Value Creation In The Airline Industry

Value Creation In The Airline Industry

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The basis for Value Creation of a classical hub-organised airline consists of its operating hub and spoke strategy. This system implies that all flights move along spokes connected to a hub placed at the centre. In fact all long-haul flights depart from the hub, to which all passengers are flown in the first place. Therefor it is necessary to own a heterogeneous fleet to secure an outstanding efficiency of the long distance flights. To have an attractive and used to capacity hub at one’s disposal is the linchpin of the entire operation. For this purpose it is extremely important for the airline to possess a high percentage of the airport’s available slots and gates which represent a distinctive key resource in this dynamic industry. Some of the major flag carriers own their capacities for decades through the protection by the grandfather rule which signifies a competitive advantage in this infrastructure restricted industry. Besides this, human capital can be seen as another crucial resource. This relates on the one hand to a capable and motivated workforce and on the other hand on the management. Foremost to cope with the extensive scheduling of a hub demands a high degree of management skill which decides of the success or failure of the operations. In addition the fact that hub-organised airlines control such a significant number of slots leads to a high negotiation power with this airport. Furthermore customer retention and loyalty is of great importance for a flag carrier, because their passengers are normally less price sensitive than low-cost carriers’ customers and are consequently able to fly more often. This goal can be achieved for instance by excellent customer service, frequent flyer programs and strong brand reputation. The mentioned capabilities apply best to long-haul traffic and business travel. The reasons therefor are that business passengers are willing to pay higher prices for more convenience and service on board which is also true for long distance flights where entertainment, food and service in general get more important. Accordingly this leads to higher yields for the airline. This does not fit for price-conscious customers, because they prefer cheaper flights.

Contrariwise low-cost carriers need to have a very low cost structure to act successfully and create value. For that reason it is indispensable to cut costs wherever possible. Consequently low-cost airlines should offer point-to-point routes with no frills and no class discrimination. Additionally low-cost carriers tend towards secondary and underutilised airports due to the inaccessibility of the major airports by virtue of the grandfather rule and even more importantly due to lower fares and less traffic as well as available slots and gates.

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Another important resource can be a homogeneous fleet which allows them to replace machines easily and therefore cause more flexibility. Moreover the fleet commonality limits costs for staff training and maintenance. Furthermore frequent and on-time departure can be seen as another decisive resource, because minimised turnaround time may allow an additional flight by crew per day. All these capabilities to deal with low-cost operations are based on high productivity and a high degree of standardisation within in the company. A successful low cost approach leads to higher margins for the low-cost carriers compared to hub-organised carriers. Subsequently the core competencies of a low-cost airline are best applicable to the market of private customers who are mainly leisure travellers being price sensitive and just want to go from point A to B the cheapest way possible. Accessorily it is also suitable for business passengers who are unsatisfied with congestion at major airports and therefor tend to secondary airports served by the low-cost airlines. Contrary this approach is not appropriate to customers looking for high quality and service.

Copying these two models to new markets could represent a problem when it leads to operations that are not consistent with the corporate strategy of the airline. That means it would not be a problem for a low-cost airline operating short-haul flights within Europe to expand to other new European markets as far as the company’s strategy of point-to-point routes with short distances would not be harmed. Otherwise it would cause a serious problem if this mentioned airline would start entering new markets outside Europe forcing the airline to make long distance flights that are not suitable for the model and the core competencies of a low-cost carrier. Consequently it can be stated that the limits of duplicating the strategy to new markets are reached as soon as it is no longer coherent with the company’s core competencies and resources. The same can be reckoned for hub-organised airlines trying to enter new markets in short-haul distance. In addition growth strategies in the airline industry are restricted to a certain extent due to the fact that this industry is extremely dependant on infrastructure resources, namely slots and gates. Thus growth is limited because this essential resource is rare and inelastic in supply. That means if slots and gates at an airport have reached capacity limit no more airplanes can take off or land. All in all growth strategies are determined and limited by the availability of resources.
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