I have no doubt they will continue to rise to the challenges facing our company and our industry in the future. Dallas, USA November This page has been left blank intentionally Foreword Alan Joyce Chief Executive Officer Qantas Airways For some time now, Nawal Taneja has been challenging aviation executives to go beyond the boundaries of our industry and seek out examples of global best practice across sectors as diverse as cars and luxury hotels, personal computing and fast food. Airlines have been forced to confront the immediate challenges posed by the global financial crisis and subsequent economic downturn.
In the case of the Qantas Group this has involved decisive management of our flying operations, capital expenditure pipeline, cash flow, and cost base. But short-term imperatives must never be allowed to detract from long-term strategy. This is the reason why the Qantas Group has a rare advantage in having not one, but two, of the leading airlines in the world in their categories in Qantas and Jetstar.
But we are also confident about the future of Qantas, our iconic, premium airline. Certainly demand for premium flying has been affected during the global downturn, and pretty seriously. But our research confirms that there is now, and will continue to be, an appetite for premium travel among both domestic and international travellers. This does not mean that premium flying will return to business as usual. As Nawal Taneja reminds us, looking beyond the runway means finding both inspiration and practical precedent in the examples of other companies and industries.
Success in such cases depends upon constant innovation supported by strong employee engagement, liv Looking Beyond the Runway a close-up relationship with customers, and is underpinned by new and converging technologies. For airlines to evolve as premium carriers, we must be ready to re-engineer how our products and services are delivered, even in radical ways. The next generation premium airline cannot win if it operates in the same way as many of the lumbering legacy businesses of the past and some in the present. Across Qantas we see opportunities to innovate in everything from our information technology processes to aircraft configuration to fuel conservation; from fleet simplification to supply chain management.
Our loyalty program, Qantas Frequent Flyer, has been boosted by a series of innovations, including powerful commercial partnerships that enable customers to earn and redeem points everyday. We have an ambitious project underway to deliver radically improved airport processes to deliver speed and ease for our domestic premium customers.
Nawal Taneja challenges us all to look beyond old thinking and take hold of new insights and opportunities. These are tough times for global aviation, but there will be a bright future for those airlines with the energy and acumen to deliver the next generation of aviation excellence. Individual travel dates and modular packages put together by the tourist in the Internet have eliminated the need for tour operators putting the charter airlines under tremendous pressure of overcapacity.
At the same time the growing impact of LCCs upon our industries was widely ignored. Similarly, one could ask, why have traditional airlines lost market share to the LCCs? The emerging market provides numerous unknowns, particularly within the airline industry. Consequently, lvi Looking Beyond the Runway it is not good enough for top airline executives to just administer their jobs.
It is their key responsibility to lead their organisation, including staff, stakeholders and processes, to what they identify to be beyond the horizon. It is a fundamental dilemma in the airline industry that even when information is pretty reliable, many changes cannot be implemented in a timely manner. It takes time to drastically change the course of an airline. A heavy balance sheet, an inflexible fleet, or inflexible labour contracts combined with rigid scope clauses, will not allow an airline to respond in a speedy manner to changes in the business environment.
While no one knows what the future will bring when changes finally take shape, wrong conclusions from the information available at the time have triggered the decision for change. However, before the first aircraft was delivered, the fuel price began to fall again, leaving Boeing with an aircraft design that was expensive to convert into metal. And airline customers were not willing to pay a premium price for a super efficient airplane, if that price could not be offset by the lower fuel consumption.
Moreover, knowing that the majority of airlines are suffering from more than 50 percent of the total costs being fixed costs, managements should amplify all efforts to convert fixed costs into variable costs. The need becomes even more critical if we assume that the speed of changes affecting the aviation industry is going to pick up significantly in the years to come, particularly relating to distribution and passenger booking behaviour. Airlines must, therefore, be on the lookout.
Companies, such as Amazon, eBay, Expedia, and Google know customers, including airline passengers, much better than most airlines! Forewords lvii Finally, airlines have to accept that they are no longer in a position to shape the market. If the market requires certain products and services, and the Googles of this digital world can meet the expectations of this new generation of airline passengers, airlines have to be prepared to meet the needs of the marketplace.
Otherwise they will fail! Since these changes can be implemented in the digital environment very quickly without advance warning, the only answer for airlines is flexibility. To quote Napoleon again: Berlin, Germany November This page has been left blank intentionally Foreword Andrew Lobbenberg Airline Analyst, European Transport Equity Research Royal Bank of Scotland The airline industry is facing grave pressure having battled through spiking oil followed in short order by the credit crisis and an extreme economic downturn.
As we look ahead, hoping without any clear-cut confidence for a recovery in demand, the industry looks in some ways to be improving. Structurally we think that consolidation and the development of economically relevant joint ventures could offer a path towards an industry characterised by fewer independent players, greater rationality and the potential for stronger returns.
