Critical Success Factors for Devising Strategies for Airline Players
Published by MBA Skool Team, Published on October 12, 2011
The airline industry is a dynamic industry where there is a rapid evolution towards a new market form. There have been entries in the airline industry in the form of low cost carriers after the deregulation in 2003. After privatization, majority of the incumbents have performed well to get a higher market share than the state owned Air India. There have been various developments in the areas of strategic alliance, mergers and acquisitions and capacity increase by various airlines in the race to compete against each other. The article focuses on those critical success factors to be looked in for while devising strategies for an Airline industry player.
The Air transport industry has been like an economic laboratory where new trends and evolutions have taken place. The industry had witnessed periods of boom and strong economic growth along with the entry of new carriers and expanding businesses. Trends and success rate at the recent years have shown that the success of the airport and airlines depends on a lot of critical factors. The approach with more increasing focus towards low cost transport and air freight has become USPs of many airlines across the globe especially the so called “low cost carriers” (LCCs). Recent developments demonstrate that the air transport sector is evolving rapidly towards a totally new market form.
Globally there are macro developments taking place rapidly in this industry but there are uncertainties prevailing too raising questions such as, Will the trend continue to increase through the horizontal and vertical forms on integration? What will be the impact of deploying capacity through ever-larger aircraft such as A380? What timeframe are carriers looking at in their search for new collaborative structures? How are the other market players i.e. the non-carriers likely to build their strategies? Will some carrier become powerful to impose other players including airport authorities and ground handling agents? With these uncertainties one can construe that the players would be anticipating one other’s moves and devising proactive strategies.
In Airline industry, there are certain critical factors which can give an incumbent high success rate and competitive advantage over others. One such success factor is the carrier’s ability to handle the transaction costs. In general, companies in order to minimize their transaction costs would want to organize their activities. When transaction costs are high especially due to uncertainties from the supply side, they would like to combine their operations under one corporate name. This process of internalization would reduce the transaction costs. In Airline industry, the companies may choose to have an intermediate form of corporate organization. Here they enter in to long term contract with firms and be independent from other entities. Alliance is a type of intermediate structure for firms to reduce transaction costs. For example, Jet-Airways in order to reduce its expenses have been forming alliances or acquiring other players. It has acquired Jet Lite (India) Limited (earlier known as Sahara Airlines Limited) in 2007 and positioned it as an all-economy, no-frills airline which currently operates a fleet of 25 aircraft. Recently, Jet-Airways formed an alliance with Kingfisher, another Indian air passenger carrier. The two airlines have joined forces in a number of service and infrastructure programs in order to reduce their expenses. Although this might have resulted in some job losses, the alliance proved to be financially beneficial for the companies.
Ability of the Carrier to benefit from economies of scale and economies of scope is another critical factor. When the carrier operates in hub or base in the airport, it would act as a structural entry barrier to other players and new entrants. Sales and marketing costs, customer service facilities, and flight cancellation costs would reduce in this case. Moreover, with the increase in the size of the base, the flexibility to switch slots, to switch crew staff from one route to another and to adjust the connections with the fluctuation in demand would increase. Large scale carriers would benefit from the negotiation power they have to get attractive time slots and other services from the airport. Hence, the advantages would increase with the increase in size of the hub or base and it would become an important factor when companies compete for merger or alliance with an incumbent having such a base or hub. In India, Spice Jet which had its hub in Mumbai is planning to open hub in Chennai in South and in Gujarat to realize the importance of economies of scale and scope. Jet Airways which started its operations in 1993 has its main hub in Mumbai with secondary hubs at Chennai, Ahmedabad, Delhi, Bengaluru, Pune and Kolkatta.
