Structure of International Aviation - Assignment Example

Structure of international aviation Table of Contents Part 3 Part 2. 3 Part 3 6 Additional Questions 7 References 14 Bibliography 16 Part 1 Question 1 The 1978 Airline Deregulation Act changed the US airline industry forever. Prior to this period the US government used to control different areas of commercial aviation. Sections like routes, schedules and fares were controlled by The Civil Aeronautics Board (CAB) of US government (Smith, F. L. Cox, B. n.d.). These controls were removed once the act was implemented. This deregulation act was an extension of the liberalization trend that was much in vogue in the airline industry especially in European Union, Latin America and Asia. This deregulation act had a great impact on the airlines industry. Several airlines discarded most of their less profitable routes. These routes used to take passengers to smaller cities. It was replaced by the concept of “hub-and-spoke” routes which was heavily practiced by the companies. Major cities, which were not a part of their route earlier, were selected as major stoppages by the airlines for their operations. Another important effect of the deregulation act was that new players were allowed to enter the market without compromising with the larger airlines that were already established. All these were short term effects of the deregulation act. However there were several long term effects of this act. Post deregulation period climate was extremely unstable and this adversely affected the performance of domestic players like Eastern Airlines and Continental. Both of these airlines experienced terrible financial crises. Poor relationships with labor unions further deteriorated the situation and in 1989 both the players declared bankruptcy (U.S. Centennial of Flight Commission, n.d.). Part 2. Question 1. Are BA alliance overtures doomed? British Airways, one of the largest airlines in the world has formed several strategic alliances over the past few decades. Two of the most important are the alliances that were made with Qantas and USAir. Qantas is one of the largest airlines in Australia and USAir is one of the major American airlines. In 1992 British Airways formed an alliance with the USAir Group Inc. In 1993 BA again invested 300 million dollar in USAir’s preferred share (British Airways, n.d.). In same year the company purchased 25% stake in the Australian airline, Qantas. However it was later revealed that these alliances did not give the desired success to the British Airways. The company had to face plenty of troubles from these alliances. At the time of privatization of Qantas, British Airway’s 25% stake valued only half of 480 million dollar that it paid three years back. However British Airways is not found to be complaining, because it has managed to make profit from the additional revenues that were brought by the alliances. Since the profit was made by the company, it can be said that BA alliance overtures are not doomed. Question 2. What makes an alliance succeed or fail? Strategic alliance is one of the most effective ways to enter a new market, to learn from the leading company in a particular industry, to diffuse the effects of technological changes etc. Large numbers of strategic alliances are formed every year, but few of them actually become successful. According to Boston Consulting Group only 30% of alliances that take place in the global arena are found to be successful. There are several factors that result to either success or failure of a strategic alliance. Some of these factors are commitment of senior management, similarities in the management philosophies, effectiveness of the management team etc. Senior management of both the companies involved in the strategic alliance is crucial for the success of the alliance. Senior management must be committed to the process of formulation of strategic plan, its implementation, control and monitoring. Management philosophy of the companies is another crucial aspect. There must be similarities between the management philosophies of the two companies that are forming the alliance. Effectiveness of the management team is also found to be important for the success of strategic alliance. According to a study conducted by McKinsey, 50% of strategic alliances fail because of poor management. In order to make a strategic alliance successful it is very important to evaluate its performance on a continuous basis. It is crucial to discern whether the present performance of the alliance is moving towards the desired objectives and goals (Elmuti, D. Kathawala, Y. n.d.). According to Boston Consulting Group, reasons behind the failures of strategic alliances in the airline industry range from disagreement on objectives to lack of alignment of standards. Question 3. Is Star outgunning one world - if yes, why? Star Alliance was formed in the year 1997. It consisted of five leading airlines in the world. These airlines identified the change in the needs of travelers of the globalised economy. They realized that conventional ways of cooperation is no longer effective in the modern world. In 1998 there were six members (Lufthansa, Air Canada, Thai international, SAS, Varig and United) in the alliance. The major objective of Star Alliance was to enhance the convenience of air travel and to help people do business with more effectiveness. There are some special programs being offered by the alliance with the purpose of helping the business organizations to reduce the expenses. Corporate plus and company plus are two such programs. Another program named conventions plus offers a special service that allows global exchange of ideas and thoughts by organizing international conferences. Star