Co-founder and Principal of Air52 Aviation Consultants, Koen Karsbergen brings over two decades of experience in airline management and strategy to his columns.
Through Air52, Koen assists airlines, airports and industry stakeholders with practical solutions for complex challenges, drawing on his extensive background in feasibility studies, fleet and network planning, and airline startups. He also contributes to IATA training courses and serves as faculty for Aviation MBA programs.
The views and opinions expressed in this column are solely those of the author and do not necessarily reflect the official policy or position of AeroTime.
Imagine being the CEO of an airline, staring at a financial report that shows your company earns just $7.00 per passenger. That’s right, in an industry with razor-thin margins, where a single route miscalculation can cost millions, the average airline makes less than the price of an airport sandwich on each traveler. Sound challenging? Welcome to the complex world of airline business models!
For airline executives, this reality transforms routine decisions into high-stakes gambles. For industry professionals, understanding these models is crucial to navigating the competitive landscape. And for passengers? While most never think about it, these business models fundamentally shape everything from ticket prices to inflight service quality.
But what exactly drives an airline’s strategic choices? Why do some carriers offer no-frills service at rock-bottom prices while others provide gourmet meals and lie-flat beds? Let’s decode the intricate business logic that keeps planes flying and explore why business models matter in this notoriously challenging industry.
The $7.00 profit puzzle
The strikingly low average profit per passenger ($7.00) isn’t a coincidence, it’s the culmination of several industry-wide challenges:
- High operating costs: Fuel, labor, and aircraft maintenance consume enormous portions of revenue
- Intense competition: Keeps fares low, especially with the rise of LCCs
- Price sensitivity: Many passengers prioritize low fares above all other factors
- Regulatory costs: Compliance with safety and security regulations is expensive
- Cyclical nature: The industry is vulnerable to economic downturns and global events
This economic environment explains why airlines constantly experiment with new revenue streams while seeking the delicate balance between competitive pricing and profitability. Have you ever wondered why that checked bag fee keeps creeping up? Now you know!
Unpacking airline business models
Before exploring specific models, it’s essential to understand what we mean by an “airline business model” and its role in broader airline management.
An airline business model describes the means by which the airline derives profit from its business. It serves as a blueprint for the airline’s strategy and operations, providing a high-level view of how the airline creates, delivers, and captures value.
Key components of an airline’s strategic framework include:
- Business model: The overarching logic of how the airline generates revenue
- Mission: Defines the core purpose of the airline – why it exists
- Vision: Outlines the desired future state
- Core values: Fundamental beliefs and principles guiding decisions
- Goals: Specific, measurable targets
- Strategy: Detailed plans to implement the business model
The business model provides structure, while the mission, vision, and values create context. Goals quantify objectives, and strategy charts the path to success.
The Business Model Canvas: A practical tool
For aviation professionals, the Business Model Canvas offers a powerful framework for analysis. Developed by Alexander Osterwalder and Yves Pigneur, this tool encompasses nine key elements that help airlines visualize their entire business at a glance:
- Customer segments: Who are you serving? (business travelers, leisure passengers, cargo shippers)
- Value proposition: What value do you deliver to customers? (low fares, premium service, extensive network)
- Channels: How do you reach customers? (booking platforms, travel agencies, mobile apps)
- Revenue streams: How do you make money? (ticket sales, ancillary revenues, loyalty programs)
- Key resources: What assets are essential? (aircraft, airport slots, skilled workforce)
- Customer relationships: How do you interact with customers? (self-service, personalized service)
- Key activities: What must you do well? (flight operations, maintenance, marketing)
- Key partnerships: Who are your crucial partners? (alliances, airports, catering companies)
- Cost structure: What are your major costs? (fuel, labor, aircraft leasing, airport fees)
Next time you’re analyzing an airline’s strategy, try mapping it on this canvas – you might be surprised by the insights you uncover.
Types of airline business models
While each airline has unique characteristics, we can categorize airlines into several main business models based on their customer segments, value propositions, and cost structures:
Network carriers
Also known as full-service carriers, flag carriers, or major carriers, these airlines:
- Serve all passenger market segments and often cargo
- Utilize hub-and-spoke networks
- Provide service with perceived uniqueness
- Have a value-driven cost structure
Think of Emirates, Lufthansa, and British Airways, carriers focused on network breadth and service quality rather than offering the lowest possible fares.
Low-cost carriers (LCCs)
These carriers focus on:
- Serving price-sensitive business, leisure, and VFR (Visiting Friends and Relatives) passengers
- Utilizing point-to-point networks
- Making price their main differentiating feature
- Maintaining a highly cost-driven operation
Southwest Airlines pioneered this model, which has been widely adopted globally by carriers like easyJet and AirAsia.
Ultra-low-cost carriers (ULCCs)
Taking the LCC model further, ULCCs:
- Target extremely price-sensitive leisure and VFR passengers
- Operate point-to-point networks
- Drive prices even lower as their primary competitive advantage
- Maintain extremely cost-driven operations with minimal free amenities
Frontier Airlines and Wizz Air exemplify this approach. Ever wondered why they charge for everything including water? It’s all part of the model.
