Monday, April 23, 2007

Strategic Issues facing the airline Industry

The face of aviation is gradually evolving. The long-standing problems of the industry in the form of large numbers of network carriers and substantial over-capacity in many markets were exacerbated by the events of September 11th. This is likely to pave the way for some acceleration in the process of airline restructuring and consolidation. Experts believe that there is not room for the current multitude of carriers in Europe, and that these will eventually be whittled down to three or four major airlines, with the others absorbed or restructured to focus more on regional traffic. This also represents an opportunity for 'no-frills' carriers to increase their market share. Along with this, some restructuring of the industry’s complex and outdated regulatory system will be required.

In the longer term, trend growth may itself slow gradually as the big air travel markets mature. In addition, falling yields, which have boosted air travel growth in the past, cannot be relied upon to persist, at least at the rate they have for the past decade or so. If cost trends are less favourable - for example because of increasing fuel costs, congestion and other environmental restrictions, as well as the prospect of higher security and insurance costs to reflect the risks of terrorism - the scope for lower yields would be less, and this might reduce future growth trends. A key issue will be the extent to which favourable cost trends - such as the impact of the Internet on distribution costs and cost synergies from industry consolidation - can offset these upward pressures on prices and costs.

The full-service airlines, saddled with big networks and strongly unionised workforces, cannot easily embrace the management strategies of the no-frills airlines. Moreover, their scope for defensive mergers is limited by competition policy. The ability of international airlines to expand is limited by ownership restrictions (In the US foreigners cannot own more than 25% of a national airline, in the EU the restriction is 49%).

The “no-frills” market within Europe is immature relative to that of the US. The sector accounts for only around 5% of all intra - European capacity, though the share is much higher in the UK domestic market and on services between the UK and Europe, closer to 20%. Further strong growth is expected over the next 2-3 years as new operations start up, and new destinations are added to the existing carriers’ networks.

However as the UK market becomes saturated, these carriers are likely to focus their development at continental European hubs. The experience of the US market suggests that deregulation will be followed by industry consolidation. So far there has been limited progress in this direction but many are viewing the current crisis as the catalyst necessary to completely restructure the European airline industry. In the US the industry has consolidated into seven major carriers, which carry over 80% of passenger traffic of US airlines. Europe is far more fragmented with the equivalent figure for the seven European majors at only 47%.

EasyJet CRM
"Come on, Let’s Fly"
Low-budget airline, EasyJet is using customer-relationship-management (CRM) software from RightNow technologies to improve its online services and reduce unnecessarily spending running costs by an estimated £750,000. The service is already deployed across the company’s seven European websites and features a knowledge base that refines and grows the more it is used, allowing easy and timelier access to booking information.

The CRM service module enables the 1.5 million people who visit the company’s website each week to carry out end-to-end transactions while they are online, without any intervention from customer service agents. It responds to natural language text and keyword searches, using artificial intelligence to ensure that the details returned are accurate and relevant to the original criteria. Currently, 90 per cent of customers are resolving queries independently using the solution.

Any enquiries that cannot be resolved through the system can be escalated to customer service agents, who have access to the resources contained in the knowledge base via e-mail. When a new question is raised, the agent can upload the answer, potentially saving time on future transactions. Already, customer e-mail enquiries have reduced by 40 per cent, allowing agents time to concentrate on more complex issues.

Solution

An Operations Data Warehouse was developed, based on Microsoft SQL Server 2000, and using Visual Basic to develop a custom ETL (Extract Transform Load) process to migrate data from the various operational systems automatically. The data was re-organised and re-formatted at the same time.
A range of reporting tools was developed based around MS Office and with integration in Visual Basic. These range from on-demand ad hoc reports, OLAP (On Line Analytical Processing) tools for data mining, together with automated, regular reports which are automatically distributed to a management audience.
The result is an orderly, accurate and efficient reporting system which presents information in a consistent manner, using familiar tools and interfaces, in precisely the desired format, and requiring minimal user intervention.

