Achieving High Performance

in the Airline Industry

2
Recently we turned our attention to the
airline industry and examined the nan-
cial performance of air carriers from 2001
to 2007, a period that represented a typi-
cal industry cycle of both growth and
decline. The analysis focused on publicly
owned companies that generated at least
60 percent of their revenues from passen-
ger transport services.
1
We limited our
study to those airlines with an available
seat kilometer (ASK) pro duction
2
of at
least 50 billion per year.
An exception was made for those air lines
that, while not meeting the 50 billion per
year ASK, had demonstrated exceptional
growth during the period under review.
Importantly, we included both low-cost
carriers and hub carriers in our analysis.
Doing so allowed us to explore perfor-
mance differences between two very
different business models.
The biggest competitive differentiator
for the high performance airlines is their
ability to win and retain revenue during
periods of both industry growth and
decline. As Figure 1 illustrates, industry
players achieved, on average, a compound
annual growth rate of approximately 5
percent during the 2001 to 2007 cycle.
In 2003, Accenture launched
an ambitious research initiative
to better understand the special
characteristics that distinguish
high-performance businesses
from their peers. To date, we have
examined more than 6,000 com-
panies along ve key dimen sions
of performance: protability,
growth, positioning for the future,
longevity and consistency. Our
ndings conrm that high perfor-
mance is denable, quantiable
and, above all, achievable. More
than 500 companies have met our
criteria for high performance.
Dening high performance
Figure 1. High-performance airlines signicantly outperform their peers in terms of
revenue growth and revenue premium.
7.87
High
performers
low-cost
carriers
10.09
High
performers
hub
carriers
9.53
Rest
of peer
set
81.7%
High
performers
low-cost
carriers
77.6%
High
performers
hub
carriers
77.6%
Rest
of peer
set
0.10
High
performers
hub carriers
in region B
0.07
Peer set
from
region B
Source: International Air Transport Association; Accenture Analysis.
Revenue growth
Compound annual growth rate (CAGR %)
-6%
Source: Accenture Analysis.
Revenue premium
Yield premium ($c/ RPK
3
) SLF %
4
Rev/ ASK ($c)
5
High performers 14%
Rest of peer set 5%
6% Worldwide International Air Transport Association
-30% -29%
0.10
0.14
High
performers
hub carriers
in region A
Peer set
from
region A
1
The 23 companies included in the peer group for
the airlines industry analysis were: Air France-KLM
Group, Alitalia, All Nippon Airways, American Air-
lines, British Airways, Cathay Pacic, Continental
Airlines, Delta Air Lines, easyJet, Iberia, Japan
Airlines International, Korean Air, LAN Airlines,
Lufthansa, Malaysian Airlines, Northwest Airlines,
Qantas, Ryanair, Singapore Airlines, Southwest
Airlines, Thai Airways, United Airlines, US Airways
2
Average seat kilometer (ASK) is a standard industry
measure of airline output, calculated by multi-
plying the number of seats available on ights by
the distance over which the seats are own
3
Revenue Passenger Kilometers
4
Seat Load Factor (SLF %) is the ratio of revenue
passenger miles to available seat miles
5
Revenue per available seat kilometer (Rev/ASK($c))
requires stage-length adjusted ASK. Data incom-
plete for peer set; hence, selected comparison
based on peer set of same region as high performer
3
In contrast, nearly all of the high-per-
formance airlines saw their revenues grow
at a pace two to three times faster. High
performers also excelled in securing rev-
enue premiums and maintaining capital
efciencies. In fact, pre-tax return on
invested capital for the low cost carrier
high performers is 32 percent and 55
percent higher, respectively, than the
industry average (see Figure 2).
This report based on the Accenture
High Performance Business research
methodology examines in greater detail
the characteristics that enable the high-
performance airlines to achieve these
results, consistently outperform their
peers and sustain their superiority over
time and across business cycles, industry
disruptions and changes in leadership.
Figure 2. High performers excel in revenue generation and capital efciency thus
realizing a higher margin.
11.9%
5.3%
7.8%
High
performers
low-cost
carriers
Rest of
peer set
High
performers
hub carriers
-32% -55%
High
performers
hub
carriers
1.5%
0.4%
0.8%
High
performers
low-cost
carriers
20.6 %
High
performers
hub
carriers
Rest
of peer
set
7.9%
6.6%
High
performers
low-cost
carriers
Rest of
peer set
-45%
Source: Accenture Analysis. All figures as 7-year average. Goodwill always included.
