Driving Airline Business Strategies through Emerging Technology

Nawal K. Taneja

• Publisher: Routledge
• Year: 2017
• Topic: Technology & Engineering
• eBook ISBN:
  9781351942829
• Subtopic: Business General
• Index: Technology & Engineering

In the rapidly evolving airline industry, new technologies play an increasingly critical role in the delivery of real and perceived value in reducing costs, enhancing revenue, and improving customer service and customer safety/security. This book focuses at a senior executive level, examining the key forces affecting the airline business and their potential in terms of short and long-term strategies. The author discusses the role of emerging technology on the airline industry, defined very broadly and including computers, information, databases, aircraft, telecommunications, Internet, wireless, speech recognition, face recognition, etc. His argument is that technology should not only be an enabler of business strategy but crucially the driver of business strategy. The central theme is the vital interaction between technology and business strategy across a wide spectrum of functions - executives sharing their insights of what is needed in terms of revolutions in consumers, technologies, and productivities. What has held airlines back are not so much legacy systems but legacy mindsets, organizational structures and processes, as well as the intelligent selection, investments, and implementation of value-adding technologies. The book is the outcome of the author's own experience while working with a number of airlines and his participation in many discussions with practitioners in the airline and technology firms.

Chapter 1

Challenges Driven by the Changing Airline Customer and Industry Dynamics

The airline industry is being radically transformed by the intersection of many forces—globalization, liberalization, privatization, hyper-competition, shortening technology cycles, changing demographics, economic and social cultures, rising consumer expectations and power, environmentalism, and the growing concern for safety/security. The first section of this chapter highlights just two of these major forces— demography and customer expectations—that are changing the airline customer. The second section deals with two other major forces—competition and technology. Both are changing the dynamics of the airline industry. A brief assessment of these four forces—two that affect the customer and two that affect the industry dynamics—can help airline managements identify, develop, and implement short- and long-term business strategies, particularly with respect to the role of emerging technology. That is the theme of this book.

The Changing Airline Customer

Demographic Trends and Implications

Demography will play a major role in the development of the commercial air transportation industry in the coming decades. Populations and their key attributes—shifts in populations, distributions of income and ages, and migrations patterns—are expected to have a profound effect. Consider the changes in the distribution of populations between the developed and the less developed countries. See Figure 1.1. Recently, the ratio of populations of developed countries to developing countries was approximately one to five. In the next 50 years the same ratio may reach one to ten. Moreover, the trend is not just that the populations of developing countries are increasing at much higher rate than the populations of developed countries. Populations of some developed countries are in fact decreasing, while some others staying flat, at best. The projection in the decline of populations in developed countries is based on lowered birth rates and is net of the increase in populations due to immigration, for example, the emigration to Western Europe from Eastern Europe.

Figure 1.1 World populations, 1950–2150, United Nations “Medium” projection

Source: United Nations and the U.S. FAA 24^th Annual Commercial Aviation Forecast Conference Proceedings, March 1999

Figure 1.2 shows the top 21 cities in the world in terms of population in 1950. It should be noted that 12 of these cities were located in developed countries and nine were located in less developed countries. The size of the circle represents approximately the size of the population in relative terms. Notice the tiny size of such cities as Mexico City and Sao Paulo compared to London and New York City. Now look at Figure 1.3 that shows the populations of the largest 21 cities in the year 2000.

Figure 1.2 21 Largest cities in terms of populations in 1950

Source: Cities of the World: World Regional Urban Development

Figure 1.3 21 Largest cities in terms of populations in 2000

Source: Cities of the World: World Regional Urban Development

This time, 17 of the top 21 cities (again in terms of populations) are located in developing countries and only four in the developed countries. In fact, if the top 20 cities had been selected instead of the top 21, the list would not have included even a single city in Europe. London was the 21^st largest city in terms of population. Notice also now the size of Mexico City and Sao Paulo. Two other attributes about Tokyo are note worthy. First, it is the largest city in the developed part of the world (according to the 1950 definition of the developed region). Second, it is the only city that is large enough to be in the ranks of the largest cities in this list such as Mexico City and Sao Paulo.

The airline industry may see significant growth to and from, or within selected regions of the less developed parts of the world. The types of products demanded by passengers in less developed regions of the world are likely to be very different from the types of products demanded in the developed regions of the world.

Population alone is not a sufficient indicator of the ability to travel by air. Populations must also have the economic means to travel by air. However, even if a very small percentage of a very large population has the economic means to travel, it could amount to a significant proportion of the air travel market. Consider the case of Sao Paulo. Obviously, there must be a significant number of passengers traveling between Sao Paulo and Miami to justify six daily nonstop flights with wide-body aircraft in each direction during a typical week day in January 2002.

Figure 1.4 shows, from a different perspective, the huge potential for air travel growth relating to less developed countries. There are a number of points worth noting about the information contained in this figure. It is a plot of trips (by air) per capita and real gross domestic product per capita in 1997 US dollars. First, for a number of countries above the curve such as Bolivia, Malaysia, New Zealand, Ireland and Iceland, air travel is more convenient than ground transportation due to a broad spectrum of barriers such as mountains, bodies of water, lack of adequate roads and railroads, and so forth. In such countries, air travel is much more convenient. Second, at one end of the scale, while in the United States each person may be making three or four trips a year, at the other end of the scale, in some developing countries (such as India), it could be one person out of every 100 making one trip per year. So an increase in that later number to just one person in 10 making one trip per year could result in an enormous increase in the total travel by air.

