Emerging business model – Airlines with charter services


admin | Feb 02, 2018

Emerging business model – Airlines with charter services

Airlines, especially the full service ones, are constantly seeking to innovate themselves by providing value added services to the upper end of the customer segment i.e. the first and the business class passengers. As a thumb rule, airlines cover their operating costs by selling economy class tickets and make margins on the business and first class seats. Product and service differentiation therefore becomes very critical to attracting premium passengers. Airlines are therefore constantly pushing the envelope to enhance first and business class customer experience by providing almost close to bespoke experiences.

However, there is a key service gap which exists today. First and business class passengers prefer high end travel experience. This experience usually breaks when such passengers transfer from a long haul premium airline and transfer to a regional airline towards their final destination, maybe to a small or tier 2 city where the airlines cannot provide such premium services. Thus the premium passengers alighting from their first or business class suites are often huddled into a regional jet with cramped economy class configuration when traveling to their next destinations.

Therefore a fast emerging business model to fill this service gap is for an airline to provide air charter services to seamlessly connect their international passengers to their onward destinations while providing a bespoke air travel experience.

Airlines have engaged in various business models to integrate their airline-charter operations. The first is having an in-house fleet of business aircraft. Qatar Airways has a business jet subsidiary Qatar Executive which has its own fleet of Gulfstream and Bombardier business jets. Qatar is able to provide the ultimate luxury experience at the highest level by providing a personalized experience wherein a first or business class passenger can seamlessly transfer, say from a long distance Qatar Airways flight, to a Qatar Executive charter flight and continue her onward journey towards a destination where commercial airline services may not be available.

Qatar has gone further and has invested in JetSuite, USA and will use their charter or shuttle services to connect their hub passengers onwards to their regional North American cities. This model requires an airline to carefully choose a charter services partner which can provide the same or equivalent level of service quality.

Second model is for an airline to engage into a joint venture with an air charter services company. This model has been followed by ANA and Sojitz. Under this model, the two companies will create a subsidiary with 51/49 share split. ANA has tied up with Honda Aircraft Company to use HondaJet for its charter service operations.

In this model ANA will use its extensive network and reservation systems to carry passengers from Japan through long distance scheduled services and will use a fleet of HondaJets based in Europe and North America to connect its hub passengers to regional cities. Sojitz, a leading business aviation company in Japan will provide charter operations expertise to the venture.

Similar models have been implemented by Delta Airlines and Delta Private Jets and Lufthansa Airlines and Lufthansa Private Jets.

As this model is being executed in various forms, the following five aspects of the business need to be carefully considered for its successful implementation:

1) Seamless booking integration: The booking, whether online or whether through travel agents, especially for target customers who are first or business class travelers should be seamless. The option to book an air service charter for onward connecting flight from the hub destination of the airline should be integrated within the airline booking system or the travel agents’ GDS system.

2) Charter options: The airline should develop partnerships to provide options to charter various segments of business aircraft. Premium travelers may not want to hire an entire Gulfstream for their onward journey but may opt for an efficient light or very light jet. The airline should be able to provide this option to its customers.

3) Service quality: Airlines can extend the same high quality service provided on their premium service on their in-house charter fleet. However, if an airline has a joint venture or service agreement with a third party air charter service provider, then overseeing the service quality control of the charter operations becomes the responsibility of the airline. For an airline it would be a better option to not provide charter service rather than agitate their premium customers by putting them on a third party charter service which does not deliver on service quality.

4) Operational integration: Premium customers pay for charter services for ease of travel and superlative experience. However, at the back end, airlines will have to tightly integrate their airline and charter operations. For example, for a passenger arriving from a foreign country, the luggage has to be identified and transferred from the airline to the domestic air charter flight, the boarding passes need to be issued for charter flight and a seamless transfer of passenger needs to take place from the airline to the chartered flight while completing the customs formalities. Hence the operational systems of the airline and air charter firm have to be well integrated to provide a seamless transfer and travel experience.

5) Key ownership for service quality: The airline is the key customer owner. Hence any issue with regards to pricing or service quality of the air charter services, whether provided by an in-house firm or through an air charter service partner, has to be resolved by the airline. If the airline does not take ownership of customer complaints, then there is a huge risk that the customer may be lost even though the airline may not be at fault.

Hence it is very essential that the airlines extending their services to air charters need to get the experience right for their most premium customers through right partner due diligence and tight operational integration. This model could become the key differentiator for many full service airlines that are constantly trying to distinguish themselves from the hyper competitive airline companies.