"The industry's strategies, business models, and institutional structure all change over time as do the environments within which it operates, but its fundamental, underlying economics are more enduring."
- Stephen Holloway
Written as a masters-level textbook, Straight and Level: Practical Airline Economics is a well written and comprehensive analysis of the economics that underpin the airline industry. This scholarly work examines nearly every major aspect of the airline business model in a level of detail appropriate for practitioners, and does a praiseworthy job of illustrating the complex interdependencies that make the industry both challenging and exciting. Although occasionally repetitive, any airline professional would be well served by reading this book at least once, and then keeping it nearby for future reference.
Airlines operate within one of the most complex, competitive, regulated and misunderstood industries. One need not look any further than almost any airline's financial statements for proof of the challenges that face airline management. In Straight and Level: Practical Airline Economics [Ashgate, 2008, 3rd ed.], Stephen Holloway sets out to help the reader make heads and tails out of the business by methodically exploring its fundamental economics. He succeeds, although it takes him 559 pages to do so.
Intended as a masters-level textbook, the book is organized into four parts: Strategic Context, Operating Performance Drivers, Capacity Management, and Operating Performance. The writing is clear and fully cited in the style of an academic paper (as opposed to foot- or end-notes), so the reader will have a fairly comprehensive reading list if further inquiry is desired. Although mostly focused on scheduled passenger air carriers, cargo carriers are also highlighted when warranted by significant differences.
Strategic Context, the opening part of the book, provides an overview of the industry, competitive strategy theory, and the major airline business models. It is here where Mr. Holloway lays out his view of strategy which he argues must simultaneously and coherently address the areas of scope, market, value proposition, competitive advantage, and operating strategy in order to be truly "strategic". "Strategy can never be about service, price, output or cost in isolation: it has to address all of them in a coherent matter." The need for coherence across all facets of the business model is something that Mr. Holloway routinely, and rightly, emphasizes.
The core material on airline economics is delivered in Part Two, Operating Performance, which consumes 307 pages. This section is structured around the profit equation, rearranged to suite the airline industry:
TRAFFIC x YIELD > < OUTPUT x UNIT COST
= OPERATING PERFORMANCE (i.e., PROFIT or LOSS)
Starting with the demand side of the equation and moving on to the supply side, a chapter is dedicated to each of the four components that define an airline's profitability. In theory, this should provide a MECE (Mutually Exclusive, Collectively Exhaustive) framework on which to build the discussion. In practice, things aren't so clear cut, as management decisions made in one of the four areas almost always affect the other three. This should become apparent to the reader as previously covered topics will reappear in later sections of the book as these relationships surface in the material. When this occurs, Mr. Holloway frequently chooses to discuss the previously covered subject in the new context. While this has the benefit of making the chapters self-standing, it adds to the length of the book and introduces a level of repetitiveness. Some readers may prefer this, but I personally would have been pleased with just a reference to an earlier page.
As Mr. Holloway proceeds through the chapters in lock-step with the profit equation, he introduces and explains the important aspects of the business. Although prior studies or experience in the principles of economics, marketing, finance, and operations will certainly speed understanding, those new to these areas will not be left behind. Mr. Holloway does not assume mastery of these subjects as he provides a cursory overview that serves equally well as either a gentle introduction or a brief refresher.
The scope of coverage is impressive. Market segmentation, tariff structures, demand modeling, capacity planning, market structure, airport and airspace issues, environmental concerns, direct operating costs, labor, fleet planning, MRO, and distribution are some of the topics that Mr. Holloway details. However, a few topics are sufficiently important in the airline industry that they deserve their own treatment, and these are withheld until the next part.
Specialized topics on Capacity Management are covered in Part 3, with chapters devoted to each of network design, network scheduling, fleet management, and revenue management. Once again, the treatment is quite thorough and presented very well. It is mostly in this part of the book that some items covered earlier get rehashed, given that each topic has an impact on one or more of the four aspects of profitability as structured in Part Two. Although each chapter is not intended to be an exhaustive exposition of the respective topic, Mr. Holloway provides a solid basis of understanding that should prove sufficient for most industry participants, and will provide a solid foundation for those who go on to specialize in any of these areas.
The sole chapter of Part Four wraps up the book with a discussion on operating performance that ties strategy, economics and operating performance together one last time. Unit cost, unit revenue, and load factor are all reviewed, and Mr. Holloway wraps up the book with a few concluding remarks.
Although not an explicit theme of the text, I believe most readers will come away with a much better appreciation for the interconnectedness of all the moving pieces of the airline business model. Very few actions can be taken by management in one area of the business that don't have ripple effects on other parts of the business. To the contrary, I posit that many airline failures can be traced back to management's inability to foresee the impact of such relationships. This also traces back to Mr. Holloway's insistence on coherent strategies that consider all aspects of the business. A careful study of Straight and Level should reward the reader with a solid understanding of these complexities and relationships.