drivers of using biofuel in the airlines industry are closely linked to the evolution of oil prices in the last decade, as well as to the risks associated with the use of petroleum fuel. First of all, the oil prices have continuously increased over the last decades and the evaluations that this would happen date back to after 2003.
As early as 2009, the predictions for the period 2009-2016 reflected oil was expected to increase by 50% (as a trend) from an average at that time of around $50 (Kitov, 2009). This was based on existing statistical facts and evaluations and past data, thus carrying a high level of abstract objectivity. These evaluations were translated in practice, with oil prices currently at $92. All this would translate into an increased cost for the airline carriers.
Even more worrying when it comes to oil is that much of the price is politically regulated and, as a consequence, subject to political risk. The group of exporting company, united in a cartel, decide when and whether the output of oil varies or not, which generates price fluctuations. Evaluations are that changes in the Middle East, in strategic oil producers such as Saudi Arabia, could increase price as much as $200-$300 (Farge, 2011). With the Arab Spring and important changes in the Middle East in the last years, it remains to be seen whether the stability of oil prices can still be supported.
Instability, difficult in access to this resource, and a trend that shows that the prices of oil will likely continue to increase, no matter what the period of time to which we are referring, seem to be the most important drivers for using biofuel. As such, the airline companies need to consider both political and economical risks when dealing with their supply of petroleum and oil fuels.
Another consideration should be given to the environmental pressures to which the companies are subjected, notably in terms of switching from oil to a more environmentally sustainable option. The trend has been clear over the last decades: more and more environmentalists have put significant pressures on companies to become more environmentally responsible, to develop in accordance with norms that have been adopted at a global level and to accept the realities of climate change and the impact that companies have on accelerating this process.
Another driver that should be considered is the fact that, over the long-term, biofuels may also be a more sustainable option from an economic point-of-view. The initial investment is certainly high and the entire transformational and change management is not an easy one. However, once the initial investment is made, the airline companies would be able to capitalize on lower fuel costs.
b. Prajogo and Ahmed (2006) proposed, in their Stimulus-Capacity-Performance (SCP) approach, that human capital and technological capital are the main factors that affect innovation performance and drive innovation capacity. The human capital includes four factors: leadership, people management, knowledge management and creativity management. The analysis here will start by looking at these four factors of human capital, with the belief that the human capital is more important than the technological capital when it comes to driving innovation capacity.
Of the four factors in human capital, the most important one seems to be leadership. In order to drive an innovatory process, such as switching to biofuel, both European and Australian airline managers need to prove leadership skills. Primarily, this would mean identifying that there are increasing risks with using petroleum and other related oil products and making the decision to start using biofuel, with all the challenges and implications that this has.
However, this is only a very incipient stage of a leadership process that is required here. As Chemers (1997) pointed out, leadership implies "social influence in which one person can enlist the aid and support of others in the accomplishment of a common task." There are several dimensions to this definition. The common task has been identified and this is implementing biofuel to replace petroleum at the airline (European or Australian). The challenge is to convince all stakeholders that this is the appropriate solution and to enlist their aid and support, from the company employees to shareholders and to other partners involved.
This leadership process will significantly affect the entire innovation process, mainly because a successful leader will be able to drive the innovatory process ahead is a sustained manner, while also ensuring that the decision has support within the organization, that it is properly understood and embraced by the rest of the company. Leadership also means vision, the fact that the company leader can project in the long-term his idea on switching to biofuels.
People management is another important factor of the human capital, as defined in the model proposed by Prajogo and Ahmed. People management takes things to a more operational level, following the leadership component that has been previously discussed. In terms of people management, Dave Ulrich defines best the different functions of people management, namely aligning people management with the overall business strategy of the company, re-engineering organizational processes, communicating with the employees, and managing transformation and change (Ulrich, 1996).
The innovation performance will thus be driven also by the way in which the leaders are able to operationally manage the workforce. In this, the communication aspect seems one of the most important function that Dave Ulrich has mentioned. The leader will have to market the innovation process and appropriately communicate expectations to the workforce, as well as progress in implementation phases.
Just as essential is transformation and change management. It is obvious that switching to biofuels and the entire innovation process is a huge transformational process that the company leader will need to appropriately manage. This is, again, related to communication, but also to understanding and managing expectations of partners and employees, as implied by the period of change.
The two final factors in terms of human capital management, according to Prajogo and Ahmed, are knowledge management and creativity management. Since this is an innovation process, these two factors will play an essential role as well. In terms of knowledge management, one of the important elements to be mentioned is that an appropriate knowledge management will ensure that knowledge is efficiently internalized at all levels of the company. In turn, this means that innovation performance will be improved, because knowledge will not be solely retained at a particular level or department in the organization, but will be disseminated throughout, making the implementation phase much easier.
The model proposed by Nonaka and Takeuchi (1995) is worth mentioning here in the context of knowledge management. They look at knowledge as a continuous, spiral-like process, which is, at times, both internalized and externalized, thus ensuring a connection between the external and internal environments of a company. In this particular case, the idea is that the innovation process is not solely internal or internally driven: it is closely linked to the evolutions in the external environment, to the new innovation trends that may appear in the biofuels industry. To all these, the company needs to be properly connected and to be ready to internalize such external processes.
Within this context, it is clear that technological capital will also play a significant role in the innovation process, as the hardware basis onto which the process will be implemented, however, between the two (human and technological capital), human capital is determinant. Technological capital, on the other hand, will require a significant investment and high costs. The European and Australian airlines will either subcontract the entire innovation process to technological companies or will develop their own technological platform, onto which they would be able to build the process. In both cases, the costs will be considerable.
a. One of the risks associated with biofuels is that this still represents, to a certain degree, an uncharted territory for companies that will switch in the future to this new type of fuel. An uncharted territory comes with a lot of risks that the companies are likely not aware of at this point, as well as significant costs. The primary risk is that the investment in switching to biofuels will eventually not translate into company revenues and profits over the medium and long terms.
From the case study, one can also deduct the fact that, with biofuels, supply remains a problem. There are still few producers and, even more so, few producers that are able to use sustainable input. The case with the coconuts reflects the situation of an industry where the input is still unclear: not all biofuels producers have access to the needed resources. Waste seems to be the best producing options, but this also means that companies need to be able to access it.
This all translates into the following economic risk for the company: despite a strong initial investment into the transformational process and into switching to biofuels, the airline company could find itself, at some point in a situation where it will not…