dr frankie o’connell - itu aviation institute main...
TRANSCRIPT
![Page 1: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/1.jpg)
Core concepts of Strategic Airline Management
Dr Frankie O’Connell
Istanbul Technical University
Air Transportation Management, MSc. Program
Airline Business Models and Strategic Management
Module # 2
8 December 2016
![Page 2: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/2.jpg)
Core Concepts of Strategic Airline Management
Dr Frankie O’Connell
Turkish Airlines Executive MSc
December 2016
![Page 3: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/3.jpg)
Definition of Strategy ‘The direction and scope of an organisation over the long term, which
Achieves advantages in a changing environment through its configuration of
Resources and competencies with the aim of fulfilling stakeholder expectations’. (Johnson, Scholes and Whittington, 2011)
![Page 4: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/4.jpg)
The essence of strategy
Strategy is the means by which we create and take
control of the future.
Source: Finkelstein, Harvey, Lawton 2007
![Page 5: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/5.jpg)
Definition of Strategy Includes understanding the strategic position of an organisation, strategic choices for the future and turning strategy into action These 3 elements are all interlinked (next slide)
Source: Johnson, Scholes and Whittington (2011). Exploring Corporate Strategy
The airline/airport finance manager tends to see problems in financial terms The airline/airport I.T. manager tends to see problems in I.T. terms The airline/airport marketing manager in marketing terms, etc The manager who aspires to manage or influence strategy needs to develop a capability to take an overview of the entire airline/airport rather than just parts of the organisation.
Strategy
![Page 6: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/6.jpg)
The Strategic Position
I
• Porters Forces
• PESTEL
• Internal issues (Micro) Expectations
& purpose
• Corporate Governance
• Stakeholder power
• Business ethics
• Culture
Corporate
level &
International
Strategy
• Product/market diversity
• Value Creation
• International Diversity
• Market Share/Market Growth
(BCG Matrix)
Direction &
Method of
Development
• Product-Market Matrix
(Ansoff)
• Mergers/Acquisition
• Strategic Alliances
Organising
for
Success
•Solid Functioning Hierarchy
•Team based Structure
•Detailed solid Master-Plan
•Full Knowledge
Enabling
Success
• Managing People
• Managing Finance
• Strategic Capability
• Technology Develop.
• Ability to Integrate
Managing
Strategic
Change • Types of Change - Adapt/Evol
• Organisational Culture
• Turnaround Strategy
• Time/Scope/Readiness/Capab.
The
Environment
1
Strategic choices
Competitive
Strategies
• Bases of Competitive Adv.
• Sustainability of Comp. Adv
• Competition & Collaboration
• Game Theory (anticipate reactions)
2
Strategy into Action
3
Strategic
Capability
• Resources
• Competencies and Benchmarking
• SWOT
The Elements of Strategic Management
Source: Johnson, Scholes and Whittington (2011)
![Page 7: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/7.jpg)
Political
• Government stability
• Taxation policy
• Foreign trade regulations
• Social welfare policy
PESTEL The Macro-Environment
The Operating Environment of the Airline is influenced by:
Economic
• Business cycles
• GDP trends
• Interest Rates
• Money supply
• Inflation
• Unemployment
• Disposable income
Sociocultural
• Population demographics
• Income distribution
• Social mobility
• Lifestyle changes
• Attitudes to work/leisure
• Consumerism
• Levels of education
Technological
• New technologies create
new products (iPhone 5)
• Speed of technology transfer
• Government spending on research
• Rates of obsolence
Environmental
• Environmental laws
• Emissions trading
• Waste disposal
• Energy consumption
• Competition law
• Employment law
• Health and safety
• Product safety
Legal
Source: Johnson, Scholes and Whittington (2011)
![Page 8: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/8.jpg)
The Operating Environment of the Airline is also influenced by... Continued
The Micro-Environment
(considering airline/airport industry)
Competition
• Network size/coverage
• Market share
• Competitive advantage
• Response strategy
• Leader/follower
• Price elasticity
• Mergers
Operational (airline)
• Aircraft utilisation
• Employee productivity
• On-time performance
• Turnaround times
• Schedule co-ordination
• Fleet mix
Marketing
• Distribution channels
• Relationship marketing
• Passenger segmentation
• Differentiating features
• Code sharing & alliances
Financial
• Cash flow
• Debt : Equity
• Airline/airport valuation
• Performance earnings
• Operating margins
• Image/reputation
• Advertising
• Sponsorship
Brand
Deregulation
• Regulated – bilaterals
• Open sky agreements
• Freedoms of the air
• 7/8th freedom traffic rights (SIA)
Source: O’Connell, PhD 2007
![Page 9: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/9.jpg)
Source: O’Connell PhD, 2007
The Operating Environment of the Airline is influenced by:
![Page 10: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/10.jpg)
% o
f in
vest
ed
Cap
ital
Return on capital invested in airlines
So
urc
e: I
AT
A
In 2014, airlines took delivery of around 1,400 new aircraft, representing an investment by the of over $150 billion.
