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89

Rethinking
the aviation industry

Peter R. Costa, Doug S. Harned, and Jerrold T. Lundquist

New strategies could help the business recover—but will also put more
pressure on established players.

N owhere have signs of an economic upturn in the US economy been

welcomed more eagerly than in the commercial-airline industry.
Already ailing from the global economic slump early in 2001, airlines then
became the prime industry victim of the September 11 terrorist attacks. The
impact of the current downturn in air travel has been severe not just on the
airlines but also on lessors and aircraft manufacturers, which have seen their
order books shrink as a result of numerous cancellations and postpone-
ments. Now, with signs of an economic updraft accumulating, many across
the industry express hopes that demand will recover quickly. The optimists
point to increases in travel during the first quarter of 2002 and also assume
that the airlines learned how to manage cyclicality better after the last cycle.

We do not expect such an optimistic scenario of recovery but rather see air-
lines struggling with a far more complicated and difficult trajectory. At a
time of unprecedented risk and uncertainty for the industry, an examination
of its fundamentals reveals nothing to suggest that this downturn will be
any shorter or less severe than previous ones, which typically lasted at least
three to four years. Indeed, most signs suggest that the current slump could
be worse and that the industry emerging at the end of it will be significantly
different.
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Airlines are once again heading into a period of intense pressure to cut costs
to counter slowing growth and may see a dramatic change to their tradi-
tional networks and fleets as a result. The dominance of many of the major
players that rely on a hub-and-spoke model, in which an airline operates
from one or a few large hub airports and serves all passenger types, will
decline. Alternative models, ones that emphasize the needs of specific cus-
tomer segments and use aircraft more efficiently, will continue to emerge.
Traditional carriers that do not significantly overhaul their service models
and cost structures risk eventual failure, and government efforts to support
them will only prolong the difficulties of the industry.

The current downturn is only part of the story, however. Unless the industry
changes significantly, it faces a slowing of the long-term growth rate in pas-
senger traffic, which has historically been well above GDP growth rates.
If, in fact, these long-term growth rates decline, aircraft manufacturers will
be severely affected as demand for new aircraft becomes more tied to the
replacement of older aircraft than to fleet expansion. It will therefore be of
paramount importance for manufacturers to support the airline business
models that will provide the most opportunity to increase demand.

The cyclical downturn began before 9/11

Over the past 30 years, worldwide passenger traffic has averaged an annual
growth rate of 6.2 percent—nearly double the rate of real growth in global
gross domestic product. Furthermore, from 1995 to 2000, airlines earned
profits of $39 billion and took delivery of more than 4,700 jetliners, both
record levels.

But in the first eight months of 2001, passenger traffic for US carriers rose
by an anemic 0.7 percent, a sharp fall from annual growth of nearly 4 per-
cent over the previous decade. The slump came despite aggressive price cuts
as airlines tried to fill seats and profits vanished. The US airlines’ net profits
dropped from margins of nearly 4 percent during 1998–2000 to losses of
greater than 3 percent during the first half of 2001.

The industry was deteriorating before the shock of September 11 caused an

unprecedented drop in air travel and airline performance, thus prompting the
US government to provide $5 billion in compensation and to make available
$10 billion in loan guarantees. The effect of the terrorist attacks was most
acute in the United States, where passenger traffic dropped by 6.8 percent
for the full year and net profit margins sank to an estimated –8.5 percent.
Passenger traffic dropped by more than 4 percent worldwide. The current
slump has already taken its toll. Four US carriers—American Airlines, Delta
Air Lines, United Airlines, and US Airways—reported record losses in 2001,
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topping $1 billion each. Elsewhere, airlines, including British Airways, Japan

Airlines (JAL), Philippine Airlines, Scandinavian Airlines System (SAS), and
VARIG, also posted substantial losses.

