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Published: October 25, 2010

 
 

The Airlines’ Global Dilemma

Until these alliances can routinely produce improved returns and greater efficiency, airlines should consider more bilateral and multilateral sharing arrangements that don’t involve an entire group of airlines but achieve synergies on a smaller but still significant scale. Among those already under way is the Atlantic Plus-Plus agreement among United, Lufthansa, Continental, and Air Canada. This, in effect, turns their linked routes into a virtual airline and could point the way toward realizing the types of sharing programs that are harder to coordinate in the big alliances.

In addition, the major airlines must finally commit to remaking themselves and develop the capabilities they need to compete in their complex business environment. The airlines have faced this challenge for a long time, but too many remain burdened by incoherence between their strategic direction and the operating model and capabilities required to succeed. For example, many of the older carriers own regional feeder airlines that they depend on to funnel customers to their major route networks. But these smaller sisters — like American Airlines’ American Eagle — are laden with nearly the same labor expenses and union rules as the legacy carriers, and thus are being undercut in cost structure and ticket prices by direct, non-union, point-to-point discounters like Southwest in the U.S. and Ryanair in Europe. Moreover, this low-cost competition is getting even stiffer, as the announced merger of Southwest and AirTran demonstrates. For the feeders to survive, they must finally adopt a business model that matches the segment of the industry in which they operate. That means a much lower cost structure and greater price flexibility. Meanwhile, the parent companies may do well to part with the feeders, because they have their own big issues to deal with: namely, to implement the skills, processes, and technologies that will enable them to operate as leanly and efficiently as possible while offering top-flight customer service, global route networks, up-to-date planes, and competitive prices. American Airlines, in fact, has been considering selling American Eagle.

Finally, although nationalistic politics have militated against serious cross-border consolidation in the airline industry, the economic forces of globalization are unlikely to allow preservation of the status quo in perpetuity. Over the next decade, the chances of major changes in political attitudes toward international airline mergers are high enough that every major player in the industry must prepare for them. Expertise in merging diverse cultures will become a crucial competitive challenge.

Integrating two companies is tough enough within the same country. International mergers only up the ante. Even same-continent pairings can present difficulties: When Air France and KLM merged, very different work ethics had to be balanced. In France, by law, employees cannot work more than 35 hours a week. In the Netherlands, working hours are more flexible. In addition, airlines must be prepared to handle the complexity created by mergers in such activities as management of ground operations and maintenance of different types of planes.

Politics might protect the industry for now. But airlines that fail to anticipate a fully globalized future risk grounding themselves. Imagination and creativity enabled them to take flight and cross the oceans nearly a century ago. Now the large, established carriers must dig deep to apply those same traits again.

Bring Back Free Aisle Seats!
by Daniel Röska

Large, established airlines are clearly facing challenges as they compete in a globalized environment — including the not-insignificant task of transforming their entrenched business models — and these efforts could take years to implement. In the short term, however, there are other steps that the airlines could take to improve their performance even as they navigate the future; unfortunately, few airlines are doing so.

In the face of intense competition for passengers and resulting low price levels — in part because of new and more nimble airlines chasing customers in domestic and global markets — the established carriers are striving to increase earnings by charging incremental fees for anything beyond the cost of air travel, including such basics as seat reservations and blankets. This unbundling of services has sparked an ugly backlash from travelers who are angry about absorbing what they view as hidden price increases and annoyed by having to decide at every step along their journey whether to pay extra for even the simplest service.

Instead of pursuing this path, the traditional airlines should consider a much more promising approach, smart rebundling, which has the potential to differentiate an airline’s offerings from those of its competitors, restore goodwill with customers, and improve margins. Smart rebundling begins with parsing the air travel product into its individual elements, analyzing the cost and the willingness of different customer segments to pay for each element, and then creating new tailored offerings that closely match each customer segment’s needs and perceptions of value. Global business travelers who pay top dollar for their tickets, for example, may want express security-line privileges. The owner of a small business flying on a domestic day trip, on the other hand, may be uninterested in having access to the airport lounge, but would be drawn to the convenience of a free voucher that could be redeemed at any airport coffee shop.

By targeting customer segments with specific service components that they prefer, the airlines could sift out unwanted low-margin services and increase revenue and margins. And by eliminating what travelers see as punitive policies that are diluting the customer experience, the airlines could offer a more appealing service, attracting consumers and building brand loyalty.

To implement this rebundling approach, airlines will first have to abandon the legacy definition of their “product” and take a fresh view from the customers’ perspective — something that they have struggled with in the past but that will be imperative in the future.

  • Daniel Röska is a principal in Booz & Company’s Frankfurt office. He specializes in strategy, policy, and business turnaround programs for global aviation, tourism, and transport organizations.
 
 
 
 
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