Pre-tax ROIC
6
EBITA
7
/Revenue
Revenue /Invested capital
6
Return on invested capital (ROIC)
7
Earnings before interest, tax and amortization
(EBITA)
4
This was certainly evident in the 2001
to 2007 industry cycle. Following several
years of healthy protability in the 1990s,
the terrorist attacks of 2001 and the
SARS virus scare of 2002 and 2003 con-
tributed to a dramatic reversal of for-
tuneprotability plummeted as did
stock performance. The airlines weak
capital returns were apparent when
gauged against not just other industries,
but also other players in the aviation
sector. When compared to airports,
catering companies, aircraft manufac
turers and other sector players, airlines
return on capital employed (ROCE) was,
on average, 140 percent lower.
Accentures research has conrmed
several trends that are reshaping the
industry today and will affect growth
strategies for years to come. These
trends include:
Industry consolidation
The 2001 to 2008 period saw a number
of hub airlinesespecially in the more
mature EU and US marketsmove to
fortify and expand their home market
positions by merging operations with
other carriers. Looking ahead, we believe
the trend of industry consolidation will
continue and force many average per-
formers to partner with former rivals or
develop niche go-to-market strategies.
Fuel price volatility
Fuel prices rose throughout the period
of the Accenture study, averaging $72 per
barrel by 2007. Airlines responded to fuel
cost pressures by improving their efcien-
ciesnot just in fuel usage, but also in
other areas such as labor productivity and
distribution. Today, a reduction in demand
for oil offers some fuel-price relief for air-
lines. However, experts predict another
mid-term fuel price rise in the coming
years. In this environment of extreme
price volatility, airlines will be challenged
to maintainand, if possible, expand
their efciency initiatives.
Airline industry overview
The airline industry, as a whole, operates in an environment of
perpetual cyclicality. Periods of strong demand and modest prots
are routinely followed by equally longand usually deeperperiods
of weak demand and economic instability. In this roller-coaster
environment, achieving protability is, at best, a zero-sum game.
5
Over-capacity
The industry is bracing for a glut of new
aircraft that were ordered in record num-
bers beginning in 2005. Specically, most
airlines are awaiting delivery of two
major aircraft types: the 500-seat Airbus
A380 geared for ultralong-haul, intercon-
tinental travel between major hubs, and
the 200-seat Boeing 787, which will be
the rst aircraft of its kind to enable
intercontinental trafc to and from
medium-sized cities. The delivery of both
types of aircraft will potentially transform
long-established leisure and business
travel trafc ows and create a tremen-
dous surge in capacity, which is likely to
accelerate price competition and place
massive downward pressure on yields and
protability. In this environment, effec-
tively using and managing aircraft capac-
ity will be critical.
Of course, the full effect these trends
might have on the industry will depend
largely on the length and depth of the
current global recession. While an upswing
in passenger trafc and aggressive cost
management initiatives have produced
modest gains in protability in recent
years, the economic downturn is neutral-
izing these gains. The International Air
Transport Association expects 900 million
fewer airline passengers over the next ve
years and year-to-year industry growth is
expected to hover around just 2 percent
before returning to an average growth
rate of just 5 percent in 2012.
6
Accentures ongoing High Performance
Business research has revealed that
top companies in all industries share a
competitive essence, made up of three
building blocks of high performance:
Market focus and position
Distinctive capabilities
Performance anatomy
It is high performers mastery of all three
building blocks that enables them to
exploit economic cycles and continue to
thrive. Aligning and renewing the building
blocks are what ultimately position the
leaders for long-term success.
For airlines, we identied seven charac-
teristics that distinguished the high-per-
formance businesses (see Figure 3).
Figure 3. The success of the high-performance airlines is based on strong market focus, a set of distinctive capabilities and
a performance-oriented culture.
Distinctive
Capabilities
Operational
excellence
Maximize aircraft
productivity
Take advantage of
cost base flexibility
Non-passenger
revenue generation
Strengthen cargo
contribution
Access ancillary
revenue sources
Demand/
capacity fit
Leverage multihub
strategies
Synchronize demand
and capacity
Financial freedom
of action
Secure superior
cash reserves
Sustain low gearing
Market Focus
& Position
Revenue growth premium
Outgrow competition
Win and retain premium passenger segments
Superior market penetration
Dominate home market
Establish a strong local operational presence
Performance
Anatomy
Leadership culture

Win and retain best talent
Re-think existing organizational structures
The building blocks of
high performance
Market Focus
and Position
Results in better
decisions
Distinctive
Capabilities
Results in better
practices
Balance, Aligment
and Renewal
Performance
Anatomy
Results in better
mindsets
7
High-performance businesses know
when and where to compete. In the
airline industry, this means proving
market dominance in two key
waysby generating more revenue
and by penetrating markets more
successfully than your competitors.
