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                                                                                    between the outsourcer (the airline)

The Airline Business Model                                                          and the different suppliers. In my
                                                                                    thesis, the creation of these
                                                                                    networks is explained from a core
Heading towards virtualization or integration                                       competence point of view. Another
                                                                                    view on this issue is that
                                                                                    outsourcing activities normally take
“Heading towards virtualization or integration” implies a strategic                 place when the costs to do this are
choice between two, metaphorical directions: on the one hand the                    lower than the internal costs (from a
direction of virtualisation, where the airline separates non-essential              transaction costs viewpoint). The
activities from the core activity. On the other hand the direction of               two business models represent the
integration where the airline groups those non-essential activities                 framework in which this
with the core activity. Rigas Doganis, author of the book “The airline              investigation takes place. Taking
industry in the 21st century”, refers to a virtual airline model and an             this into account does not mean that
aviation business model respectively. The aim of this thesis, based                 I ignore the existence of (more
on those two models, is to find out if there are any competitive                    obvious) intermediate models. On
differences as a result of contrasting approaches by airlines                       the contrary, the continuum of
towards the defining of this core activity. In attempting to realise                virtualization serves as a guideline:
this aim I had to ask myself two key questions: What is this core                   virtualization represents the degree
activity? And do different approaches in defining this core activity                of outsourced activities by an
affect the competitive climate in the airline industry?                             airline. A low degree implies that
                                                                                    less or no activities, apart from the
By Laurens Bomhof                                                                   most essential activity, are being
                                                                                    outsourced. However, a high degree
Which interpretation should be            a necessity for airlines. In this case    implies that almost all activities are
given to a core activity? Based on        important issues are; the growing         being outsourced.
the core competence theory of             difficulties in obtaining the right
Prahalad and Hamel, together with         slots at airports and the changes in      This theoretical knowledge gives me
other, different economical               the environment airlines are              the opportunity to study four
approaches towards this theory, I         currently operating in - such as          airlines, in the course of which, in
created a core competence checklist.      regulations, new entrants and new         order to answer the above question I
This checklist gives, based on nine       alliances. The availability of a          must pose two further questions:
criteria/conditions, a further insight    network and / or effective network        which activities are organised in
into the concept of the core              management is not the only issue.         what way and which are part of the
competence. The core activity,            An airline needs the necessary            organisational framework?
assumed in this thesis, is created out    insights into the marketing               Secondly, what is the highest degree
of the available core                     implications that a network has -         of virtualization based on this study
competenc(i)e(s): the realization of      specifically: the so called hub-and-      and in what way does it correspond
these core competencies will lead to      spoke network. There are synergy          to the theory? The choice of an
core products. The creation of these      effects between the aviation-related      airline to organise activities
core products gives an organisation       marketing instruments in a hub-and-       internally or in another way is based
direction in defining those activities    spoke network. Examples are; the          on two conditions, the actual aim
it thinks are most essential.             positive interrelations between code      (priorities) an airline has and the
Regarding this thesis, it should be       sharing, frequent flyer programs and      available core competencies. In this
asked which specific activity an          global distribution systems.              thesis I defined four possible
airline thinks is most essential. At      On this point, upon which I stated        structures: activities which are part
this important stage I disagree with      effective network management as           of the internal organisation;
the assumption Doganis made by            the most essential activity, an airline   activities which are formed by
regarding the so-called ‘flight           will decide if it will expand or          means of a unique outsource
operations’ as the airlines’ core         narrow the scope of core activities.      relation; activities which are formed
activity. I believe the rationalisation   At this stage a link is made between      by means of a profit centre or
and exploitation of the ‘physical’        the two business models postulated        activities that are executed by
transport network should be the           by Doganis: scope expansion and           suppliers because those activities
most essential activity undertaken        integration, are shown in the             aren’t part of the organisation.
by each airline. Network                  aviation business model where             British Airways, as part of this
management is the core of each            narrowing of this same scope,             airline study, only allows a small
airline organisation. This belief is      outsourcing, is shown in the virtual      amount of activities to be executed
based on two conditions; the              airline model. This last model            by specialised suppliers and
dynamics of the airline industry          particularly, implies the existence of    integrates all the other activities in
make effective network management         ‘organisational’ networks: networks       different ways. This means that

