Innovation in Aviation –The Sky is the Limit

by Jörgen Eriksson on December 29, 2012

Icarus and Daedalus“Never regret thy fall,
O Icarus of the fearless flight
For the greatest tragedy of them all
Is never to feel the burning light.”

– Oscar Wilde

The current state

There was a time when aviation was for the exclusive few. This time is being re-sought and popularized in a current television period drama about the pilots and flight attendants who once made Pan Am the most glamorous way to fly. However this was in the past and today the situation is different.

Today, as the transport of people and cargo across countries, continents and time zones becomes increasingly complex, airlines, travel agencies, airport owners, operators and investors are challenged to adapt and provide efficient aviation solutions. However the aviation industry is maybe the industry that is the most hit by globalization and amongst the most vulnerable to global and local shocks, like the SARS scare, wars, recession, financial crises and the like.

To catch up and stay ahead requires agile and bold leadership and a culture to innovate. How successful is the industry in doing so? That is the topic of this blog post.

Default templateAviation has changed the way people live and experience the world today. It facilitates international trade, world economic growth, talent attraction and migration, tourism and international investment.

But a history of exclusivity, regulation and government involvement has left the aviation industry burdened by trade protection, inefficient legacies and excess capacity.

Airlines helped to bring about globalisation, but their own industry is far from globalised. Instead of globe-spanning giants, the world has more than 200 flag-carriers and dozens of regional budget airlines, and of the carriers, only the innovative low-cost airlines make decent money whilst the traditional carriers struggles with buffers for contingencies, like cash reserves and hedging of major risks such as oil prices.

Flying above the clouds

The hardest hit in the aviation industry are the airlines. As the Economist reported in an article in April 2012, everyone else in the travel business makes money off the airlines. Airlines are wonderful generators of profit, for everyone except themselves.

Global Airlines profitsEven in good times airline margins are as thin as a boarding pass, and in recent years they have more often lost money (see chart).

Averaged over the past forty years, the net profit margin of the world’s airlines, taken together, has been a lousy 0.1%! By contrast, other areas of the travel business that depend on the airlines, such as aircraft-makers, travel agents, airports, caterers and maintenance firms, have done very nicely.

Many airline carriers are struggling, as we have written about in a previous blog post. One historic reason for the lack of profitability has been aggressive free-trade practice of loss leader strategy.

This is a tactic where a company, that already dominates a market in a capital-intense industry lowers fares below self-cost in order to force any new competitors out of business. For a long time this practice by itself resulted in low profits, and in the recent decade the new low-cost carriers have disrupted this business model by actually being able to fly at lower cost and yet remain profitable.

EasyjetThe low-cost carriers can do this as they have been created around a business model that treats air travel not as the exclusive treat it was historically but instead as a long distance “bus-service” with lower comfort.

Low-cost carriers pay lower salaries, standardize on one type of aircrafts and have fewer hubs than the national carriers, where the aircrafts return to the home base by the end of each day, This has a big impact in competitiveness, as the three top cost items for an airline are fuel, labour and maintenance.

The traditional airlines chronic unprofitability is in part the result of competition, especially from new low-cost carriers, unleashed by the steady deregulation of aviation since the 1970s. The emergence and growth of the no frills, low-cost carriers have radically altered the nature of competition within the industry.

But it is also due to two moves by the airlines, from the 1990s onwards, that in retrospect were strategic errors. One was to stop paying direct commissions to travel agents. The other was to set the reservation systems free to become, as the airlines now see it, profitable monsters that devour their parents.

Road signAt the dawn of the internet age, airlines assumed that the middlemen who came between them and their passengers were headed for extinction. Travellers would eventually buy tickets either from the airlines’ own websites or from price-comparison engines which hooked up directly to the airlines’ computers over the web. So why pay commissions to agents? And why continue to own reservation systems?

This turned out to be erroneous assumptions, as the travel agencies continue to thrive. Their success is driven by providing package trips, combinations of air travel, hotels and rental cars, etc., and other customized offerings.

The carriers are trying to fight back. In order to cut costs and increase performance airlines work constantly on fuel efficiency and on reducing turnaround time, the time from when an aircraft parks at the gate until it can pull out again with a new load of passengers, on business model and pricing innovations, on co-innovation, etc. These many smaller and larger adaptations can be seen as  important innovations, and they are crucial for competitiveness.  The carriers also charge more and higher ancillaries: all those extra charges for meals, checked bags, less-cramped seats and the like.

Other trends are the grouping of airlines around the three major airline alliances Star Alliance, Oneworld and and SkyTeam, which often is combined with waves of mergers and acquisitions. Alliances provide a network of connectivity and convenience for international passengers and international packages. Alliances also provide convenient marketing branding to facilitate travelers making inter-airline codeshare connections within countries. This branding goes as far as to even include unified aircraft liveries among member airlines.

The innovative few

The most ambitious airlines are spending billions to implement out-of-the-box thinking. Airlinetrends.com, an independent research agency focusing on global aviation, has published a report ranking the world’s 10 most innovative airlines. According to the ranking, the world’s top 10 innovative airlines are:

Airplane1. Korean Air
2. British Airways
3. Delta Air Lines
4. KLM
5. TAM (Brazil)
6. Qatar Airways
7. Virgin America
8. airBaltic
9. AirAsia
10. ANA (Japan)

The report can be downloaded by clicking on the link below:

The hardware

The shifts in global aviation affects builders of aircraft as well as buyers. Boeing and Airbus could lose their tight grip. Embraer in Brazil and Bombardier in Canada are moving up from smaller regional jets to big ones and Russia’s Irkut and China’s Comac are entering the international market for single-aisle airliners.

