Airline Industry

Poised for Disruptive Innovation?

Nawal K. Taneja

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317183068
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Many business sectors have been, and are being, forced to compete with new competitors-disrupters of some sort-who have found new ways to create and deliver new value for customers often through the use of technology that is coupled with a new underlying production or business model, and/or a broad array of partners, including, in some cases, customers themselves. Think about the disruption created by Apple by the introduction of the iPod and iTunes, and by Netflix within the entertainment sectors using partners within the ecosystem; think of Uber that didn't build an app around the taxi business but rather built a mobility business around the app to improve customer experience.

Airline Industry considers whether the airline industry is poised for disruptive innovations from inside or outside of the industry. Although airlines have a long history of continuous improvements and innovation, few of their innovations can be classified as disruptive innovations. The few disruptive innovations that did emerge were facilitated, for example by new technology (jet aircraft) and government policy (deregulation). Now there are new forces in play-customers who expect to receive products that are more personalized and experience-based throughout the entire journey, new customer interfaces (via social media), advanced information systems and analytics, financially powerful airlines based in emerging nations, and the rise of unencumbered entrepreneurs who think differently as well as platform-focused integrators.

1 Perspectives on Disruptive Innovation

DOI: 10.4324/9781315566429-1

What Is Disruptive Innovation?

• It is reported that IKEA introduced the ideas of selling products (a) through a catalog (instead of door-to-door); (b) directly to customers (instead of through distributors); (c) through self-service processes in stores (instead of through sales staff ); and (d) with unassembled parts in flat boxes (to the extent possible) to make transportation easier for the customers.
• Aldi started selling basic and long-lasting food products (for example, in cans) at low prices, then added fresh, refrigerated foods, then came up with non-food products at very low prices and deep-frozen food, then introduced some branded products, and thus expanded the product line without losing focus on price and smart processes.
• Zara evolved its strategy that started by selling reasonably priced fashion clothes similar to those from more well-known brands, followed with designing and marketing many shorter-run collections rather than the typical two per year, and then moved the production line closer to home, involving higher costs but reducing the need to discount prices heavily to move inventory.
• Sony produced state-of-the-art radios and televisions in the 1960s and 1970s, and in the 1980s brought to the market camcorders, video recorders, and digital cameras. But it was when Sony introduced the Walkman in 1979 that changed the way people listened to music. ¹
• Within the airline industry, Singapore Airlines decided from the start to (a) develop a business model based on the transportation of sixth freedom traffic; (b) renew its fleets more frequently than did its competitors; (c) offer significantly higher levels of cabin and in-flight service; (d) introduce the world’s longest non-stop flight between Newark, New Jersey and Singapore (about 9,500 miles); (e) offer the Singapore Airlines Suites product (separate compartments with walls and doors); (f ) introduce private jet connections in the US markets with JetSuite; and (g) offer service with four brands to cover different lengths of haul and different levels of customer service.
• Continuing within the airline industry, Laker Airways and PEOPLExpress tried to bring air transport “to the masses.” They paved the way for what became the low-cost concept.

Which part of the change in business models of these companies can be considered to be represented as an improvement, which part as an innovation, and which part as a disruption? This leads to the question of what is disruptive innovation and why is it important, not just within business sectors, but also within the government, higher education, and healthcare sectors? Is developing a better product or service considered to be disruptive innovation? Is disruptive innovation developing a product or service that meets a market need that was previously unmet? Is disruptive innovation developing a product or service that is not only less expensive, but also easier to use? As businesses improve their products at different paces and at different levels, at what point can an improvement be described as innovative and when can an innovation be described as disruptive?

Improvement represents simple and modest increases in usefulness and functionality, and innovations lead to higher levels of increase in value added to products and services. Innovation can be evolutionary or revolutionary, depending on whether it enhances value or creates new markets, or both. If an innovation is revolutionary, could it be classified as disruption? Paraphrasing one acclaimed expert, Clayton Christensen, there are two basic attributes relating to disruptive innovation, new-market disruption and low-end disruption. He explains that disruptive innovation takes place when a business transforms a once expensive and/or complicated-to-use product that had a limited number of customers. The innovative disrupter transforms the product into one that is affordable and accessible for many more buyers. ² This transformation provides value for a much larger segment of buyers while enhancing value to existing customers. According to Christensen, disruptive innovations come from the “bottom and rise up.” One could assume, then, that the mass-produced and low-priced Ford Model T represented disruptive innovation in that it made the automobile affordable to a larger segment of the population and changed the transportation systems within cities as well as the associated layout of the cities themselves in the USA. Within the computer industry, Christensen exemplifies the perspective of disruptive innovation by the progressive transformations from a mainframe to mini to desktop to laptop to smartphone. Disruptive innovation created value by making the product more affordable and easier to use for a larger and different market.

According to another acknowledged business analyst, whereas value was created through mass production and mass consumption until recently, increasingly value is being created through the development, marketing, and delivery of personalized products and services created through partnerships within the ecosystem. ³ The personalized product or service may not be cheaper. Prices could, in fact, be higher as long as customers receive higher values that encompass, for example, brand and quality.