Revenue growth premium
Being keenly focused on growing your
year-to-year market revenues at a faster
rate than your rivals. Our research con-
rms the strength of the low-cost busi-
ness model. Ryanair and easyJet, for
example, both earned revenues at a rate
of three times the industry average. But,
more surprisingly, so did LAN, demon-
strating that impressive revenue growth
could also be achieved under the hub
business model. LANs secret? Success-
fully going after an underserved market
namely, short-haul passengers who tradi-
tionally opted for alternative, cheaper
modes of transportation and exploiting
competitors weaknesses. With a new
network model for its short-haul eet,
LAN slashed its prices by 30 percent and,
overnight, made short-haul air service
more accessible and affordable to South
American consumers. The strategy paid
off. Since launching the programdubbed,
appropriately, a new way to travelLAN
has welcomed half a million new custom-
ers each year.
Besides attracting impressive passenger
numbers, it is important to clearly dem-
onstrate your superior ability to access
and sustain a high share of premium
passengers. For example, comparing
Lufthansa to its European peers and
Cathay Pacic to its Asian peers, both
companies achieved a 30 percent advan-
tage in revenue per ASK and they did so
while operating their network at an
industry-average overall seat load factor.
Superior market penetration
Signicantly strengthening market share
position is another characteristic of high
performance. Cathay Pacic, for example,
expanded its market share at its Hong
Kong hub by 15 percentage points to cap-
ture a dominant market share of 48 per-
cent. LAN has achieved at least a No. 2
position for intercontinental and short-
haul ights in each of the South Ameri-
can markets it has entered.
Achieving dominant home-market posi-
tion is due, in large part, to a strong local
operational presence. Ryanair, which does
not offer connecting ights like hub car-
riers do, bolstered its market share by
establishing new operational basesand
the corresponding direct ights between
those bases. Over the past 10 years, the
airline has increased its number of bases
from two to 27. Today, the airline owns a
27 percent share of the European low-
cost carrier market.
For their part, Lufthansa and LAN extend
their market reach by placing hub opera-
tions in key catchment locations that
attract more passengers. LAN, through
organic growth, established dedicated
hubs in each primate city in South
America upon its market entry. In Europe,
Lufthansa acquired Swiss International
Airlines, Austrian Airlines and Brussels
Airlines, adding Zurich, Vienna and
Brussels hub operations to the established
Lufthansa network. Both airlines use their
multihub networks as a competitive
advantage.
Market focus and position
8
Accentures research has consis-
tently shown that high-performance
businesses in all industries differen-
tiate themselves with hard-to-repli-
cate ways of working. In the airline
industry, our research revealed that
mastery of four broad capabilities is
essential.
Operational excellence
High aircraft productivityfor both
long- and short-haulsis a key factor in
achieving cost advantages. The high
performers among the hub carriers out-
perform their peers by 15 percent (14.3
block hours per day compared to 12.3) on
intercontinental ights. They have also
been able to successfully imitate certain
components of the low-cost network
structure within the hub business model,
thereby closing the average gap of two
block hours per day between low-cost
carriers and the peer set by 50 percent.
Lufthansa, for example, introduced a net-
work design at its non-hub Hamburg base
that mimicked low-cost carriers point-
to-point model with dedicated aircraft,
reduced turn-around time and a minimal
number of overnight stays away from
Hamburg.
While hub carriers might be able to mimic
low-cost carriers when it comes to imple-
menting programs that improve aircraft
productivity, there is little they can do to
match the low-cost carriers cost exibil-
ity advantages. Ryanair and easyJet, for
example, both have a much higher share
of variable costs, which means they can
more effectively control their capital
ows and more quickly respond to market
uctuations. The most important variable
cost is labor. Only about half of their
workers are full-time employees with
unlimited employment contracts. The
remaining workforcecomprising con-
tract workers or employees on xed-term
contractscan be scaled up or down as
needed to meet changing market
demands.
