Newswise — For the world's airlines to survive their current financial crisis, they should take a cue from the banking and retail industries, according to a new book by an Ohio State University analyst.
The way these industries have used innovative technologies such as the Internet to connect with customers and generate revenue is just one of many strategies for the airlines to confront their difficult problems, said Nawal Taneja, chair of Ohio State's Department of Aerospace Engineering and Aviation.
Drawing upon decades of experience as an aviation analyst and his own stint as the president of an airline, Taneja wrote his new book "Airline Survival Kit" (Ashgate Publishing, 2003) to answer a pressing question: how can the airline industry make billions of dollars every year and still have a cumulative profit margin of less than one percent?
He found that the answer lies in the industry's vast complexity.
"The airlines have many different problems they have to solve at once," Taneja said. "In the book, I identify 12 separate problems, including high labor costs, varying seasonal demand, and vulnerability to weather conditions. Most industries have to deal with only one or two of these issues, but it is almost impossible to find any other industry that has to deal with all 12." (See sidebar below, "12 FACTORS MEAN 'ALL PAIN, NO GAIN' FOR AIRLINE INDUSTRY" )
Because airlines face so many obstacles, they can't borrow their solutions wholesale from other industries, Taneja explained. Instead, each airline must pick and choose specific solutions that fit its unique situation.
Among pieces of advice Taneja's book offers the airlines:
-- Focus on one unique service. "With the traditional business model, airlines have tried to be all things to all people," Taneja said. A better strategy is to pick a niche, such as budget travel, regional business travel, or global travel -- and be the best airline in that niche.
-- Let go of destructive competition. In their blind pursuit of market share, airlines have sometimes devoted resources to competition that hurts the company. Examples: lowering ticket prices to beat a competitor -- even when it means losing money -- or continuing to fly an unprofitable route just to keep a competitor from gaining a foothold in that territory.
-- Be disciplined to make tough decisions. To make these changes, airlines will likely have to restructure, and jobs will be lost. "Sadly, that is the case," Taneja said. "Because the airlines aren't making a profit, the investors who gave them money in the past will soon say 'no more.' Then the airlines will have to pay more attention to shareholders."
-- Use technology to enhance customer relationships. Taneja feels that technology will play an important role in the industry's recovery. In an earlier book, Driving Airline Business Strategies through Emerging Technology, he suggested that technology should not merely enable business strategy, but drive business strategy. Airline Survival Kit builds on this idea by detailing specific tactics for using technology to generate profit.
A case in point: the retail industry, which has used the Internet and data mining technology to offer each customer a personalized shopping experience.
With data mining, vendors study people's spending habits to find the hidden relationships between events. For instance, other researchers have shown that people who buy bread often buy butter, so grocery stores can boost sales by placing these two items within eyeshot of each other. Some relationships uncovered by data mining are not so obvious. For instance, research has shown that people who buy diapers often buy beer.
Airlines can use the same technology to offer travelers a Web interface customized to their type of travel, Taneja said. Whether someone flies frequently, or checks many pieces of luggage, or likes to enjoy certain amenities like an airport club lounge, the web interface can direct the customer to services that cost a little more, but offer desired benefits.
Another opportunity lies in the automated check-in machines some airlines now operate. Instead of checking in with airport staff, travelers swipe a credit card through the machine as identification, and print out their own tickets. Currently, each airline manages its own machines, and travelers of other airlines may not use them.
But just as one bank allows customers of other banks to use its ATMs -- for a fee -- airlines could profit from letting all travelers check in through a common machine interface.
The banks' success with ATMs suggests that customers are willing to pay a small fee for convenience. The way ATMs have unified the "face" of the banking industry for consumers, check-in machines could unify the face of the airline industry.
Airlines may fear that sharing an interface with their competitors would hurt their brand identity, but Taneja pointed to a study that showed that most of them don't really have that much of a brand to protect. He noted that there wasn't a single passenger airline among the list of top 100 brands compiled by Business Week magazine and the consultancy Interbrand in 2001.
"A central message of the book is that the airlines need to distinguish themselves if they want to develop a brand identity. My advice is, pick the customers you want and go after them," Taneja said. "How do you do that? Through technology."
SIDEBAR:
12 FACTORS MEAN "ALL PAIN, NO GAIN" FOR AIRLINE INDUSTRY
In his book, Airline Survival Kit, Nawal Taneja identified 12 factors that contribute to the airline industry's low profitability:
1. Excessive government intervention. Government regulation for safety's sake is good. But worldwide, some governments have put economic pressure on their airlines by requiring service in certain markets, or putting artificial controls on competition.
2. Network-driven structure. Airlines generate revenue on an origin-destination basis, while their costs are generated on a flight segment basis, which makes for a very complicated business structure.
3. Organized labor. Poor labor-management relations raise costs and create a poor image with the traveling public.
4. High labor, capital, and fuel intensity. The costs of labor and new aircraft are very high across the industry, though money spent on fuel has decreased in part due to the use of more fuel-efficient aircraft.
5. High fixed costs and low marginal costs. Regardless of the number of tickets they sell, airlines still have to pay the high fixed costs of aircraft, labor, and maintenance facilities. This means that management can't quickly scale back the business when necessary. On the positive side, having low marginal costs means that airlines can generate revenue by filling empty seats on planes that are already going to be in the air.
6. High cyclicality and seasonality. Demand for leisure and business travel varies depending on the state of the economy and time of the day, week, and month.
7. Revenue vulnerability. Many factors external to an airline can affect its revenue, including new low-cost carriers entering a market, threats of terrorism and war, threats of strikes by labor, or government tax increases.
8. Destructive competition. Airlines sometimes sacrifice profits to retain market share.
9. Commodity products. Seats on flights are treated like commodities -- that is, it is difficult for one airline to charge a higher ticket price than another airline.
10. Vulnerability to weather and infrastructure. Even if bad weather closes only one major airport, the impact to business and scheduling is immediately felt worldwide. Vulnerabilities of infrastructure include limited availability of terminal slots in airports.
11. Uneven playing field. Worldwide, the airline industry contains companies of different levels of development and different levels of efficiency, operating under different economic and regulatory conditions, each receiving different amounts of government support or subsidies.
12. Extremely variable planning horizon. The airlines have to simultaneously conduct long-term and short-term planning. Building a fleet of airplanes takes years, for example, but pricing decisions have to happen within minutes.
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