The current woes of commercial airlines are well known – the industry has endured terrorist attacks, the SARS epidemic, and a global recession. What’s less recognized is that the business model for most major airlines has shifted, too.

Traditionally, industry executives focused on managing the economic cycle – making enough money in good times to carry them through the next downturn. Today, the challenge is different: how to compete in a time when turbulence is a permanent part of the environment.

With the rise of discount carriers and internet ticketing, customers’ expectations about pricing, value, and service have changed dramatically – along with most industry assumptions about how to structure networks, manage schedules, and market products. In short, the industry’s current race to control costs is likely to fall short of what’s needed. Among the deeper changes we expect to see over the next one to three years:

	Product Simplification. Airport lounges, frequent connecting flights, and food service are standard – and expensive – elements of major carriers’ product offering. Carriers will need to move toward more transparent pricing – maintaining amenities for passengers who want to pay for them, and reducing service and fares for others.
	Operational Improvement. By taking a lean, factory-like approach to maintenance, ground handling, and other support services, most airlines can increase productivity and reduce turnaround times by 25 percent or more. In addition, carriers with hub-and-spoke systems are likely to revamp their schedules, reducing their waves of coordinated departures (which create operational peaks and valleys, and often cause delays), increasing the number of point-to-point routes, and thus improving their fleet utilization, reliability, and cost structure.
	Network Reconfiguration. Airlines will continue to form international alliances and partnerships, and consolidate wherever possible – mostly through competitors’ bankruptcies. Major carriers will need to retrench, adjusting their fleet mix to favor either smaller planes serving many destinations (for business customers), or larger planes serving international and transcontinental flights.