But, whilst some of this improvement could come from cost synergies, much would come from revenue benefits, a fact not lost on the competition authorities, who are scrutinising all deals with vigour. Operationally, network carriers are broadly speaking making sensible moves. They are endeavouring to ease the burden of legacy working practices, though the negotiations with organised labour are challenging, to say the least.
Network carriers appear, mercifully, to be maintaining capacity discipline; with management having scant regard for market share measures. Attention is rather focused on boosting unit revenues, buttressing fragile fare revenues with ancillary revenues where possible. So we are optimistic; we do think the weight of probability is that the economic recovery should be better than an L-shape and we do think management teams are making progress strategically and operationally.
However, we are far from confident that there is any obvious path towards a value creating industry. We do not see any strategic move by network carriers to meet the challenges of low cost carriers on short haul routes or Gulf carriers on long haul. We expect to see the global trend of liberalisation continue to pick off those remaining pockets of regulated super normal lx Looking Beyond the Runway profitability.
Meanwhile competition authorities delay the pace of joint ventures and consolidation. Nationalism stands in the way of true cross border consolidation. Finally increasing environmental awareness looks set to combine with battered government budgets to bring a swathe of increased taxation and charges on the industry, no doubt all wrapped in fine biodegradable recycled green packaging. Given such persistently dismal financial performance and against the backdrop of difficulty in finding credit to continue funding this capital intensive industry, questions about the sustainability of our business as a whole are becoming a popular topic of discussion.
On the other hand, it is opportune to remind ourselves that over 5. Taking into account the additional industries that depend on air transport, these figures are even larger. Having said that it is not an excuse to all sit back and wave our hands in dismay.
Taking a leaf from the other industries which Nawal did, there are lessons to be learnt; it is time to take a long hard look into this mature yet somewhat inefficient industry. A major impediment to our longer term financial stability relates to Aeropolitics. Consolidation in our industry varies from mergers and acquisitions, to the different forms of alliance and partnership.
Given the current climate of increasingly more protectionism, this may further hamper the dire need to synergise airline businesses and operations. Associated with this are the all familiar bilateral constraints which restrict commercial freedom for airlines. Nawal aptly surmised that the elimination of such regulatory constraints will enable airlines to achieve greater efficiency and optimal organizational structures.
These countries represent some 60 percent of global aviation. The task in hand is to quickly ratify more countries into this initiative. A case in point is the plan by the United Kingdom UK to increase its departure tax on air passengers from , touted as a green initiative. This, together with the other charges will constitute about 15 percent of the average ticket price and there are other new waves of taxation in the pipeline. As an airline executive these issues are very close to my heart. There are two particular points that I would like to share.
Any discussion about carbon costs should recognize the benefits that air transportation brings to many worldwide; responsible policy should work towards a sustainable balance between these positive impacts and the cost inherent in future growth. Governments should give their full backing and support to International Civil Aviation Organisation ICAO , as the appropriate international body to set and administer specific standards and targets for aviation CO2 emissions. ICAO is the right vehicle to coordinate a proper global response to the issues of aviation pollution.
The other aspect is the treatment of airlines as cash cows which is inequitable and unsustainable, considering that we are only part of the equation in this industry but often regarded as the solution. As an industry we are all in this together! In essence, while recognizing the important role the global airline industry plays in linking economies and societies in ways that are practically irreversible, the impediments to its sustainability must ease. These stem from the inherent inefficiency of the complex and outdated structure of government ownership and control rules, restrictive regulations in bilateral agreements as well as political intervention often hidden behind legitimate causes such as climate change control.
The call for action is now. Governments must un-tie the hands of airline managements so that they can innovate along the lines suggested by Nawal in this book using the best global business practices. Bahrain December This page has been left blank intentionally Foreword Hussein Massoud Chairman and Chief Executive Officer Egyptair Holding Company Like most other industries, the airline industry has been heavily affected by the economic crisis that the global economy has been suffering since last year. Whether the current recession be L, U or W-shaped and whether recovery be realized in , or even , the rule is that the global economy is to revive.
However, the real challenge for the airline industry in the course of this recession is the ability of the airlines to navigate safely throughout the storm until reaching recovery. Withstanding the high headwind and crosswinds tending to drift airlines from their targeted tracks towards profitability and growth requires from airlines a high degree of agility.
In seeking a way out from difficulties encountered by the airlines, management needs not to be bound by conventional solutions and inherited constraints. The need for agility in this industry is not confined to intervals of crises. The high dynamicity of the airline industry and the nature of the challenges it is confronting imply the need for agility as a characteristic of the airline management in order to assure sustainability of business efficiency. This led airlines to enter into fuel hedging arrangements with various selections of the covered amounts, thus running—at different levels—the risk of becoming exposed to a financial burden that could have been escaped.
The risk became a reality when later a downturn of fuel prices took place, demonstrating the importance of right-sizing the risk when taken. The high sensitivity of fuel prices to political and economic interactions can lead one to predict that fuel prices will lx vi Looking Beyond the Runway remain a challenge, which this industry has to be ready to cope with from time to time. Current overcapacity, augmented by the projected volume of deliveries of wide-body aircraft leading to a mismatch between supply and demand , forms another challenge to the industry and is likely to affect competition in long-haul markets.
