See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/331533432

Current Developments in Airline Network Management (4) The Future of

Airlines' Network Management

Article · March 2019

CITATIONS READS

0 37

1 author:

Christoph Brützel
IUBH – Internationale Hochschule
6 PUBLICATIONS   0 CITATIONS   

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Aviation Managemnent View project

All content following this page was uploaded by Christoph Brützel on 05 March 2019.

The user has requested enhancement of the downloaded file.

 Current Developments in Airline Network Management (4)
Christoph Brützel

The Future of Airlines’ Network Management

In the first three parts, the network management of the network carriers, leisure airlines and
the low-cost carriers (LCC) were discussed individually. It became clear that the network
models are not complementary, but increasingly overlapping. In the interest of adequate
capacity utilization, the network carriers remain dependent on the private travel public.
After the low-cost carriers had to learn in serving classic package tour destinations that their
services there had led to a massive oversaturation of the markets with the resultant
pressure on margins, they are now also trying to gain a foothold in the business travel
market. What will happen next?

Megatrends in network development and management

Last year, IATA presented a study (Future of the Airline Industry 2035), for which many
experts, coordinated by a School of International Futures (SOIF), had given intensive thought
to the future development of the industry and, after evaluating numerous trends, formed
four scenarios. With regard to the development of airline business models and in particular
network management, however, the results of the study are rather poor. They are more or
less reduced to the indication that it will be a matter of identifying the true customer needs
and further developing the offers accordingly (page 45 of the study). How this can be done
remains open. To answer this question, a few megatrends will first be identified:

1. Hybridization of business models continues

The overlap between the customer segments will continue to increase and, accordingly, the
networks and O&Ds offered (true origin true destination itineraries) and, finally, the services
and service combinations offered will increasingly converge. Business models will continue
to hybridize accordingly.

2. Consolidation continues, but does not lead to reduced competition

The consolidation of the airline industry, already at an advanced stage in the USA and
Australia, will continue globally, initially in Europe and South America, but ultimately also in
China, India, Southeast Asia and even in the Middle East. This will lead to extended coverage
of the networks of each individual provider, but not to reduced competition if liberalization
continues.

3. Sustainability of excess capacity

The growth forecasts for the market published by manufacturers and industry associations
are rather at the upper end of realistic developments, especially for the economically
mature regions of the world (North America, Europe). In view of the order lists of aircraft
manufacturers and the well-known longevity of active fleets, it is foreseeable that capacity in
the market as a whole will continue to advance demand in the future.

Meerbusch / Bad Honnef March 2019 Page 1 of 7

Brützel: Current Developments in Airline Network Management (4)

4. Continued pressure on prices and costs

In the absence of effective differentiation of service products from the customer's point of
view, competition in the event of sustained overcapacity in the market (see third point) will
continue to be conducted via price and thus via costs.

5. Digitization leads to decoupling of network management and

production

The cross-industry networking of production planning and control systems tends to lead to a
further flattening of vertical value chains and thus potentially to a decoupling of product
management (network management) and production.

The next generation of network management

In line with the IATA study cited above, the megatrends mentioned could lead to a scenario
in which three types of networks are offered to specific customer groups:

(1) Global networks, primarily for business travelers, for long-haul networks also for private
travelers, who, beyond the classic models for organizing transfer connections
(interlining, alliances), organize a frequent and comprehensive range of airport-to-
airport connections and, at best, door-to-door connections.

(2) Point-to-point networks, primarily for private travellers who prefer to operate beyond
the hubs of global network providers. These networks do not focus on the number of
frequencies, but on the price.

(3) Network capacities offered at regional airports for airline customers (ACMI) and for tour
operators (charter), at daytime as hub feeders and during the day for the presentation
of tourist offers for LCC, holiday airlines and tour operators.

1. Global tour operator network management for business

travelers
From the customer's point of view, the added value of network management is the
organization of the supply chain of an air journey from the point of embarkation to the point
of disembarkation, including the associated services at the airport (departure, transfer if
necessary, arrival), whereby this only represents part of the total journey from the point of
origin to the point of destination.

