Strategies in Airline Business

Introduction

Airline industry is highly competitive like most industries. Competition is highly intense on the routes which are more profitable. The growth of the industry is closely linked to economic growth. An airline seat comes under the category of intangible and perishable goods and hence marketers take usually special care while formulating their marketing strategies (BNET, 2005). Price elastic is when price of the service is decreasing with a resultant in an increase of demand. While income elastic means that when income of the general populace goes up, more people tend to travel by air (ICMR – ICFAI Center for Management Research, 2004). The profitability of an airline increases, when the flight capacity is properly utilized and the aircraft spends less time on the ground. The most common strategies that are used in the airline industry are identification and elimination of non-value adding cost and use the money saved to provide better quality service. It is good to find a niche market and cater for it this is like identifying and flying to secondary airports which do not handle too much air traffic. This would yield more profits to an airline. This is a strategy followed by many low-cost, no frills airlines in the United States and the European countries (Jain, 2000, p.26).

Establishing marketing tie-ups with travel agents and offering them incentives as well as commissions is yet another way of making good profits. Otherwise, as some they provide ticket over the Internet thus bypassing travel agents altogether (Schonberger,1997). Offering competitive frequent flyer schemes, discounted packages are also a few other good strategies. Apart from these, the players of the airline industry can enter into trade alliances with other businesses and enter into operational agreements and code sharing with other airline as these increases profits and operational efficiency (Wolf and Copulsky 1990, p.18).

Strategic Decision Making

Strategic management places a heavy emphasis on strategic decision-making. As organizations grow larger and environments become more uncertain, decisions become increasingly complex and difficult to make (ICMR – The ICFAI Center for Management Research, 2004). In order for a decision to be called strategic, it should have the following characteristics:

  • It deals with the long-run future of the entire organization.
  • It commits substantial resources and demands a great deal of commitment from people at all levels of the organizational hierarchy.
  • It acts as a directive and sets a precedent for lower level decisions and future actions, and has implications for the entire organization (Remenyi, 1991, p. 28).

Classic Airlines

The current scenario at Classic Airlines, the world’s fifth largest airline is such that though the company is pretty profitably in its business operations, the uncertainty of regular customers flying the airlines has drastically come down. The share prices of the company have plunged by 10% and the economic crisis and various other supplementing factors have even had a very bad impact on the employee morale at the company. Adding to the woes, the consumer confidence of Classic Airlines has also started waning recently (ITP.net., 2006).

The broader vision of the management helped the airline take decisions which resulted in profit for the airlines. Although, Classic Airlines do not operate internationally, but its success rate indicates that Classic Airlines has the potential to become successful and rank among world’s most profitable international airlines with the help of its dynamic organizational culture and teamwork. Classic Airlines have a dynamic organizational culture, which is always a positive sign for any business organization. An organizational culture consists of the attitudes, experiences, beliefs and values of the organization (Chopra and Meindl, 2003)

Turnaround Strategy – the need of the hour for Classic Airlines

In this context, it is very pertinent to review the turnaround strategies as followed by Continental Airlines – another famous player in the airline industry and learn some lessons from it. Also learning from the Balanced Scorecard concept will be used to examine the turnaround strategies from both the companies critically. We will also examine the learning from Braniff and examine Balanced Scorecard is defined as the performance monitor used by the organizations to track their possible future performance by using a set of “lead indicators” across at the minimum of four key dimensions – Financial, Customer, Internal and Learning. This paper uses the same dimensions to examine the turnaround strategies used by Continental, Classic and lessons from Braniff. Balanced Scorecard (BSC) is a revolutionary way of evaluating organizational performance formally unveiled in the year 1992 by Robert Kaplan and David Norton. BSC possibly was revolutionary concept at its time. Since prior to this only financial measures were used to evaluate organizational performance (Kaplan, 1993). But BSC was the first concept that went beyond pure financial measures to measure the performance of an organization. BSC was the first to use a holistic approach to organizational performance as also using indictors that could actually predict into the future rather than looking at historical measures. Continental’s turnaround strategy as conceptualized by Gordon Bethune is possibly one of the dramatically tangential approaches adopted by taking a holistic approach to the entire problem at hand rather than be driven purely by financial measures for a turnaround.

As analyzed by Gordon in his book “From Worst to First” typical turn around strategies revolve around finances and market.

