This month”s chief executive ON THE SOAP is Ray Webster, who holds that position at easyJet ”the web”s favourite airline”.
Ray (56) joined easyJet in March 1996 as managing director and in 2000 was appointed chief executive as the airline prepared for its flotation on the London Stock Exchange in November 2000. Previously he had 27 years of experience in the airline industry at Air New Zealand. Prior to joining easyJet he was general manager, strategic planning at Air New Zealand. Readers will not be surprised to learn he is a Kiwi.
”Why the Hub and Spoke is Broke.
The Government”s long-awaited White Paper, which was published at the end of last year, was broadly welcomed by the aviation industry ” and rightly so. The industry had been crying out for decades for a considered, coherent aviation policy and what we got was pretty good. However, the Government has been guilty of committing one mistake ” assuming that the structure of the industry will remain broadly unchanged and that the corresponding airport needs are broadly the same.
This is most noticeable in the proposed expansion of Heathrow Airport. OK, the third runway is, of course, subject to some pretty strenuous environmental restrictions. But the ”hub and spoke” mantra of the traditional airlines has obviously persuaded the Government that Heathrow is deserving of additional capacity. That”s a big assumption ” and I think it”s worth challenging.
Today”s rapid structural changes in the airline industry have highlighted the rigidities in the market and the need for further deregulation. This is why it will come as no surprise that from a low cost airline perspective, the hub in its present form stands out as particularly inefficient, outdated and expensive. The hub is essentially an unwanted legacy of a regulated and protected industry, a product of a 747-driven industry. This is not to say that the hub will not survive, certainly for long haul connections, but that its business model needs revisiting if it is going to have any scope for future development.
There is no doubt that the hub is a poor customer product, which requires two flights instead of one to get a passenger to their destination. This automatically translates into higher costs, which exceed those of an equivalent point-to-point flight. Hubs are costly for a number of reasons. Not only do network carriers require a higher slot usage, but by providing two flights, they also double landing and passenger related charges. The added environmental costs are also significant and raise a number of issues around noise, pollution and congestion levels. Indirect costs are higher as well, given the need for additional ground staff and support infrastructure including further complexities such as ticketing, scheduling and hotel arrangements for missed connections.
By adding delay and complexity, hubs and network carriers are essentially destroying passenger value. This is because the hub business model is not tailored to customer needs. Its business model was designed to reflect national interests and rights over designated routes with a view to prevent other national carriers or new entrants from entering the market. The restrictions on nationality and the lack of consolidation in the market are the hallmarks of a flawed system in need of reform. Whereas in the past making a connection was the only option, conveniently exploited by network carriers charging very high fares, passengers are now faced with a widening range of alternatives. Passengers value the hub service less than a direct flight and as such pay less for an inferior service. The hub business model needs to be adapted and brought into line with changes in the industry. It cannot continue to be the legacy of a regulated and protected industry. The design capacity of hub airports is a case in point. Hubs have a large over-sized infrastructure designed to accommodate large volumes of passengers in short periods of time. But the wave nature of hub operations is a very inefficient use of the terminal and runway. Peak periods drive the design specification of hub airports, which then forces them to build more and larger capacity than otherwise required. Furthermore, there is a knock on effect with greater building and investment costs incurred and higher land usage required. All of which, make it all the more difficult for network carriers and hub airports to break away from the status quo. Such poor use of airport infrastructure loses sight of the customers” interests.
Passengers reward efficiency and convenience and this is particularly the case for the low cost passenger. They want fast and efficient airport facilities and operations ” good surface access to and from the airport ” direct point-to-point services ” local and convenient airports ” And to pay only for the facilities that they use.
Efficiency is a central element of the easyJet low cost approach. This is why easyJet airports are situated within 90 minutes of where 90% of the UK population lives. We fly to main destination airports throughout Europe but gain efficiencies through rapid turnaround times, and progressive landing charges agreements with the airports. By reducing turnarounds to 30 minutes and below, easyJet can achieve extra rotations on the high-frequency routes, thereby maximising utilisation rates of its aircraft.
Given that airport charges represent the single largest operating cost for easyJet (26%), when talking to airports we seek the following. Efficient use of ground staff which drives cost and performance ” use of flexible pre-boarding zones as quick boarding enables high utilisation of infrastructure ” no dedicated facilities to retain flexibility ” short walking distance to aircraft with no air bridges or bussing ” minimised waste of operational time (taxi, holding, ATC delays).
Overall, easyJet keeps costs low by eliminating the unnecessary costs and 'frills' which characterise 'traditional' airlines. This is done in a number of ways:
Use of the Internet to reduce distribution costs ” approximately 95% of all seats are sold over the Internet, making easyJet one of Europe's biggest Internet retailers ” Maximise the utilisation of each aircraft to reduce the unit cost ” Ticketless travel to reduce significantly the cost of issuing, distributing, processing and reconciling millions of tickets each year ” no free lunch on-board to reduce cost and unnecessary bureaucracy.
Looking ahead, my vision is one of a predominantly low cost European air travel market. And as I see it, further deregulation in the market could altogether remove the need to build any new hubs. Over the longer term, further deregulation should enable the flag carriers to operate long haul routes from non-domestic bases, reducing their need to provide intra-regional feeder flights, which are less attractive to their high cost business models. This will work to the advantage of established low cost carriers such as easyJet. At present, low cost airlines have relatively low levels of penetration in most European countries, which can only increase as the concept develops and becomes more widely accepted. Only the UK, Belgium and Ireland have achieved the 25% level of penetration seen in the US, and easyJet believes that the overall potential in Europe is far greater as, unlike the US, there are few natural sectors that exceed the length at which low cost travel stops being attractive”.
easyJet is confident that it will be able to grow passenger volumes at around 20% per annum. The easyJet business model is based on a simple, consistent approach to running an airline that appeals to the cost conscious consumer.
The future of air travel in Europe is certainly promising, whether today”s hub survives is a different matter. Going forward, the efficient use of airports will be key. Improving existing capacity is a real priority before building anything new”.
Ray Webster http://www.easyJet.com