Strategic Management in Aviation

Critical Essays

Thomas C. Lawton, Thomas C. Lawton

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351897709
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Aviation
• Index: Technology & Engineering

This valuable volume reprints the most important and influential journal articles and papers on aviation management with an extensive introduction by the editor. The volume is designed to improve access to the journal literature for libraries expanding their collections and provide scholars with a convenient and authoritative reference source. Tom Lawton selects the best of the management literature in this area from the top journals as well as including harder-to-find articles in the wider strategic management literature. The volume will be essential reading for all scholars and students interested in aviation management issues as well as those working in the industry who want a snapshot of current thinking in the field.

Part I
Conception

[1]
The development of the airline industry from 1978 to 1998

A strategic global overview

Daniel Chan

Deputy Head of Department/Group Head, Republic of Singapore Air Force Singapore

Keywords Airlines, Globalization, Competitive strategy, Strategic alliances, Differentiation

AbstractLooks at the world airline industry, from 1978 to 1998, from a strategy perspective. Traces the strategic developments and the strategy responses of the key airline players that have had a profound impact on the shape and direction of the industry. These include the deregulation of the industry, the nature and extent of competition, the emergence of brand/differentiation based competition, and airline alliance developments, strategies and their implications. Also provides a glimpse of what the future will hold for the world airline industry, including the prospects of increased global market concentration and the emergence of mega consortia, comprising lead airlines from key regions of the world, on the global stage. These global consortia, which will marginalise other players, will also compete against each other on the basis of branding/differentiation.

Introduction

The airline industry is a unique and fascinating industry. It captures the interest of a wide audience because of its glamour, reach and impact on the large and growing numbers of consumers/travellers worldwide. British Airways (BA) Chairman, Sir Colin Marshall, in describing the industry in 1994, called it “the flywheel for the engine of the world’s industry.” The industry figures involved are staggering and speak for themselves. The industry is worth over US$1,000 billion (directly, indirectly and “induced”), employs 22 million people, and transports and services over 1.25 billion passengers a year. A quarter of the world’s manufactured exports by value reach their markets by air. The industry is also at the heart of travel and tourism, the world’s largest industry, employing one in nine workers (Corporate Location Journal, 1994, p. 15).

This research paper looks at the development of the world airline industry over the past 20 years, from 1978 to 1998, from a strategy perspective. This is in contrast to most of the existing research literature on the airline industry which tends to approach the subject primarily from an economics, regulatory or public policy perspective. This research paper traces and analyses the strategic developments and the strategy responses of the key airline players that have had profound impact on the shape and direction of the industry. As the essence of strategy formulation is coping with competition (Porter, 1979), the latter will be dwelt on in great detail throughout the paper. The key developments and issues covered include the deregulation of the industry, the nature and extent of competition, the emergence of “brand” differentiation-based competition, and airline alliance developments, strategies and the longer-term implications. These strategic developments have shaped and directed the airline industry and will continue to do so in the years ahead. This research paper also provides a glimpse into what the future will hold for the world airline industry, including the prospects of increased global market concentration and the emergence of mega consortia, comprising of lead airlines from key regions of the world, on the global stage. These global consortia, which will marginalise other players, will also compete against each other on the basis of branding/differentiation.

Strategic outcome after 20 years of deregulation

1978 was a watershed year for the airline industry. It was the year airline deregulation was first introduced in the USA (Williams, 1994). From the outset, airline deregulation had attracted much attention because of its mass impact on the large numbers of consumers/travellers. It generated further interest when the deregulated industry turned out to be so different from what was confidently predicted by advocates of deregulation. Looking back, it was clear that deregulation advocates had underestimated or misjudged the ability of incumbents to defend and protect what were supposedly to have become their highly vulnerable markets. Incumbent carriers had responded with innovative strategies to deal with the new and sudden change of competitive scenario brought upon them by deregulation More significantly, they succeeded in redefining some of the rules of the new game/competition. The result was an airline industry, kept within a regulatory time bubble for about four decades, emerging to replicate the kind of strategic behaviour observed in other competitive industries (Williams, 1994).

By 1998, 20 years after the industry deregulation was first mooted in the USA, the US airline deregulation experience has be imitated and replicated around the world. Within key regions of the globe, distinct market segments of air travel have emerged. The first pertains to the main regional/global trunk system markets dominated by big and powerful hub-and-spoke class carriers, while the second relates to peripheral markets operated by relatively weaker point-to-point carriers. The latter class of carriers has more or less given up trying to penetrate and compete in the former markets dominated by the big and powerful carriers. The airline industry meanwhile has become increasingly global in orientation and scope.

Some historical and political legacies

The airline industry carries with it certain historical and political legacies that have constrained it from developing fully like other industries. Over the past three decades or so, the world has seen the markets for many goods and services worldwide developing into internationally organised enterprises. Recently, we have also witnessed the rising wave of cross-border or global mergers and acquisitions in many major world industries, such as financial markets/services, telecommunications, information technology, car manufacturing, shipping, etc. Airline services, on the other hand, still retain a certain conservative nationalistic character inhibiting their full growth internationally, despite ironically having played a key role in facilitating or bringing about such international transformations.

Historically, aviation has played an important strategic role in the affairs of the state. This stemmed from the experiences of the Second World War and the Cold War, leading to the tight governmental control of national aviation capabilities. Even in recent times, such as the 1990/1991 Gulf War, the US Government, for instance, invoked its national emergency (Civil Resource Air Fleet) provisions calling upon the mobilisation of civil aviation resources in support of the national war effort (O’Connor, 1995). This role of civil aviation is unlikely to become defunct in the near future.