Adding the knowledge of BSC to the typical turnaround strategies it is amply clear that more than these two factors must be considered for a rapid and surer turnarounds to happen. Gordon Bethune had chosen the right four factors critical to continental’s turn around. The market, the product, the finance and the people dimensions. These are so very similar to the four dimensions of BSC. Even though this is being said in the hind sight the charisma and personality of Gordon in turning around Continental did matter. The most important thing that he did right from the very beginning is to ensure that he walks every bit of the talk and the second most important thing he did was to make sure that he and his colleagues at the leadership level were always accessible. The third important thing that he did was to ensure that he gave all the employees at Continental the operational freedom they needed (Krajewski and Ritzman,2000, p. 78).

Even before Gordon initiated the “Go Forward” plan he was very realistic in his approach to the fact that future is uncertain – he named his regular dinners the last suppers just before the most critical and important board meeting where he had presented his “Go Forward” plan- all directly pointing to his ability of being a strong and dependable business leader. He conquered most of his adversaries and critics by his open and candid business approach. Keeping these two as the fundamental learning blocks, the Classic Airlines case seems to have its own strengths and merits. Some of the key learning that can actual be taken off from the Continental case and applied at the Classic Airlines case is the two fundamental essential ingredients of the turnaround strategy – the market, finance and the product dimensions are applied here too. The major assumption that is being made is that the culture dimension of the entire organization was intact. The major focus of the Classic Airlines turnaround focus should be to pinch every penny that could possibly be pinched and saved. Second most important dimension is that the operations would be heavily streamlined. Major cost cutting would be done in the area of customer intimacy and the way the customers booked their tickets and printing their boarding passes i.e., all the areas that are needed before the passenger actually travelled. So what Classic Airlines could possibly do is to automate everything and leave everything in the hands of the customer giving him the perception of greater choice, but simultaneously focusing not to do away with areas that are not core to the business of Classic Airlines. The core of Classic Airline’s business is to fly passengers and their baggage safely from one place to another and this should be the predominant focus all through the strategy implementation phase (Webster,1992, p.1-17).

Another of critical areas that Classic Airlines can focus is on the market. It is necessary that the company critically evaluates its entire market offerings and streamline and rationalize without any mingling of emotion all its product offerings in the market place (Gross et al, 1998). Classic Airlines possibly can look for de-hubbing and eliminating all non-profit making routes. This way Classic Airlines can enhance all its profit making routes and focus on its “core competencies” rather than frittering away everything by doing everything and being everything to its customers. Classic Airlines instead of following the market trends – can possibly follow the trends of full service carriers approach to the low cost carriers. Classic Airlines can take bold steps to cut down the flab and what did not make proper business sense to it – because it confused its full service customers.

One of the important take away from Braniff for Classic Airlines which Classic Airlines did not actually adhere to is the massive manpower reduction. Braniff can possibly try and cut manpower so much without thought to its actual impact on business. There will possibly be no serious impact and the manpower reduction, if is a well planned move implemented without inconveniencing the customers and passengers in any way will surely not have any serious impacts and on the contrary will turn out to be a boon to the current scenario of the organization..

The final lessons that need to be learnt from the turnaround strategies successfully adopted by both Continental Airlines is that a turnaround strategy must not be reduced to purely looking at numbers in the strategy. It should be looked at very holistically and approached holistically. Along with the holistic approach a very firm, strong and committed leadership positioning is very important. To all these another critical component for a turnaround strategy to actually work is to have open, candid and honest communication at all times, especially from the leadership of the organization.

SWOT

Strengths

The Company’s main strength is its dedicated team of ground and air staff doing their best to make it a success. The southwest airlines fleet consists of over 100 aircrafts catering to about 100 million plus passengers annually flying them around 63 destinations all over the world. The company manages keeping low fare by cutting down unnecessary expanses. Due to the introduction of online ticketing, the cost has been enormously decreased making it affordable on customer’s pocket (Biz/ed, 2002, p.11).

The seats are all standard as there is no business class in Classic Airlines aircrafts. Only simple snacks are offered on board saving the unnecessary cost of proper meals. The airline operates to selected destination through their standard aircrafts, Boeing 737 that are low cost and easy and cheap on maintenance. Similarly the company does not believe in any kind of advertising except what it does on board.

The company operates through more than 30,000 contented employees many of them are couples controlled by the highly diverse management in a very friendly way. The top management since beginning has maintained a homely atmosphere making the employees operates with full job guarantee and workplace satisfaction.