Filling seats isn’t enough

Industry optimists who see a relatively quick return to profitability point
out that passenger traffic had started to rise again at the end of last year. We
would note, however, that this hap-
pened only because seats were being EXHIBIT 1

filled at bargain prices—fares in the A global glut

United States were down by more World aircraft surplus as percentage of total fleet1
than 13 percent in March 2002 com-
Active In storage
pared with levels a year earlier, and
even then traffic was off 9 percent 13.2

on a year-over-year basis.
4.6
9.2 9.1
7.2 2.2
The optimists also argue that airlines 2.3

have improved their ability to control 4.3

8.6
costs and capacity. It is true that in 7.0 6.8
the late 1990s, airlines did appear to 2.9
be preparing for a downturn. They 1982 1992 20012 20023
reduced orders for new aircraft, 481 1,003 1,499 2,243
began using older jets to absorb peak
Total number of surplus aircraft
demand, and signed shorter-term 1
For all types of civilian jet aircraft.
leases. Nevertheless, total aircraft 2
3
After announced retirement of 302 aircraft.
Forecast assumes scheduled deliveries of 1,025 aircraft, 1.5% growth in
capacity still rose by 2.7 percent revenue-passenger-kilometers (RPKs) over 2001 level, retirement of 450 aircraft
in 2002, load factor of 70%. RPKs are number of passengers multiplied by
during early 2001 against a back- number of kilometers they fly; available-seat-kilometers (ASKs) are number of
seats airline provides multiplied by number of kilometers they are flown; load
drop of stagnant passenger traffic— factor is RPKs divided by ASKs.
Source: Airline Monitor ; McKinsey analysis
weakening the optimists’ claim that
airlines are now capable of effectively
managing capacity in preparation for downturns. We estimate that in 2002
excess capacity will be greater than it was at the same stage in either of the
previous two downturns, in 1982 and 1992 (Exhibit 1).

A cycle like other cycles . . . only worse

Even a solid economic rebound may provide little immediate relief. History
shows that downturns in the airline industry go on for years after the end
of general economic recessions. In each of the past three cycles, in fact, the
trough has become progressively longer. The 1990s cycle, though mild,
showed a typical pattern, passing through four phases from boom to slump
(Exhibit 2, on the next page). It took five years before airlines regained prof-
itability in 1995 as they passed cost reductions on to consumers in an effort
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to fill excess capacity. As a result, yields remained low until capacity was bal-
anced and business travelers began to accept increasingly high fares. After
the two previous cycles—from 1970 to 19751 and from 1980 to 1984—
there were also long periods of slack before recovery kicked in (Exhibit 3).

The current downturn resembles earlier cycles but in several areas appears
more severe. For example, passenger traffic, yields, and profit margins were
weaker in 2001 compared with the same phase of the cycle in the 1990s
because of the devastating impact on the industry of the September 11 events
(Exhibit 4, on the next spread).

A slow climb to recovery

Profitable airlines are a prerequisite for recovery in the aircraft industry. In
general, carriers begin ordering new aircraft only when they can confidently
see sustained growth and high utili-
EXHIBIT 2 zation levels. That typically occurs a
Round and round year after carriers return to prof-
itability. Since it takes one to two
Phases of typical cycle
years to build a commercial jetliner,
1
this means that new aircraft won’t
2 4
3
be delivered to an airline until two
1. Bubble 2. Crash to three years after the company
• Revenues peak with strong • Weakening GDP lowers demand returns to profitability.
yields1 and growing RPKs2 • Yields1 fall as airlines prop up RPK2
• Profits begin to fall as labor levels to hold market share; profits
actions raise costs plummet In times of low demand, airlines are
• New-aircraft orders peak • Future new-aircraft orders badly hampered by high fixed costs.
~1 year after profits canceled or deferred; peak orders
from bubble phase arrive As an example, the newest Boeing
3. Stabilization 4. Recovery or Airbus wide-body jetliners cost
• GDP regains lost ground; • Strong economic growth between $80 million and $150 mil-
RPKs2 climb fuels demand
• Losses ease as cost-cutting • Profits rise with increased lion each, and lease or loan pay-
measures take hold revenues and stabilized costs ments are due whether a plane is
• New-aircraft deliveries add • Capacity balances as new-
to excess capacity; yields 1
aircraft deliveries taper off; parked on a tarmac or cruising with
continue to fall price discipline reemerges
a cabin full of paying passengers.
Meanwhile, strong unions have his-
1
Price paid for each passenger-kilometer flown.
2
Revenue-passenger-kilometers (number of passengers multiplied by number of torically made it difficult to reduce
kilometers they fly).
labor costs.2 From 1995 to 2000,
operating costs for the US majors
stayed roughly constant, with costs rising even higher in 2001 prior to Sep-
1
The impact on profits of the 1970s downturn was mitigated because it occurred before deregulation in
the United States.
2
Even when jobs are cut, as happened at many airlines in late 2001, these measures usually affect
lower-paid workers and create large onetime costs for severance packages and the redeployment of
the remaining workers. In addition, because it is generally the better-paid senior employees who
remain, average wages paid can even rise following massive layoffs.
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EXHIBIT 3

