Strategies for the twenty-first century A period of uncertainty Essay Example

some alliances and the strengthening of others. These alliances will evolve from being mostly commercial to being more strategic, achieved through the creation of joint operating companies and other joint ventures.

As the ownership rules loosen, a wave of instability and transformation will arise. Cross-border acquisitions and mergers will take over the conventional alliance agreements, leading to the abandonment of old partners and the formation of new partnerships. Additionally, the ongoing privatization process of around seventy international airlines, which were primarily government-owned in 2000, will also contribute to this shift. The top-performing airlines will become targets for acquisition while some may not endure for much longer.

The aviation industry is experiencing a shift in focus, moving towards combining efforts rather than focusing on specific areas. Competition on longer routes will primarily involve alliances and their hubs instead of individual airlines. On shorter routes lasting up to three or four hours, low-cost carriers in North America and Europe will expand at a faster rate compared to traditional scheduled and charter airlines, resulting in them capturing a larger market share. Additionally, new low-cost carriers will emerge in regions such as East Asia and South America. However, not all of these emerging low-cost carriers will survive; as a result, some European and other low-cost carriers operational in 2000 will cease operations within the next two to three years.

The airline industry is facing instability, which will significantly impact conventional airlines. Competitors like Southwest, Ryanair, and easyJet will compel conventional operators to lower fares and re-evaluate their cost structures. It is clear that these established airlines have much to learn from their counterparts. Both the structure of the airline industry and markets

will become more unstable due to further liberalization. This is a consequence of negotiations for more 'open skies' agreements in the US, the European single market expanding to include central European states, and the establishment of regional open aviation areas worldwide. With increased market access, more new entrant carriers will compete against established airlines.

As regulations are relaxed, airlines will become more competitive by increasing frequencies and expanding their hubs, as well as those of their alliance partners. Overcapacity in most markets will be a recurring issue, leading to a continued downward trend in fares and yields. The presence of low-cost carriers on shorter routes will further intensify these pressures. Additionally, the rapid adoption of e-commerce and online ticket sales will create market instability. The internet will empower customers with instant access to airline prices and services, exacerbating the downward pressure on tariffs and fares.

The potential commoditisation of the airline product poses a risk. In such a scenario, price becomes the critical, potentially solitary, competitive factor. Airlines will have to increasingly rely on branding and product differentiation, which will become harder and more expensive. Low-cost carriers will especially benefit from the shift to online sales as search engines will allow consumers to find and choose their affordable fares, even if online travel intermediaries don't feature them.

To successfully navigate the challenges and uncertainties ahead, airlines must establish their corporate mission. This is essential as it determines the path they wish to pursue in the future. They have two options: becoming a global network carrier or a niche player. A global carrier strives to create a comprehensive global system by connecting their routes with alliance partners' hubs, resulting

in a worldwide network. Visions of becoming global airlines are evident among carriers such as British Airways, Lufthansa, Singapore Airlines, American, Delta, and others. Alternatively, airlines can opt to be niche carriers by focusing on specific geographical areas or providing unique services.

A geographical niche can take on different forms. Certain airlines have a corporate objective of exclusively offering domestic services within a specific country. In a large country, a domestic niche carrier could have a wide network or concentrate on a specific region within that country. Examples of niche carriers like this include Alaskan Airlines in the United States or Regional Airlines in France. Another niche strategy involves focusing on being the scheduled international airline for a specific country or region. Numerous national airlines fall into this category, with no aspirations of becoming global carriers.

The primary objective of niche airlines is to provide high-quality services either within their own country or a specific region. Examples of such airlines include Cyprus Airways and Tunis Air, which focus on their respective countries, while Gulf Air and Emirates have a regional focus. To achieve success, niche airlines must establish a strong presence in the markets they serve, making it challenging and costly for competitors to effectively challenge them. Many niche carriers strengthen their position by forming alliances or partnering with larger network carriers. Additionally, some smaller domestic or international airlines may choose to operate as franchises of larger airlines, adopting their branding and services. Several UK domestic airlines have pursued this approach through franchisee agreements with British Airways.

Both large and small airlines should not have much trouble defining their corporate mission. However, medium-sized international airlines like Finnair,

LOT Polish Airlines, Olympic, Pakistan International, or Mexicana face the biggest challenge. They may be too small to compete globally but too big to fully accept being a niche airline. If they are unable to determine a realistic and feasible long-term role, they will struggle to make strategic decisions that align with their corporate mission. This lack of a cohesive, long-term strategy puts their survival at risk in an increasingly competitive future. Furthermore, there are market niches that are not based on geography but rather the specific type of air services being provided.