Low cost carriers have and will continue to acquire some of the market segments that previously belonged to legacy carriers. They are deviating from their initial business models with the aim of attracting more segments and increasing their market shares. Regulatory changes also are expected to bring to the playground new concerns and considerations to this already complex industry. Liberalization of air transport between the US and the EU will certainly reflect on the global air transport industry.
Likewise, the implementation of the articles of the European Community Treaty, allowing cross ownership among EU countries as well as the designation under bilateral agreements with non EU countries, will also induce effects on the industry. The upcoming enforcement of emission rules and the evolving emission trading schemes bring to reality a new dimension and constraint that never existed before, thus imposing an additional financial burden on this industry which already has the thinnest profit margin.
The trend of cross border consolidation and acquisitions associated with granted anti-trust immunities is perceived to vary the map of market shares leaving stand-alone carriers in a difficult position. One of the contributors to the operating cost of legacy airlines is the charges imposed by GDS providers for distribution of inventory data through their networks. The burden of these charges unfairly cuts down the thin profit margin resulting from passenger transport operations, particularly in low yield sectors, and requires revisiting this mutual service provider-client relationship. Nawal Taneja is providing a professional insight of the new changes and challenges that the airline industry is undergoing through a deep and thorough analysis supported by factual examples.
In Chapter 4 of his valuable book, he addresses in a comprehensive manner the Forewords lx vii need for innovation in airline business and the venues for its realization. He further provides examples from industry and case studies from outside the airline industry. On the side of opportunities, air transport remains to have the advantage of being the safest mode of transportation compared to surface transportation.
The global airline industry, facing significant changes and discontinuity is prompted Airlines Innovating with Best Practices while Facing Realities, 1st Edition. Download Citation on ResearchGate | Looking beyond the runway: Airlines innovating with best practices while facing realities | Nawal Taneja is a career.
This fact provides an opportunity for short-haul air transport to replace, in certain markets, other modes of transportation. Emerging markets in various regions of the world are valuable opportunities. Partnership, in form of code share and alliances, has widened the domain of beneficiaries from these opportunities in lieu of being limited to traditional traffic right owners.
The spreading use of Internet worldwide creates the opportunity for airlines to increase the share of direct distribution through Internet booking engines at the expense of GDS distribution, and hence an opportunity to reduce significantly distribution costs. The reader of Dr. It is a call for farsightedness that should not be missed by airline executives. As with his previous books, he analyzes the turbulent, challenging and rapidly changing economic environment in which airlines operate, and provides insights for the airlines that must compete in this environment.
I will seize this opportunity to comment on a few overlapping issues of particular interest. In this book, Dr. Taneja addresses airline ownership and control, their access to foreign markets and their ability to enter into collaborative ventures. In an ideal world, airlines might enjoy the freedom to operate like most other business enterprises — acquiring equity capital from global investment markets, establishing global brands and entering markets with the greatest economic potential.
Under current legal regimes, however, airlines face restrictions in all of these areas, severely limiting some aspects of innovation discussed in this book. As an advocate for the international airline industry, IATA has supported liberalization of national laws on foreign ownership of airlines. By creating the legal structures for lawful collaborative arrangements, such as codeshare agreements, alliances and minority investments, airline lawyers have helped to expand airline networks, to create additional virtual online services for millions of passengers, and to enable airlines to allocate resources more efficiently.
Taneja has stressed the importance of controlling costs. IATA attorneys, and our colleagues in airline member legal departments, have worked diligently, but with less success, on the legal environment that is responsible for a significant portion of airline costs. One obvious area of rapidly escalating costs is taxes and fees that governments impose on airlines and their passengers. The airline industry remains the favorite source of funding for new governmental programs, ranging from the protection of the environment, to supporting economic development in developing countries, to providing compensation for non-passenger injuries caused by terrorist interference with aircra.
Unfortunately, we cannot claim much credit for reining in these costs. Unlike most other industries, however, when airlines buy goods and services they often have no option other than to negotiate with monopoly or oligopoly sellers — jet fuel suppliers, airports, ground handling companies, air navigation systems, and global distribution systems to name a few.
In some cases, governments have mandated or tolerated monopoly suppliers when competition is entirely feasible e. In other cases, the monopoly supplier enjoys a natural monopoly e. With mixed success, IATA has advocated that privatization should not result in unchecked Forewords lxxi private monopolies. Finally, I must agree with Dr. Among our business intelligence products, IATA offers airline ticketing data. Some of them claim exclusive rights to control the dissemination of that data.
It seems appropriate, however, to recognize that if other entities in the airline distribution system gain the sole right to disseminate airline reservation and ticketing data, the airlines will not fully utilize the power of good market intelligence. We should advocate changes in legal and regulatory systems that will give airlines the rights, responsibilities and flexibility of other international business that are trying to survive these turbulent times.