The Challenges
The operations systems are "Mission Critical": a key challenge was to extract the large volumes of necessary data without disruption, yet with a good enough reliability to ensure that vital reports were delivered on time each day.
Operations systems often depended on obscure data formats and database technologies, to ensure accuracy and data integrity involve a degree of "reverse engineering" to understand how these functioned prior to development.

easyJet’s Future
easyJet has to consider whether it should respond to new entrants by ceding niche-segments or by competing aggressively on price, routes and service in an attempt to drive the entrant out of the market. To make the strategic decision market research on the size of different combinations of pricing and service is needed. easyJet also needs to know how much it costs the competitor to serve, and how much capacity the competitor has for, every route in question.

Finally, the new entrant’s competitive objectives are of relevance to anticipate how it would respond to any strategic moves easyJet might make. By obtaining these information residual uncertainty would be limited, and the incumbent airline would be able to build a confident business case around its strategy. It is advisable that easyJet targets mainly leisure travellers as business often demand frequent flights to a wide range of destinations, seek quality service and frequent flyer programmes, and are willing to pay a premium for these benefits. Also, 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. No real opportunity offers the long-haul business as it is very different, both technically and in customer needs, to short-haul travel. easyJet should continue to focus on price and attempt to connect the dots in its network, which cost less than opening new cities.

Thereby, it needs to make sure that a growth in its network and fleet does not lead to higher operating costs. It should also consider putting more emphasis on direct marketing by e.g. introducing a customer retention scheme. To differentiate its brand further on promotional lines, easyJet could introduce a CRM (cause related marketing) scheme, developing a reputation for being a ‘caring airline’, e.g. by selling shares in forest help programmes over its website, collecting foreign currency on flights for charity etc., thereby giving its passengers ‘a sense of psychological comfort and well-being’ when they choose to fly with easyJet. Overall, easyJet has to develop a realistic and accurate assessment of the market-niche to be served. A relentless commitment to quality service and cost control is as important as the discipline to establish a growth plan (see www.easyJet.com for easyJet product life cycle and marketing strategy).


Strategic Issues facing the airline Industry

US

  • American Trans Air Temporary layoff of 1,500 workers; cuts service by 20%
  • America West Sheds 2,000 jobs; cuts services by 20 %
  • Continental Airlines Sheds 12,000 jobs; cuts schedules, postpones ExpressJet unit float
  • Delta Air Lines Cuts service by 20 %
  • N West Airlines Cuts service by 20 %; reviews possibility of job cuts
  • US Airways Cuts 11,000 jobs and flight schedule by 23 %
  • United Airlines Cuts worldwide flight schedule by 20%
UK
  • British Airways Cuts jobs and transatlantic flights
  • Virgin Atlantic Cuts 1,200 jobs; grounds five aircraft, cuts transatlantic flights by 20%
Ireland
  • Aer Lingus Cuts operations by at least 25%
Canada
  • Air Canada Cuts flights to US by 20 %
France
  • Air France Hiring freeze; retires 17 aircraft from service. Cutting costs not linked to safety or service quality
Spain
  • Iberia Sales down 30%; may report net loss in 2001
Netherlands
  • KLM Expects 2001 operating loss
Germany
  • Lufthansa Expected to cut 2001 operating profit by more than €250m (£156m)
Sweden
  • SAS Expects "significantly negative" effect; will make capacity cuts
Korea
  • Korean Air Lines Expects losses of 20bn won (£10m)

References

  1. Problems faced by the world’s biggest airlines after September 11th , 2001 (source: Clark, A. (2001)
  2. www.ba.com
  3. Courtney, Kirkland and Viguerie (1999) ‘Strategy under Uncertainty’, in Harvard Business Review on Managing Uncertainty, Boston MA: Harvard Business School Publishing: p8, 19p.
  4. Costa, P.R. et. al (2002) “Rethinking the aviation industry”, The McKinsey Quarterly, Mid-summer 2002, p89, 12p
  5. Pringle, H. and M. Thompson (2001) “Brand Spirit - how cause related marketing builds brands”, Chichester: Wiley, p130.
  6. Clark, A. (20010 “Airlines face bankruptcy”, The Guardian, 20 September 2001.