The airline industry consists of various sectors, including specialist charter or non-scheduled carriers. In Europe, there are well-established airlines like Britannia Airways and Condor that specialize in passenger services. There are also niche airlines such as Cargolux that focus solely on scheduled and/or non-scheduled freight traffic. Another sector is occupied by low-cost carriers. Additionally, integrated or express carriers like Federal Express, DHL, and UPS provide high-speed door-to-door services for parcels and 'small' freight. Defining the corporate mission is crucial as it helps determine effective strategies for long-term success and survival.

In the short term, it is crucial to ensure that current management decisions align with the corporate mission and objectives. If corporate objectives are unclear, confused, or incompatible, it can lead to contradictory and poor commercial and operating decisions.

Debonair, a pioneer of the European low-cost carrier industry, faced a sudden collapse in 1999 primarily due to unclear corporate objectives. The airline attempted to operate as a low-cost carrier while providing amenities like business class and extra legroom, resulting in increased costs.

Similarly, Virgin Express, a Brussels-based low-cost carrier, also seemed to have conflicting corporate objectives

during the same period. This raised concerns about whether this indicated warning signs or new paradigms in the airline industry.

It underscores the importance for airlines to have a clear and unambiguous corporate mission that includes determining if they are primarily engaged in the airline or aviation business.

Due to the expansion of the airline industry, most traditional airlines have chosen to internally handle the majority of their required services and functions. This approach is reflected in their departmental structure. In most airlines, there are separate departments dedicated to engineering and overhaul, in-flight catering, ground handling, cargo, reservations and ticketing, sales, management information systems and informatics, and more. These functions are deemed essential for the effective operation of the business, leading airline managements to maintain direct control over them. Consequently, medium-sized and large airlines typically possess self-sufficiency in these areas. Occasionally, certain tasks may be outsourced to other carriers or suppliers, but this is typically done at locations apart from the airline's home base.

Many airlines rely on external providers for services such as ground handling or catering at remote airports. Specialized maintenance organizations or other carriers with advanced facilities are often contracted for complicated engine or airframe overhauls. While the goal has been to achieve self-sufficiency in most areas and minimize outsourcing, most airlines share similar operational methods and management structures.

The airline industry has traditionally focused on operating a network of air services. However, in the 1990s, two different business models emerged: British Airways representing one, and Lufthansa and Swissair representing the other.

In response to the crisis of 1990-1993 and the need to reduce costs, senior managers at British Airways introduced the concept of a 'virtual airline'.

The idea was simple: prioritize core competencies and outsource non-core activities to cut costs. This approach allowed for significant cost reduction, especially in areas where there had been excessive staffing. Furthermore, future costs could be minimized by outsourcing these functions through competitive bidding.

In the years following, British Airways outsourced its ground transport services at Heathrow and Gatwick to a US company, Ryder. It sold its in-flight catering at Heathrow to Swissair's Gate Gourmet and its heavy engine maintenance facility in South Wales. The airline also stopped providing third-party terminal and ramp handling to other carriers at Heathrow's terminals 1 and 2. In other words, it withdrew from the provision of ground handling services to third parties. However, BA faced union opposition which hindered further progress in its outsourcing strategy. While outsourcing negatively affected industrial relations, British Airways did not see significant reductions in staff numbers.

At the beginning of 1999, the company still had 56,000 employees, which was approximately 8,000 more compared to five years ago. The strategy of virtual airlines appears to be more effective for new airlines that do not have existing facilities and staff. By outsourcing most functions, these airlines can secure the best deals and achieve lower costs, allowing them to start operating quickly. Some low-cost airlines, like easyJet and Go, which is BA's subsidiary, are almost considered virtual airlines. In fact, when easyJet launched in 1995, even aircraft provision and flying were outsourced. Another model suggests that airlines are not solely in the core airline business but also part of a broader aviation industry.

The aviation industry encompasses various aspects beyond just flying. It involves in-flight catering, aircraft maintenance, ground handling, air-transport-related

informatics, and other activities. To cut costs, many airlines, regardless of their size, now outsource these services to external suppliers. Some services can even be offered to customers who are not airlines. In the past, airlines used to handle these tasks internally but some have now realized that they can be profitable businesses on their own.

