Industry Disruptors On The Rise

Disruptive innovation has historic significance in many industries, and perhaps greater significance in the airline industry than first meets the eye. Can airlines expect innovators outside of the airline industry to continue to disrupt the status quo?

Disruptive innovation is not new in the business world, not even in the airline industry. In their early  years, airlines essentially disrupted other forms of transportation. Consider what airlines such as  Pan American (PanAm), BOAC (British Overseas Airways Corp.) and Qantas did to the intercontinental passenger/shipping sector.

Entrepreneurial-spirited businessmen like PanAm’s Juan Trippe integrated the necessary ingredients to offer service in intercontinental markets by:

  • Encouraging airplane makers to manufacture the needed aircraft,
  • Working with governments to develop the needed bilateral agreements,
  • Driving airport operators to develop landing strips,
  • Partnering with electronics companies to develop the essential navigational aids.

In North America, think about what airlines such as American Airlines, Trans World Airlines (TWA) and United Airlines did to the railroad industry. How about what airlines such as Southwest did to Greyhound Lines’ business in the United States, and what GOL and Azul did to the bus services in Brazil?

These are examples of disruptive innovation by which air-transportation services were made affordable and accessible for travelers on the lower end of the travel pyramid.

Additional Airline Innovations

Extending airlines’ long history of innovation further, there have been developments including interline systems (so a traveler can fly around the world on one ticket, paid for in one currency at one location, charged on one credit card), deployment of long-range aircraft to provide nonstop service, hub-and-spoke systems to provide higher frequencies in thinner markets, revenue management, multiclass cabins and fares to appeal to different segments, and alliances to extend the number of destinations offered.

Then there’s electronic ticketing, online shopping, merchandising, self-service check-in systems, in-flight entertainment and connectivity, boarding passes on mobile phones, ground transportation for passengers traveling in premium cabins, and pickup and delivery of bags. All have been important incremental improvements.

Southwest Disrupts Greyhound

The industry’s first low-cost carrier, Southwest Airlines, provided fares low enough to compete with and take business from U.S.-based bus transport provider Greyhound Lines. That was one of the early examples of disruptive innovation in the airline industry.

Low-Cost Innovations

A prevalence of high fares, combined with a history of over-regulation, attracted lower-fare airlines to enter the marketplace. The low-cost sector introduced lower fares, service in secondary short-, medium- and long-haul markets, and unbundled fares.

Within about two decades, the global growth of low-cost carriers accelerated and morphed into a fundamental shift in the entire industry.

Persian Gulf Region

Today, the financially powerful Persian Gulf-based airlines offer global service through their own, almost ideally-located, mega hubs, but with higher levels of scale and density and wider price/service options. To entice budget-minded travelers, these carriers offer extensive service to segments to and from emerging markets at lower fares, and with higher frequencies.

For the higher end of the market, Qatar is aiming for five-star service, Emirates offers shower facilities in first class, and Etihad offers private suites with butlers.

The State Of Air Travel

Despite these innovations, commercial air travel continues to be mass-produced and mass-delivered for most travelers, and traveler frustration at various touchpoints continues to increase. Although personalization has progressed, customers want more.

Traveler frustration has increased as airlines implement strategies to reduce costs and generate higher levels of revenue through more and tighter connections at mega hubs, rigorous capacity control, higher load factors, franchising of feeder services to low-cost bidders, and loyalty programs that are unappealing for infrequent travelers.

Although mostly outside of airlines’ control, there are also the complexities of airport security and infrastructure constraints.

Then there’s frustration with online shopping through websites that are difficult to navigate, difficult to obtain relevant and contextual information without going to multiple websites, and difficult to undertake comparison shopping. And these are areas that are within an airline’s control.

While airline efforts to improve are largely headed in the right direction, on a scale of change in which incremental changes are at one end and disruptive changes at the other, the needle is really not that close to “disruptive innovation” from within the industry.

Leaders at traditional airlines clearly understand disruption and recognize the value it could bring to both travelers and airlines: better customer service and greater profitability. But some see potential disruptive change as what they describe as “difficult, painful and slow,” given the constraints of legacy technology systems and international regulations.

Another group of airlines sees disruptive innovation as “a threat to existing revenue streams.” And a third group believes the industry is “immune to disruption,” due to the existence of regulatory policies for reasons of “safety and national security.”

However, there is a small group of traditional airlines (including British Airways, Delta Air Lines and Qantas Airways) working on significant transformational changes. Having improved their balance sheets and hoping that the recent financial performance is sustainable, these carriers are now focusing on technology and retailing strategies to decommoditize their products and services, identify marketplace segments to pursue, and commit financial resources to enhance the customer experience.

And there is yet another group, less than 20 years old, basically “business teenagers” with no allegiance to conventional pricing, revenue management or scheduling processes for airplanes, crews and loyalty schemes.

These “teenagers” include Ryanair (which could initiate trans-Atlantic service with narrow-body aircraft and websites enabling comparison shopping), Virgin Australia (which could leverage its partnerships with other airlines to become a “virtual” global player), and Etihad (which could synchronize its physical and digital operations, and “virtually” extend its operations through the networks of its partners).

And from outside the airline industry, platform-focused entrepreneurs could emerge who might attract other players in the ecosystem, including eager investors, to disrupt the non-core business of the airline industry.

They could leverage new points of integration, the exponential and converging technology revolution, comprehensive information on the needs of existing and potential customers, and powerful customer and predictive analytics to provide high-impact “travel solutions” and “total travel care” to all travelers, not just those in the top tiers of loyalty programs.

