Avelo Airlines' Success: Pandemic, Business Model, and Market Dynamics

This report examines the remarkable success of Avelo Airlines during the challenging period of the COVID-19 pandemic. It begins with an overview of the airline's background and its low-cost carrier (LCC) business model, highlighting its point-to-point flight strategy, use of secondary airports, and ancillary revenue streams. The report then applies Porter's Five Forces framework to analyze the competitive environment, demonstrating how the pandemic created favorable conditions for Avelo's growth, particularly in terms of supplier bargaining power, customer bargaining power, and the threat of new entrants. The analysis also discusses the responses of incumbent airlines to Avelo's entry into the market. The report concludes that Avelo Airlines successfully capitalized on the instability of the US domestic aviation market, driven by the pandemic, through strategic decisions such as acquiring cheaper aircrafts and offering direct routes without pre-existing competition. The report provides a comprehensive understanding of the key factors contributing to Avelo's achievements in the modern aviation landscape.

Avelo Airlines success during the modern Pandemic
Word Count - 1482
Introduction
The COVID-19 pandemic triggered a universal wave of economic downfall in supply and demand
chains for the travel market (Dube, Nhamo & Chikodzi, 2021). Heighted perceptions of fear and
stay-at-home biases caused international tourist numbers to drop from 1.1 billion to mealy 263
million and a loss of $910 billion to $1.2 trillion in export revenues from tourism (IATA, 2021).
Mobility reduction caused a catastrophic loss for airlines; however, start-up airlines have capitalised
on the instability of the industry and successfully established a presence in the modern aviation
market. This essay looks at how Avelo Airlines (AA) managed to develop a successful and profitable
business model during the hardest years of modern aviation. The essay starts with its background and
business model, followed by Porters Five Forces analysis and the Incumbents responses to new
entrants.
Background and business model
AA founded by former executive of United Airways Andrew Levy, acquired Xtra Airways in 2018
with the intention of rebranding into a low-cost charter airline (Airline History, n.d). AA’s April
2021 inaugural flight was between western hub, Hollywood Burbank Airport (BUR), to Charles M.
Shultz Sonoma County Airport (Rains, 2021) and as of January 2022, AA operates 19 direct, point-
to-point flights between secondary markets as seen in the route map below (Aveloair, n.d).

All flights are scheduled on a weekly timetable utilising its 6 Boeing 737 aircrafts (Airfleets, 2021).
The frequency to each destination is heavily dependent on individual demand per route which is
between 2 to 7 days a week. AA most popular flight is between Burbank and Santa Rosa which
departs once a day at 7am and the rest have reduced frequency of 5 to 2 times per week (Aveloair,
n.d).
AA follows the Low-Cost Carriers (LCC) business model which operate a ‘no frills’ service focused
on a bare minimal pricing structure that passes on saving to the passengers. AA application to the
LCC model defined by Boloz & Meltzer (2009), is seen below
Model AA application
One type of aircraft with single cabin class and
high seat density
Two variations of Boeing 737, with 189
economy seats with a pitch of 29-32 inches
(seatmaps, n.d)
Point to point flights with no transfers No hub and spoke model (aveloair, n.d)
Use of secondary airports All 19 airports are regional, and many AA is one
of two or three carriers to operate. (aveloair, n.d;
Flynoco, 2021; Redding Municipal Airport,
2021)
< 30-minute turnaround times Only 6 planes services 19 destinations a week.
Ticket sales through internet for reduced
distribution costs
Only available to purchase through Aveloair
(supplier’s official website)
Strong dependence on Ancillary revenue Baggage, extra leg room, food and beverages
(Aveloair, 2021)
This differs to traditional Full-service network carriers (FSNC)
• Fares determined by week/time of day and holiday periods.
• Utilize wide and narrow body destinations based on demand
• Hub-and-spoke model to connect as many passengers to as many destinations as possible
• Operating from main national hubs in addition to regional airports
• In-flight entertainment
• Included ancillary services of food and beverages, baggage (Whyte & Lohmann, 2020)
FSNC are known for being double or triple the price of LCC’s and patterns of global crisis’s have
indicated passengers like to switch to cheaper alternative in times of economic downturn. Leisure
travel is highly income-elastic (Graham, Papatheodorou & Forsyth, 2010) and when IATA predicted
a loss of $9 Billion to airlines due to the 2008 recession (The Guardian, 2009), LCCs like Ryan air’s
revenue increased 23 per cent and passenger numbers increased 10 percent (BBC, 2010). The switch
and proven success are motivations for AA to join the market even in economic downfall.
In the perspective of airline start-ups, the post pandemic period is either detrimental or benefiting to
success based on their business model. Southwest, the largest LCC, and the pioneer of the LCC
model currently ‘does not have enough aircrafts to meet the demand spike for 2022’ (Pallini, 2021)
in conjunction to announcing a 36-route expansion during the middle of 2021 (Haria, 2021). This