The "Airport-to-Airport" section has so far been a proprietary core competence of the
airlines, especially when it comes to the presentation of transfer connections (airline
internal, code sharing, interlining).
The decoupling of network management and production will provide space on the market
side for customer group-specific business models in order to optimally meet the different
needs of business and private travelers.

Meerbusch / Bad Honnef March 2019 Page 2 of 7

Brützel: Current Developments in Airline Network Management (4)

NDC and One Order are messengers of a development that will ultimately allow not only
airlines but also virtual integrators to organize networks that enable seamless travel for
customers - for themselves and for their baggage, from the airport of embarkation to the
airport of destination and beyond - without the need for airline internal transfer
connections, interlining or code sharing. Global network providers are thus increasingly
becoming "tour operators" for business travelers and, on long-haul routes, also for private
travelers.
Global alliances and coordinated hub schedules will continue to offer significant competitive
advantages for the business travel market and for long-haul connections. Where "in-house
production", e.g. to display feeder flights at the shoulder of the day (overnight costs for
aircraft and crews at the spoke), is not cost-efficient, it is advisable to integrate flights or
partial capacities at the spoke of airline operations into one's own network, whether in the
form of a single ticket from the point of embarkation to the point of disembarkation or also
by combining two or more tickets and organizing the transfer processes separately.
Outsourcing operations of flights in the form of ACMI has already established itself in the
management of regional aircraft. However, the example of Lufthansa Cityline shows that the
Group's internal ACMI regional fleet operation is also positioned at the hubs in terms of
synergies and cost efficiency. Full or partial capacities are being sought from third parties for
the management of day-trip connections from regional spokes. In the case of BMI Regional,
however, it recently emerged that the stationing of individual aircraft to serve such
connections is ultimately neither stable nor economically viable.
If the traffic volume permits a sufficiently frequent offer between the spokes of global
network carriers through appropriate catchment areas, global network providers will
integrate point-to-point airline capacities into their offer over long or short distances,
especially if the point-to-point networks are produced in parallel in the group. A Eurowings
offer from Düsseldorf to Barcelona should not compete in the Lufthansa Group's network
management with the connecting offers via Frankfurt, Munich, Vienna or Zurich. From the
customer's point of view, Eurowings' flights to European spokes of non-European alliance
partners (e.g. DUS-LHR) should be connected to their long-haul flights in the Star Alliance.
Due to the existing joint ventures, this would also improve the network quality for the
Lufthansa Group itself.
It is pointless to discuss whether global network management should better be integrated or
isolated from the customer's point of view - there is enough external competition anyway. In
the first article on network management, it was already stated that the offerings of the
point-to-point airlines in an airline group, such as the Lufthansa Group, Air France/KLM or
IAG, ultimately do not serve any independent market segments and should therefore be
offered and controlled integrated on the market side. For the business travel market, this
means that they should be offered as part of a global network.
This market-side consolidation of the Group's offering corresponds to the existing product
management qualifications and distribution channel structures. In particular, the scheduling,
pricing and handling of transfer connections is undoubtedly a core qualification of network
airlines. As is well known, the business travel market prefers indirect distribution channels

Meerbusch / Bad Honnef March 2019 Page 3 of 7

Brützel: Current Developments in Airline Network Management (4)

even for non-stop connections for a variety of reasons. The systems and competencies
required to serve and control transfer connections and indirect distribution channels (in
particular GDS) are also core qualifications of the global network airlines.
It would also be logistically simpler to treat the customers of the global network airlines in
the front part of the cabin of a point-to-point airline uniformly as "business class" and to
concentrate on à la carte offers in the direct sales of the point-to-point airlines and to
entertain the customers thus acquired in the rear part of the cabin accordingly.
Supply chain management for a global network not only requires the technical networking of
flight services but also needs highly competent active operations control, especially if
individual services in the process chain are delayed and/or not available. The possibilities of
virtual network operators (platforms) to fill in the learned airline competencies for "event
management", especially for transfer connections, are likely to be limited for the time being.
If, however, the leading global network carriers do not succeed in freeing themselves from
the limited view of their own resources and those of their alliance and interlining partners
and understand their network management as an independent value creation level at tour
operator level, one or the other digital market leader will find a way to build up the
necessary airline specific competencies, for example by acquiring a qualified network carrier.