The global airline industry posted net post-tax profits of $16.4 billion in 2014, which is a margin of just 2.2%. Apple (one company) made of net profit of $18 billion in the 1st Quarter of 2015.
![Page 11: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/11.jpg)
% o
f in
vest
ed
Cap
ital
Return on capital invested in airlines
•The airline industry needs to attract $5 trillion of capital Boeing/Airbus estimate will be necessary to buy sufficient aircraft over the next 20 years. •The ROIC needs to be higher than its costs of Capital always
![Page 12: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/12.jpg)
The challenge of strategic management
• The management of complexity and ambiguity.
• The ability to analyse and conceptualise big picture issues.
• The reconciliation of the influences of a changing environment, stakeholder expectations, and resource capabilities.
• To identify or create organisational opportunities.
• To effectively manage change.
![Page 13: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/13.jpg)
Benefits of a strategic approach to management
• Guides entire firm re ‘what it is we are trying to do and achieve’.
• Increases management’s threshold to change.
• Provides basis for resource allocation decisions.
• Unites various strategy-related decisions of managers at all levels in organisation.
• Creates proactive rather than reactive atmosphere.
• Enhances long range performance.
![Page 14: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/14.jpg)
Porter’s Bases of Competitive Strategy
Cost Leadership
Differentiation
Hybrid (Difficult to get right)
Focus Strategies
If company doesn’t meet any of these Criteria’s:-
Stuck in the Middle
Gaining competitive advantage
Source: Michael Porter, Harvard University
![Page 15: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/15.jpg)
Cost Leadership
1. A no Frills strategy, combining low prices and low perceived added value e.g. Ryanair, Air Asia, Spirit
2. A low Price strategy, providing lower price than competitors at similar added value of product or service to competitors e.g. easyJet, Southwest, Jetblue, Flydubai ... (Low cost carrier with add-ons)
![Page 16: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/16.jpg)
Cost Leadership
• The companies that attempt to become the lowest-cost producers in an industry can be referred to as those following a cost leadership strategy.
• The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry price to gain market share
• A low cost producer finds and exploits all sources of cost advantage.