Non-passenger revenue generation
The hub carrier high performers generate
approximately 60 percent more cargo-
related revenues than the peer set. By
professionalizing their belly cargo capa-
bilities, these players are able to lower
their break-even seat load factor by an
average of 6 percentage points. Low-cost
carriers, by their business model, do not
provide cargo services. Yet they have gone
far beyond traditional airline passenger
ticket sales and demonstrated a notewor-
thy ability to access additional revenue
streams related to the customers travel
experience such as the sale of bus and rail
tickets, hotel reservations and onboard
sales of beverages, food and merchandise.
In doing so, Ryanair, for example, has
added $ 360 million (US$486 million) to
its 2007 total reve nues.
Demand/ capacity t
Hub carrier high performers excel at
balancing the demand for their services
with their capacity to deliver these ser-
vices. The simplestand most efcient
strategy to achieve a prosperous demand/
capacity t involves a single hub, located
in a large catchment.
For example, Cathay Pacic uses this
approach to take advantage of a prot-
able long-haul operation that requires
only a small feed network. LAN has
recently extended the Cathay Pacic
model with an international multihub
approach that operates several hubs in
various South American primate cities, all
linked together to form a multihub net-
work.
Multihub models require clear hub roles
and strategies to avoid internal over-
capacities. Lufthansa demonstrates the
value of such thinking. Its main hub in
Frankfurt serves as a 360-degree hub
with worldwide coverage. The airlines
acquired hub operations in Zurich,
Brussels and Vienna are (or soon will be)
sized to the local catchment demand.
Financial freedom of action
As mentioned earlier, the airline industry
is highly cyclical. Managing through eco-
nomic downturns is key. In this regard,
high-performance airlines also distinguish
themselves by adopting different strate-
gies according to their business model
(see Figure 4). Hub carriers demonstrate a
strong capital basis by operating at a
gearing level that is nearly a quarter of
that of their peers. High performers among
the low-cost carriers, in contrast, rely on
high cash reserves. For example, Ryanairs
cash reserves equal the size of the com-
panys annual sales. These reserves serve
as a buffer against economic downturn
and a source of future growth.
Figure 4. High-performance airlines enjoy nancial freedom to act.
High performers
hub carriers
Source: Accenture Analysis.
Average gearing 20012007
(debt / equity ratio)
US peers Non-US peers High performers
low-cost carriers
x3.8
3.5
0.9
1.7
30.5
Source: Accenture Analysis.
Average cash reserves 20012007
(cash/ revenue ratio)
Peer Set High performers
16%
42%
Distinctive capabilities
9
Accentures research has identied
performance anatomy as the third
building block of high performance.
Performance anatomy refers to the
unique way companies manage
common business elements rela-
ted to culture, leadership and the
work force. Among high-performance
airlines, performance anatomy is
driven by a leadership culture that
not only places a premium on win-
ning and retaining the best talent,
but also encourages innovation and
promotes entrepreneurship among
teams.
In terms of talent management, LAN has
launched a number of initiatives to attract
promising young candidates to join the
company, build skills among existing
workers and provide selected employees
the nancial support necessary to pursue
outside training and education. To retain
the best people, the airline even provides
scholarships to family members of
employees for vocational training courses.
When it comes to creating a culture of
innovation and entrepreneurship, no one
in the airline business does more than
easyGroup, the owner of the easy brand.
Formed in 1995, easyJet was the rst of
many easy companies currently in exis-
tence to adhere to a common principle:
the fewer frills a product or service has,
the cheaper it will be. Today, theres easy-
Internetcaf, which has grown to become
Europes largest chain of Internet cafs.
Theres easyBus, which offers a low-cost
express minibus service between central
London and Gatwick, Stansted and Luton
airports. Their no frills super budget easy-
Hotel has operations across London and
in select European and Middle Eastern
countries. Theres even easyPizza, a deliv-
ery-only pizza company launched in
2004. The easy model for success is any-
thing but. Its about more than creating a
different business. It is about transferring
best practices and enabling the whole
group to evolve and improve efciency
and customer satisfaction. It is also about
having strong and visible leaders who act
as a brand and value symbol to workers.
Performance anatomy
10
The immediate future for airlines
will be shaped largely by how well
they cope with the current econom-
ic crisis. Accenture believes that
high-performance businesses will
use the current economic downturn
to their advantage.
That is, they will use this time of
instability and agging revenue to
capitalize on their competitors
weaknesses. The most successful
carriers will do four things right:
Manage growth
High-performance airlines teach that
winning and retaining revenue growth
premium has been the major strategic
objective for multihub and low-cost
carriers in years past. Yet, with the mid-
term industry outlook, achieving prot-
able growth will be harder than ever.