We should not be too pessimistic, however, or put all of our hopes on legal reform. Taneja has analyzed the success of airlines that have overcome these challenges, and ventured outside the industry to provide insights into creative ways of doing business that are available to us under the current legal and regulatory environment. Airline attorneys and business executives must work together to create success stories that compare favorably to the examples Dr. Taneja describes in this book. Nawal Taneja and I share a fundamental view that the time is now for the aviation industry to step-up to our challenges and take control of the future.
While good management may deliver short-term fixes, visionaries backed by good strategies hold the key to a more sustainable, long-term prosperity. We need to create and shape our future! Taneja is such a visionary, and the next seven chapters of Looking Beyond the Runway will convince you that change is necessary, re-invention is vital. He brings home the point that we are the change. Taneja articulates in Looking Beyond the Runway.
When we set out to launch CSeries we examined what is, and envisioned what should be. We quickly realized that a new product needed to take advantage of all new available technology to offer maximum flexibility, a dramatic improvement in cost over the aircraft life cycle and a breakthrough in environmental impact. A recent survey by Ascend confirms that the top two concerns of professionals from 90 airlines are fuel price instability and declining revenue and yield. In the s, the Bombardier CRJ changed the game for airlines and passengers by introducing reduced travel times and more choice through the development of high frequency service connecting cities to hub and spoke networks.
Today, several airlines offer non-stop trans-Atlantic flights to smaller cities and can extract a premium for the convenience. The CSeries is another game changer — greener, flexible, more comfortable and purpose-built to make money for airlines in the key to seat market space. The CSeries promises to enable yet another dimension for airline growth by providing visionary airline management a tool for real network optimization instead of traditional adjustments with the last generation of aircraft designs.
Taneja points out that resisting change because of cost is perilous. We accept this challenge with confidence and along with our other stakeholders understand that it is not without risk, but a risk worth taking. The potential payback more than justifies the investment plus it will propel us into the future, continuing our leadership and brand growth.
Sounds like something out of Dr. Over the years, he has demonstrated clearly that the differences among airlines are as great, or even greater than, the apparent similarities. While there are some striking examples of success, there are only a few cases of managementled transformation. The imperative for strong, focused leadership, and the need for a positive and growth oriented organizational culture, resonate throughout. Cases like Zipcar, Zappos and, previously, Zara, help to stretch the horizon for innovation. For some of the most vital lessons in this fast-paced work, we must read between the lines.
How many have embraced the concept that all travel has become discretionary, that growth in revenue and profit can indeed come from the now-dominant and still faster growing leisure segments, and that relevance is the key to earning consumer preference? Successful innovators must be more inventive than inventors. They scan the horizon for models, technology, insight lxx vi Looking Beyond the Runway and leadership that has transformed other businesses and categories, and apply it smartly, out of context.
But how can airline industry leadership bring these lessons into their own organizations, when they and their beleaguered colleagues spend their business days and nights grappling with the endless challenges of their own industry environment? In the airline sector of the travel industry, content consists of pricing and schedules. In the hospitality sector, where Outrigger Enterprises Group has a growing portfolio in Hawaii and the Asia-Pacific region, we strive to provide a genuine and differentiated customer experience. While the cultural context varies, employee commitment is always rooted in a shared set of fundamental values that travel very well.
When our guests can feel the difference, they become our most effective marketing channel, and we apply leading edge technology to convey the relevant story to the right customer at the right time. Although our booking usually comes after the airline transaction, we work very hard to inspire the decision to fly. This is where Nawal Taneja brings significant value to the airline industry—by challenging, provoking, and assisting the process of looking across, beyond, and ahead of the flight path.
The Federal Aviation Act as amended required the U. Title 49, United States Code, Section Yes, in case you are wondering, this law is still on the books. I have long felt that the simplest explanation for this failure lies in our reluctance to pursue policies consistent with these explicit objectives. If three decades of deregulation has taught us anything, it is that we cannot satisfy consumers when the only thing we seem to really care about other than safety is treating air transportation as a commodity and keeping airfares at levels.
As a matter of aviation policy, this means moving away from a singular focus on lowering prices to consumers, the guiding principle to date. This fundamental misapplication of our objectives created not a mere academic problem but a big commercial one that has largely eluded a solution.
Over the years mistaken policy has produced a visceral and foolish opposition to almost any form lxx viii Looking Beyond the Runway of consolidation by network airlines, harebrained attempts to legislate customer service such as current bills in Congress that would micromanage air carriers in their handling of ground delays , assaults on the networks themselves read: By pursuing policies that were designed to ensure major U.
As the legacy carriers were forced to slash domestic capacity beginning in due to sky high fuel costs that they could not pass on to their passengers , prices began to go up, not down. And despite fewer flights, we saw abysmal customer service, increasing delays, and a frightening reduction in service to rural communities. In a hub and spoke system, airlines pull out of their thinnest markets when times get tough. We all know that the rules of capitalism were never suspended for the passenger airline business.