o Ryanair, Spirit, Air Asia, JetStar, Cebu
o IKEA
o LIDL
o ASDA
o ARGOS
o Wal-Mart
![Page 17: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/17.jpg)
$0
$200
$400
$600
$800
Operating Revenues
World Airline revenues and expenses
1991 - 2015
Source: ICAO and IATA
$ B
illi
on
s
Operating Expenses
![Page 18: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/18.jpg)
The strategic business model of Ryanair
A cost leader in the Airline Industry
Ryanair made a pre-tax profit per aircraft of around €1.9m in 2014
![Page 19: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/19.jpg)
The competitive advantage of the low cost carrier – 2014 data
Unit cost
of Ryanair
Airport charges
Ground Handling
Ryanair’s cost advantage
Seat
Density 20% more seats/aircraft
4.6c ( $/ASK)
10.8c ( $/ASK)
Average unit cost of British Airways
Air France and Lufthansa
Aircraft &
Fuel
Distribution &
Overheads
Labour
Note: Stage lengths are adjusted
Use of secondary airports
Low ground handling charges
Allows for quick aircraft turnarounds
Direct sales only
Marginal GDS Fees (just beginning to implement these)
No commission on ticket sales
Lower compensation costs
Higher crew productivity & commonality
Reduced cabin crew
High aircraft utilisation
New generation aircraft and commonality
Fuel hedging, winglets
Reduced aircraft prices by highly leveraged Negotiation
![Page 20: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/20.jpg)
Core labour differences between LCCs and flag carriers Cost and Productivity Issues
0
1
2
3
4
5
Personnel cost per ASM (US Cents) – 2015 data
0
20
40
60
80
100
120
140
160
Employees per Aircraft - 2015 Sets of Pilots per Aircraft - 2011
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000
10,000
Number of Passengers per Employee - 2015
![Page 21: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/21.jpg)
easyJet A320
Ryanair 737-800
Wizz Air A320
8 9 10 11 12 13
British Airways A320
BA A319
Average daily utilisation of short haul aircraft - 2014 data
Sourc
e: U
K C
AA
, 2014;
Wiz
z A
ir, F
lightG
lobal
• LCCs fly around 11 hours per day with short-haul aircraft compared to 9 hours for flag carriers
• easyJet has a 25-30% higher aircraft utilisation than BA
• As a consequence European LCC generates 35-50% more seats per day from one aircraft
Hours per day
![Page 22: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/22.jpg)
European Carriers Unit Costs – 2015 data
Source: Center for Aviation, BofA Merrill Lynch Global Research, O’Connell
Ryanair’s non-fuel costs as being 50% lower than most of its rivals.
![Page 23: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/23.jpg)
Source: O’Connell and Williams (2005) Journal of Air Transport Management
Fare Schedule Other 0%
20%
40%
60%
80%
100%
Ryanair Air Asia Air Deccan
Principle reason for travelling on a low cost carrier Surveys conducted with Ryanair, Air Asia and Air Deccan
![Page 24: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/24.jpg)
Penetration of LCCs in Europe European market share
Source: Company filings, Deutsche Bank Airline Research, HSBC Research
6.3%
11.8%
16.5% 19.1%
22.7% 26.4% 27.8% 28.5%
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
0%
10%
20%
30%
20
15
40%
50%
40.1%
32% 34% 35% 35.8%
38.1% 39.4%
20
09
20
10
20
11
20
12
20
13
20
14
Seat
Cap
acit
y
![Page 25: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/25.jpg)
0
2
4
6
8
10
12
14
16
18
New Routes opened between 31 August and 04 September 2016
![Page 26: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/26.jpg)
Porter’s Bases of Competitive Strategy
Cost Leadership
Differentiation
Hybrid (Rarely successful)
Focus Strategies
If company doesn’t meet any of these Criteria’s:-
Stuck in the Middle
Gaining competitive advantage
Michael Porter
![Page 27: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/27.jpg)
Differentiation Strategy seeks to provide products or services that offer benefits different from those of competitors and are widely valued by customers. It also implies offering better products or services than competitors. Differentiation also reduces the price sensitivity of consumers
Differentiation Strategy
JetBlue’s LiveTV: This is the second/third most important reason why passengers travel with Jetblue
JetBlue’s aircraft ongoing upholstering program BA’s Flat Bed
Virgin Atlantic and Emirates Limousine Service
Qatar Airways Business Lounge at Doha
Automatic check-in by Mobile Phone offered at some Japanese airports
![Page 28: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/28.jpg)
Q0
P0
D0 AC0(Q)
Volume of output
Price
The economics of differentiating a business class product
As a result of the product differentiation, more business passengers became attracted, thus pushing out the demand curve from D0 to D1. In 2005 BA’s premium passengers increased by 8% - Triggering the carrier to add more business seats. In ’06 invested £100m
D1
Singapore Airlines invested $370 million in its flatbeds and it increased business fares by 15-20% (P0 to P1) as a result of its differentiation strategy attracting more pax (Pilling, 2007).
