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GLOBAL STRATEGIES OF THE AIRLINE INDUSTRY: A CASE STUDY OF RYANAIR, EMIRATES, NETJETS, AND THOMAS COOK
ГЛОБАЛЬНЫЕ СТРАТЕГИИ АВИАЦИОННОЙ ИНДУСТРИИ: ИССЛЕДОВАНИЕ RYANAIR, EMIRATES, NETJETS И THOMAS COOK
УДК 655.7.025
Ameyaw Abdul-Kadir, Master's Student 2nd year, Graduate School of Management, Saint Petersburg State University. St. Petersburg, Russia Ameyaw Ahmed Sadat, Bachelor's Student 1st year, Graduate School of Management, St. Petersburg University. St. Petersburg, Russia Ameyaw Adu Sadick, Dormaa Senior High School. Ghana Амеяо Абдул-Кадир, магистр 2 курс, Высшая Школа Менеджмент, Санкт-Петербургский Государственный Университет, Россия, г. Санкт-Петербург Амеяо Ахмед Садат, Студент 1 курс, Высшая Школа Менеджмент, Санкт-Петербургский Государственный Университет, Россия, г. Санкт-Петербург Амеяо Аду Садик, Дормаа Высшая Школа. Гана
Abstract: Despite the airline industry's immense economic, political, and societal importance, it is structurally unattractive, because it constitutes the least profitable industry within the aviation industry. Although strong rivalry and external challenges led to various airline bankruptcies in the past years, sustainable growth stories of airlines are still observable. This research identifies firm-specific advantages and sources of international advantages of well-established players, that allow them to be profitable. These advantages were derived from the analysis of four airlines with a different strategic focus, which are Ryanair, Emirates, NetJets, and Thomas Cook Group. We found that for an airline to be successful in this extremely competitive industry, it needs to have a clear strategy as suggested by Porter (2008). It also needs to internationalize its operations by choosing a core strategy from the rule of four: augment, aggregate, agglomerate, and arbitrage as recommended by Collis (2014).
Аннотация: несмотря на огромное экономическое, политическое и общественное значение авиационной отрасли, она структурно непривлекательна, поскольку представляет собой наименее прибыльную в авиационной отрасли. Хотя сильная конкуренция и внешние проблемы привели к различным банкротствам авиакомпаний в последние годы, случаи устойчивого роста авиакомпаний по-прежнему наблюдаются. Это исследование выявляет специфические для фирмы преимущества и источники международных преимуществ известных игроков, которые позволяют им быть
прибыльными. Эти преимущества были получены в результате анализа четырех авиакомпаний с различной стратегической направленностью: Ryanair, Emirates, NetJets и Thomas Cook Group. Было обнаружено, что для того, чтобы авиакомпания достигла успеха в этой чрезвычайно конкурентной отрасли, ей необходимо иметь четкую стратегию, предложенную Портером (2008). Он также должен интернационализировать свои операции, выбрав основную стратегию из правила четырех: увеличение, агрегирование, агломерация и арбитраж, как рекомендовано Коллис (2014).
Keywords: Airline industry, the rule of four, Emirates, Ryanair, NetJets, Thomas Cook.
Ключевые слова: авиакомпания, правило четырех, Эмираты, Ryanair, NetJets, Томас Кук.
1. INTRODUCTION
Despite repeated shocks from terrorism, diseases, and recessions, there has been a significant increase in the number of passengers and cargo volumes. The industry, which used to be heavily regulated, has experienced strong deregulation: first in the 1970s when the US liberalized their domestic market and expanded it internationally through the 'Open Skies' policy in the 1990s (U.S. Department of State, 1992), and then in the mid-1990s when Europe created its single aviation market (European Council, 1999). This transformation attracted many new entrants and induced intense competition (IATA, 2012).
Deregulation dramatically changed the structure of the industry by allowing competition (Morrison & Winston, 2010). Belobaba et. al., (2015) argue that competition in the industry forced airlines to provide better services at affordable prices than they previously used to. Despite the low profitability in the industry, a better business strategy adopted by many airlines makes their operations sustainable in the long-run. Low-cost carriers (LCCs) have been able to compete on price due to their lower marginal cost as compared to full cost carries (Chiu et. al., 2016).
To the best of our knowledge, none of the papers however, compares and contrasts the internationalization strategies of airlines, using the case study method in a way that it covers all sectors of the airline industry.
Thus, this paper aims to analyze the internationalization strategies of some major airlines by responding to the research question:
What are the firm-specific advantages and sources of international advantages of well-established airlines that allow them to be profitable in an unattractive industry?