Like other companies, airlines that perennially lose money cannot afford to reinvest in their core businesses, much less innovate or improve them. Instead, they focus on cutting costs and just staying afloat. Even when they make profits, if the long term prospects for their shareholders remain bleak, they are wise not to reinvest the money in new capital assets. Sadly, eight years after the shocks of the World Trade Center attacks, none of our largest network carriers has replenished its fleet.
This situation is disastrous for U. In fact, our legacy carriers have fallen far behind their foreign rivals on every measure of success: Instead, we are forced to excel in the creative use of the bankruptcy laws. But what is the solution? As one alternative, some have proposed re-regulation of fares and markets, but not too many observers believe this step is desirable consumers would clearly be worse off or practicable who stops flying where?
As a another alternative, Wall Street investors say that the real solution is to permit the airlines to consolidate — Forewords lxxix through mergers, asset sales, or exit by failed firms -- just as other deregulated industries have done. The airline industry today is still as highly fragmented as it was after being deregulated three decades ago. By treating the shortcomings of the legacy airline industry as a simple failure of innovation -- and then offering, in systematic detail, case studies from other industries -- he makes a persuasive case for viewing the airline crisis in more classical business terms.
And he gives some insight into those airlines that appear successful at innovation. One is left with the feeling that improvement is really possible.
Looking Beyond the Runway is a welcome contribution to the business literature on airlines and an important book for practitioners in the aviation industry to read. Passenger and cargo traffic, and asset values have declined; and the fundamental structure of the aviation industry has changed. These changes are dramatic in their depth and breadth, and stem primarily from demographic, social, technological, political, regulatory, and economic trends.
However, while these changes have produced challenges for the aviation industry, they could also produce opportunities if the suppliers in the air travel value chain would change their business models and government policy makers would create an environment that makes it easier for aviation service providers to introduce innovation. The need for air transportation in this increasingly global world will continue to grow, perhaps, even much more in developing economies. In fact, analyzing the working profile of the global aviation industry for viable improvements is one of major focuses of the College of Aviation and Management in our university, Korea Aerospace University KAU.
Taneja makes an important point in this book, Looking Beyond the Runway. It is true that the global airline industry is constrained by many factors, such as varying degrees of government control in different regions and the labor, capital, and fuel intensive nature of the industry itself. However, the operators in the aviation industry must learn to innovate in the presence of these constraints. This point is well aligned with what we emphasize in the classroom at KAU, where students learn how to optimize the system within the realities of the marketplace.
Through the aviation education programs, we assure that the students will contribute to efforts in making aviation a leading industry when they work in the real world after graduation. Another point that Dr. Taneja has made in this book is that it has a great value for the aviation industry to learn from the best lxxxii Looking Beyond the Runway global practices in operations, logistics, and other areas.
We at KAU have already introduced this concept to aviation education programs. We start with cross-functional integration within the aerospace field. For example, in the study of the current and future aviation infrastructure, such as airports and air traffic control systems, we include a study on how a new aircraft is designed. We move even further by looking at emerging considerations such as the protection of the environment.
We also teach and research about the need of integrating on a system basis and considering the interest of all stakeholders in the aviation industry, such as users, service providers, policy makers, regulators, and labors. Taneja mentions in both Chapters 4 and 7, advanced airplane technology has always made a major impact on the global airline industry. This is true and no one would disagree that a highly trained and skilled workforce is one of the key contributors to the advancement in aviation.
As the aviation industry will face more challenging and complicated issues due to higher competition and additional constraints such as regulations regarding the protection of the environment, the industry will require people with more advanced and analyticsoriented knowledge. KAU constantly update aviation education programs to equip the students with the skills needed to pursue successful careers in various sectors of the aviation industry.
I am sure that many other aviation education programs in the world will also receive the same benefit or even more from this book. Goyang City, Korea November Acknowledgements I would like to express my appreciation for all those who contributed in various ways, especially, Angela Taneja, an experienced analyst of best global business practices, Dr. Dietmar Kirchner formerly with Lufthansa and now a Senior Aviation Consultant , and Rob Solomon Senior Vice President and Chief Marketing Officer at the Outrigger Enterprises for discussions on challenges and opportunities facing the global airline industry and related businesses.
The second group of individuals that I would like to recognize include, at: Third, there are a number of authors whose work and ideas have been referenced numerous times in this book. Fourth, there are a number of other people who provided significant help: Finally, I would also like to thank my family for its support and patience.
During the past four decades alone, it has survived numerous oil price shocks, significant changes in government regulatory policies, new technologies ranging from aircraft with advanced capabilities to the introduction of the Internet and related businesses , competition from new categories of airlines and aviation, varying lengths and depths of economic cycles, the events of September 11, , diseases such as SARS and H1N1, two wars in the Gulf region, infrastructure constraints and development, and the impact of changing environmental regulations.
While the global airline industry has managed to survive, albeit with a growing tendency towards bankruptcies and mergers, it has not managed to earn a sufficient return on the investment deployed to cover its average weighted cost of capital on an ongoing basis.
