Hub and Spoke vs. Point to Point

Airlines have two methods of scheduling flights: Hub and Spoke and Point to Point. With the Hub and Spoke model, airlines route all make regional “hubs” that channel all of the local trafic and route customers to their destination. With the Point to Point model, as the name would suggest, flights go from point to point. Not all cities are connected, but in general, a city will have flights to every city in its region and would not not have any predetermined route if it needed to make a stop. Both methods have their strengths and weeknesses.

Suppose we have this space with 13 points:

Here is how we would connect them with hubs and spokes: (A,B, and C are the hubs)

The benefits of this model are:

• The majority of the flights go between A, B, and C. If someone doesn’t show up for one of those flights, there will certainly be someone in line to take their seat.

• With the multiple flights between hubs, the airline will be able to overbook these routes.

• The airline will not have to offer low traffic routes, like K==>L, which may not fill up.

The weeknesses are:

• The airline will not be competetive on many routes. Competitors will offer non-stop flights on many routes where hub-and-spoke method can only offer flights with stops.

• If there is a weather complication or mechanical slowdown at a hub, the entire airline has to readjust

• Because few people will stay on the same plane, the airline will have to move their bags to a different plane.

Here is how we would connect them with Point to Point:

The benefits of this model are:

• With a larger relative amount of non-stop flights, the airline will be able to pay less for docking, fuel, and baggage transfer per customer.

• The airline be able to offer routes like K==>L.

• A weather or mechanical complication at any airport is unable to disrupt the entire airline

The weeknesses are:

• If there is a weather complication or mechanical slowdown anywhere in the space, the airline will be somewhat disrupted

• Because few people will stay on the same plane, the airline will have to move their bags to a different plane.

In the USA, Southwest is the only major carrier to use the Point to Point model. Different airlines have different marketing strategies, in large part, because of what method of delivery they use. Continental is an elite carrier. It has hubs in major cities, so it offers a relatively high amount of nonstop flights to people who live within driving distance of the major cities (generally richer people and generally more business travel.) Southwest is a discount carrier, in part because it connects relatively small cities with other small cities, a service that caters to a relatively poorer, less business-oriented clientelle. Southwest is also able to let “bags fly free” because it has a relatively high amount of nonstop flights and doesn’t have to worry about transfering the bags between planes. Here are two examples of how the strategies play out in real life. Displayed below are the flight schedules for ExpressJet, and Delta in America.

http://www.flightglobal.com/blogs/the-networker/2010/12/the-difference-hub-and-spoke-vs-point-to-point.html http://www.google.com/search?q=southwest&rls=com.microsoft:en-us&ie=UTF-8&oe=UTF-8&startIndex=&startPage=1 http://en.wikipedia.org/wiki/Spoke-hub_distribution_paradigm

-Zachery Poche

Consumer Choice

The airline industry is extremely cyclical because of the buyers high bargaining power and travelers’ demand is sensitive to the state of the economy.  Because traveling is considered a luxury good, when a global economic crisis strikes our nations, consumers often have to refocus their funds on necessity goods thus decreasing their demand for luxury goods. There are no switching costs for the consumers which puts the powers in the buyers hands.  With competition being so intense, buyers frequently do price comparisons when deciding upon which airline to travel with.  With prices, flight schedules tend to be a crucial competitive issue as well.

The following graph from the U.S. Bureau of Economic Analysis demonstrates how the airline industry is extremely cyclical.

With such a high fix cots, significant operating cost sensitivity to fuel prices and sensitivity of demand depends on economic factors, prices have increased making air travel costlier.  As a result, airlines have made adjustments in their pricing whether it be a bag additional cost, paying for meals on the plane or just a higher ticket prices: prices have increased which is not good for business.  As previous mentioned the customers are all about the best deal so airlines can not count on brand loyalty to help them through this tough time; price took precedence over loyalty.

http://www.usatoday.com/travel/flights/2006-04-21-airline-loyalty_x.htm
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American Airlines Bankruptcy Protest & Airline Job Salaries

As can be expected, Unions have been organizing protests following American Airlines efforts to cut spending by firing thousands of employees. There was an organized protest at the Dallas Fort- Worth airport on 2/14/2012, two weeks after AA laid off 13,000 employees. Pilots, flight attendants, and mechanics from all over the world gathered for the protest.

Although many large airlines have been cutting back on employees, here are median salaries for the airline industry.

http://jobs.aol.com/airline-jobs

Jim Whitehurst.mov

In this video, Jim Whitehurst, the former CEO of Delta Airlines, discusses the implications of American Airlines filing for bankruptcy and the importance of “cleaning up their cost structure.”

American Airlines Files for Bankruptcy

Since 2001 American Airlines has lost $ 12 billion.  Finally, in November 2011, the last “old-line carrier” files for bankruptcy.  Although American Airlines stated they plan to operate normally during this period, their restructuring efforts are massive.  The airline intends to lay off 16% of the workforce (13,000 employees).  Furthermore, the airline plans on ending pension plans and decreasing employee health benefits in an effort to cut costs by 20%.  On February of this year, the company told their employees what they were expected to give up in this restructuring process, the proposal was far worse than they feared.

In a company that has 80,000 employees, it is that that 4,600 mechanics’ jobs are intended to be cut along with 4,2000 ground services positions, 2,300 flight attendants and 400 pilots in addition to the 1,400 jobs to be cut in management and support service.  American estimated that with this new reconstructing the company will reduce overall costs by $2 billion a year, $1.25 billion of which would come from employees.  Boy, I sure wouldn’t want to be working for American Airlines right now.

American Airlines current stock ratios

“The world has changed around us and this is our moment to adapt or lose the opportunity forever. Our industry is now defined by the changes our competitors made in restructuring to secure their futures, and the landscape is littered with those airlines that failed to change.”

-Tom Horton, American Airlines Chairman (as a justification of this new move)

http://topics.nytimes.com/top/news/business/companies/amr_corporation/index.html