The Classic Airlines revenues are on continuous increase even in days of recession when many American airlines either collapsed or sought mergers. In fiscal year 2005, the company revenues increased by 6 percent and net income augmented by 70 percent. It is a public limited company with about 80% of shares owned by the employees.

Weaknesses

The company also have certain weaknesses, the first being the online ticketing that is both a merit and demerit. Being a virgin concept it worked well initially but due to increasing traffic over the internet, it is difficult advertising effectively and reaching new clients.

The low cost models of Boeing 737 may create problems when it comes to replacement of parts that may go obsolete after some time. The airline only operates on national routes and has no international flights making it a second choice for some passengers. The uniform seating is at time annoying for some people especially for obese or ailing passengers who need extra space to relax. The airline does not offer any morning flights making it difficult for early morning fliers. The cargo and freight capacity is also limited.

Opportunities

Classic Airlines currently operates all over the world and can expand its operations to countries where they don’t have a presence. New national and international markets offer greater potentials and opportunities to a company like Classic Airlines. The growing Hispanic population also offers new clientele to the airline. The development of technology provides further innovations and openings to be availed successfully increasing its customer base.

Threats and Trends:-The rising fuel costs are an equal threat to the Classic Airlines as it is to other competitors in the market. The terrorist threat is always there equally alarming the Classic Airlines operators. The online ticketing is no more the exclusive specialty of Classic Airlines with other competitors providing a tough competition especially with Classic Airlines’ reluctance towards advertising. The new federal regulations may increase the costs of operations with declining air travelling ratio affecting the revenues.

PORTERS

The very basic definition of competitive advantage can be found in its description regarding a firm’s position in comparison to another which is considered its competitor. Such attributes may include but are not limited to its access to natural resources, access to higher quality of skilled human resources, or access to both within its operational niche (Hise,Gillet and Ryans, 1984,p. 45). Competitive advantage thus becomes an ability gained by a firm to perform better than its competitors within the same industry. This is done through the analysis of porter’s five forces as analyzed below;

The degree of Rivalry: in the airline industry demand is led by the design and trends apart from low cost and comfort. In this industry competition is decided by the marketing skills. The market has undergone cuts in prices. The competition Classic Airlines faces most is from companies like British airways, gulf airline, Kenya airways, continental, Virgin Atlantic and many others who can offer their services at a much lower price.

The threat of entry: Classic Airlines’s continuous attempts towards innovation and method of testing their services before introducing to the market ensure its quality. Its turnaround strategy ensured proper incorporation of technology and final testing of services before customer use. Besides, its brand value and service differentiation also helps in maintaining the barrier to entry of other companies. These protect the entry of other firms within Classic Airlines’s market share.

The threat of substitute: Classic Airlines has been able to survive the threat of substitutes owing to its ability to keep the supply cost low and because of its brand recognition. Otherwise the Airlines industry is characterized by price cuts and customers pay higher prices only for a better quality which Classic Airlines has been able to maintain.

Buyer power: Being a large organization with a large customer base, Classic Airlines has been able to maintain its buyer power. It has also has partnered with several partners all over the world to deliver good services.

The supplier power: Owing to its reputation and well established position in the regions it operates, Classic Airlines is capable of controlling its supplies through increase in the number of suppliers and thus raising competition and reducing costs. It has a supplier diversity management system to report and track their aims and expenses related to supplier diversity.

PESTEL

External factors exist to shape an organization’s manipulation of its resources (which might be the factors themselves) and are associated with a particular country or region to which the firm is inextricably linked (Porter, 1985). This setting comes with multiple contexts and capabilities that a firm manipulates to gain an edge in competition. This environment provides either facilitative or inhibitive influences that affect the firm’s performance. They form the boundaries of operation, shape how the firm defines itself and its operations, or how it articulates it positive products or how appropriate it wishes to achieve such productive ends. Legislation, technology, economic, political and socio-cultural contexts, relationship with competitors and pertinent institutions as well as the needs of external clients and stakeholders, all contribute to how a firm orients to its industry, market and consumers (Kotler,1972, p. 49 and Donald, 1995).

Political

Anti labor practices are treated as a counter productive tool to the growth of nations (Goldberg, 1998, p. 103). It tends to show massive political turbulence in the economy. Countries where Classic Airlines may increase their business fell apart due to anti labor measures. Hence it should be noticed that when a brand like Classic Airlines enters a third world country wages are bound to get increased and poverty is expected to decline.