Alliance makes full use of information strategy. Travelers can access all the relevant information from its website. The member airlines of the alliance maintain excellent cooperation with the airport authorities in order to enhance the effectiveness of the air travel. So it can be said that the Star Alliance is huge success in the history of airline alliances (Star Alliance, n.d.). Part 3 Question 1 What impact will the widespread availability of lower budget VLJs have on NetJets business Netjets is famous for introducing the concept called ‘fractional jet ownership’. It was introduced in the year 1986. According to concept business organizations and individuals are provided all the benefits that an owner of an aircraft can enjoy. Most importantly all the benefits can be enjoyed at a fractional cost. Netjets is the market leader in the aircraft rental industry (Netjets, n.d.). However this position of the company might be challenged with the increasing popularity of Very Light Jets (VLJs). This Very Light Jet is an entirely new category of private jet. They are result of advancement of aircraft engineering. Operating cost in case of these small jets is much lower than the traditional ones. As a result it is very likely that individuals and business organizations will prefer to purchase these mini jets in stead of using rented aircraft. There are several individuals who have the capability of affording a small aircraft but not a traditional large or even a medium one. These individuals are likely to the potential customer of VLJs. Since these small jets are easier and cheaper to maintain, business organizations are also likely to be the big customers of these jets. Most importantly all the aircraft manufacturing giants are now focusing on producing these jets and they will be heavily promoted by the producers. All these factors are likely to have great influence over the business of Netjets which is involved in renting aircrafts. It is very likely that in the next five year a large section of rented aircraft customers will own their new personal aircrafts and these aircrafts will be of VLJ type. Question 2 Fractional ownership programs regarding aircraft mainly target the corporate executives, business leaders who hardly have any time to waste. As a result the concept of fractional ownership is not likely to affect the business of traditional airlines that target the frequently travelers. Since the target market of companies who rent aircraft and the target market of traditional airlines are totally different from each other. People who are the customers of aircraft rental companies like Netjets are not likely to choose traditional airlines frequently. So, it can be said that the concept of fractional ownership programs will not affect the business of traditional airlines. However, individuals and business organizations that are the customers of Netjets, have actually shifted from traditional airlines to the Netjets. Earlier when there was only traditional airlines in the market the people had no choice but to travel through them. At that time even the business leaders and corporate executives had to choose traditional airlines. However, since today they have choice of moving out from traditional airlines, they are choosing concepts like ‘fractional ownership’ of Netjets. So from this point of view it can be said that the business model of Netjets has affected the business of traditional large airlines. Additional Questions Question 1 Japan Airlines (JAL) is one of the biggest airlines in the world and the biggest airlines in Asia. However the company has recently filed for bankruptcy and this is one of the biggest corporate failures in the history of Japan. It is expected that almost 15,600 jobs will be cut by the company. The mighty aircraft carrier company has decided to restructure the organization. According to BBC almost 300 billion yen will be injected into the company. The BBC report also says that the company will receive a credit of 600 billion. The main reason behind such unexpected results of Asia’s airlines is the recent global financial turmoil. During this turmoil number of passenger is significantly reduced. As a result revenue of the company has gone down sharply. According to Andrew Walker of BBC World, Japan Airlines has been unable to control its operating costs during the period of downturn. As a result the company has struggled to make profit. Before filing for bankruptcy, the company has 25.6 billion dollar debts (BBC, 19 January 2010). There are number of important alliances in the airlines industry. Japan Airlines is a part of One World Alliance. There are two other members in this alliance. These are British Airways and American Airlines. This team is in intense competition with another alliance named Skyteam. It includes two of the biggest airlines in the world. These two are Air France and Delta Airlines. Skyteam is very interested to have Japan Airlines in its team so that the existing members can operate in more number of routes. However Japan Airlines has rejected the proposal of Skyteam and decided to stay back in the current team. American Airlines, the alliance partner of JAL has supported the decision of JAL. According to a report of Wall Street Journal, an application will be submitted by both American airlines and Japan Airlines to the US Department of Transportation for antitrust. It is expected that if Department of Transportation pass this application then the alliance between the two airlines will be stronger than it was ever before (Sanchata, Esterl, February 7, 2010). As a result it can be stated that decision of filing for bankruptcy has not affected the relationship between the JAL and American Airlines. Alliances