Passenger trafc is expected to decline.
Fuel costs are expected to rise again
above the early-2009 level. Emissions
trading schemes will be introduced,
placing new and additional pressures
on a carriers bottom line.
Also, with record aircraft deliveries
expected in the next few years, price
competition will surely become more
intense. The infusion of record-capacity
of A380s in the Middle East and smaller
B787s with the potential to establish
more point-to-point intercontinental ser-
vices between medium-sized cities will
transform traditional hub trafc ows.
Against this backdrop, high performers
will be those that dominate their home
markets, create the right balance between
demand and capacity, build a competitive
culture and effectively pursue secondary
revenue sources.
Excel in customer relationship
management
Many airlines believe that transporting
passengers to their destinations safely
and serving food and beverages along the
way is all that is needed to generate cus-
tomer loyalty. This extremely limited
approach to customer relationship man-
agement does little to drive customer loy-
altyeven in the best of times. With air-
lines facing stiffer competition and a
global economic downturn, prudent cus-
tomer-centric investments in marketing,
sales and distribution are critical, as is
understanding passengers needs and
preferences along the entire value chain
of travellingfrom pre-book planning to
services upon arrival.
Looking ahead
11
The immediate future for airlines will be shaped by how well they
cope with the current economic crisis. Over the long-term, however,
we believe those carriers that demonstrate the characteristics
presented in this report will continue to achieve high performance.
In short, the manner in which they build market focus and position,
distinctive capabilities and performance anatomy will ultimately
separate the high-performance airlines from their peers.
Accenture believe there is tremendous
opportunity for airlines to strengthen
their customer interactions, given that
customer relationship management in the
industry, as a whole, has seen little
advancement since the introduction of
the frequent yer programs in the 1990s.
Those airlines that learn how to access,
analyze and use customer data beyond
frequent yer enrollments will be well
placed to improve customer loyalty, cap-
ture others customers and build new
markets around the world.
Supercharge their efforts to achieve
operational excellence
Amid the steady stream of challenges
associated with cyclicality, intense com-
petition and high capital costs, carriers
have become used to activating and fol-
lowing a standard set of temporary crisis
measures to deal with ordinary economic
downturns. Todays global recession is
anything but ordinary. Normal tactics
that have been used to achieve or main-
tain operational excellence will no longer
sufce. Drastic action is needed. Efcien-
cies must be achieved wherever possible.
Costs must be cut by, at minimum, 10
percent, and business models must be
designed with long-term sustainability
and adaptability in mind. To achieve these
goals, airlines will need to examine every
opportunity to optimize their costs. Out-
sourcing non-core activities and imple-
menting innovative lead-buyer programs
are just two concepts that should be con-
sidered.
Focus on sustainability
In the coming years, sustainability will be
more than a cost issue; it will be a com-
petitive lever. An airlines CO
2
emissions,
reported with bookings, will play an
important role in consumers purchasing
decisions. This is because customers
increasingly prefer to support companies
that demonstrate a commitment to envi-
ronmental, economic and social sustain-
ability. Along with customers perceptions,
regulatory requirements will soon prompt
airlines to take action. The European
Union, for example, is looking to reduce
CO
2
emissions by 46 percent by 2020. As
part of this EU initiative, all ights to and
from Europe will require emissions trading
scheme (ETS) certicates beginning in
2012, with ever-greater CO
2
reductions
expected there after. In this environment,
ETS certi cates will hold as much com-
petitive importance as airport slots. An
airlines growth will depend, largely, on
how well it navigates a path toward sus-
tainability.
Copyright 2009 Accenture
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High Performance Delivered
are trademarks of Accenture.
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assertion of ownership of such trade-
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association between Accenture and the
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About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company. Combining unpar-
alleled experience, comprehensive capa-
bilities across all industries and business
functions, and extensive research on the
worlds most successful companies,
Accenture collaborates with clients to
help them become high-performance
businesses and governments. With
approximately 177,000 people serving
clients in more than 120 countries, the
company generated net revenues of
US$23.39 billion for the scal year
ended Aug. 31, 2008. Its home page is
www.accenture.com.
Contacts
For more information on achieving high
performance in the airline industry,
please contact:

Guido Haarmann
Global Managing Director, Airlines
+49 89 93081 68617
guido.haarmann@accenture.com
Peter Baumgart
Senior Manager
+41 79 540 5303
peter.baumgart@accenture.com
Marcus Fromm
Senior Manager
+41 44219 5940
marcus.fromm@accenture.com