The song remains the same

World airline industry profit margin, percent

Operating profit
Net profit

1970s cycle (prior to US deregulation)

8
1 year of losses
6
4
2 1990s world industry cycle breakout
0
–2 Oil crisis Index: RPKs,1 real GDP, real yield2 = 1.0 in 1988
–4
1.6
1968 1971 1974 1977 RPKs1
1.4
1980s cycle
1.2 Real GDP
8
6 1.0
4 years of losses
4
0.8 Real yield2
2
0 0.6
–2 Percent
–4
25
1978 1981 1984 1987
20 Net new-
1990s cycle
15 aircraft
8 orders3
6 10
5 years of losses New-aircraft
4 5 deliveries3
2 0 Net profit
0 margin
–5
–2
88

95

97
92

–4
19

19

19
19

1988 1991 1994 1997

Bubble Crash Stabili- Recov-
zation ery
1
Revenue-passenger-kilometers are number of passengers multiplied by number of kilometers they fly.
2
Price paid for each passenger-kilometer flown.
3
Net new-aircraft orders and deliveries as percentage of total fleet.
Source: Airline Monitor ; BACK Aviation Solutions; International Monetary Fund; McKinsey analysis

tember 11. After September 11, costs moved still higher to pay for increased
security and insurance provisions (probably 1 to 2 percent of revenues)—
and that is before adding the high cost of increased debt levels.

Cutting capacity is considered critical to cost reduction, but the full impact
on profits still takes time to emerge. Analysts estimate that after Septem-
ber 11, airlines reduced the number of seats available for each kilometer they
were flying by more than 20 percent in the United States. However, more
than three-quarters of these reductions came from using active aircraft less,
with the remaining cuts coming from putting aircraft into storage. Both
measures allow airlines to lower variable costs, notably fuel and mainte-
nance, by dropping unprofitable flights, but fixed costs such as lease and
debt payments remain. What is more, because the excess capacity is readily
available, it can come back quickly. In early 2002, airlines were already
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bringing back capacity into their networks rather than lose market share on
key routes. This is particularly important, since available excess capacity in
the present downturn exceeds that at similar points in the past two cycles.
As scheduled deliveries arrive during the next two years, the record surplus
EXHIBIT 4
may continue growing
despite the fact that the
Bad to worse
number of orders as a
Effects of Sept 11, 2001, terrorist attacks on US airline industry economics, percent percentage of total fleet
CAGR1 of revenue- size is lower than it was
passenger- CAGR1 of
kilometers (RPKs) real yields2 Net profit margin at this point during the
most recent cycle.
1990–91 1.7 –3.4 –3.9

2001 (pre–Sept 11)3 0.7 –3.34 –3.2 Another important ele-

Full-year 2001 –6.8 4
–8.5 4
–8.5 ment in recovery is pas-
senger yield—the price
1
paid for each passenger-
Compound annual growth rate.
2
3
Price paid for each passenger-kilometer flown. kilometer flown. The
Jan–Aug 2001 for RPKs, Jan–June 2001 for yields and net profit margin; RPKs are number of passengers
4
multiplied by number of kilometers they fly. problem here is that,
Estimate based on reported figures for subset of major US airlines.
Source: Air Transport Association; BACK Aviation Solutions; US Bureau of Economic Analysis; McKinsey given near-term fixed
analysis
costs, airlines must
sacrifice yield to keep
seats filled. Business travel has been the primary source for high-yield pas-
sengers, critical to the economic viability of the hub-and-spoke model used
by the major airlines. However, over the past several years, business travel
has accounted for an ever smaller share of airline revenues. In 2001 before
September 11, the share had dropped to 23 percent, from more than 35 per-
cent in 1999, in the United States. While some of this drop is normal cycli-
cality as companies cut back on travel, other factors indicate that the decline
may be longer term. After September 11, the inconveniences caused by time-
consuming new security measures have made business travel even less attrac-
tive, and the likelihood is that these inconveniences will continue for the
foreseeable future.

In order to reduce the cost of travel, companies have made several fundamental
changes that are likely to have long-lasting effects on business travel revenues.
Large corporations have used their purchasing power to negotiate volume
discounts on fares, with price reductions on some routes often as high as 20
to 30 percent. Furthermore, most corporations are now enforcing the travel
restrictions tied to these volume agreements.

