26 July 2008

Qantas's Geoff Dixon outlines a new world order - is he right?

So we are now headed for the era of the mega carrier and little else. Oh yes by the way your fares are going to double and your service will suck but apart from that we will be all right Jack.


I have to take issue and point out a few salient points to Mr Dixon's self serving remarks.

Lets start with the supposition that the airline network model is the right one. Clearly he doesn't think so because he has put his eggs into the LCC model with Jetstar. Just because the FNC (Full Service Network Carrier) model is broken in so many places doesn't mean that other models can fly. If you will pardon the pun.

The LCC model is alive and well. (Ryanair and Air Asia)

The HVC (Hybrid Value Carrier) model is alive and well (Aer Lingus and EasyJet)

The niche market is constantly evolving. The results have been mixed over the last year. We have seen the outright failure of the business only carriers. Yet the niche business services continue to flourish. (Eg LH/AF/KL/BA/LX biz class services).

Where he is right is that this is a step up in terms of what an airline must do. This is where the current crop of legacy airline managements need to have their heads examined. The model needs changing and some airlines will be successful at this and others will just fail. The airline business is high risk and not necessarily high value. There is a great deal of clear water between the consistently successful players and the rest of the market.

As Exhibit A in the "fuel is the root cause of all evil" debate - I present Allegiant Airlines. An airline that is continuing to fly allegedly fuel inefficient MD80 series aircraft.

So the view of the world dominated by the mega boys is not necessarily one I can subscribe to. I suggest you go and read a previous blog entry that I posted earlier this year. I believe now is actually a good time to start an airline. Critical lift in certain markets is needed. If you have planes and can move them to those markets - then you can now make money without fear of intervention by the incredibly shrinking big boys.

If Mr Dixon's view of the world is right we are in for a large amount of grey mice. Let's hope there are a lot of colorful parrots out there who will seize the opportunity and bring in a new crop of airlines with low costs and more appropriate business models that will hopefully make the industry more fundamentally sound.

Its nice to dream




Rory said...

I wholeheartedly agree - many carriers (and that's diplomatic for "US Legacy") would have you beleive that fuel costs are their only issue. The fact is that most of them are fundamentally unsound businesses - regardless of the oil price.

Allegiant is a good example. Titan in the UK also just posted an incredible profit margins.

John S said...

Nice analysis, Professor. The challenges require a similar change in thinking at two levels.

Any HVC or LCC model, especially a new entrant, needs access to capital. The investment bankers and investors need to agree to fund these new business models. This is problematic when they rely on a small cadre of analysts and consultants who arrive with their mostly legacy pedigrees and have little taste for endorsing new visions. Their perspective is based on an old reality.

The other challenge to a new world is that its development in the US predicated on old world approaches, mostly ones that have or are failing. Rather than self-propagating management supported by old-school boards, bold and brave boards need to take a leap of faith to completely rethink the traditional models.

There are good new airline business models out there, but for them to succeed there has to be acceptance of new approaches from those that control the resources. In short, investors can't rely on the old guard to understand and endorse the new guard; they have too much of their reputations and revenues dependent on the old ways.