There are two outof-the-ordinary points to notice in this chart. First, even during the best years, the highest net profit margins achieved were only about 3 percent. Second, on a cumulative basis, the global airline industry did not break even. For the 30 year period, the industry posted a slight negative cumulative net profit margin, a phenomenon unseen in any other industry. While each force, itself an enormous and sudden increase in the price of fuel; a deep recession; an unusual financial crisis, affecting both the credit market and the volume of premium travel; changes in foreign currencies; acceleration in the use of social technology to communicate the travel experience of passengers , represents a major challenge for this industry with already paper-thin profit margins , their confluence is finally producing a herculean challenge, from a short- and long-term perspective.
The Global Airline Industry Source: The Airline Monitor, June , p. The major contributor to the losses in appears to be mostly on the revenue side, resulting from both reductions in traffic and in yields. The significant reductions in both the volume and the prices of premium travel are particular concerns. During the first quarter of , premium passengers those traveling in Business Class and First Class accounted for nine percent of the total passengers in international markets, but they generated 30 percent of the passenger revenue. In the second quarter of , it declined 41 percent relative to the same period in While most of the expected losses in are due to a reduction in traffic and yield, some losses are due to an increase in the price of fuel.
If we assume the first element of this chaos to be the reduction in passenger and cargo traffic and the reduction in premium traffic and premium fares, then the second component would be the increasing level of incursions being made by low-cost carriers worldwide. Take AirAsia as just one example. International Air Transport Association. There is, of course, no single low-cost airline business model. At one end of the spectrum are airlines operating with a single type of aircraft, with high-density, one-class configuration, serving point-to-point markets, with traffic that is more stimulated for example, diverted from other modes of transportation and less diverted from existing airlines.
Ryanair could be an example using such a business model. At the other end of the spectrum might be an airline with a hybrid business model using multiple types of aircraft in a broad spectrum of markets.
Air Berlin might be an example of airline using such a model. In between the two ends of the spectrum are airlines with very different models, such as those with code-share agreements with network carriers. In general, numerous different business models of low-cost carriers are proving to be more durable compared to the legacy carriers, enabling low-cost carriers to become much more aggressive in expanding their operations and in their pricing policies. Just consider the experience of Azul in Brazil. Having been launched in December of , Azul became the third largest carrier with a domestic market share of just under 5 percent in July with TAM and GOL, each having just over 40 percent.
Finally, the operations of the low-cost carriers are no longer restricted to their own regions. The intercontinental markets, once thought to be impenetrable by low-cost carriers, have begun to show economic viability, exemplified by the experience of AirAsia X, Jetstar, and V Australia. Evolving Strategies As stated above, airlines are not unaccustomed to changing capacity and pricing policies to adapt to the changes in demand. In general, airlines have done a reasonable job, given the inherent constraints relating to the airline industry. Given the severity of this downturn that began at the end of , a number of legacy airlines are fighting for their survival and, as such, have begun to implement changes more rapidly and more intensively.
The first major challenge began to appear in when the major US network airlines began to face increasing levels of competition from low-cost, low-fare airlines. Their initial response was to shift capacity from domestic markets to international markets where competition was limited. Next, the price of fuel began to increase at an exponential rate. Such an exponential increase in the price of fuel caught the global airlines industry off guard, leading to varying degrees of reductions in capacity.
Although most airlines around the world followed a similar strategy, the airlines in the US began to make the capacity cuts more rapidly and more deeply using a combination of techniques such as the use of lower capacity aircraft and a reduction in frequency. While these strategies have increased revenue streams, they have also led to a certain degree of resentment on the part of passengers. Only a part of the resentment problem relates to the concept itself. However, the irritation experienced by some passengers relates partly to the areas in which airlines instituted charges such as a charge for seat selection and reservation change fees and partly to the level of the charge such as the cost for transporting the first bag and each additional bag and, in some cases, the level of reservation change fees.
Passengers can tolerate additional charges for services that lead to additional costs for airlines, for example, food served in the cabins. However, many passengers object to paying for services that do not cost airlines any money, such as which seat the passenger occupies in the economy cabin.
Even though airlines have been doing reasonably well with the network, fleet, and schedule changes in general, two areas remain a major concern, a the reduction in Premium Class travel and the reduction in cargo traffic, and b the growth of low-cost carriers. The reduction in cargo traffic is the result of consumers buying less in North America and Europe that, in turn, means a reduction in the transportation of manufactured goods from emerging markets, such as China.
Similarly, there is a reduction in the transportation of some perishables such as fresh flowers. Although there is no other viable alternative for transportation for perishable products, the demand is down, as people are buying less fresh flowers. However, while the reduction in cargo traffic can be considered as a cyclical phenomenon in line with the decline in world trade, the reduction in premium travel may be a lasting experience. Despite the progress made in reducing costs and enhancing revenues using mostly conventional strategies, at least, four questions remain on the minds of traditional network airlines leaving aside the uncertainty relating to the price of fuel and the availability as well as the cost of credit.