Some alternatives to business travel on commercial airlines may now finally

take hold. Companies are turning increasingly to travel substitutes such as
videoconferencing and have been experimenting with shared corporate jets
as a replacement for first-class travel for top executives. New advances such
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R E T H I N K I N G T H E AV I AT I O N I N D U S T R Y 95

as Web conferencing have boosted demand for videoconferencing services,

with a 30 percent year-over-year increase prior to September 11. Forced
behavioral changes in the aftermath of the terrorist attacks have pushed the
growth rate for these services up to
40 percent. In addition, the expan-
sion of fractional jet models for A recovery in the airline business
business aircraft significantly will have to come from long-term,
increases the availability of busi- structural reductions in cost
ness jets as a travel alternative.
The corporate jet option, which is
becoming more attractive given the increased time required to negotiate
security procedures at major airports, may take away at least 10 percent of
first-class travelers by 2005. In view of these changes in the way corpora-
tions work and purchase travel, we believe that business travel revenues will
remain under pressure even when the world economy recovers.

In the 1980s, increased yields drove recovery in the airline business. This
time around, given the high levels of excess capacity and projected weakness
in business travel revenues, we do not believe that yields will come back as
strongly as in previous downturns. Instead, any recovery will have to come
from long-term, structural cost reductions. For major airlines using the high-
coverage hub-and-spoke model, such reductions may be difficult to achieve,
and these airlines may struggle beyond 2004. In contrast, competitors that
utilize a lower-cost strategy—such as Ryanair and easyJet in Europe, South-
west Airlines and WestJet in North America, and Virgin Blue in Australia—
look well positioned to expand their operations and profitability.

Toward a new model

In any event, the industry that recovers from these challenges is likely to
look very different from today’s industry. As airlines emerged from the previ-
ous two cycles, they adjusted their operations—for example, by establishing
and then improving yield-management systems, which price seats in a more
discriminating way, and by outsourcing more services. The industry’s struc-
ture has remained fairly constant since the early 1980s, leaning heavily on
a hub-and-spoke model. In this downturn, however, many new forces are
working to weaken that model, including unprecedented pressure on prices,
challenges to further cost cutting, the replacement of turboprops by more
comfortable regional jets, and a change in flying habits since September 11.

The traditional model of the major airlines provides broad geographic cover-
age. That model has dominated the airline industry. But the economics of
the “shared-factory” approach have become less attractive because the two
customer bases that it tries to serve—business and leisure travelers—have
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competing priorities and more options. Leisure travelers seek the lowest
prices and are less concerned with service, flight frequency, or a broad slate
of destinations. Business travelers, on the other hand, demand frequent
flights to a wide range of destinations, seek quality service, and are willing
to pay a reasonable premium for these benefits.

Trying to appeal to widely different customer needs runs counter to the

overall trend in service industries, in which distinctive approaches, tailored
to different customers, have generally come to dominate. The majors’ busi-
ness model functions well as long as there are enough high-yield passengers
to balance the effect on an airline’s yield of price cuts for tourists. But with
higher infrastructure, labor, and overhead costs, a large proportion of high-
yield business passenger revenue is needed for profitability except during the
peaks of the cycle.

Today, this high-yield revenue is no longer assured. In addition to the previ-

ously mentioned factors that are likely to lead to a longer-term decline in
business travel revenues, business travelers often dislike having to negotiate
many flight connections, frequently at congested hub airports, in a customer
service infrastructure that also has to accommodate a mass of leisure travelers.
The difficulties of business travelers have been heightened further by current
and proposed security measures (for instance, gate screening and bag match-
ing), which increase the time required for connections.

There are two alternative strategies that have succeeded in keeping costs
considerably lower and have been good at attracting leisure travelers. The
first focuses on the highly efficient utilization of aircraft. The second empha-
sizes the purchase of low-cost used aircraft. In many cases, these strategies
provide for lower service levels and maintain lower overhead costs. Both strat-
egies pose a significant threat to the higher-cost airlines that are constrained
by their legacy fleet and network structures as well as onerous labor agree-
ments. Both approaches can take advantage of the current downturn by
taking over routes abandoned by the bigger airlines.