Many business sectors have been and are being forced to compete with new competitors – disrupters of some sort – who have found new ways to create and/or deliver new value for customers often through the use of technology that is coupled with a new underlying production or business model, and/or a broad array of partners, including, in some cases, customers themselves. Increasingly, these changes have been emerging from “outside-in” rather than “bottom-up,” making them much harder to anticipate or regard as significant threats in early stages. With massive and nimble technology enablement of consumers, disrupters are placing control in the hands of customers so they can receive the services in the form, at the precise time, and through the channel to suit the convenience of customers. For example, as explained by one former senior airline executive, for years, channels were called “distribution channels” as technology was expensive and cumbersome. Sellers made arrangements with “distribution channels” to connect sellers with buyers. Now, with the power shifting from businesses to customers, customers have “acquisition channels” that can be personalized on a variety of devices that can help buyers find their most appropriate suppliers.

One former senior executive at a hotel chain suggests that traditional intermediaries are under stress to evolve older systems, while new intermediaries have been investing in and renewing technologies on faster cycles, making them inherently more dynamic. Think about the traditional hotel sector that is competing with not only online travel agencies (OTAs) with enormous amounts of information on customers and their behavior, as well as review sites such as TripAdvisor, but also sharing economy players such as Airbnb that connect property owners who want to rent out their facilities to travelers looking for unique places to stay. Although the vacation rental business provided a similar marketplace, and has undergone significant growth and consolidation, Airbnb fundamentally re-defined the business model and achieved phenomenal growth through an end-to-end model based on consumer-controlled digital interactions.

Think about the disruption created by Apple by the introduction of the iPod and iTunes and by Netflix within the entertainment sectors using partners within the ecosystem. Consumers could download, using iTunes (instead of going to a store to purchase CDs), songs they wanted (instead of purchasing CDs with a predetermined list of songs) and listen at their convenience on a mobile device (iPod). And now we have Spotify and other streaming services for which consumers do not even have to “buy” a download, but rather subscribe to unlimited access to a music database. Netflix enabled consumers to stream movies they want to see on devices they want to use and see the movies at times convenient for them. Let us also not forget the disruptive impact Apple’s iPhone had on the major player, RIM’s BlackBerry, through an improvement in the user interface. The innovation provided by the iPhone’s larger screen and the touchscreen capability (making it easier to use) destroyed the sales of BlackBerry phones when, in 2008, it had a market share of more than 50 percent of the smartphone business. Think about Uber. A customer can be in a given city and at any location in that city and simply touch the Uber app. The driver knows the exact location of the customer and the customer knows the exact location of the vehicle. Uber did not build an app around the taxi business. It built a mobility business around the app to improve customer experience. Although the service may not be cheaper than a standard taxi, it is much more convenient both in ordering a service and in payment handling.

Disruptive innovation is not limited to business sectors. Even within the bureaucracies of public and education sectors and the inefficiencies in the healthcare sector, there are examples of disruption. Singapore’s Land Transport Authority is developing an Intelligent Transport System (in a land-scarce country) to maximize safety and the capacity of its road network by monitoring and managing traffic flow to improve user experience. In Helsinki, Finland, a multi-modal transit system is being analyzed to encourage people to reduce the use of cars and subscribe to a system that provides an array of mobility options with services that can be paid for using mobile phones.

Within the high-cost education sector, disruptive innovation could result in more personalized programs in higher education, not to mention more affordable programs. These points fit well with the Khan Academy, which offers “a free, world class education system for anyone, anywhere.” Think about the potential ramifications of open online courses and their almost zero marginal costs. There are some who believe it is possible to replace, in some cases, traditional professors in business schools with video games that are carefully designed by academicians who have a lot of practical knowledge and with machines. And, as in acquiring other products and services, experience now plays a role in the learning space too. Students, particularly practitioners, care as to where and how they access the knowledge desired. ⁴

Within the healthcare sector, CVS Health, an enormous pharmacy chain in the USA, has established walk-in MinuteClinics (as discussed in a previous book), to care for common family illnesses and soon chronic conditions such as high blood pressure and diabetes. These facilities are staffed with nurse practitioners and physician assistants who are trained to diagnose and treat common health problems. They are also establishing relationships with nearby physicians and hospitals. The idea is to provide the right care to the right patient at the right time, while saving money for both the patient and the system. ⁵

Within the banking industry, consider the potential disruption that could result from “Blockchain,” the “shared database technology” that reflects crypto-currency Bitcoin. In very simple terms this technology enables consumers and suppliers to make online connections directly by bypassing intermediaries and saving money. Just as iTunes changed the music industry, this technology has the potential to dramatically change some sub-sectors within the financial services sector through an increase in the speed of and a reduction in the costs of certain types of transactions such as security settlements. These changes do not even take into consideration the reduction in margins. ⁶

