC model is cost-penalized by the synchronized hub operations (e.g. long aircraft turns, slack built into schedules to increase connectivity) that implicitly accept the extra time needed for passengers and baggage to make connections. In addition, the FSC business model relies upon highly sophisticated information systems and infrastructure to optimize its hubs. The most relevant success factors of LCCs are their network conﬁguration and their streamlined production processes in relation to FSCs.

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FAQs

1. What are the types of airlines?

The types of airlines are classified into four main categories:

1. Network carriers
2. Low-cost carriers
3. Regional carriers
4. Charter airlines

2. What kind of airlines are there?

Various types of airlines exist, including full-service carriers, low-cost carriers, regional airlines, and charter airlines. Each type offers different services and caters to specific market segments.

3. What are the key characteristics associated with airline industry?

Key characteristics of the airline industry include different types of airlines with various business models, such as full-service, low-cost, and ultra-low-cost carriers. These airlines operate in a regulated environment and face challenges like fuel price fluctuations and intense competition. They often rely on partnerships and alliances to expand their services.

4. How many subgroups do the regional airlines have?

Regional airlines, as outlined in the provided link, are segmented into two subgroups: network airlines and point-to-point airlines. Network airlines typically operate hub-and-spoke systems, connecting passengers through major airports, while point-to-point airlines focus on direct routes between smaller airports without central hubs.

5. What category of air carriers have an annual revenue of less than $100 million?

The category of air carriers with an annual revenue of less than $100 million, as described in the content from the provided source, is referred to as “Regional Carriers.” These carriers typically operate within specific geographic regions, serving shorter routes and connecting smaller airports.

6. What industry is airlines in?

The airline industry operates within the transportation sector, facilitating the movement of people and goods via air travel.

7. What type of industry is an airport?

The airport industry falls under the broader category of the aviation sector, which encompasses various aspects related to air travel, including airlines, aircraft manufacturing, and airport operations.

8. What is the service product of the airline industry?

The service product of the airline industry is transporting passengers and cargo by air. Different types of airlines offer various levels of service to cater to different market segments.

9. What is a leisure airline?

A leisure airline is an airline company that caters primarily to holidaymakers and tourists, offering affordable flights to popular vacation destinations. They typically focus on providing no-frills services, such as limited in-flight amenities and simple booking processes, to keep costs low and attract budget-conscious travelers.

10. What is a national airline?

A national airline is an airline that is owned by the government of a particular country. It operates flights within the country and sometimes to international destinations as well. National airlines are often seen as representing the identity and interests of their home country in the aviation industry.

11. What type of market is the airline industry?

The airline industry operates within a competitive market characterized by various types of airlines and business models.

12. How does a point to point flight system work?

Point-to-point flight systems operate by connecting passengers directly from their origin to their destination without needing to go through a central hub, which saves time and reduces layovers for travelers.

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3 Key Types of Airlines and Their Business Models for Success