Southwest Airlines and JetBlue Airways in the United States, along with the
United Kingdom’s easyJet, are prime examples of the high-utilization model.
They design their routes to maximize the use of their aircraft, and by using
the same types of aircraft throughout the network they save on maintenance
and training costs. These airlines do not feel compelled to offer a broad slate
of destinations and can operate from smaller, less congested airports or at
off-peak departure times. With their lower costs (Exhibit 5), they can afford
to charge the lower fares that leisure travelers are increasingly demanding.
Furthermore, the growth of these competitors has been facilitated by the
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introduction of new, EXHIBIT 5

longer-range versions Challenging the majors

of the aircraft types Economics of selected airlines,1 Q1–Q2 2001, cents per available-seat-kilometer (ASK)2
they currently fly (for
instance, Boeing 737- Profit margin per
Revenue Cost Profit ASK,2 percent
800s and 737-900s),
Southwest
allowing much greater Airlines
5.7 4.8 0.9 15.8
reach without losing JetBlue
5.2 4.5 0.7 13.5
Airways
the advantages of a Average of
6.7 7.0 –0.3 –4.5
common cockpit. US majors

1
Not adjusted for length of routes flown.
The second model, 2
Number of seats airline provides multiplied by number of kilometers they are flown.
Source: US Department of Transportation; McKinsey analysis
which uses older air-
craft to keep costs
down, is typified by the original ValuJet (now AirTran Airways) and its initial
fleet of old DC-9 jetliners. Such an airline can fly into hub airports, attract-
ing passengers by reducing prices on prime routes. In the current downturn,
prices for older jetliners have fallen by as much as 50 percent, opening the
door for new players to use this model to break into the market. The model
does have some drawbacks. While using an older fleet keeps asset costs
down, maintenance and fuel costs tend to be higher, and ensuring on-time
reliability can be more difficult. The impact of maintenance and fuel costs
increases the more the aircraft are used, making it difficult for airlines that
choose this model to expand profitably. Another constraint on growth is
that when demand increases, fewer acceptable older aircraft are on the
market, and those that are available are more expensive. In fact, as AirTran
has grown, it has shifted to acquiring new Boeing 717s, which have much
lower operating costs than do the older aircraft. Despite the drawbacks of
this low-cost-asset model, the ready availability of a large number of low-
cost aircraft—for example, 737-200s, for less than $2 million, that have
been hushkitted to meet all current noise regulations—makes it likely that
new players will pursue this approach, which will put more pressure on
established airlines even if the new ones are not ultimately successful.

While the lower-cost strategies can be ideal for leisure travelers, they are
not suitable for many business fliers, because they cannot offer the flexibil-
ity, range of flights and destinations, or level of service that business travelers
demand. As an example of one solution, regional jets can provide an increas-
ingly attractive option to avoid time-consuming connections on certain routes
and deliver greater convenience, with higher frequencies of departure and
service from nearby airports. These 45- to 70-seat jets are quieter and more
comfortable than the turboprop planes that were formerly the backbone of
commuter airlines.
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Up until the past two to three years, these commuter airlines provided feeder
service to hubs from an average distance of about 200 miles. Today, regional
jets can help passengers avoid connections by offering direct flights to a net-
work of more distant large and small airports, with the average stage length
of a flight now nearly 500 miles and the newest regional aircraft targeted at
stage lengths of 1,000 miles. While regional jets are more costly to operate
than larger aircraft on a per-seat-kilometer basis, on lightly traveled routes
their overall profit per passenger can be higher. Since the planes are so small,
their seats can be filled through limited discounting, allowing these airlines
to target service effectively to the business traveler. Also, regional airlines
have historically been able to operate with a more efficient cost structure for
both management overhead and labor.

The regional-jet model has yet to be exploited fully by existing commuter

airlines, which tend to be units of major carriers or tied to major-carrier
labor agreements with code-sharing relationships. The limiting factor has
been scope clauses—stipulations in union contracts that limit the use of
smaller planes on longer routes. Nevertheless, as regional carriers (for
instance, the spin-offs of Continental Express and Northwest’s Express
Airlines I) achieve greater independence, the economic attractiveness of
using new longer-range regional jets raises the possibility that change may
eventually occur in these operations.

Despite the pressure on traditional players, the hub-and-spoke model will

not disappear, as it will remain necessary for connectivity between smaller
airports. Low-cost airlines currently represent less than 15 percent of the
revenue-passenger-kilometers flown by US carriers and less than that for
European and Asian carriers. These airlines, however, are poised to take
much greater shares in view of their lower cost structures, the availability of
attractive new aircraft options, and the sharp drop in high-yield-passenger
revenue.

