The Strive for Competitiveness: A Multiple Case Study of Airline Operations

Espen Krohn-Holm Brunvatne & Jens Rye

Student thesis: Master thesis

Abstract

The airline industry has been characterized by a tremendous and continuous growth in demand for its services over the past decades. Despite this, the industry as a whole has in the same period suffered from both low and cyclical profit margins. The progressive deregulation that begun in the US in the late 1970s opened the industry for new-entrants, and with their innovative business models these airlines started to undermine the existing carriers’ competitive basis. The challenges related to this, as well as the industry’s susceptibility to external events, have resulted in a highly complex and intricate industry, making the task of matching supply and demand for its products and services utterly difficult. Accordingly, the airline industry is viewed as an extremely competitive industry. When faced with a more competitive environment, companies tend to look to their operations function, as diverging operational emphasis often result in different forms of competitiveness. Within the airline industry, a distinction is usually made between full service network carriers (FSNCs) on one side and low-cost carriers (LCCs) on the other. The former refers to carriers that operate according to a hub-and-spoke network, flying passengers in from various cities, referred to as spokes, to a main hub, before embarking on a connecting flight to the final destination. The latter type of carriers operates direct point-to-point flights between popular destinations, and by minimizing operating costs they are able to offer fare levels significantly below their FSNC counterparts. These two different business models represent diverging operational emphasis. Although the disparities between FSNCs and LCCs are most apparent, we have also discovered major differences within the two models. By conducting a multiple case study, utilizing Slack, Chambers and Johnston’s (2010) five different performance objectives, this thesis has examined how six different airlines emphasize diverging aspects of their operations in a constant strive to improve their competitiveness. These five performance dimensions are referred to as quality, speed, dependability, flexibility and cost efficiency, and together with their associated sub indicators they form a comprehensive framework for assessing the different airlines operations. The analysis demonstrates that FSNCs operations seem to be characterized by a greater emphasis on flexibility and quality. However, the analysis has demonstrated that the latter focus does not seem to yield the corresponding results in terms of passenger evaluations. Moreover, the emphasis on these two aspects appears to result in rather complex operations, which is reflected in their poor cost efficiency. LCCs, however, appear to be characterized by a greater emphasis on both speed and dependability, with the former seemingly affecting the latter. Moreover, these carriers seem to outperform the FSNCs in terms of cost efficiency. Subsequently, this diverging operational emphasis has been linked with the carriers’ financial and market share performance. This revealed that the entire sample of FSNCs currently operate in an unprofitable manner, with operating costs surpassing their passenger revenues. One of the main contributors to this seem to be labor costs, as FSNCs’ operations require a substantially higher labor force due to their complexity. On the contrary, all the LCCs in the case sample seem to operate profitably although to a varying degree. Moreover, the market share growth of LCCs stemming from both air travel commoditization and recent years signs of traditional FSNC passengers shifting air travel preferences, implies that the current state of the FSNC model is under immense pressure. However, FSNCs still seem to serve such a substantial proportion of the demand in terms of both ASKs and RPKs produced, as well as in terms of passengers carried, that LCCs neither currently nor in the foreseeable future are able to serve such a substantial demand. Nevertheless, the FSNC model seems to be in need several alterations in order to return to profitability. The challenge for the LCCs going forward appears to be how to expand their network, possibly to include long-haul routes, while simultaneously maintaining or reducing their cost base.

EducationsMSc in Strategy, Organization and Leadership, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2013
Number of pages118