2. Point-to-point offers for private travelers

Point-to-point airlines are too interchangeable from the customer's point of view to offer
anything that could lead to sustainable brand loyalty. From the customer's point of view,
network management for relevant offers takes place at the level of digital search engines.
This applies in particular to the market segment of visiting friends and relatives (VFR), who
only want to buy a flight ticket. They will continue to make their pre-selections via the
portals of search engines (such as swodoo.de, fluege.de and others), integrators (such as
kiwi.com, skyscaner.com) or at best online travel agencies (such as opodo.de, expedia.de).
Holidaymakers looking for integrated offers including destination services may prefer to
access tour operator or travel agency portals directly – unless tehy go to their personal
advisor at the local travel agency. Even though some low-cost carriers try to present their
range of products and services and their Internet presence as a holistic travel platform,
customers will generally only take advantage of the additional offers if, for whatever reason,
they have already reached the airline's portal via the flight offer.
Since low-cost carriers are increasingly using the flight offer as an eye-catcher in order to
earn money with additional offers (ancillaries), the network is primarily about being cheap.
In contrast to the network management of global network carriers, the quality of which
differs on the market due to its diversity and frequency, the network management of point-
to-point airlines therefore focuses on the efficiency (costs) of production and, at best, its
unrivalled nature.
The most important drivers of cost efficiency are the consistent focus on point-to-point
connections, optimum utilization of resources (aircraft and crews) and the reliability
(punctuality, regularity) of operations. This requires a critical operating size at the known

Meerbusch / Bad Honnef March 2019 Page 4 of 7

Brützel: Current Developments in Airline Network Management (4)

decentralized home bases, especially if the supply is in direct competition at the airport or in
indirect competition at other airports near the home base.
At airports where Ryanair operates without competition (e.g. Hahn, Weeze), bases for
smaller fleets have also been maintained to date. The more recent past shows, however,
that Ryanair is also increasingly employing its own line maintenance staff at bases in the
interests of reliability and that small bases are gradually threatened with closure. The recent
bankruptcy of Germania also proves that the stationing of individual aircraft at regional
airports does not permit regular and efficient operation on a sustainable basis.
The LCCs will increasingly concentrate their home bases on large airports and increasingly
turn their backs on regional airports if they do not have a sufficiently attractive, overlap-free
catchment area.
For regional airports, this will mean that they will be connected as a "destination" from the
destinations of private travel – most probably for the holiday flight market. The latest
developments following the insolvency of Germania provide obvious evidence of this. The
new customers in Rostock, Erfurt or Muenster are all of Turkish or North African origin.
Eurowings and Lauda Motion also want to serve these airports from the destination, i.e.
Palma de Mallorca.
For LCC, network management and production resources can be decoupled, too. Ryanair
offers an example of this. The network management for Lauda Motion takes place in Dublin
and also includes production resources of Ryanair itself (e.g. OE2050, DUS-TFS, operated by
FR). Eurowings has its long haul services produced by Brussels Airlines and Sun Express.
However, while the network carriers, as shown above, can also have their homogeneous
product produced as a partial capacity in the cabin of a point-to-point carrier, the à la carte
offer of a low-cost carrier cannot reasonably be offered in parallel with other à la carte offers
in one cabin.
In the Lufthansa Group, on the other hand, it could be an option,
- as recommended above, to offer the products for business travelers integrated via indirect
distribution channels at "Lufthansa Passage", even if they are produced at Eurowings; and
- to have Eurowings market the products for private travelers in an integrated manner via
direct sales channels, even if they are produced by Lufthansa, Swiss or Austrian Airlines
from one of their hubs.
Here, too, this would go well with the system and yield management competence.
As described in the second part of the articles on network management, the holiday flight
takes us back in the direction of charter or split charter. The perception of network
management is shifted to the tour operator level, as is already the case at Tuifly. An
integrated airline is useful for the travel group as long as its designer enriches the options for
cooperation with other airlines. Thomas Cook seems no longer to be convinced of this and is
therefore bringing the sale of the airlines into discussion. For Condor, this would imply an
uncertain future in the area of tension between global network airlines and low-cost
carriers.