If the major airlines are to continue serving price-sensitive travelers on intra-

continental routes, they will need to take significant steps to transform their
networks, fleet structures, and labor agreements in order to compete effec-
tively against newer competitors. The major airlines that rely on serving a
large number of destinations and a broad range of passengers will have to
reevaluate their cost structures and service offerings in the face of new incur-
sions on their most profitable routes and the decline in their most profitable
customer segments. It will take major steps to transform the networks, fleet
structures, and labor agreements of these airlines so that they can compete
effectively with aggressive new entrants. In the past, larger airlines have
found it difficult to make these types of changes, which today may be a pre-
requisite for survival.
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Ensuring robust long-term demand

Air travel has long enjoyed growth rates well above GDP—a particularly
important phenomenon for aircraft manufacturers, which gain most of their
orders from fleet expansion rather than replacement. These high growth
rates, however, have eroded over time (Exhibit 6). The worldwide growth
rate for revenue-passenger-kilometers has declined from nearly 6 percent in
the 1980–90 period to only 4.7 per-
cent in 1990–2000. Growth rates EXHIBIT 6

vary in each region of the world, An erosion of growth

with Asian growth being the fastest.
Compound annual growth rate (10-year rolling average), percent
In each region, however, the gap
10
between traffic growth and GDP
8 Worldwide
growth has been shrinking. industry RPKs1
6

Over the past three decades, the 4

principal engines that have kept 2 World real GDP2

passenger traffic growth above 0
1980 1985 1990 1995 2000
GDP growth have been globaliza-
1
Revenue-passenger-kilometers are number of passengers multiplied by number
tion, lower ticket prices matched of kilometers they fly.
2
GDP based on market exchange rates (not purchasing-power parity).
by lower costs, and increased conve- Source: International Civil Aviation Organization; International Monetary Fund;
US Bureau of Economic Analysis; McKinsey analysis
nience (frequent flights, few connec-
tions, and more nearby airports, for
example). Looking forward, these drivers of strong growth are at risk. While
globalization should continue to boost traffic, the other two drivers—cost
cutting and convenience—are reaching their limits within the traditional
model. In the past, major airlines could achieve significant profit improve-
ment by increasing load factors; by moving from three- to two-engine air-
craft, thereby saving on fuel; and by reducing the size of cockpit crews,
saving labor costs. But load factors are now reaching their natural limits,
and such large step-function improvements in cost are no longer easily
available without major changes to business models and labor relationships.
Furthermore, convenience has been declining of late; congestion and flight
delays reached record levels before September 11, and the additional security
measures now in place have added further difficulties for travelers.

The implication of these changes is that significant steps must be taken to

improve convenience and lower the cost to the passenger if long-term growth
rates for traffic are not to decline toward GDP levels. The emergence of
new airline business models represents an opportunity for building demand
growth by providing customers with a lower-priced but more convenient
offering. Assuming that these models continue to take hold, the mix of air-
craft being ordered will change, with more planes sold to the low-fare, high-
utilization carriers and to the regional- and business-jet operators. If, on the
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contrary, airline business models remain substantially the same, manufactur-

ers may have to contend with lower overall demand for new aircraft not just
during the cyclical downturn but also as an industry norm. Purchases will
focus more on replacement aircraft than on aircraft to expand fleets.

The commercial-aircraft industry—hit by an economic slump, last Septem-

ber’s terrorist attacks, and a likely longer-term decline in business travel reve-
nues—now faces an era in which many of its basic operating assumptions
must be reexamined. The growth of new airlines that cater to specific seg-
ments places added pressure on the established players, as these newer air-
lines offer realistic alternatives for passengers at lower cost and greater
convenience.

For aircraft manufacturers and their suppliers, both the nature of the current
downturn and the growth of new airline business models are critical. Because
the downturn will likely extend into 2004–05, deliveries will remain under
pressure and orders are unlikely to exhibit strong growth until 2005–06.
Manufacturers, however, must focus on supporting the airline business
models that will provide a long-term attractive solution for the passenger—
a solution that has important implications for the product mix. It will be the
ability of the airlines to deliver lower cost and greater convenience that will
ultimately support robust long-term aircraft demand.

Peter Costa is a consultant, Doug Harned is a principal, and Jerry Lundquist is a director in
McKinsey’s Stamford office. Copyright © 2002 McKinsey & Company. All rights reserved.