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2. RESEARCH METHODOLOGY
This study uses a qualitative exploratory method, using case studies of four airlines. According to existing literature (example, Peng, 2014; Porter 2008), the basis for successful performance, in the long run, is a sustainable competitive advantage. This sustainable competitive advantage can be achieved by employing resources that are, according to the VRIO-Framework (Barney, 1991), valuable, rare, not easy to imitate, and exploitable. Therefore, firms that are successful in their home market gain a domestic competitive advantage by employing resource-based advantages also described as firm-specific advantages (Rugman & Verbeke, 2003).
For identification of the firm-specific advantages (FSAs) and sources of international advantages to answer the research question, four companies were selected based on Porter's (1985, p.5) generic strategies.
Uniqueness perceived by
customer
Low cost position
a; od
Industry wide
5=5 Particular segment only
Differentiation Cost Leadership
A
Emirates RYAN AIR
Thomas Cook
Focus
NETJETS'
Fig. 1. Case Selection Based on Porter's Generic Strategies (Porter, 1985) This approach allowed a broad overview of differentiated methods chosen by airlines to tackle their unattractive environment. While Ryanair provided the perspective of a cost leader, Emirates' full-service carrier was selected as a differentiator, NetJets' fractional ownership concept follows a focus approach, whereas the Thomas Cook Group was selected as a bankruptcy case that lacked a clear strategy or "stuck in the middle" (Porter, 1985). The intention of including Thomas Cook in the analysis is to increase understanding of the advantages that are decisive in the airline industry to be profitable by contrasting strategies taken by a failed airline to successful ones. These four airlines were then subjected to methodologically identical analyses, which allowed a comparison of their advantages within the final summary.
Firms can create value through international activities, therefore, the impact of their initial FSAs on their internationalization strategies was analyzed to assess how these firms were able to further grow their advantages using the "The Rule of Four" framework (Collis, 2014). Furthermore, the industry challenges affecting the focal airlines were inspected and then compared to the introduced advantages in a conclusion per case study.
Data were collected through secondary sources such as the International Air Transport Association (IATA), annual reports, reports from consulting firms, market research reports of focal airlines, and analysis reports of CAPA.
3. CASE STUDIES
The case study allows exploring the core FSAs (Rugman & Verbeke, 2003), internationalization strategies using Collis's framework, as well as the challenges and competitive advantages driving the profitability of the focal airlines. These FSAs can influence the way firms are configured to create value across countries.
3.1. Ryanair
Despite the increase of mergers and acquisitions in the European airline industry, Ryanair continues to be the largest LLC and the largest carrier by the number of passengers in Europe. The firm was able to augment its FSA through international expansion (Collis, 2014) thereby, increasing both the number of passengers they could serve and the firm's profit.
The airline's FSAs consisted of smart pricing and cost efficiency by selecting secondary airports, having a standardized fleet and strategic routing, and unbundling their products and services. The unbundling of the traditional product meant that passengers had to pay extra for snacks, drinks, and checked-in luggage. The development of FSAs was further facilitated by having a standardized fleet of aircraft. Emua (2018) argues that this was relevant for the customers in the target market as it reduced the flight price. From a counter perspective, it also decreased the maintenance costs and raised fuel efficiency as more passengers were served in larger aircraft for the short-haul and point-to-point routes. Besides, Ryanair enforced the FSAs by targeting only regional, secondary airports as these were less inclined to be used by other airlines than major hubs. Therefore, resulting in low airport-related costs. The Collis framework, in this case, refers to how Ryanair used these FSAs to augment and aggregate their product to other countries to achieve global efficiency and scale.
Firms who expand their scope can exploit both economies of scale and experience (Collis, 2014). The expansion to Europe enabled Ryanair to receive the volume of passengers it could not obtain in the domestic market. Diaconu (2012) argues that the unbundled product from Ryanair was unique as no other airline had
offered something similar before and to a low price. Collis (2014) claims that offering solely one type of product allowed Ryanair to achieve global efficiency and economies of scale which would not be possible if they adhered to local responsiveness.
However, in recent years, more airlines have been acquired and merged with others which poses a threat to Ryanair. Examples of such are Lufthansa acquiring Air Berlin and Eurowings and offering low flight fares (CAPA, 2018b). Thereby, increasing the intensity of competition as well as saturation in Central Europe. In response to the consolidation and saturation, Ryanair acquired Laudamotion and partnered up with the Maltese government for the JV Malta Air in 2019 (Ryanair, 2019a; Ryanair, 2019c). This enabled Ryanair to expand to more countries as these two had prior experience of operating in Eastern Europe and Northern Africa. Therefore, "Aggregation" allows Ryanair to achieve not only a larger scale but also simplicity from offering a standardized product (Collis, 2014; Popova, 2015).