The potential for disruption is causing many business leaders to re-think the markets they serve, re-design their business practices, and re-imagine the depth and intensity of their relationships with their actual and prospective customers and partners. A survey of CEOs conducted by Pricewaterhouse-Coopers (PwC) shows that 97 percent of all CEOs (and 85 percent of airline CEOs) list innovation as a key priority for growth; and 67 percent of all CEOs (and 92 percent of airline CEOs) believe new market entrants will disrupt their industries. Finally, 10 percent of all CEOs (and 18 percent of airline CEOs) see their companies as innovative leaders. While the CEOs, in general or within the airline sector, do see the need for high levels of innovation, there seems to be a gap between the innovation initiatives taken and the results achieved. According to PwC the gap is the result of a lack of innovation strategy that can fill the gap between incremental growth and the desired growth (see Figure 1.1). ⁷

Figure 1.1 Role of Innovation Strategy.

(source: PricewaterhouseCoopers Survey of CEOs, 2015)

The innovation-focused business leaders are looking beyond the met and unmet needs of customers. They are exploring needs that are unstated and, in some cases, needs that customers may not have even thought about. Did customers ask about having cameras in their mobile phones when the mobile phones became available? It is partly for reasons of unstated needs that traditional automakers have become concerned about the technology-empowered potential disrupters entering the marketplace offering “connected cars.” It is reported that there are as many as 100 million lines of code in an average car. In addition to Google with its “self-driving” car, technologists such as those providing the “tabletlike infotainment system(s)” with an open computer browser environment built into cars being developed by Tesla Motors, are leading to cars that are truly mobile friendly. According to IHS Automotive, the economic value of control software in a $94,000 Mercedes-Benz’s S550 is $23,000. And Bill Ford Jr., the Chairman of Ford, is quoted about his concern that he does not want his company to become a “handset maker” in the internet-centric world, dominated by software integrators. ⁸

However, the PwC strategists caution on the proportion of resources committed to initiatives related to incremental changes versus radically new businesses. Although the innovation mix would depend on such factors as the dynamics of the industry, corporate strategy, and risk profile, they suggest a rule of thumb to be 60 percent for incremental ideas, 30 percent for breakthrough ideas, and 10 percent for radical ideas (see Figure 1.2).

Figure 1.2 Right Mix of Incremental and Radical Ideas.

(source: PricewaterhouseCoopers Survey of CEOs, 2015)

How about improvements, transformations, innovations, and disruptive innovations within the airline industry? This is the content of the book.

Outline of the Book

Whereas this chapter tries to explore what disruptive innovation is, Chapter 2 outlines its relevance to the global airline industry. While there have been numerous and significant improvements throughout the airline industry’s history, few can be categorized as disruptive innovations. Even the introduction of the jet aircraft in long-haul markets that led to fast, convenient, and cheaper air travel was a transformational change as opposed to disruptive innovation. It was a long time in coming and over time it was accessible to and deployed across the entire industry. It was a fundamentally superior product with better economics, and if there was any disruption involved, it occurred in other segments of the travel industry rather than the airlines. In contrast, the entry of LCCs represented a different business and operating model that was inherently more difficult for established competitors to adapt to or cope with, hence truly disruptive – and it did disrupt the marketplace. The low-cost, low-fare airline model was first facilitated by the US government policies and later by governments in Europe, as well as regions around the world, to deregulate the airline sector. Consequently, many changes belong more in th...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Figures
• List of Tables
• More about the Book
• Foreword by Ben Baldanza, Chief Executive Officer, Spirit Airlines
• Foreword by Alex Cruz, Chairman and Chief Executive Officer, British Airways
• Foreword by Pieter J. Th. Elbers, President and Chief Executive Officer, KLM Royal Dutch Airlines
• Foreword by Michael Issenberg, Chairman and Chief Executive Officer, AccorHotels Asia Pacific
• Foreword by Kay Kratky, Chief Executive Officer, Austrian Airlines
• Foreword by Dermot Mannion, Deputy Chairman, Royal Brunei Airlines
• Foreword by Mike McGearty, Chief Executive Officer, CarTrawler
• Foreword by Aleks Popovich, Senior Vice President, Financial and Distribution Services, International Air Transport Association
• Foreword by Craig Richmond, President and Chief Executive Officer, Vancouver Airport Authority
• Foreword by Pekka Vauramo, President and Chief Executive Officer, Finnair
• Foreword by Chris Zweigenthal, Chief Executive, Airlines Association of Southern Africa
• Preface
• Acknowledgments
• 1 Perspectives on Disruptive Innovation
• 2 Relevance to the Airline Industry
• 3 Disruptive Forces and Their Convergence
• 4 Adaptation Strategies by Airlines
• 5 Adaptation Strategies: Developing and Emerging Markets
• 6 Adaptation Strategies by Airports
• 7 Airline Transformational Opportunities
• 8 Potential Disruptive Innovators and Scenarios
• 9 Closing Thoughts: Innovating in the Air Travel Space
• 10 Thought Leadership Pieces
• Index