Ryanair has signed a co-operation deal with Comac, with a view to using it as an alternative to Boeing, its sole supplier. As aviation goes properly global, so might the aircraft manufacturing industry. Wherever you look, newcomers are muscling in on what was once a Western domain.

Embraer jetI met key people from Embraer at an event in Johannesburg earlier this year. They were from the company´s headquarters in São José dos Campos and they had a very optimistic view of Embraer´s future. It is easy to understand their optimism as Embraer has developed an innovative range of smaller jets that have blown turboprop and older small jets from competitors out of the skies.

Despite the competition, the manufacturers understand the importance of cooperating on new technologies. Airbus, Boeing, and Embraer have recently signed a memorandum of understanding to collaborate and co-innovate on the development of drop-in, affordable aviation biofuels. The three major manufacturers agreed to seek collaborative opportunities to speak in unity to government, biofuel producers, and other key stakeholders to support, promote, and accelerate the availability of sustainable new jet fuel sources. The significance of this agreement is substantial.

This type of continuous innovation is made possible because of the competitive market dynamics that are pushing each manufacturer to continuously improve their product performance and to try new ways to differentiate.

For the dominating companies Boeing and Airbus, manufacturing of aircrafts is today a collaborative effort of a large number of manufacturers making components. The video below that was published by Financial Times this week illustrates how this works.

Financial Times: Innovation makes Airbus wings fly


However, it may be that the next major product innovation in aircrafts comes from one of the smaller, aggressive companies from emerging markets
.

For Airbus and Boing, why would they create new aircraft that renders most of the carrier client’s fleets obsolete in one go when they have a comfortable hold of this market? Well, their market domination makes them prime targets to the risk of being disrupted, just as Motorola got disrupted by Nokia, that then got disrupted by Apple. and any such breakthrough is likely to come from outsiders…

Actors may come and go, but the long-term future for aviation looks bright. The historic iron law of aviation is that rising numbers of urban middle-class people will mean rising demand for air travel. As the developing economies now are in-fact developing and as much of Africa, Asia and Latin America lacks the road- and railway infrastructure that we take for granted in the western World, it is likely that aviation will have a even stronger role in transport for decades to come. For this, “innovation and an aligned value chain will be crucial components toward serving a growing aviation industry”, as IATA CEO Tony Tyler said at the IATA World Passenger Symposium in Abu Dhabi in October.

About Jörgen Eriksson :

Jörgen Eriksson is the founder of Bearing and is the Chairman of the firm since it was created. He has successfully expanded Bearing into covering projects on four continents. He is also Adjunct Professor of Innovation Management at the International University of Monaco and at Universitat Politècnica de Catalunya in Barcelona and he is an active member of the Founders Alliance organisation.

Working with consulting engagements across Bearings practices, he has over the past fifteen years participated in and supervised a large number of client projects, from innovation system development and place development and branding, to merger and acquisition assignments and leading edge research and business development activities for key clients.

His new book, Branding for Hooligans, will be published in 2015. It is about how innovation and branding are key survival factors in our modern times of hyper competitive markets.

Prior to Bearing, he was Director of Europe, Middle East, and Africa for Trema Treasury Management, a technology and consulting services provider, supplying financial software solutions for the global financial industry, Clients included The European Central Bank, Citibank, SEB, South African reserve Bank, Deutsche Bank, Abu Dhabi Investment Authority (ADIA), as well as many other large financial institutions and Fortune 500 companies.

Early in his career Eriksson was educated at the Stockholm School of Economics, where he studied economics, financial economics and philosophy. He then worked in Scandinavian investment banks and also for the Swedish Institute of National Defense Research.

You can contact Jörgen on e-mail jorgen.eriksson@bearing-consulting.com, connect on LinkedIn on http://fr.linkedin.com/pub/jörgen-eriksson/0/38/8a0/ and follow him on twitter on joreri508.

{ 2 comments… read them below or add one }

Dorian Glass Dorian Glass December 29, 2012 at 05:29

Hi Jorgen,
I knew when I saw the topic that this blog would be from you! Stunning blog, txs. – v well researched & great perspective.
I was quite surprised, firstly, to see Virgin no-where near #1 in ranking as regards innovation. And, a reminder came to me that Emirates, which is one of my favourite airlines together with Singapore Airlines, did not come in the top ten. Reason, probably, simply, is that Emirates does not “need” to make a profit, maily, and, possibly, due to it being a “marketing arm” of Dubai (“Inc.”). Strategy rules. Loss-leaders rule. So, the industry has become widely (& wildly!) complex.
SUCH interesting projects await us here… I dearly hope we have the opportunity to pioneer & leverage these realities & opportunities as you delineate above, here in S A / Africa / beyond. Can any other industry be more interesting? I doubt it…
A lovely day to you!
Warm rgds,
Dorian

Jörgen Eriksson Jörgen Eriksson January 3, 2013 at 21:11

🙂

I think Virgin are good at getting attention and development of the brand. I do like Virgin trains in the UK, but I have not been on the airline yet myself.

I agree on Emirates.

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