In the United States the average person making three or four trips per year may not only be unwilling to make any more trips but could in fact make one less trip per year if the hassle associated with travel increases or if alternatives become more viable, such as an increase in the quality and availability of video conferencing (and Web conferencing) and a decrease in its cost. Such alternatives are not expected to have a large impact on air travel but they could have a small impact in certain situations such as intracorporate travel that may not require a face-to-face interaction. For the people in the less developed countries, air travel, on the other hand, is not a hassle but rather is a dream. And for that small segment of the population that has already met its basic needs of food and shelter, people may be willing to spend a larger percentage of their income on air travel compared to the people in the developed countries.

Figure 1.4 Potential for growth in air travel

Source: AIRBUS, ICAO, and Standard & Poors

According to the shape of the curve displayed in Figure 1.4 a small percentage increase in the economies of less developed countries such as India and China is likely to produce a disproportionately large increase in the amount of air travel for reasons mentioned above. In the developing parts of the world air travel may be a higher priority once other basic needs have been met. Moreover, other alternatives for travel may not be viable.

All developing countries shown in Figure 1.4 have not been able to take advantage, to the same degree, of the globalization process—spread of international trade, financial markets, foreign direct investments, emerging technologies, advanced communications, and global patterns of production and consumption. Examples of economies that have benefited the most from the globalization process are located in the Asia-Pacific region (India, China, and Indonesia) and Latin America (Brazil and Mexico). This economic growth has resulted in an increase in travel. Just consider travel between Beijing and some other large cities in China—Hong Kong, Shanghai, Guangzhou, Shenzhen, and Xian. They are already generators of large amounts of air travel and could become much more significant in the next 20 years.

Different strategies have penetrated the air travel market in less developed countries vs. developed countries. In the United States, the air travel market is becoming saturated. At one end of the spectrum, airlines are reducing fares further and further to encourage travel at the low end of the market. At the other end, airlines are either seeking more and more premium passengers though higher and higher quality of service or attempting to “sell up” the service to obtain better yield in return for higher value. However, in developing countries where air travel may be a dream for some segments of the marketplace, the product demanded will be very different—for example, a basic seat in a high-density configured cabin, or low-frequency, or less convenient schedules. The second aspect of the product relates to frequency. The low end of the marketplace will travel whenever the airline schedules the aircraft. The desire for high frequency is not the same in all markets and once a certain number of flights have been scheduled the value of additional flights provides diminishing returns. Finally, even in developing countries there will be a need for a small amount of premium travel. In some cultures, there will always be small segments that will spend the money to go first class, either for comfort or for prestigious reasons.

The four parts of Figure 1.5 portray a different viewpoint of the changing nature of populations in four different regions of the world. Each illustration is a logarithmic plot of the real gross domestic product and population. The first two provide the information on Western Europe and Central Europe/CIS. The next two show the information for the Asia-Pacific and Latin America regions. Each chart has three lines representing three levels of incomes, 200, 2000, and 20,000 dollars per capita. Once again, the real potential for significant growth in air travel is not within North America (not shown included in the chart) or Western Europe but within Central Europe, Latin America, and the Asia-Pacific regions. And within these groups, the real potential is for countries projected to have high growth in income per capita—such as those located in East Asia. Unfortunately, most countries in Africa (not shown here), particularly Africa Sub-Sahara, will continue to be a tiny part of the air travel market.

If we consider the growth and shift in populations as one important component of demography, the impact of immigration is the second important component of changing populations. This component relates to an increase in the number of immigrants to the developed countries, partly for greater economic opportunities and partly for political freedom. The United States has been experiencing a significant growth in the Hispanic segment of the population. During the first decade of the 21st century the Hispanic segment of the U.S. population may represent the largest minority, surpassing the African American segment. Moreover, although small in base, Asians now represent the fastest growing segment of the U.S. population. Within this segment, higher levels of education could also imply significant gains in personal wealth and purchasing power for this minority group. The impact of this segment (with respect to its purchasing power) will not only be an increase in the amount and type of goods and services purchased, but also the brand loyalty relating to the goods and services purchased. Similar trends are being experienced in other developed countries such as those in Western Europe and in Japan where, for example, ethnic Japanese from Brazil and Peru are moving in to fill manufacturing jobs as well as to take care of the growing numbers within the elderly segment.¹

Besides the growth/shift in populations and impact of immigration, other changes in demography include, the emergence of a large middle class in selected developing countries, a significant increase in the number of women entering the workplace (especially in developed countries), and an increase in life spans resulting from such factors as advances in medicine, health care and education. All these trends will have varying degrees of positive influence on air travel.

Figure 1.5 Real GDP 1999 versus populations

Source: AIRBUS

What do Customers Want?

A number of forces are changing the expectations and power of customers. Th...

Table of contents

• Cover
• Half Title
• Dedication
• Title Page
• Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• Foreword
• Preface
• Acknowledgements
• 1 Challenges Driven by the Changing Airline Customer and Industry Dynamics
• 2 Opportunities Driven by Emerging Technology
• 3 Market Segmentation and Customer Relationship Management
• 4 E-Business and its Application to Airlines
• 5 Opportunities Driven by Emerging Aircraft Technology
• 6 Forces Transforming the Air Cargo Market
• 7 Business Structures and Processes to Capitalize on Emerging Technology
• 8 A Call for Action
• Index
• About the Author