have been successful for Japan Airlines, but it forced to file for bankruptcy because of poor cost management as well as decreased revenue. It is perhaps not the right time for Japan Airlines to come out from an established alliance and get into a new strategic partnership. Question 2 2. Using self-directed research, evaluate the threat to the traditional legacy carriers of the alternative business travel-focused airlines. Airline industry is a highly competitive industry and this intensity has increased over the years. Earlier there were only big giants that dominated the industry for a long time. There was hardly any scope for a new company to get into the industry. Even if one or two could enter the industry, they had to make lot of compromise on routes and fares. They always had to stay under the dominance of large players. However situation changed after massive deregulations that took place in the airlines industry over the past few decades. Several new players have emerged since then and each of them has come up with new concepts and ideas. For example Netjets came up with the concept of ‘fractional ownership’. Some started to target economy class of people in the society and some started to focus on the business executives and leaders. Then the concept of ‘low cost airlines’ came in the industry. This was mainly targeted towards the middle class people who tend to fly frequently. However all these new concepts and new players have increased the intensity of competition in the industry and this competition has badly affected the business of traditional legacy carriers like British Airways, Continental airlines, Air France, Japan Airlines and American Airlines etc. These airlines are facing tough challenges from those that focus the business travelers. Generally traditional airlines believe in conventional business principles. Their target market is not limited to any special class of people. They are always found to be struggling to retain their market share and make profit on a continuous basis. They struggle to manage their large number of employees. Moreover there are several trade unions that make situation more complicated. For example there are at least four trade unions in British Airways. Since traditional airlines usually deal with huge number of large size aircrafts, they face several operational complicacies. It is a difficult task to maintain such huge aircrafts on a daily basis. As a result these airlines face tough challenges to manage the maintenance cost as well as operating cost properly. These problems have become acute during the recent global financial turmoil when the number of passenger decreased for almost all the traditional airlines. Moreover they are unable to reduce their price by a significant amount as they bear huge operating costs. As a result they have ended up with loss in the last financial year. Japan Airlines has even filed for bankruptcy. This is the overall scenario of the traditional large airlines. On the other hand airlines that are business travel focused are more structured and well managed. They have their well defined target market and they know how to reach this target market. These airlines have come up with new look, new ideas and new packages. For example Netjets that has changed the world of airlines by introducing the concept of ‘Fractional Ownership’. The company brought the concept of ‘renting aircraft’ in a larger scale. It targets the corporate leaders, business executives who do not have a single minute to lose. Customers of ‘Fractional Ownership’ can enjoy almost all the facilities of having a personal aircraft. Moreover expenditure is much lower as compared to the expenditure of having own aircraft. Executive airlines, another example of business travel focused airlines. As far as corporate aviation is concerned it is the market leader in Europe. Apart from airlines companies like Netjets and executive airlines there are large number of low-far carriers that are paying more attention on the business travel. It is found that traditional large airlines are facing their biggest threat from low fare carriers. According a McKinsey quarterly publication, airlines industry has become more competitive than it was ever before. In order to survive in such intense competition traditional airlines have adopted strategies to trim costs, spur growth and increase profits. Some of them have created own regional or budget carriers in order to counter the challenge of low-cost carriers like Ryanair and South West Airlines. As a result there are almost 50 airlines that are owned by only 20 aviation groups. In order to have sustainable profit large traditional carriers are found to be diversifying into related businesses. As a result their customer base has broadened up. Moreover it is often found that traditional airlines, in order to reduce costs, sought special consideration from their own workers. Overall it can be said that complexity in the process of managing an aviation group has increased significantly. This complexity has made the process of effective decision making more complicated (Heynold, Rosander, 2006). Low cost carriers are likely to become bigger threat because business organizations are found to be finding them more effective. It is found that business travelers are more and more using low fare airlines (Mayer, 2008). Airlines companies are also heavily promoting their offerings to the business executives as well as the organizations. They are giving attractive offers to the organizations, making partnerships with them to attract more number of passengers. In order to counter these challenges traditional airlines are also reducing their fares and trying to coming up new schemes. One of the major