Despite the actions to remain profitable, these actions may be insufficient for the future as Ryanair encounter economic, political, and environmental challenges. Travelers are becoming more conscious of the impact their travel habits have on the environment. It is also reflected on the travel taxes which are levied per passenger several European governments have enforced (Asen, 2019). This would indicate that ground transportation may be an increasing substitute for air travel. The chances for people to fly with regards to current climate challenges would appear to be slim, but Ryanair's air traffic grew by 9% in the 2019 physical year which reinforces the idea that current travel paradigms remain unchanged (Ryanair, 2019b). Conversely, Brexit could potentially impact Ryanair's financial condition as approximately 22% of revenue in FY 2019 came from the UK. Brexit also poses regulatory challenges regarding open-air transport and taxes (Ryanair, 2019b). Similarly, the volatility of oil prices is subject to political tension. This poses a major risk for Ryanair as approximately 40 % of their operating costs are fuel expenditures (Ryanair, 2019c). Finally, the spread of COVID-19, especially around the world, may cause a reduction in revenue and profitability if it isn't sustained (IATA, 2020).
3.2. Emirates
Emirates Airline is the largest airline in the Middle East and the world's fourth-largest by scheduled revenue passenger-kilometers flown. With a wide range of portfolios, it has operations ranging from cargo activities run by Emirates SkyCargo, airport, and tour operator services.
Peng (2014) argues that superior access to CSAs is an FSA. Therefore, one of the key FSAs of Emirates is the superior access to UAE's CSA. Being a state-owned enterprise (SOE), the airline is able to enjoy all the benefits of running most of its
operations from Dubai, which is one of the leading tourist destinations and a hub for businesses (FT, 2013). With a long haul to long haul business model, passengers are flown in large numbers from different destinations into a central hub in Dubai and reconnected to other flights to their destination. With this type of business model, the location of the Emirates hub is extremely vital to its success. Emirates also benefits from the low landing, parking, catering, and handling charges the company pays at its Dubai hub. Even though pricing is nondiscriminatory, Emirates benefits the most since its aircraft spend the most time at the Dubai International Airport. The backing of the Dubai government towards Emirates' growth strategy allows the airline to take risk.
Emirates gains international advantages through the "Arbitrage" strategy by exploiting the factor cost advantage in developing countries (Collis, 2014). The airline sets up call centers in India and South Africa to handle calls from all over the world, which reduces cost (Bhasin, 2019). As a result, the airline can exploit the factor cost advantage of foreign countries and reduce operating costs while increasing efficiency.
The airline also pursues an "Aggregation" strategy. Emirates SkyCargo takes advantage of its existing cargo capacity of the passenger fleets, through the Emirates passenger network which enables Emirates SkyCargo access to additional 100 destinations. Emirates has a global presence, which allows them to provide service to customers by leveraging its global scope while maintaining the same service. Global- scale and coverage increase market share and achieve economies of scale. Emirates' strategic decision to reposition itself as a global carrier enables air travelers to bypass traditional airline hubs in Europe and North America.
The biggest threat to Emirates' growth, however, is Dubai's airport infrastructure, which is struggling to keep up with the airline's expansion (IATA, 2019). Regional instability also poses a threat but the UAE has reaped the economic benefit of not being affected by the revolts in the Arabian Peninsula, popular known as the Arab spring. The outbreak of the COVID-19 virus which originated from Wuhan, China has had the highest impact on air travel within the Asia pacific. This has reduced demand and revenue in the world and has forced the Emirates to suspend operations for the time being (IATA, 2020).
3.3. NetJets
In 1986, NetJets invented the concept of fractional ownership for aircraft as a value proposition that merges the convenience of the private jet traveling with the benefits of outsourcing maintenance and crew recruiting to a third-party provider (Kim & Mauborgne, 2005). In this niche, NetJets operated as a monopolist for nine years, as the first competitor joined the market only in 1995 (Flexjet, 2015). This
monopolistic situation enabled NetJets to carry the derived first-mover advantage up to its earliest international expansion in 1996. The first-mover advantage of the firm included the opportunity to create significant switching costs due to the intensive initial investment costumers had pledged and the establishment of capabilities in managing the flight schedule of a fleet that is fractionally shared among its owners before any other organization could (NetJets, 2019).