Meerbusch / Bad Honnef March 2019 Page 5 of 7

Brützel: Current Developments in Airline Network Management (4)

3. Homebase-focused ACMI business models to serve airlines

and tour operators
By definition, wet lease carriers (ACMI) do not have their own network management. Rather,
their network is determined by the network management of their customers. A particular
challenge here is that customers often need individual aircraft, either because they
themselves do not have a suitable aircraft for the route to be operated (for example, Boeing
737 BBJ operated by Privat Air for Lufthansa and others) or because they have capacity
bottlenecks (for example, Condor and Eurowings are employing a large number of different
ACMI providers in the summer of 2018 to fill the gaps after Niki's eventful history).
For the ACMI providers, the resulting denomination of their operations results in a kind of
"travelling circus". This means that they have to organize their fleet and crew capacities on
operations for individual aircraft and locations. It is easy to see that such operations not only
place the highest demands on flexibility and operational logistics, but are also very
susceptible to disruptions. This is to the detriment of cost efficiency and leads to
correspondingly high market rates for wet leases. However, even with adequate rates,
operational integration into the operations control of the customer airline poses a problem,
especially in the event of disruptions.
In the interests of stable and efficient operations, it makes sense to look for a business
model for ACMI that enables the sustainable employment of a critical mass of aircraft and
crews under its own management.
Such a business model is suitable at regional airports. As explained above and in an earlier
article, the connection of regional airports to the margins of the global network airlines
(business travel market) proves to be an unresolved need. In addition, many regional
airports lack the sustainable potential to justify a home base for low-cost carriers and/or
holiday airlines.
As far as these regional airports have a traffic volume of more than one million passengers,
they offer a venue for an innovative ACMI business model to offer a homogeneous fleet of
critical operational size including reserve capacities and station management for the
network of other airlines. Such a business model would create synergies for customers and
ensure stable operations at low cost. In contrast to the current models, in which the aircraft
operated under wet leasing as much as possible integrated into the lessee's operations, the
business model also offers ACMI providers the option of organizing operations largely
isolated from the rest of the customer's operations on a site-specific basis. The ACMI carrier
would be the undisputed "top dog" and as such not interchangeable. Where Ryanair today
dominates regional airports, such an ACMI carrier could offer competitors an efficient
platform and thus stimulate competition. Where even Ryanair, due to a lack of sufficient
critical mass, strokes the sails, these could also become customers.
At locations such as Bremen, Dortmund, Dresden, Hahn, Leipzig, Weeze or even Nuremberg,
such an ACMI carrier, in the long run, probably is the only way to sustainably enjoy local
added value and thus regional economic and fiscal benefits beyond the service of turn-
arounds.

Meerbusch / Bad Honnef March 2019 Page 6 of 7

 Brützel: Current Developments in Airline Network Management (4)

The Author: Prof. Dr. Christoph Brützel has been active in the aviation industry for over 30 years -
initially with Lufthansa, LTU and A.T. Kearney - currently as an independent consultant
and professor for aviation management at the IUBH International University - Campus
Studies in Bad Honnef. Contact: Christoph(ad)Brutzel.com

Meerbusch / Bad Honnef March 2019 Page 7 of 7

View publication stats