The reasons appear to be a that most businesses are controlling their travel budgets much more tightly and, b that many individual travelers who pay for their own tickets do not consider the Premium Class, price-service options to be valuable. The provisions of accounts that airlines have with corporations are likely to change if airlines continue to offer discounted fares that are lower than the corporate discounted fares, and airlines expand their initiatives to lower, or eliminate, some restrictive fences previously deployed to stop business travelers from being able to take advantage of lower fares available to leisure travelers.
As for consolidation, airlines have stepped up their interest in the different consolidation options. The main idea behind consolidation is to capitalize on synergies to reduce costs and increase revenue. Consolidation strategies have varied from mergers and acquisitions to different types of alliances and different levels of participation within alliances. The consolidation process has been difficult due to the existence of ownership and control rules and even alliance participation requiring government approvals.
However, the code-sharing level of participation in alliances has been relatively easy and the process has enabled alliance members to offer passengers integrated services around the world while achieving some cost reductions. Higher levels of consolidation have met varying degrees of resistance from governments.
Take the case of British Airways BA and Iberia IB , carriers that have been in discussions to consolidate in a way that allows them to maintain their two brands, but coordinate schedules and fares across their combined networks. While BA has had a link with Iberia for almost a decade through a minor equity stake, the link has been limited to a joint venture on some routes between the UK and Spain and the standard agreements between alliance partners.
Next, came the open skies regime across the Atlantic. Then the impact of the increase in the price of fuel and the decline in traffic from the recession made the need for the consolidation initiative more imperative. Finally, the two four-way joint ventures Delta, Northwest, Air France, KLM and United, Air Canada, Lufthansa, Continental put an even greater pressure on British Airways not only to have a joint venture with Iberia finally agreed in November , but also for the two to have a joint venture with American.
Such joint ventures will bring more synergies to reduce costs through joint purchases and joint marketing programs such as sharing of airport lounges , but more important, use of the synergies to optimize the margin. This effect, however, has raised eyebrows from some anti-trust authorities suggesting that the initiatives may not be in the public interest.
As for the expansion of low-cost carriers, both older and newer low-cost carriers are demonstrating enormous staying power. Take the case of AirAsia which will be discussed in Chapter 4. It has developed not only huge bases in Asia, but it has also begun services in intercontinental markets. Consider also the performance of Sharjah-based Air Arabia. This carrier has not only been posting positive financial results during the downturn, but the carrier now has two subsidiaries, one based in Morocco, and one based in Egypt.
Penguin Group, , Chapter 2. Even when they make profits, if the long term prospects for their shareholders remain bleak, they are wise not to reinvest the money in new capital assets. Further, an ever looming challenge for the entire aviation industry is the environmental file with various entities seeking a leadership role in setting appropriate emission targets and taxation structures which will further dampen the growth in air travel. The imperative for strong, focused leadership, and the need for a positive and growth oriented organizational culture, resonate throughout. Passenger and cargo traffic, and asset values have declined; and the fundamental structure of the aviation industry has changed.
The experience of Jetstar also substantiates the force of lowcost carriers. Jetstar is now the largest operator between Australia and Japan. As to the question of new global network carriers, while most traditional legacy carriers have been contracting out their operations and implementing strategies just to survive, there are a few airlines with different mindsets, coupled with some inherent strength, that are looking at the current chaos as an 10 Looking Beyond the Runway opportunity to not only expand now, but also position themselves to take further advantage of the changing marketplace after the start of the recovery.
The change in the landscape has provided an opportunity for some airlines with resources to expand their operations. The Gulf region of the Middle East is one example.
Using the fleet that they had on order, the strength of the network they had developed, and the liberal regulatory policies in certain markets, the Gulf-based carriers began to expand their operations. Take the case of Emirates. While the airline is suffering financially to some extent, it is less so than many other carriers because of the strength of its network. The network is highly diversified. Consequently, even with the reduction in passenger traffic to and from Dubai as a result, for example, of the reduction in building activities in Dubai , Emirates is able to expand its operations because of the enormous connectivity network at its hub in Dubai.
A case in point: Passengers in six cities in the UK can connect to nine cities in India and four cities in Australia via Dubai. Based on the information available on the website of the airline. Outlining the Chaos, Evolving Strategies, and the New Normal 11 The Gulf region is doing well because of its geographic location, the unique mix of markets, not just the standard business, VFR, and leisure travel growing investments in tourism related projects , but also pilgrimage related travel, and labor workers.
The Gulf carriers are investing in aircraft, infrastructure not just new runways, but also new terminals, new airports and even relating to ATC , and in in-flight product. They also are not saddled with legacy issues facing other carriers, for example, in old fleet, old IT systems, and old labor contracts. They will also be able to take advantage of the Premium Class travel when, and if, it returns. For these airlines, tough times mean having a slower growth rate, for example, from 15 percent down to 8 percent. Similarly, some Asian and Latin American carriers have also been doing reasonably well relative to those in the US and Europe.