Swissair, Lufthansa, and Singapore Airlines have all implemented internal reorganizations by dividing their departments into specialized companies. In Europe, Swissair and Lufthansa are leading this change, while Singapore Airlines is taking the lead in Asia.

Lufthansa has identified seven distinct business segments: 'Passenger Business' (including Lufthansa, Lufthansa Cityline, Lauda Air with a 20% shareholding, and Luxair with a 13% stake owned by Lufthansa), 'Maintenance, Repair and Overhaul,' 'Catering' (both in-flight and on the ground), 'Ground Services' (both domestic and international), 'Leisure Travel' (including Condor as Lufthansa's charter airline), 'IT Services,' and 'Logistics' (which includes activities carried out by Lufthansa Cargo). By establishing these segments as separate businesses with their own management teams, they have achieved better cost control and improved customer focus.

These changes have led to significant increases in turnover across most areas from 1998 to 1999. The overall objective set by the board of the Lufthansa Group for each segment is to become one of the top three providers worldwide in its respective business area.

By the end of 2000, most businesses had achieved their goals. Swissair followed a similar approach with five separate business areas. Today, both Luftthansa and Swissair see themselves in the aviation business, while British Airways remains primarily an airline. The strategy to follow is a matter of debate. British Airways focuses on reducing costs by outsourcing

and becoming a virtual airline, but this approach carries a significant risk. The airline industry is cyclical, and concentrating solely on core activities leaves an airline vulnerable to economic downturns. Without peripheral services like catering or ground handling, there are no alternate sources of revenue to offset a decline in passenger growth or yields.

Revenues from ancillary areas such as aircraft handling, aircraft maintenance, in-flight meals, and catering are also vulnerable to a cyclical downturn, although not as severely as core airline revenues. In 1999, British Airways experienced a significant decrease in profits due to the absence of any compensatory revenues from other sources. This decline in performance led to the resignation of CEO Robert Ayling in March 2000. Similar to BA, Lufthansa and Swissair also faced declining profits in their airline operations that year. These airlines were all impacted by factors such as higher fuel prices, overcapacity in key markets, and decreasing yields.

However, the ancillary businesses of airlines performed better and helped mitigate the shortfall in airline revenues, thereby preventing the need for their chief executives to resign. However, there are some risks associated with the Lufthansa-Swissair paradigm. If the core airline business is required to source all necessary services, such as catering or maintenance, from its own non-core business units, there is uncertainty about whether it always obtains the best and most cost-effective deals. On the other hand, it can be argued that these specialized business units are likely to benefit from economies of scale due to their size, and their constant competitive bidding for external work makes them more efficient than an airline's internal supplier that lacks real competition. Moreover, there is

a further risk that the non-core businesses may consistently generate profit while the airline business itself remains marginal. In this case, should the airline business be abandoned or sold off while retaining the former? In the future, airlines will have three business models to choose from.

There are two models for airlines to consider. The first is the traditional self-sufficient model, in which the airline provides most of the necessary ancillary support services in-house. While this may be more expensive, the management feels it has control over its own destiny. Some outsourcing is done, but usually only for specialist areas or services that are not based at its home base(s). The airline may also contract work from other airlines, although this is not seen as a major revenue source on its own. Rather, it is seen as a way to optimize the utilization of existing staff and facilities. The second model is the virtual airline model, which British Airways has partially adopted.

Some of the European low-cost carriers, like easyJet, are excellent examples of cost minimisation as their priority. If an external supplier can provide a service or function at a cheaper cost, then it should be outsourced. This is easier for new start-up airlines compared to traditional airlines that are trying to transition to a more virtual model. Existing staff and facilities make this transition more challenging as they face opposition from employees and unions. Additionally, the aviation business model treats each ancillary activity related to air services as separate and potentially profitable businesses. These businesses aim to attract a larger and wider customer base beyond their own host airline.

Currently, Lufthansa and Swissair have been the

most successful proponents of this model, while Singapore Airlines has also made some progress. Interestingly, no North American airlines have ventured into this territory yet. Airline executives and their boards must decide which of the three business models to adopt and further enhance in their long-term corporate strategy. At first glance, the aviation business model seems to be the most appealing. However, not all airlines possess the necessary size or resources to embrace this model.