Q1
P1
AC1(Q)
BA invested £600 million into the design and development of flatbeds for their premier classes in 2000. This differentiation strategy increased the average cost from AC0 to AC1
Source: Besanko et al. (2000) Economics of Strategy
![Page 29: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/29.jpg)
Differentiation Value Innovation
Source: Boeing
![Page 30: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/30.jpg)
Differentiation Strategy – Example: the Business class Flat Bed
![Page 31: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/31.jpg)
Source: Inflight Research Services
Cabin Seating Comfort Total Comfort Analysis
Quality Grading System
Seat Pitch 18%
Seat Width 16%
Sleep Position
& Comfort 14%
Seat Recline 13%
Lumbar Support 12%
Headrest Comfort 10%
Leg-rest Support 8%
Footrest Support 5%
Switch Controls 4%
2016 Skytrax Awards
![Page 32: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/32.jpg)
Seat Pitch (18%)
Seat Width (16%)
Seat Recline (13%)
Headrest Comfort (10%)
Sleep Position & Comfort (14%)
Lumbar Support (12%)
Legrest Support (8%)
0 -1 -2 -3
+2 +1
+3
Dimensions of Perceived Use Value Most Important Least Important
Excellent
Very low
R A T I N G
Flatbed
73”
20”
Source; Adapted from Bowman - ‘Formulating Strategy’
Benchmarking the Business class Seat against the competition (Boeing 777-200)
48”
20”
21.5”
61”
Lie Flat
![Page 33: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/33.jpg)
Seat Pitch
Seat Width
Seat Recline
Headrest Comfort
Sleep Position & Comfort
Lumbar Support
Legrest Support
Weighting
18 16 13 14 12
8
10
Rating Rating * Wt 2 36 1 16 3 39 3 42 3 36
3 30 3 24
223
Source: Adapted from Bowman - ‘Formulating Strategy’
Rating Rating * Wt
-1 -10
1 +8
-2 -36 1 +16 -3 -39 -3 -42 -1 -12
-115
1 10
1 8
Rating Rating * Wt
1 18 2 32 1 13 1 14 2 24
119
Benchmarking the Business Seat against the competition (Boeing 777-200)
![Page 34: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/34.jpg)
What makes Singapore Airlines a differentiator in the Market?
![Page 35: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/35.jpg)
40%
0%
10%
20%
30%
40%
50%
35% 33% 33%
22% 22% 20% 20% 20% 15%
10% 8%
First/Business Class Revenues as a % of Total Passenger Revenues 2015 data
Source: Company accounts
![Page 36: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/36.jpg)
Singapore’s strategy going forward
Singapore places huge influence on 3 core areas
![Page 37: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/37.jpg)
Focus on 3 pillars
1) Service Excellence
• Highest quality of service from cabin crew (all Asian) • Enhancing customer service
2) Product Leadership (see slide above)
• Superior business and first class product (constantly innovating) • Focusing on next generation first and business class seats
3) Network connectivity
• Frequencies, right schedule, on-time, seamless transfers, airport, waves • Leveraging and deepening partnerships
Source: Skytrax
2016
![Page 38: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/38.jpg)
Porter’s Bases of Competitive Strategy
Cost Leadership
Differentiation
Hybrid (Rarely successful)
Focus Strategies
If company doesn’t meet any of these Criteria’s:-
Stuck in the Middle
Gaining competitive advantage
Michael Porter
![Page 39: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/39.jpg)
Hybrid Strategies
The hybrid strategy seeks simultaneously to achieve differentiation and
a price lower than that of competitors.