When NetJets first expanded its operations to Europe in 1996, it was able to transfer its FSA of being the pioneer in fractional ownership for aircraft to another market and augment the European product space through its innovative concept and thereby grow its business outside of the USA. According to Collis (2014), the source of international advantage "Augmentation" is accompanied by the critical decision of efficiently offering one standardized product or adapting to local preferences. As the customers of private jets have a similar demand across borders, NetJets was able to focus on efficiency by offering the same product in all its markets (Copley, 2019).
Just in time when NetJets' FSA started to erode due to the growing competition, Berkshire Hathaway acquired the organization in 1998 and created a new competitive advantage due to granting interest-free loans to its newly bought organization. NetJets invested the capital into a business expansion by extending its aircraft fleet and through further market entries (Whyte, 2018). Enlarging its business and therefore using the source of international advantage "Aggregation", allowed the firm to create additional advantages that it could transfer back to its domestic market. Firstly, the larger fleet eased meeting the promised service level of 10-hour upfront flight reservations through more available aircraft on hand. Additionally, the global coverage and their international customer base enhanced efficiency (Whyte, 2018).
As part of the private jet industry, NetJets is pressured by reputational challenges related to sustainability issues, as well as customers' cost-saving measures during economic recessions (Deloitte, 2019). These aspects are specially strengthened as the passengers on NetJets' aircraft are often board members of corporate customers, adopting the values and strategic roadmaps of their firms (Crow et al. 2016), which could conflict with NetJets' inefficient means of travel. Additionally, the initial investments customers conduct when acquiring the fraction of an aircraft, require certain confidence into their future solvency (Deloitte, 2019). Especially for corporate customers, these investments take place outside of their core value creation and therefore require a specific certainty to be justified. Any source of uncertainty, based on global tensions, such as trade wars, pandemics like COVID-19 could harm this confidence and therefore lead to investment cancellations.
3.4. Thomas Cook
Thomas Cook Group was the second largest vertically integrated travel group in Europe and the world's pioneering company in mass tourism due to its invention of package travel. Mergers and acquisitions (M&A) played a major role in Thomas Cook's internationalization. These M&A transactions, however, contributed to a large extent to Thomas Cook's high debt burden (Thomas Cook, 2018). The airline was not profitable in the last eight years, leading to the refusal of another loan and the airline's insolvency in September 2019.
Before the deregulation of the European Aviation market in 1997, Thomas Cook's FSA had been its vertically integrated operations as they enabled an efficient cost structure. Due to its broad network of travel agencies, its charter airline and, strategic alliances with hotel chains, Thomas Cook was able to offer low-priced all-inclusive travel packages.
The deregulation of the European market led to the entry of LCCs which contributed largely to Thomas Cook's declining customer basis (CAPA, 2018). Therefore, Thomas Cook internationalized to enlarge its customer basis through the "Aggregation" strategy. By deciding for many countries, which increases scale, Thomas Cook was able to enlarge its customer basis, because a larger scale increases capacity, which in turn allows for an expansion of the route network. This enabled building economies of scale and thereby decreased fixed cost.
In 2013, Thomas Cook shifted its focus to the "Agglomeration" advantage by merging the formerly separated airline segments into one unit. The reason for this stronger internal collaboration between the globally dispersed activities was to further decrease costs by realizing synergies in the supporting functions, such as purchasing, and to increase learning and knowledge transfer between the airline segments. Agglomerating the supporting functions into one unit made global coordination possible, which increased synergies and thereby lead to reduced costs.
The key challenge to Thomas Cook was the strong competition from LCC after the deregulation (CAPA, 2018). The business model of LCC allowed for even lower overall costs, enabling them to offer more competitive prices. Therefore, the LCC became the preferred carriers for intra-European journeys and traditional charter destinations. Furthermore, LCCs imitated parts of Thomas Cook's business model by entering into strategic alliances for travel-related services (CAPA, 2018). This imitation led to the erosion of Thomas Cook's FSA.
A decline in demand for standardized all-inclusive travel packages caused by an increase in independent travel as well as a shift towards the online booking made Thomas Cook's services and a broad network of travel agencies less relevant (Kaminski-Morrow, 2019). Uncertainties arising from Brexit had implications for
Thomas Cook's UK Airline as a loss of access to the European Single Aviation Market results in restricted traffic rights and increased airfares (CAPA, 2018).
4. RESULTS OF THE CASE STUDIES
Ryanair has strong FSAs that are leveraged and still being transferred to other countries. However, it is shown that competition is increasing in varying levels across regions (CAPA, 2018; Ryanair, 2019). The recent acquisition and JV could be seen as key characteristics as to how Ryanair intends to overcome current challenges. Augmentation and aggregation hold similar expectations of continuous global efficiency and scale (Collis, 2014). However, the European airline industry is slowly changing. Thereby, increasing the limitations to Ryanair's future growth.