Aerlines Magazine e-zine edition, Issue 25                                                                               1
network management, e-commerce            Charleroi and Frankfurt Hahn serve        difficult to compensate for. The
activities and the so-called leisure      as mini-hubs) as well as its IT-          presence of less essential activities
activities are all part of British        services should be viewed as              (aviation business model) or the lack
Airways’ internal organisation.           essential parts of the internal           of it (virtual airline model) does
Cargo, engineering and consulting         framework. Cost reductions are            NOT guarantee compensation for
activities are all formed under three     normally created by outsourcing           losses in the core activity. The
separate profit centres. They do not      activities, like maintenance,             economic basis is fragile.
only serve British Airways but also       materials & repair, ground services       Competitive differences could arise
other organisations. Finally catering     and catering.                             as a result of virtualization
(Gate Gourmet and ALPHA                                                             differences between airlines: a high
Catering) and the ground services         In conclusion, based on these four        degree of virtualization could lead
are those activities that are executed    small airline studies, a network and      to lower cost levels which, in its
by the specialised suppliers.             its rationalisation and exploitation      way, has an impact on prices. A low
The mixed-model form British              need to be viewed as the most             degree (read: a high degree of
Airways uses, can also be found in        essential part of an airline, THE         integration) could lead to a better
the way in which KLM organises its        core activity. It also needs to be said   monitoring of these cost levels. This
activities. ‘Passage’ and ‘E-             that, apart from the Lufthansa study,     could indirectly have a positive
commerce’ are part of the internal        e-commerce activities form an             effect on the prices as well.
organisation. Cargo activities as         important part of the internal            A second cause can be found in the
well as ‘Engineering &                    organisation. I like to call those        efficiency of price agreements: the
Maintenance’ and ground services          activities the ‘kerosine of a             use of a virtual airline model implies
are liberalised as profit centres. Like   virtualization process’. These            a free choice of suppliers, which, in
British Airways, catering is              activities give airlines, notably not     turn will automatically lead to more
outsourced. This also counts for          only the low cost airlines, the           efficient price agreements. This in
handling services.                        chance to simplify, accelerate and        comparison with the inefficient
The organisational framework of           even eliminate (most) critical and        price agreements in airlines who use
Lufthansa shows the most                  operational processes. In this way        the model of the aviation business,
similarities with the aviation            airlines can attempt to reduce their      which means they have to depend on
business model proposed by                cost levels. Obviously competitive        ‘fixed’ suppliers.
Doganis. The ‘Passenger Business’         differences will arise. What is           A third cause comes from the
should be viewed as the most              important is that a specific airline      separate profit centres in the
essential activity. Together with the     should recognise the critical link        aviation business model.
underlying network and its                between the exploitation of e-            Competitive differences could arise
rationalisation and exploitation this     commerce and the degree of                as a result of economies of scale the
business unit is the core of the          virtualization. This could result in a    separate profit centres have. This
Lufthansa Group. The passenger            smaller activity-base. However, to        could lead to higher and stronger
business unit is, like the other six      what extent does the model of the         competitiveness and so realisation
business units within the group -         near- virtual airline preserve itself     of more efficiency.
Logistics; Maintenance, Repair &          during an economic recession? In
Overhaul; Catering; Leisure Travel;       other
IT & Consulting Services and              words: is
Ground Services - a specialised and       there an
profit seeking company. Those six         economic
business units not only serve units       basis that
within the Lufthansa Group, they          could
also function as external suppliers.      compensat
This means that each unit has its         e for the
own specialised market.                   financial
Finally, in studying Ryanair’s            losses during a recession? The            It needs to be said that, based on the
organisational structure I have found     answer to this question can only be       four airline studies, the difficulty
that, as a result of the high degree of   found by looking more closely at the      lies in recognising and defining the
virtualization, by means of               use of the aviation business model.       competitive consequences as a result
outsourcing activities to external        It is said that the use of this model     of an unequal defining of the core
suppliers, Ryanair is capable of          has the advantage that it protects an     activity or activities. Another
creating and sustaining relatively        airline from the cyclical character of    difficulty lies in the comparison of
lower cost levels. This explains the      the aviation industry because there       British Airways and KLM: two
choice for the ‘low cost-no frills’       will be a leverage effect between the     airlines in this thesis that show the
airline in this thesis. Soon it became    core activity and the activities not      most similarities. Usually, just as in
clear Ryanair is not a complete           related to this core activity. But is     this thesis, the framework has been
virtual airline but more a near           this true? Normally those less            created by two ‘extremes’,
virtual airline: Ryanair’s multi-base     essential activities will be, to a        Lufthansa and Ryanair.
network (the secondary airports of        certain degree, related to the core
Dublin, Shannon, Glasgow                  activity, which means that a loss in
Prestwick, London Stansted, Brussel       the core activity is much more

Aerlines Magazine e-zine edition, Issue 25                                                                              2

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