The success of the Hybrid strategy depends on the ability to deliver
enhanced benefits to customers together with low prices whilst achieving
sufficient margins for re-investment to maintain and develop the bases
of differentiation (e.g. Aer Lingus)
![Page 40: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/40.jpg)
Hybrid Positioning of Aer Lingus
![Page 41: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/41.jpg)
European Route structure 2002 European Route structure 2016
Short haul is Low Cost
Source: SRS Analyser
![Page 42: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/42.jpg)
Aer Lingus Connectivity from UK regional airports to Dublin 2009 and 2016 data
2009 2016
![Page 43: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/43.jpg)
US route structure 2002 US route structure 2016
Long Haul is Full Service
• Aer Lingus carried 1.06 million passengers from the US to/from Ireland in 2015 worth $636 million
• 306,830 transferred at Dublin to other points in Europe worth $237 million
Source: SRS Analyser
Of those 306,830 passengers who transferred on Aer Lingus
• 116,000 transferred at Dublin for other points in the UK worth $93 million • 38,000 transferred at Dublin for other points in France worth $28.5 million • 28,000 transferred at Dublin for other points in Germany worth $20 million • 22,000 transferred at Dublin for Amsterdam worth $15.5 million
• Dublin airport advantages: US Pre-clearance Immigration and new Terminal
![Page 44: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/44.jpg)
Porter’s Bases of Competitive Strategy
Cost Leadership
Differentiation
Hybrid (Rarely successful)
Focus Strategies
If company doesn’t meet any of these Criteria’s:-
Stuck in the Middle
Gaining competitive advantage
Michael Porter
![Page 45: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/45.jpg)
A focused strategy seeks to provide high perceived product/service benefits
justifying a substantial price premium, usually to a select market segment
niche e.g. Fedex; TAP (long-haul to Brazil and Africa); Iberia (Long-haul
to S. America); Finnair (Europe to Asia)
Focus Strategies
![Page 46: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/46.jpg)
TAP’s route structure 2005 TAPS’s route structure 2016
Source: SRS Analyser and Innovata
• In Summer 2005, TAP had 39 weekly flights to 6 cities in Brazil
TAPs Route Network in 2005 and 2016
• In Summer 2016, TAP had 67 weekly flights to 10 cities in Brazil
![Page 47: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/47.jpg)
TAP Portugal
Air France
Iberia
LATAM Airlines Group
Air Europa
KLM
Avianca
Lufthansa
Alitalia
British Airways
Aerolineas Argentinas
0 20 40 60 80
Europe – South America (September 2016 data)
Leading airlines by weekly non-stop flights
Number of Flights per Week
Source: OAG
![Page 48: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/48.jpg)
2007 2012 2015 0
1,000,000
2,000,000
3,000,000
Direct Connecting
Passenger dynamics of TAP’s traffic to/from Europe - Brazil 2007 – 2015 (traffic is both ways)
Source:Sabre
In 2015, the revenues that TAP generated from its Brazil operations amounted to over $574m
Pass
en
gers
![Page 49: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/49.jpg)
Focused differentiation Market share of TAP from Europe to Brazil
2000 - 2014
Sou
rce:
OA
G D
ata
Sea
t C
apac
ity
• Around 22 million people travel yearly between Europe and Brazil each year
• TAP has around 30% of this market
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
0%
5%
10%
15%
20%
25%
30%
35%
![Page 50: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/50.jpg)
• It carried 11.4 million passengers in 2015, same as the year before
• It generated $2.86 billion in in revenues in 2015
• The airline also made progress in reducing its net debt, by cutting it from
€1.2 billion in 2008 down to €780 million by 2013.
•Around 70% of TAP’s revenues are generated outside of Portugal
•Spain is its most important market with around 850,000 passengers per annum
•Brazil and Africa are its most important International markets
•It operates 61 aircraft including 18 long range aircraft (14 A330s and 4 A340s)
• It has 12 A350s on order but no narrow bodies
•Europe accounts for 6.3 million passengers (out of 11.4m) with 49 destinations to EU
•It purchased PGA-Portugalia Airlines in 2006 for €140m – operates 16 RJ jets
•TAP has code shares with almost 27 carriers mostly from STAR
TAP’s Dilema
•The EU IMF attached conditions to Portugal’s €78 billion bailout including the
privatisation of national assets including TAP (top of list).
•Azul – Brazil’s 3rd largest airline purchased a 61% stake in TAP in the
Summer of 2015 for $391 million.
