Innovation and Disruption – Learning from Airlines

Airline has been among the glamorous businesses of the previous century. Given its high cost and limited market size, starting an airline was a mammoth task until recently. Earlier, it was difficult to find sufficient traffic across all routes except major cities. So instead of flying from point to point, airlines routed flights through major cities which gradually evolved as hubs to house their activities such as flight routing, aircraft maintenance, offices, etc… Today, most major airliners operate through hubs also known as 100 spoke model given the common origin of flights.

Usually these hubs are airports with either higher footfall or strategic locations; for instance, LHA – Heathrow, hub for British Airways; London has a high footfall and also serves as a strategic stop-over for long haul transatlantic flights. But building a hub is time consuming and requires billions of dollars in initial capital outlay. Hence, in smaller markets where flights need to be routed through major cities in absence of sufficient traffic, the requirement of hub serves as an entry barrier to the airline business.

At one point of time, as market size grows, the passenger traffic reaches a point where sufficient revenues can be generated on point-to-point flights. South West airlines first recognised this opportunity to operate interstate flights and adopted the point to point model. This innovative operational model helped overcome the entry barrier and establish a flourishing business model now replicated in other domestic as well as international markets.

In India, earlier given the limited market size, only Jet Airways and Air India operated as nation-wide FSCs (Full Service Carrier) routing via Mumbai and Delhi hubs. But with the growing economy, the market flourished and interstate flights became financially viable. First of the new entrants was Air Deccan followed by Indigo, SpiceJet and GoAir. While others in the international market including EasyJet, Ryanair and fly Scoot have successfully adopted and amplified the “no-frills” model.

Over time, some also introduced unconventional approaches such as aircraft leasing to reduce the initial cash outlay and training staff to handle multiple tasks such as flight attendants trained to handle check-in counters, to increase utilisation. As the term “no-frills” suggests, the airlines subtracted all frivolous inclusions such as meals, lounge access and seat selection or provide them at an additional charge. Also, the landing rights at major airports being expensive, Ryanair went a step ahead and started flying to airports closer to major cities instead; for instance, Ryanair flight to Paris will land you at BVA (approximately 50 miles from city centre) instead of CDG – Paris.

Few years ago, the gulf countries identified the potential in the airline business posed by their oil reserves and strategic location connecting South East Asia, Europe and Africa. And as we all know, this led to the advent of Gulf Carriers; Emirates, Etihad and Qatar Airways, also known as the super connectors. These carriers amplified the hub model of an FSC; through unparalleled experience with best-in-class seating, lounges and stopover experience for business and first class, whereas they kept the economy class hooked through better meals, entertainment and transit options.

Technology and environmental conditions also resulted in favourable conditions. The new Airbus A380 – 40% larger than the closest Boeing 747-800 helped ferry more passengers per flight translating into lower cost per passenger. Emirates is the top buyer of A380s accounting for almost half of the orders; 162 of 331. Although the contribution is debatable as the other two gulf carriers currently operate only 10 super jumbos. In terms of environment, the government subsidies and lower oil rates accompanied with boost in GCC economy, tourism and migration helped up to an extent.

(Edit 1: After stabilisation of the market share amongst the older giants like Lufthansa, British Airways, KLM, Cathay Pacific and others, the new entrants like easyJet and Ryanair in the affordable segment suddenly and quickly grabbed their market share of economy passengers while the Gulf Carriers wooed away their higher margin clientele from business and first class.)

The innovative operational model helped budget carriers enter a market whereas, removal of frivolous inclusions resulted in a new product which satisfied major utility at a lower cost, thus creating a new segment and carving out a portion from the existing segment. The product enhancement by Gulf Carriers, shifted customer satisfaction benchmarks, combined with inability of competitors to respond quickly disrupted market share. As we learn from the examples, in most cases, innovation can only disrupt a certain segment whereas, disruption does not necessarily require innovation.

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