Economic

How can a MNC like Classic Airlines create an impact in the overall economy? To answer this we must look into the overall economies of scale as well as the managerial experience of Classic Airlines which can affect the overall economy of a developing nation. This mainly created to protect the small business owners from getting destroyed due to the open market competition. This helps the economy to grow. Also in this context outsourcing is a vital factor that helps the economy to flourish. Labor cost of Classic Airlines just comprises a small percentage of the total product cost while the other operating costs include ‘R&D’, ‘logistics’, ‘product designing’ are still present in the U.S. economy.

Social

Every MNC should have some ‘Corporate Social Responsibility’ & Classic Airlines is no exception. Along with this Classic Airlines does look into the other major areas too from which the overall society can be benefited. Improving the working conditions in the contacted factories, minimizing the global environmental footprint & using their brand get access to the excluded market. The company has to consider vary many factors of the new international, market place, some of these are political factors, social factors, economic and technological factors. Looking at the social cultural factors ethnocentricity is a major factor especially if the new marketplace is in a country with diverse cultures. This is a major challenge because most of these people hold so much to these cultures that it is very difficult to make them adopt your product and your marketing strategies. The cultural activities of these people desires and their likes and preferences, these equip the individuals of the communities with certain value systems and on the other hand compel individuals and the community to comply with certain demands and participate in certain activities (Bharadwaj, Varadarajan, and Fahy 1993, p. 86).

Technological

Technology has played a crucial role in the quality of services that Classic Airlines offers to the market. Classic Airlines has exploited e-commerce; through e-commerce sales Classic Airlines have increased in value in the fiscal year 2005. Classic Airlines also benefited from technology by use online ticketing to increase efficiency. Customers used to patronize services from the company by using checks, cash and debit cards (Moe, Fosser, Leister and Newman, 2007, p. 36).

Conclusion

One of the major differences between a low cost carrier and a full service carrier is the way that they can be accessed and tickets booked. Possibly this also saves the low-cost airlines the cost of the paper that is used to print the tickets. Whereas full service carriers offer a variety of options including web based reservations, call centers, travel agents etc. This is again so because the low cost airlines prefer to save the money on the travel agent commissions and cost of call centers. Whereas the full service carriers tend to share a bit of their revenues with the travel agents and also manage to spend a little more money on setting up and running call centers. Actually the low cost carriers distinctly discourage passengers from even coming to their counters and offices to make reservations! They even strategically locate their office relatively inconvenient to access (Michaelson, 1999).

The most important and the significant differentiating factor is the difference between the fares of low cost carriers and full service carriers. The cost of travel in a low cost carrier is almost 40 – 60% lowers than the full service carriers and full service carriers have to compete in the same market place at this kind of a price differential. Low cost carriers have gone to the extreme of even issuing free tickets or tickets that are almost free( Keerti, 2009).

The reverse study of the above situation was also undertaken when 10%, 20% and 30% of the prices were increased by the full service carriers. It showed that at a 10% increased price levels would persuade about 5% of passengers to switch to low cost carriers, an increase of 20% would persuade 15% of the passengers to switch. And a 30% increase would convince about 42% of the passengers to switch over. But what is extremely interesting is that more than 35% of the passengers would remain loyal to full service carriers at any price levels. Also the perception varies between the low cost carriers and the full service carriers mainly differentiated by the income levels (Irish Times, 1996). The higher the level of income the passengers would typically tend to lean towards a full service carrier and lower the level of income the inclination would be more toward low service carriers (AESICA, 2007). All these differences have been observed uniformly across long haul and short haul travels. The differences have arisen and remain unchanged despite many minor small inconveniences that the passengers face on low cost carriers (Air Carrier Compliance Group,2009).

One really very significant observation on low cost carriers is the question of safety procedures during travel. By the on flight conditions and the rush the staff seems to be in when dispatching the flights one could wrongly come to a conclusion that the safety procedures are being compromised on. This is a very serious allegation that is faced by many low cost carriers, which is stiffly contested by the low cost carriers. Also there is no data to indicate that low cost carriers have significantly reduced their focus on safety. On the contrary they claim that travel on low cost carriers is safer. Both the arguments do not have any substantiate backing or data for the arguments put forth (O’Connell, 2009).

Well difference may be perceptive or real, but for now the reality on the ground seem to be the fact that the low cost carriers are giving the full service carriers a run for their money!

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