![Page 51: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/51.jpg)
SN Brussels Route Network – Summer 2016
Source: SRS Analyser
SN carried 244,000 passengers from
Brussels to Africa in 2015 generating
$181.5 million (Sabre, 2016)
![Page 52: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/52.jpg)
The Holiday Market – a Focus market
Two scenarios ongoing in the European Charter Market
1. Charters based out of a specific country like the UK such as Monarch
2. Charters based out of specific regions like that covering all of Europe such as Thomson and Thomas Cook
![Page 53: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/53.jpg)
4.4 4.1 3.8 3.3 3.1 2.8 2.6 2.5 2.6 2.5 2.1
1.4 0.9 0.8 0.8
0.2 0
2
4
6
8
Charter
1.3 1.9 2.5 3.1 3.6 3.9 3.7
3.7 4.5 5.4 6.0 6.3
5.5
Scheduled LCC
0.5 0.6 0.8
Monarch Airlines
Change in Strategy
• Monarch has 25 A321s; 8 A320s; 1 737-700 in service – all are narrowbody aircraft (Sept 2015 data)
• Has 30 737-800s on order. No long haul aircraft
![Page 54: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/54.jpg)
0
2
4
6
8
10
12
14
2005
2008
2011
2014
*Spain includes the Canary Islands
Changes in UK short-haul charter demand
Source: UK CAA, 2006, 2009, 2012, 2015
Mill
ion
s o
f p
asse
nge
rs
![Page 55: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/55.jpg)
Focus Strategies - Charters
![Page 56: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/56.jpg)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
Thomson Airways Thomas Cook Airlines
Operating margin Net profit margin
-
2
4
6
8
10
12
2009 2012 2015 2009 2012 2015 2009 2012 2015
Thomson Airways Thomas Cook Airlines Monarch Airlines
Mill
ion
s o
f P
asse
nge
rs
Non-Scheduled Scheduled
Charter Airline Traffic and Profitability
![Page 57: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/57.jpg)
Focus Strategies - Charters
![Page 58: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/58.jpg)
Thomas Cook Group Snapshot – 2014 data
£4.1 billion in Revenues
£2.9 billion
£1.3 billion £1.2 billion
Northern Europe
Group
£9.5 billion
Includes Widebodies
![Page 59: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/59.jpg)
Changes in UK long-haul charter demand
Source: UK CAA, 2003, 2006, 2009, 2015
Num
ber
of
Pas
sen
ger
s
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2002
2005
2008
2011
2014
![Page 60: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/60.jpg)
Differentiation
Hybrid
Increased Price Standard Value
Increased Price Low Value (Monopoly)
Airline Positioning for Success
Very low cost Strictly no frills
Focused Differentiation
Low value Standard Price
Where would Thai Airways be positioned?
Low cost
with add-ons
Long-haul
![Page 61: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/61.jpg)
Conclusions
The Strategic Position, Strategic Choices and Strategy into Action are the most
important elements of Strategic Management
Strategic positioning of Airlines depends on the Macro and Micro environment
The strategic cycle is concentric on Leadership
An airline can gain competitive advantage through:
i) Cost leadership
ii) Differentiation
iii) Hybrid strategy
iv) Focus Strategy
![Page 62: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/62.jpg)
Thank you all very much
![Page 63: Dr Frankie O’Connell - ITU AVIATION INSTITUTE Main Pageaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes... · · 2016-12-01Dr Frankie O’Connell Istanbul Technical University](https://reader031.vdocuments.net/reader031/viewer/2022022500/5aa258ba7f8b9a07758ce8eb/html5/thumbnails/63.jpg)
Safety
Strategic Risk
* Ineffective planning * Capital expenditure overrun
* Union disagreements - Strikes
* Consolidation/mergers
* Market share battles
* Customer demand fall off
* Fare wars
* Non-traditional competitors
* Alliance troubles
* Passenger defection
* Aircraft acquisition
* Revenue Mgt * Liquidity/Cash
* Credit rating
* Recession
* Financial market risk
* Asset valuation
* Currency fluctuation
* Taxation
* Interest rate fluctuation
* Credit default
* Fuel prices
Financial Risks
External
Internal
*
Operational Risk
Key planning
* Maintenance/reliability * Scheduling risks
* Accounting systems
* E-commerce
* IT obsolescence
* Government regulations
* Supply chain logistics
* Network constraints
* 3rd party problems
* 3rd party liability
* Legal risks
* Aircraft damage
* Workers Comp
* Deductibles * Cargo losses
* Political risks
* Terrorism
* Weather
* Airline inquiry
Hazard Risks
* Hull loss
The Risks facing the Airline Industry
Source: O’Connell