advantages that traditional airlines have over the low fare airlines is the route coverage. Since they are operating for long period they have their presence in all the major routes in the world. Moreover there are strong alliances among the traditional airlines. Each member in these alliances has greater coverage of market as compared to a business travel focused airlines that is not there in any alliances. Question 3 According to the report published by ‘Flight Global’, there is a study going on at EADS Innovation Works that is located in Germany. It is a feasibility study on the usage of wireless communications systems that would be used at 60 GHz and it would be used for in-flight entertainment (IFE). It is a sub-project of another major project named EASY-A, Enablers for Ambient Services and Systems Part A - 60 GHz Broadband Links. It is a publicly funded project. The main objective of EADS Innovation Works is to design and make a demonstrator which will be incorporated into the cabin mock-up of Airbus A340. This demonstrator includes RF silicon and specific antennas. It is expected to show the feasibility of 60 GHz WLAN that is present in the cabin of the aircraft. According to a source that is well aware of the situation, the incorporation of the demonstrator will be complete by mid-2011. A wireless cabin is required in order to fulfill the need of AVOD (Audio/Video O Demand). However the current WLAN technologies (60 GHz) are unable to make such a wireless cabin that will be able to fulfill the need of AVOD. According to Dr. Ing Wilhelm Keusgen of Fraunhofer Institute for Telecommunications, "It seems that 60 GHz is ideal for wireless in-flight entertainment applications where seat displays are connected to access points in the cabin ceiling". He also said that there were several projects regarding the incorporation of 60 GHz technology. All these projects were done in association with Airbus. He claimed that a 60 GHz demonstrator is successfully developed by the institute along with its partners from Gothenburg and Berlin. However, according to a spokesperson from Airbus, the company is not involved in the project of EASY-A 60 GHz. The person, however acknowledge the fact that the company is well aware of that such a project is being conducted at EADS Innovation Works. Dr. Keusgen believes that the main rival of Airbus, Boeing is also planning to investigate the 60 GHz technology and it is not the first time that the company is dealing with wireless technology. Earlier Panasonic Avionics and Thales, at the request of Boeing, developed wireless solutions for ‘787 twinjet’. However in 2007 the project was made stopped by Boeing. There were several factors behind such decision. One of the reasons were that the specifications of 802.11n technology was till not approved by ‘Institute of Electrical and Electronics Engineers’. However the issue was resolved later. According to Panasonic and Thales, there might be trade-offs in bandwidth while introducing the wireless IFE (In-Flight Entertainment). According to the Cedric Rhoads, product marketing director in Panasonic "The concern for us was that the value of wireless was not there and it represented a very big trade-off in bandwidth, and thus capability". However the aircraft manufacturing giant Boeing has ruled out the possibilities of introduction of wireless IFE in future (Kirby, 2010). References British Airways, No Date, Explore our past: 1990 – 1999, History and Heritage, [Online] Available at: http://www.britishairways.com/travel/history-1990-1999/public/en_gb [Accessed on March 20, 2010] BBC, 19 January 2010, Japan Airlines files for bankruptcy protection, [Online] Available at: http://news.bbc.co.uk/2/hi/8466997.stm [Accessed on March 20, 2010] Elmuti, D. Kathawala, Y. No Date, An Overview of Strategic Alliances, [Online] Available at: http://www.ux1.eiu.edu/~cfyak/Articles/An%20overview%20of%20strategic%20alliances.pdf [Accessed on March 20, 2010] Heynold, Y. Rosander, J. 2006, A new organizational model for airlines, McKinsey Quarterly, [Online] Available at: http://www.mckinseyquarterly.com/A_new_organizational_model_for_airlines_1700# [Accessed on March 20, 2010] Kirby, M. 2010, Wireless IFE study progresses at EADS, [Online] Available at: http://www.flightglobal.com/articles/2010/03/15/339458/wireless-ife-study-progresses-at-eads.html [Accessed on March 20, 2010] Mayer, S. 2008, Ryanair and Its Low Cost Flights in Europe: Marketing Plan, GRIN Verlag Netjets, No Date, About NetJets, overview, [Online] Available at: http://www.netjets.com/About_NetJets/about_netjets.asp [Accessed on March 20, 2010] Smith, F. L. Cox, B. No Date, Airline Deregulation, Library Economics Liberty, [Online] Available at: http://www.econlib.org/library/Enc/AirlineDeregulation.html [Accessed on March 20, 2010] Star Alliance, No Date, Star Alliance - “The way the Earth connects” Creating the future of air travel today, [Online] Available at: http://www.staralliance.com/assets/doc/en/about/member-airlines/pdf/star_backgrounder_future.pdf [Accessed on March 20, 2010] Sanchata, M. Esterl, M. February 7, 2010, JAL Stays in AMR Alliance, Delta Out, Wall Street Journal, [Online] Available at: http://online.wsj.com/article/SB10001424052748703615904575053860586727220.html [Accessed on March 20, 2010] U.S. Centennial of Flight Commission, No Date, Deregulation and Its Consequences, [Online] Available at: http://www.centennialofflight.gov/essay/Commercial_Aviation/Dereg/Tran8.htm [Accessed on March 20, 2010] Bibliography Kernchen, N. 2007, Marketing Differences Between Traditional Airlines and Low-cost Airlines in Europe, GRIN Verlag Hitt, et al, 2008, Strategic management: competitiveness and globalization : cases, Cengage Learning Read More