Regional and ACMI Carriers: A terminology note
Here’s where terminology gets interesting. In North America, what are called “regional carriers” often function as ACMI (Aircraft, Crew, Maintenance, and Insurance) providers for larger airlines. These carriers typically:
- Operate smaller aircraft on behalf of major airlines
- Fly under the brand and flight codes of their major airline partners
- Provide feeder traffic into major airline hubs
- Have other airlines as customers
Airlines like SkyWest, Republic Airways, and Mesa Airlines in the US operate under this model, even though they’re called “regional airlines” rather than ACMI providers. This differs from usage in other parts of the world, where “regional carrier” may refer to an independent airline serving a specific geographic region.
Additional models
The industry also includes specialized business models such as:
- Charter airlines: Primarily serve tour operators with non-scheduled service
- Dedicated ACMI/capacity providers: Outside North America, offering aircraft, crew, maintenance, and insurance to other airlines
- Cargo airlines: Focusing exclusively on freight transportation
- Hybrid airlines: Blending aspects of LCC and network carrier models such as JetBlue. This can also be done within an airline group (either within the same brand or using different brands). For example, the Singapore Airlines group comprises of the premium network carrier Singapore Airlines and the LCC Scoot.
Global variations: How geography shapes business models
Airline business models vary significantly by region, shaped by regulatory environments, geographic characteristics, and economic conditions:
- North America: Dominated by network carriers and LCCs, with growing ULCC presence. Features extensive use of carriers operating as ACMI providers in the hub-and-spoke system.
- Europe: Mix of network carriers, LCCs, and hybrid carriers, with stronger competition across models.
- Asia-Pacific: Diverse landscape with network carriers, LCCs, and emerging ULCCs. Regional airlines play a significant role in connecting vast and diverse (island) territories.
- Middle East: Prominence of global network carriers with growing LCC segment. The region’s geographic position enables global hub strategies.
- Latin America: Increasing LCC market share alongside strong network carriers, with regional airlines connecting remote areas.
- Africa: Mostly network carriers with a growing LCC presence, where regional airlines provide essential connectivity across the continent.
Success stories: Business models in action
Let’s look at how these models work in practice with some successful implementations:
Southwest Airlines pioneered the LCC model, focusing on operational efficiency, consistent branding, and strong company culture. Its challenge? Maintaining the low-cost advantage as they grow larger than many competitors they originally disrupted.
AirAsia successfully adapted the LCC model in Asia through a multi-country/multi-base strategy, strong ancillary revenue focus, and effective technology use. When you’re flying in Southeast Asia, notice how the airline has mastered cross-selling everything from hotels to activities.
Lufthansa Group represents a sophisticated multi-brand strategy encompassing network, LCC, and regional carriers. The group’s diverse portfolio and strong hub network are strengths, while balancing different business models presents ongoing challenges. Just look at the tailfins within the group, each representing a different business model under one corporate umbrella.
Challenges and future trends
Each business model faces unique challenges, but several key trends are shaping the future for all:
- Sustainability-driven innovation: IATA’s “Fly Net Zero” commitment is driving significant changes across all airline business models. How will your favorite airline balance environmental responsibility with cost control?
- Personalization at scale: Airlines are moving toward hyper-personalization of services and offers. Next time you’re browsing airline offers and see eerily relevant suggestions, you’re seeing this trend in action.
- Multi-modal integration: Combining air travel with ground transportation for seamless journeys. Think about airlines selling train tickets as part of your journey – that’s already happening in Europe.
- Flexible capacity management: Adapting capacity to match volatile demand patterns, particularly relevant as we emerge from pandemic-era disruptions.
- Unbundling and rebundling: The continuing evolution of fare structures and product offerings that affects your booking experience regardless of which airline you choose.
Looking ahead, while core business model categories will likely persist, we’ll see increasing hybridization and specialization as airlines adapt to changing market conditions and customer preferences.
What does this mean for you?
Understanding airline business models offers practical benefits whether you’re an industry professional or an informed traveler:
- For airline managers: Guides strategic decision-making and resource allocation
- For network planners: Informs route selection and capacity decisions
- For marketing professionals: Shapes branding and customer segmentation strategies
- For passengers: Helps you understand why airlines make the decisions they do
The future of flight
The fundamental question remains: How will these models adapt to balance the dual challenges of sustainability and profitability in an increasingly competitive global market?
As aviation professionals, understanding and adapting these business models gives you the power to shape the future of air travel. The challenges are significant, but so are the opportunities for those who can innovate and adapt.
The next time you book a flight, consider the complex business model working behind the scenes to make your journey possible. That $7.00 profit margin represents both the industry’s greatest challenge and its most remarkable achievement – bringing global connectivity to millions while navigating one of the world’s most demanding business environments.