Like costing and pricing, the competition among players invariably comes down to another critical factor which is the available capacity. The players increase the capacity by introducing more routes and by choosing airports that are congestion free and less of bottlenecks. These apply to both in the air and in the ground level. Congestion incurs costs and can lead the player to compromise its competitive advantage. The number of aircrafts and the seating capacity would be advantageous to the incumbent especially in busy routes where the new entrant would be required to incur huge fixed costs. In India, Spice jet which began its service in 2005 has firmed up its strategic expansion plan with an order of 30 Boeing 737-800 aircraft during the month of September 2010 with the expected deliveries of these aircraft commencing in Jan 2014 through till 2019. Indigo which began its services in 2006, has started its preparation for international expansion. In January 2011, Indigo signed a major procurement deal with Airbus to buy 180 A320s in one of the largest ever deals of its kind.
Diversification is identified as another critical factor while designing strategies for Airline players. Air freight which was once considered as a separate product has now become an exclusive product of the Airline players. In some cases the freight helps the carriers to cross finance the lower passenger fares. Diversification has also led the airlines by providing access to products such as hotel and/or restaurants booking and shops in the airports by forming strategic alliances with these groups. One such examples of diversification is IndiGo Airlines offering a diverse array of packages for its passengers: Holiday packages, business packages, religious packages, God's Own Country, hill station trips and Goa's sun & sand.
Without marketing and promotional practices, the transaction costs in this industry may become too high which makes it another critical factor. Market segmentation and product differentiation such as dividing classes in to first class and business class in air travel has been introduced. Airlines use these skills as their core elements of their strategies especially to attract wealthy customers for business class. Generally, the first class is twice as high as economy class and business class is about 1.5 times than the economy class. There are several promotional strategies such as including fare promotion, spokespersons and customer loyalty programmes. The most common promotional strategy is fare promotion but it is limited due to the negative effect that it can create by psychologically attaching the customer to a particular price level. Hence, this is kept limited by the airlines. The most popular way of increasing the customer loyalty is to set up a frequent flyer programme (FFP). Many studies have shown that the FFP is an effective marketing tool in this industry. Marketing is also done through partnering with credit card companies to provide discounts. Social Media marketing helps to capture the audience through the rapidly growing accounts on Facebook and Twitter. This initiative started by Jet Airways and other players has helped the firm to connect with its guests, increase the awareness of the company on a global level, understand and address the issues faced by them and appeal to a broader section of people. Also, the firms have launched a Wireless Application Protocol (WAP) site for mobile users. They plan to offer a booking engine facility on this site as well as a WAP check-in system for guests to seamlessly book their tickets and check-in using 2D Mobile Barcoded Boarding Pass
Investment in Technology is another critical factor in today’s scenario. When an incumbent faces a problem of a new entrant or an existing player increasing its capacity by opening new routes, the incumbent can overnight redeploy aircraft and secure gates and ground personnel immediately to react to the entrant. This is made possible due to the advancement of communication and information systems. Similarly, the lowering of price of one player can be counteracted by another player by immediately lowering the price utilizing the advantages of the online booking system reflecting the same price. Carriers have been investing significantly on technology to ensure its fleet reliability and safety monitoring. Along with the installation of the In-flight Safety Monitoring System (of Star Navigation), other modern features for seamless communication and information transfer are also implemented in Spice Jet to launch the world's first WiFi system on-board allowing the aircraft to communicate with the airline's corporate LAN, and enable high speed data downloads and uploads while in the air.
The airline industry is a dynamic industry and every player in the field have been anticipating one another’s moves and devising strategies accordingly. With the success of the strategies devised by the management, Indigo, an unlisted company has been performing well and was even conferred with Best Domestic Low Cost Carrier award in 2008. At the end of the day how big the airline company does not matter when it comes to devising the strategy for the airlines to remain competitive.
This article has been authored by ARIVAZHAGAN G D, PGP BATCH OF 2012, INDIAN INSTITUTE OF MANAGEMENT AHMEDABAD (IIM A)
Views expressed in the article are personal. The articles are for educational & academic purpose only, and have been uploaded by the MBA Skool Team.
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