Emirates' business model of a long haul to long haul requires it to have superior access to CSAs to make it profitable. With Dubai being the perfect location as well as the support from the government, the company is able to take risks related to its growth strategy that many other airlines are not willing to take. Emirates arbitraged the factor cost advantages in other countries. On the demand side, the company aggregates through global coverage FDI and alliances to benefit from scale. Emirates is faced with intense competition, the volatility of oil prices, political and economic tensions in the Middle East (Reley, 2019). Nevertheless, the challenges are surpassed due to their differentiation strategy of providing quality air service at very competitive prices.
NetJets had a market share of 64% in its segment in 2018 and is forecasted to further grow its flight hours by 6% (NetJets, 2019). These results show how its prior advantage of being a pioneer and the later advantage of exclusive access to capital outweigh the mentioned challenges. Besides the advantages of its operating model, the economic rationale of its value proposition for customers, who do require private jets flights despite the reputational and financial drawbacks, enables NetJets to continuously attract customers worldwide.
The former sustainable FSA of Thomas Cook turned into a temporary competitive advantage after the deregulation of the European market, because the deregulation made it easier to imitate Thomas Cook's FSA. This temporary competitive advantage was eroded after some time by LCCs, as their business model allowed them to take over the cost-efficiency advantage of Thomas Cook, which no longer had a clear strategy according to Porter's Generic strategies and was "stuck in the middle" because it failed to develop a new FSA. The absence of a clear strategy and FSA after the deregulation, therefore, led to Thomas Cook's collapse in 2019.
One Location
NETJETS Gne Product RYAN AIR ~
One Country Aggregate Many Countries,
Scope m
m
Emirates Thomas
Cook
Fig. 2. Application of all the case studies to "the rule offour" framework
One trend that can be realized from the case study is that all focal firms including Thomas cook used the "Aggregation" strategy as part of their internationalization process. It is seen that all airlines took the FSAs that allow them to be successful in their home country or region and extended that to different locations. What that proves is that, within the airline industry, it is vital to have a wider customer base so airlines strategize by going for scale which is shown through their global strategies. It is therefore apparent that aggregating operations by expanding to different countries using the same business model to achieve global efficiency and scale are vital to the success of an airline.
Notwithstanding the key challenges affecting the industry, Ryanair, Emirates, and NetJets are making a profit. Therefore, successful airlines benefit from having clear strategies and access to capital that allows them to scale internationally (efficiency-seeking), which is essential to increase low margins.
The industry analysis reveals an intense rivalry within the airline industry, based on high price transparency, low switching cost, and limited differentiation options, thereby leading to extremely low profitability (IATA, 2019). Current challenges in the industry such as consumer consciousness, global tensions, and increased regulations further lower the profitability of the airline industry.
Combining the results of all four airline case studies allows detecting common sources of advantages that airlines can pursue to increase profitability despite their unattractive industry. Based on the case studies conducted, three key recommendations for airlines were hereby attained. Firstly, organizations need a
5. CONCLUSION
strongly differentiated value proposition that can be allocated to one of Porter's generic strategies. Secondly, due to the low margins per passenger, it is essential to increase scale by aggregating internationally, as this allows for economies of scale and therefore decreases the cost per customer. Lastly, the intensive investment into a larger scale is heavily facilitated by exclusive access to inexpensive capital, such as governmental subsidies.
It can be concluded that airlines benefit from setting a clear strategy according to Porter's Generic strategies. Due to the cost-intensive business, Airlines need to build scale internationally, for example through alliances, to achieve efficiencies, which is essential to increase the low margins. The investment-intensity of the airline industry also makes exclusive access to capital, such as through subsidies, crucial for future growth. As major political trends might further decrease the industry's profitability, it becomes even more important to focus on a specific strategy and to have facilitated access to inexpensive capital that is used to increase scale to secure and raise the low margin.
As with all research, there are bound to be limitations that need to be acknowledged. The Collis framework, in this case, focuses on a short-term time frame. Although this time frame is helpful to determine the sustainability of an advantage, it is difficult to predict future events. The Collis framework also eliminates any considerations regarding uncertainty that originates from operating environments such as political, economic, environmental, and actors in general that can influence the future. Additionally, the reports of Ryanair, Emirates, and NetJets describe how the future could look and is most likely to be attributed to their optimistic assumptions and bounded rationality. Consequently, it is not possible to currently determine the actual sustainability of the FSAs or growth of these airlines in regards to recent challenges.
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