The post-crisis world, at least in many western economies, will be fundamentally different for many reasons. Let us first begin with some factors that are related indirectly to airlines. Although the airline business has always been more exposed than many other businesses to the economic cycles, the current crisis is likely to have more severe impacts. Moreover, even when the economies begin to show signs of a modest recovery, oil prices that have a disproportional leverage on airlines could go up again.
Ageing populations will be less productive and produce higher cost in the healthcare sector. Also, over time, the cost of the present debt-financed stimulus packages will inevitably lead to higher taxes. Consequently, the growth in air travel in the developed regions is not likely to be at anywhere near the historical level of twice the rate of growth of the economies.
The expected strong economic growth of the new economies, such as those that will be discussed in Chapter 6, will lead to much higher growth rates in air travel. However, this higher growth rate, being applied to relatively small bases, may not offset the lower rates of growth in air travel in the developed regions, at least not in the near term. The Millennial generation, for example, focuses more on shopping smartly; having smart mobility, as well as smart communications channels than on the fulfillment of the prestige needs.
This generation will most certainly impact airline product decisions. Here are just two examples. In February , passengers, stranded for about 10 hours on a jetBlue airplane during a snow and ice storm, were able to communicate with the media in realtime about their experience while on the aircraft. In July , a musician became an Internet sensation by making a video and placing it on YouTube with a song on how United Airlines broke his guitar. Clearly, all of the aforementioned points relating directly or indirectly to airlines do not apply to markets worldwide.
First, the American notion of consumerism is quite different from many other parts of the world.
Second, the fact that consumers entered the recession loaded with debt and some US consumers may be paying this debt the rest of their lives is also a mostly US phenomenon. For example, there are many countries in the world where most travelers still use the traditional brick-and-mortar travel agents and airline city ticket offices to make reservations and purchase tickets. Consequently, the new normal described in this section applies mostly to the US, parts of Europe, and parts of Asia. Airlines have obviously been trying intensively to deal with the current chaos as best as they can, given their inherent constraints, such as government ownership and control rules, restrictive regulations contained in many Air Services Agreements, as well as political intervention.
There will also be enormous opportunities for those managements who are prepared to lead in the new environment using non-traditional business models, developed with best business practices and capabilities as well as some imagination , and who work around the constraints internal to the airline industry. There are, basically, three fundamental growth drivers in commercial aviation: Consider, first, economic growth. While the global air travel growth rate has varied from year to year over the past 30 years, it has correlated well with the growth in the global economies, resulting in an average rate of growth in traffic that has exceeded 5 percent per year.
As for the future, while the global GDP growth may only average around 3 percent per year for the next 20 years, the economies of certain countries such as China and India in Asia and parts of Latin America are expected to grow at much higher rates. In addition, setbacks in traffic growth in some regions could possibly be made up, to some extent, through the stimulation of traffic by growing airlines in other regions, such as from the operations of the airlines based in the Gulf region of the Middle East, and the lower- cost, lowerfare airlines starting operations in intercontinental markets for example, AirAsia X and V Australia.
While the decline in premium travel is related to the state of the economy, it could improve to some extent as the economy improves, based on the experiences of the reduction in, and recovery of, premium travel during the years and In both cases, the traffic levels returned to their previous levels.
However, even if the traffic levels were to return to their pre-economic crisis levels, the fare levels for travel in premium cabins in intercontinental markets are not likely to return to their previous levels for a couple of reasons. Some travelers previously choosing Premium Classes may switch from the higher-priced, flexible fares to the lower-priced, restricted fares. Next, some premium travelers buying Business Class and First Class tickets in intercontinental markets may switch to the Premium Economy cabins. The second contributor to the growth of commercial aviation is the enabling technology capability.
With respect to aircraft alone, each new generation has introduced technology that enabled airlines, in some combination, to reduce costs, reduce fares, or improve the product in terms of capacity, range, or frequency. The underlying message driven home by him can be found in the Chinese phrase for Crisis: It is made up of two words - Danger and Opportunity. In this candidly-written book, Nawal Taneja explains what will separate the winners from the losers. He maintains the leaders will be the airlines that: To help airline executives become informed of new competitive games, the author analyzes numerous business sectors such as auto, hospitality, retail, technology, and entertainment.
For example, relevant lessons can be learned from the strategic mistakes made by the US automakers. Likewise, emergent and compelling insights can be gained in superior customer experience from Ritz-Carlton and Zappos, and in value-creating innovation from Cirque du Soleil and Zipcar. The book also features a multitude of forewords from airlines and related businesses to provide readers with multiple perspectives on the changing landscape in the global airline industry. Airlines Innovating with Best Practices while Taneja has more than 30 years of experience in the airline industry.
As a practitioner, he has worked for and advised major airlines and airline-related businesses worldwide in the areas of strategic and tactical planning. On the government side, he has advised civil aviation authorities in public policy areas such as airline liberalization, air transportation bilateral and multilateral agreements, and the management and operations of government-owned airlines.