One-time airline operations and business models

¶ … Airline Case Analysis

Explain the key competitive forces in the airline industry (10)

Defined by the need for exceptional asset and process efficiency, in addition to standardization to reduce operating costs, the airlines industry continues to be one of the most challenging to operate in at a profit. Figure 1, Profitability of Selected Industries Analysis by Dr. Michael Porter (Porter, 2008) shows where the Return on Invested Capital (ROIC) of the airlines industry is relative to other industries he has included in his five forces model analysis. The data in Figure 1 are from industry comparisons from 1992 to 2006 ranking ROIC by industry. This data is U.S.-based yet applies globally due to the use of the five forces model Dr. Porter invented. Airlines on average generate just a 5.9% ROIC, the lowest in the study.

This very low level of ROIC and the troubled profitability of this industry can be directly attributed to the competitive forces described here. First, there are the fluctuating costs of oil, which has led American low-cost carriers including Southwest Airlines to hedge oil contracts by as much as 80% of their value to minimize costs (Lu, Chen, 2010). Hedging of oil futures and contracts is very risky and takes exceptional skill and insight to do well, yet Southwest has been able to do this and still remain profitable the majority of its financial reporting periods. Competing on oil purchases and futures, managing oil commodities and being able to anticipate market trends is one of the most critical competitive factors in this industry. Those companies who do this well are able to overcome many other limitations and weaknesses in their business models on cost savings for fuel alone. Airlines with mediocre or poor customer service who see a reduction in passenger traffic can still be profitable if oil and fuel costs are managed excellently (Lu, Chen, 2010).

Figure 1:

Profitability of Selected Industries Analysis by Dr. Michael Porter

Source: (Porter, 2008)

A second key competitive force that is affecting this industry is the focus on low-price competition to the exclusion of customer service. Ryanair is an extreme example of strategy, and regional carriers throughout Europe including BerlinAir and smaller commuter airlines throughout the U.S. exemplify this trend. Low-cost airlines that are driven on price alone however struggle over the long-term to retain customers as those airlines that have a customer service mindset are also invading the low end of the market as well to cannibalize these price-only competitors.

A third key competitive trend is the automation of ticket ordering, customer service including call centres and pricing optimization strategies industry-wide. As the cost savings are very significant across all segments of the airline industry, there is a rapid adoption of automation systems, tools and technologies industry-wide. The use of online ordering applications is now pervasive and continues to become more streamlined so the entire ticketing and check-in process can be managed entirely over the Internet. There are also airline companies who use software-based decision rules engines to compare their fares to competitors in real-time and then define a lower, yet profitable, ticket price for the same flight (Liou, Yen, Tzeng, 2010). Airline companies are also using these software-based decision rules engines to also define the optimal price point for a given flight based on its popularity, load factor, and adoption rate by the most valued trawler segment of all, the business traveler (Liou, Yen, Tzeng, 2010).

A fourth key competitive force in the industry is an intensive focus on process standardization and efficiency. This has become the cornerstone of nearly every airline's competitive strategy for achieving short- and long-term profit and growth objectives. The standardization on a specific type of aircraft is the most visible evidence of this strategy in any airline, as is the case with Southwest and their fleet of Boeing 737s and 1 Time with their MD-80s (Models 82, 83 and 87 specifically). Standardization of processes is critical for a positive ROIC to be attained over time (Porter, 2008). The focus in high seat density and flying direct routes to airports that are not as popular and expense to gain gates at as larger carriers is also part of this focus on process efficiency.

A fifth key competitive force in the industry is contrary to the price-only driven mindset of low-cost carriers Ryanair and others, and that is a focus on the customer experience. The strategy at Virgin Atlanta, Virgin Australia and Virgin America for example is to offer free WiFi, free AC power and low cost seats in an attempt to redefine the overall customer experience. The backlash on this key competitive factor can be seen in the video "United Breaks Guitars" (Bernoff, Schadler, 2010). This video was produced by a Canadian band who had its guitar crushed by United and the completely lack of customer service around it. This situation has since been turned into a Harvard University case study as well. There are those airlines carriers however including 1 time, JetBlue, Southwest, and the Virgin Airlines brand that focus on delivering and exceptional customer experience at a low price, and these airlines are earning customer loyalty and repeat flyers as a result (Heinonen, Strandvik, Mickelsson, Edvardsson, Sundstrom, Andersson, 2010).

