Hub and Spoke vs point-to-point in airline logistics. The network strategy of Lufthansa

Table of Contents

Executive Summary

List of Figures

List of Abbreviations

Introduction

1.1 Problem definition

1.2 Objective

1.3 Methodology

1.4 Structure of the work

2. Network logistic strategies in the airline industry
2.1 Hub and spoke system
2.2 Point-to-point system

3. Strategic network systems by Lufthansa
3.1 Lufthansa and Hub-and-Spoke Strategy in Germany
3.2 Cost and network analysis
3.3 Advantages and disadvantages of H&S and PtP strategies

4. Conclusion and recommendations

List of references

Executive Summary

This paper is dedicated to the most applied international logistic network systems, which are: hub-and-spoke and point-to-points. Airlines use these strategic networks in order to reduce different types of costs, optimize their network and flexibility of flight operation’s. The author elaborates on the different network strategies by putting his focus on one of the biggest German and European airline Lufthansa.

The paper provides insight into hub-and-spoke and point-to-point of the airline industry. The author weighs up the advantages and disadvantages of both logistic strategies.

List of Figures

Figure 1: Passengers growth since 1950

Figure 2: Hub and Spoke system

Figure 3: Point to Pointy system

Figure 4: Frankfurt geographical position

Figure 5: Hub Network of Lufthansa and United

Figure 6: Multi Hub System by Lufthansa

Figure 7: Lufthansa hub Frankfurt

Figure 8: Ticket prices from different German airports

List of Abbreviations

Introduction

Nowadays, passengers get more opportunities to travel around the world, having more flexibility and selection of different airlines. The airline industry is the most flexible and growing industry in the world. The World Real Gross Domestic Product (GDP) and global economic are the crucial factors in order to increase the numbers of the passengers and thus making flights more attractive. The GDP in 2015 was listed by 2,6 % and the passenger growth was over 5,8 %.^[1]

Meanwhile, more than 900 commercial airlines transport over 3 billion (2013) passengers around the globe every year (see figure 1). With over 1670 international airports worldwide, commercial airlines organize flight network with 22.000 aircrafts for both business and touristic travellers. ^[2]

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Figure 1: Passengers growth since 1950 ^[3]

The airline traffic utilization is often measured in the Revenue Passenger Miles (RPM), which is generated by flying one revenue passenger, one mile or kilometre.^[4] In 2014, the RPM was by 6.2 trillions and was operated by 17.354 passenger fleet aircrafts. In the forthcoming future the world airlines are aspiring to new challenges: 70 % passengers growth, 15.2 RPM until 2034.^[5]

With respect to the growing flying demand, the world airlines have to efficiently optimize their operation network costs and widen their flexibility. By resorting to different logistic strategies systems, the airlines can reduce their operations costs and generate more profit.

1.1 Problem definition

The biggest airlines choose their destinations based on economic factors such as trade, demand or airport hubs. Direct connections between continents from the regional and local airports are mostly not available. The research question and problem definition of this paper is meant to analyse, how Lufthansa organizes its flight network with respect to airport hubs. In order to properly answer the question, it is important to understand, which logistic strategy (hub-and-spoke or point-to-point) is employed by the Lufthansa. In addition to that, it has to be examined why Lufthansa doesn’t offer direct connections to world major cities (e.g. Singapore, Los Angeles etc.) and also which problems airlines are confronted with by making use of hub-and-spoke and point-to-point strategies.

1.2 Objective

The overall aim of this assignment is to analyse the different logistic network strategies of both hub-and-spoke as well as point-to-point. The assignment focuses on the logistic network of Lufthansa and its approach to the respective price and cost strategy.

1.3 Methodology

This paper is based on different sources such as books, internet web sources, International Air Transport Association (IATA) and International Civil Aviation (ICAO). The assignment describes important major termini and phenomena, which are necessary to understand the concepts of hub-and-spoke and point-to-point in aviation industry. Further, the major advantages and disadvantages are analysed and discussed.

1.4 Structure of the work

After the introduction and problem definition in chapter one, the second chapter starts with the theoretical part of this work. The second chapter introduces the airline logistic management strategic systems “hub-and-spoke” and “point-to-point”.

The last chapter of this work examines the cost and network structure of the biggest European airline Lufthansa. This work ends with a conclusion, recommendation and ITM checklist.

2. Network logistic strategies in the airline industry

The second chapter begins with the introduction of “hub-and-spoke” (HaS) and “point-to-point” (PtP) connections. Both of these network structures are strategic decisions of airlines ^[6]. Usually, the airline strategy of choosing between the both network structures, depends on different environmental factors such as population (city), airport infrastructure, geographical position, strategic airlines partners and etc.

2.1 Hub and spoke system

The history and development of hub-and-spoke system dates back to the 20th century. Before 1978, major airlines provided their customers only direct connections between cities such as New York – Cologne or Boston – Berlin. After the airline industry deregulation in 1978 and growing flight demand; the major US airliners restructured their flight network and developed the HaS. ^[7] Delta airlines was the first airline worldwide, which developed HaS and introduced Atlanta (Georgia) as the first airport hub for national and international flights. ^[8] Atlanta airport is one of the biggest airports (measured by departures and destinations) in the world and headquarter of Delta airlines ^[9]. Since then, American airlines and European airlines have been engaged in developing of the HaS system in important touristic and business cities e.g. New York and San Francisco. In the US, United airlines was the last airline in 1981, which has selected Chicago O’Hare airport as a central hub for international and national flights. ^[10]

From the airline perspective, the HaS network strategy minimizes the airline operating costs per seat kilometre (PRM) flown in relation to the airports served in a network. A hub can be defined as a central airport location used as a transfer point for services from outlying spoke airports. Airlines schedule waves of flights into the hub and then back out to where they came from within a short time period. Passengers transfer between flights at the hub. This allows the airlines to maximize the number of marketable connections between points of the network for the lowest airline operating cost. ^[11] One of the examples of HaS is represented in figure 2.

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Figure 2: Hub and Spoke system^[12]

The figure 2 shows the original HaS diagram for a network choosing five airports.^[13] For the preparing all 5 destinations airline needs only 4 connections, the number of connections can be calculated by using the following formula:

Where n is the number of Airports and NoF the number of flights. ^[14] From the logistical point of view, an airline needs four aircrafts to connect all destinations together, via hub airport A.

[...]

^[1] Cf. Leahy, J. (2016), p. 5.

^[2] Cf. Tyler, T. (2016), p. 14.

^[3] Cf. Crotti, R., Misrahi, T. (2015), p. 60.

^[4] Cf. Holloway, S. (2008), p. 65.

^[5] Cf. Leahy, J. (2016), p. 2.

^[6] Cf. Abdelghany, A., Abdelghany, K. (2009), p. 8.

^[7] Cf. Burghouwt, G. (2007), p. 2.

^[8] Cf. Upham, P. et. al. (2003), p. 61.

^[9] Cf. Delta Airlines (2016), see the paragraph “key informations”

^[10] Cf. Sheth, J. et. al. (2007), p. 62.

^[11] Upham, P. et. al. (2003), p.24.

^[12] Cf. own ilustartion based on Vasigh, B. et. al. (2013), p. 115.

^[13] Cf. ibid.

^[14] Cf. Vasigh, B. et. al. (2013), p. 116.