In addition, flag carrying scheduled airlines worldwide have played the “ambassadorial” roles for the nations they represent abroad. For example, it is often said that it was Singapore Airlines (SIA) that first introduced Singapore to the world. Although these roles have gradually diminished over time, the extent to which this has been allowed to be the case varies from nation to nation. Today, even where these roles are no longer important, many flag carrying airlines are still viewed very much as symbols of national prestige and pride.

Nations with big and strong flag carriers have often voiced support for the call for airlines to be subjected to international market forces, confident that their airlines can survive and fare better against smaller or weaker airlines. For the latter, however, this inevitably means the prospects of either their relegation to playing mere supporting or secondary roles dictated by the dominant carriers at best, or the precipitation of their eventual collapse at worst. The need to protect one’s own carrier’s interests has been, and remains in many cases, of considerable importance.

This explains, for instance, why bilateral air agreements and services between nations have been extremely difficult thus far, as in many instances airlines are still government-owned and much of the trade in aviation services is still controlled by governments. For some airlines disadvantaged because of country size, such as SLA or KLM, these constraints can be stifling. Their frustration is aptly reflected by SIA CEO, Dr Cheong Choon Kong’s lament in 1997 that “For no rational reason, the aviation industry is not game to be like other industry” (Asian Business, 1997, p. 22). Dr Cheong also highlighted the point that bilateral agreements are made by governments, which has accounted for why the aviation industry is so different from any other industry. Even governments of the USA and EU, strong proponents of deregulation and international market forces, have taken positions contrary to their avowed free market beliefs whenever these were deemed to be against their national interests (O’Connor, 1995). SIA, however, hopes that ultimately the growing number of liberal air bilateral agreements will be merged into a single multilateral one, à la the World Trade Organisation.

All these nationalistic factors in the airline industry explain why the industry has not developed in a comparable manner and at a similar pace to many other industries. In today’s highly internationalised world, globalised products and services have become very common. Even commercial shipping and leisure/vacation cruise lines have gone the way of the internationalisation tide. However, this has yet to be the full experience for the airline industry. The demise or acquisition and control of a flag carrier by a foreign-owned airline remains a politically sensitive matter. In the case of Pan American, in its time the US flag carrier, it has been argued that its collapse was allowed by the US Government only because there were other nationally owned airlines ready to step into that role (Williams, 1994). It is only when flag carrying airlines are allowed to shed these historical and political roles that the industry will develop fully like other industries.

In a world swept increasingly by global mergers and acquisitions in many major industries, such as financial markets/services, telecommunications, information technology, car manufacturing, shipping, etc., the airline industry cannot remain unaffected for long. There are indications that the industry is indeed responding. The pace of change, though slow at present, should accelerate in the near future.

Strategic direction of the industry: globalisation and the trend of airline alliances

In recent years, with the trend towards globalisation of the airline industry, the formation of airline alliances as a strategy to cope with competition has gathered momentum. Alliance strategy is a part of every good strategist repertoire and, when properly managed, is among the best means to bring strategy to bear in global markets as noted by Ohmae (1991). Without the protected position of national airlines brought about by deregulation, building alliances as a strategy became necessary for many airlines to stay competitive and gain access to a global market too huge for any existing airline to dominate (Johnstone, 1996).

Virtually every major airline is involved in some kind of alliances or another. Some are in as many as 30 partnerships, and none has shown any scruples about linking up with two directly competing rivals at the same time (Johnstone, 1996). However, the alliance strategy has not turned out to be smooth running for many. A study by the Boston Consulting Group found that only a third of the intercontinental alliances in place in 1992 still existed three years later. Alliances within the same region showed a slightly higher survival rate, with 59 percent of them lasting the three years (Business Times, 1998a, p. 2). This state of iterative and constant search for the best/right “dancing” partners looks set to continue for some time to come.

The announcement by British Airways (BA) and American Airlines (AA) in 1996 about their intention and plans to marry their services across the Atlantic has attracted much attention and generated great interest. It involved BA dumping an earlier alliance forged with USAir for the AA deal BA has since sold off its 24.6 percent shareholding in USAir and ended an extensive operating alliance linking their networks. In terms of scale and scope, the proposed BA and AA partnership breaks new ground and stretches the alliance strategy hitherto known. The deal is under scrutiny and is being examined by US, UK and EU regulatory authorities. While there have been immediate and strong reactions from both sides of the Atlantic, meanwhile many with aspirations to be major world players are watching how these events will unfold with great interest. The proposed BA and AA alliance, if allowed to go through, may herald a new phase of airline alliances building, besides the obvious impact that the alliance will have as it may now pose a formidable threat to other airlines worldwide. The BA and AA alliance is highly significant, as between the two they control between 60 percent and 70 percent of the transatlantic traffic. With this alliance, they will be able to give customers/travellers an unprecedented choice of transatlantic flights-a choice other airlines would find difficult to match.

The alliance does not involve an equity swap, but aims to combine operations on all transatlantic flights. According to the proposal, BA and AA will pool resources and possibly collaborate on pricing. At the heart of the deal is a code-sharing and schedule co-ordination arrangement. Code-sharing is now very common in the airline industry. It can be used to expand the number of flights offered at only a low incremental cost. By providing access to each other’s flight codes, two airlines can quickly incre...