2. Evaluate 1 Time's current position in the South African airline industry. (10 marks)

Time has successfully defined itself as one of the trusted low-cost passenger airlines in the South African airline industry yet is lagging in terms of its reputation for safety and punctual, reliable flights, two of the most critical attributes South African flyers consider when choosing an airlines. They are considered below average on reliability and average on safety. Despite the global recession, 1 Time was able to attain 12% passenger growth in their latest full fiscal year and was able to also grow revenue by 19% and deliver a profit of 46 million rand as shown in Table 1, Financial Analysis of 1 Time Airlines. The company operates on very slim margins of 7.5% and has an average load factor of 82%, which is very good for this industry. This shows that the marketing and operations systems and strategies in the company are well coordinated and selling only the most profitable flights and seats over the last fiscal year.

Table 1: Financial Analysis of 1 Time Airlines

Source: 2009 Annual Report, 1 Time Holdings http://www.1timeholdings.co.za/pdf/1time_holdings_limited_annual_report_2009.pdf

The company recently announced their 1 Time Holidays service, which shows significantly revenue potential over the long-term. In writing about their current market success, the Chairman Sipho Twala and CEO Glenn Orsmond on 23 March 2010 said that it was the ability to attract the valued business traveller from the higher-priced airlines to 1 Time that led their profitable growth and high utilization rate of 82%. At the time of the 1 Time prospectus being written the company had 10% market share as Table 2: South African Market Shares for Passenger Airlines.

Figure 2: South African Market Shares for Airlines

Source: http://www.1timeholdings.co.za/pdf/Prospectus.pdf

3. Given that to achieve a particular position requires more than just communication, what recommendations would you make to 1 Time Airline to improve its position in the airline industry? (20 marks)

The business traveller is critical to their long-term growth and the retaining and growing of market share. It is also ironic that the company has such a strong foundation for Maintenance, Repair and Overhaul (MRO) as shown in Figure 3 yet such a mediocre reputation for service.

Figure 3:

Structure of the Maintenance, Repair and Overhaul Business of 1 Time

Source: http://www.1timeholdings.co.za/pdf/Prospectus.pdf

What the company must do is translate this expertise in MRO and service into a competitive advantage in the service of the business traveller. They could do this through a series of campaigns that features a road warrior of a small business owner that needs to get all around South Africa and the region for their business, and illustrate how 1 Time has been instrumental in their growth. The business traveller needs to see 1 Time as a business partner first and gain trust in them. Right now, that is lacking according the case study. A concerted marketing campaign, backed up with hard data and results of their global MRO operations, is a first step, followed by success stories of small businesses being able to expand based on the reliability and flexibility of the company at this time.

4. Analyse the marketing mix for 1 time (10)

As the product is actually a service, the experience of riding an MD-80 Series jet to a chosen destination is actually the value delivered. 1 Time has shown insight in deciding to accentuate the experience of being on their jets with more legroom, leather seats, jet configuration customers asked for, and rental video games and food for sale. All of these factors contribute to a more positive customer experience, which in service industries is positively correlated to customer loyalty over the long-term (Heinonen, Strandvik, Mickelsson, Edvardsson, Sundstrom, Andersson, 2010). Independent reviewers have praised the call centre staff and operations as being responsive and accurate as well (Kelly, 2008).

On the price dimension of the marketing mix, the company continues to compete with low-end and state-funded carriers, who arguably have a competitive advantage due to their funding source. Nonetheless, 1 Time is fighting the good fight of customer service and delivering value at their price points (Mantshantsha, 2007).