Transforming To Compete

Some traditional airlines, such as British Airways, Delta Air Lines and Qantas Airways, are focusing on technology and retailing strategies to decommoditize their products and services, identify specific markets to pursue, and dedicate financial resources to enrich the customer experience.

Through disruptive innovation, they could rapidly expand the market by facilitating, with the use of apps, information and services, end-to-end services for customers who are not only connected and influence-driven, but are also looking for (and willing to purchase) personalized and self-controlled services.

Disruptive innovation in business has typically been brought about by entrepreneurs, not by existing traditional businesses.

Outside the airline industry, look at Jeff Bezos and Amazon.com, Reed Hastings and Netflix, Guy Laliberté and Cirque du Soleil, Dietrich Mateschitz and Red Bull, Mark Zuckerberg and Facebook, and Salman Khan and Khan Academy.

From within the airline industry, think about Herb Kelleher and Southwest Airlines in the early years, Tony Fernandes and Air Asia, Bjørn Kjos and the Norwegian Air Shuttle, and David Neeleman and Azul in more recent years.

Disruptive innovation in the airline industry will happen, perhaps more slowly than in other industries due to institutional constraints such as regulatory policies, constrained infrastructure, and control by traditional airlines of hard assets. It will likely be started by a few traditional airlines, plus some that are the unconstrained “teenagers” with no legacy baggage, in the areas of networks, products and operations.

Unencumbered outside-the-industry entrepreneurs first see distribution as a ripe area for disruption, specifically through initiatives to provide travelers exactly what they want, when they want it and how they want it throughout the entire trip. Examples include websites that incorporate search engines that take into account not only past transactions, but also user shopping behavior and expectations.

Given the historical limited profitability and incredible complexity, these outside disrupters are unlikely to start up airline operations. Rather, they’ll do business around airlines, leaving airlines to actually fly the airplanes at thin margins.

Some Food For Thought

In 2014, Expedia invested almost three-quarters of a billion dollars to develop new technology products cutting across its extensive brand portfolio, with over a dozen travel-related brands including Expedia.com, Hotels.com, Hotwire and Travelocity. Presumably, the objective is to focus on conversion (the percentage of those who buy as opposed to those who just shop).

The Priceline Group, an organization created to help users obtain discount rates for travel-related purchases, has also been investing hundreds of millions of dollars in technology to position itself as a potential disrupter. As with Expedia, the idea appears to be to improve customer service across its product line, including Booking.com, Priceline.com and Kayak.com.

Meanwhile, the TUI Group (the largest leisure travel/tourism business, encompassing travel agencies, airlines, hotels/resorts and tour operators) is committed to delivering an end-to-end experience across a traveler’s entire journey.

Thompson Airways, one of the six airlines in the TUI Group, has about 60 aircraft (from Boeing 737s to 787s) offering scheduled and charter service from the United Kingdom and Ireland to destinations in Europe, North America, Africa and Asia. TUI has articulated a clear vision of its customer-service plans, from trip ideation through post-trip engagement.

Customer Behavior Is Key

In any industry, the key to disrupting the business landscape is changing customer behavior.

Customers are increasingly looking for

  • Personalized products and services to fulfill their unmet and unstated needs,
  • Empowerment to control their travel before and during their journeys,
  • Good price and good experience.

That last point could be one reason people with the ability to pay higher fares aren’t willing to pay them because the perceived difference in experience doesn’t warrant the price differential.

Platform-focused entrepreneurs might seize opportunities, not to start new airlines themselves, but to focus on air-travel-related spaces around the airline business where customers’ pain points exist, such as the online shopping experience, processing at airports and receiving relevant information at various touchpoints in the journey.

Entrepreneurs may also understand the potential negatives of high profit levels being generated through the sale of fee-based services, endured (but not embraced) by customers. The outside entrepreneurs will likely focus on profit margins within selected air-travel-related spaces, targeting (and picking off) the profit concentrations in travelers’ journeys.

It is recognized that the latest value in consumer discretionary industries lies in customer information and in the use of customer analytics and predictive analytics to uncover hidden patterns and relationships to make better-informed marketing decisions. Just think about how Amazon is expanding into new types of services relating to consumers, retailers and even manufacturers.

In the future, entrepreneurs will likely own the customer-serving and revenue-generating networks that programmatically address the mobility needs of travelers, rather than owning the airlines themselves.

Entrepreneurs Drive Disruptive Innovation

Disruptive innovation is brought about by entrepreneurs, not by existing traditional businesses. Reed Hastings, for example, introduced Netflix to television and movie watchers at a much lower price than the traditional cable and satellite providers. His net worth, as of June is US$1.35 billion. Guy Laliberté founded Cirque du Soleil, one of the largest live entertainment groups in the world, and a young Mark Zuckerberg connected many people around the world with the introduction of Facebook. These entrepreneurs clearly represent disruptive innovation.

Future Disruptions

Only as to the timing, intensity and pace of disruptive innovation is there any real uncertainty. And the message for the status quo and passive airlines (in all sectors) is clear: Explore bold new ideas, developing compelling strategies to face the hyper-complex era by:

  • Accelerating differentiation through the technology-facilitated changes with rich, abundant and integrated information,
  • Deploying synchronized technology systems that enable optimization at an enterprise level as opposed to current systems that optimize at department or functional levels,
  • Partnering with technology-proven experts to develop and flawlessly implement customer-experience strategies.

Either that, or in the long run status quo and passive airlines should prepare to be disrupted, obtaining at best a lower share of the profit from travelers’ journeys, or at worst by being acquired, becoming irrelevant or becoming a supplier of seats to disrupters that handle the high-margin aspects of the customer relationship.

It all adds up to disruptive innovation, and it’s coming in one form or another … sooner rather than later.

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