growth simultaneously happened when FNSC’s like British Airways experienced a £6.4 Billion loss
a bail out by the UK government. (Sweney & Topham, 2021).
Porters Five Forces
Porter (1990) published an external competition model to identify and help determine an industry’s
strengths and weaknesses. Porters Five Forces breaks the competitive environment into the five
sections shown below.
An application of Porters Five Forces to the US domestic aviation market highlights how the
pandemic environment has aided in the growth and success of AA.
Suppliers
The main suppliers in the aviation industry are aircraft manufacturers with Airbus’s A-series jets and
Boeing’s 7-Series jets having an Oligopoly of the airplane business supply (Beers, 2021). Two
suppliers leading an entire market traditionally induces high bargaining power, however the
pandemic decreased the demand for aviation products and heightened instability. Boeing, the
manufacturer of AA aircrafts, reported a loss of nearly $12 billion in 2020 from the pandemic due to
lack of demand and cancellations of orders (NPR, 2021) while AA is planning on adding 15 737NGs
to its existing fleet by the end of 2022 to increase route maps to over 40 destinations (Silk, 2022).
Furnishing aircrafts were also cheaper as seats were purchased at a discount since they were initially
ordered by another airline but were cancelled in 2020. (Maqtousek, 2021)

Buyers
The bargaining power of customers has dramatically decreased due to the pandemic. Every year
passenger numbers traveling to and from the United States increased until peaking in 2019 with 254
Million passengers (FAA Aerospace Forecast, 2021). This dropped sharply in 2020 with the
pandemic and consumers went from having high bargaining power and many alternatives to limited.
Leisure travel became non-existent, so the only commercial travel was of those of top priority which
meant the passenger was more price-in elastic. This aided in start-ups, and they could see demand
and follow as well as dedicate resources to areas of demand.
Substitutes
Threat of substitutions are low in aviation because of the longer routes, time considerations and
overall price. As a result, aviation is practical and convenient choice for consumers compared to
trains and buses. Train fares are also 49% more expensive than the same route by plane on average
(Bell, 2021) as well as taking significantly longer, so the speed, accessibility and price of flying
make substitutions a minimal threat.
Potential Entrants
Decrease in demand of air travel from the pandemic is a significant barrier preventing start-ups from
entering the aviation industry. AA debut made it the first mainline U.S. carrier launch in nearly 15
years, followed closely after by Breeze Airlines a month later (Griff, 2021; Slotnick, 2021). These
two airlines have been successful as they are both founded by individuals with comprehensive
knowledge of the aviation industry and had the capital needed like the $150 million private capital to
fund AA (Sena, 2022). Additionally, Small airports have small demand, so entrants are already
fighting for limited passengers. For example, only United Airways and AA service Northern
Colorado Regional Airport, AA travels to BUR and LAS when United only services Denver
(Flynoco, 2021). Aviation products are perishable product and for airlines to maximise revenue,
aircrafts should have aim for full occupancy rate. Therefore, limited demand prevents rivalry,
especially when a single airline has a complete monopoly on demand.
Rivalry among existing firms
Competitive rivalry within both LLCs and FSNC incumbent players is significant with American
Airlines (19.3%), Southwest (17.4%) and Delta (15.5%) constitute over 50% of the US domestic
market shares (US Department of Transportation ,2021).
Even though BUR is AA western hub, Southwest have stronger presence with a 68.7% dominance in
flight offers while AA is only 4.8% (Sena, 2022). However, A remains competitive through
differentiating itself being the only airline to fly certain routes. If passengers want to fly from BUR
to TUS, passengers have no choice but to travel with AA as it’s the only one of the 10 carriers to
travel there (Tucson International Airport, 2021). The same principle applies as AA offers the only
direct flight between RDD to BUR (Redding Municipal Airport, 2021).

Response from Incumbent airlines
Traditionally, incumbents' pricing strategy goes either two ways when a competitor enters a
market: the competitive effect and the displacement effect. When an entrant joins, the incumbent
may reduce prices to retain customers or displacement effect if entrants cater to price-conscious
customers, incumbents may benefit from raising prices and focus on consumers with brand loyalty
(Tan, 2015). Traditionally new entrants reduce market share and profits of incumbent firms (Simon,
2005) however, since AA only offers direct routes with no-pre-existing competition, Incumbent
Airlines have had no need or motivation to respond as AA is catering for a demand that is not within
their current business operations.
Conclusion
In conclusion, AA capitalised on the instability of the US domestic aviation market because of the
global pandemic through purchasing cheaper aircrafts and offering direct routes with no pre-existing
competition.
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