airlines industry in europe_mba

8/4/2019 Airlines Industry in Europe_MBA

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AirlineIndustryConsolida1oninEurope

Interna(onalMergersandAcquisi(ons

SonjaVogeler

UTSMBA

14August2010


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KeyIssues

Airlineindustryconsolida(oninEuropesince1980sleadstoadrama(cchangeinownershipandstructure.

Na(onalflagcarriersandthenewlow-costcarriersredefinetheairlinebusinessinEuropethroughmergers,acquisi(ons

andstart-ups.

Priva(zedopenskypolicydevelopedthrough,firstlypriva(za(on,cross-borderacquisi(onsandderegula(on,and

mostrecentlytheenforcementoftheOpenSkyAgreement

betweentheEUandUS,increasingglobalcompe((on.

Theopportuni(esforthenewlow-costcarriersandconsolida(onofna(onalflagcarriersbringbigadvantagesto

consumersinformoflowerairfares,moredes(na(onsand

moreflights.

Thismassivechangehowever,hascomeatacost,withairlinebankruptciesandpredatorypricingbythelow-cost

carrierschangingtheEuropeanairlineindustrypermanently.

Manystrugglingairlinesarelookingforstrongpartners.Duetodemandforvaluableairportslotsandstrategichubs,the

strongairlinessuchasLuhansaandAirFrancehaveused

theseopportuni(estoexpandtheirnetworkthroughstrategic

acquisi(ons.


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Priva1za1on(987onwards)

ThefirstmajorEuropean-basedairlinetobepriva(sedwas

Bri(shAirwaysin1987undertheUKThatcherConserva(veGovernment.

Priva(sa(onofna(onalflagcarriersusuallycomeswith

condi(ons.RarelydoesaGovernment-ownedairlinebecome

fullypriva(sedwithoutrestric(onsonthelevelsofforeign

ownershipandcarriagecondi(onstosa(sfydomes(cpoli(cal

requirements.

Strongna(onalsen(mentandpridewouldnotliketoseethe

na(onalflagcarriergounder.

However,manygovernmentsrecognisedthebenefitsof

priva(za(on,whichhasledtoagradualtransferofownership

ofairlinesfromthestatetotheprivatesector.

Inordertoappealtoprospec1veinvestorsandshareholders,

airlineswereforcedtobecomemuchmoreefficientand

compe11ve.


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Early1990s:Deregula(onoftheEuropeanUnionairspace

officiallystarted,longaertheUSledthewaywiththeAirlineDeregula(onActin1978.

WhilsttheUSderegula(ons(llhadheavyrestric1onson

foreignownershipofitsairlines,theEUenforcedmeasuresin

1993thatwouldallowthedevelopmentofasingleEuropean

avia1onmarket.ThismadetheEUthefirstregioninthe

worldtoremoveforeignownershiprestric(onsHsu&Chang,

2005).

Crossborderacquisi(onwasnowseenasthebestwaytoaccesstheotherwiseinaccessibleEuropeanmarket.

Crossborderacquisi(onsprovideasecondadvantagein

crea(ngnewhubstoconnectintoeg.AirFrance-KLM

merger).

Crossborderacquisi(onsprovidetheaddedbenefitofgaining

accesstovaluableairportslotseg.Luhansatookadvantage

ofbyacquiring20%shareholdinginBri(shMidland)

CrossBoarderAcquisi1ons(992onwards)


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TheEU'sfinalstageofderegula(ontookeffectinApril1997,

allowingairlinesfromonememberstatetoflypassengerswithinanothermember'sdomes(cmarket.

Deregula(onwasseenasawaytos1mulatecompe11onand

haschangedthestructureoftheindustrysubstan(ally.

Smalllow-costcarriers onshorterroutes,suchaseasyJetand

Ryanairhavegrownattheexpenseofthetradi(onalairlines.

TheEuropeanUnionhasruledthatGovernmentsshouldnot

beallowedtosubsidizetheirloss-makingflag-carriers.

Buttherehasalwaysbeenasafetynetforairlinesno

countrylikestoseeitsna(onalcarriergodown.

Nootherindustrysectorevenourcloseststrategic

equivalent,telecommunica8onsremainsshackledbythe

no8onofna8onalsovereigntyandarchaicownership

rulesChairmanofBri(shAirwaysLordMarshall,2001).

MostindustrywatchersagreewithLordMarshallthatonlythoseairlinespreparedtoconsolidatewithoutregardfor

borderswillsurvivethefutureSymonds,2001).

EUDeregula1on(997onwards)


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2004mergerofFrenchflag-carrierAirFranceanditsDutch

counterpartKLMwasthefirstmajorEuropeanairlinemerger.

Giventheeconomicchallengesfollowingthe9/11disaster

2001)-suchaslowerconsumerspending,securityconcerns

thathavereducedleisuretravelandcorporatecostcung

thathasreducedbusinesstravelandtheopportuni(es

followingderegula(on,itissurprisingthattheairlinesector

hasnotbeguntoconsolidateyearsbefore.

Booz&Co2008)seetwomainreasonsforthelackof

industrymergersinthepast:

1. Flag-carrierairlinesoperateinapoli(calandculturalenvironmentthatishos(letodealmaking.

2. AlthoughtheEUcon(nuestopushformoremergers,tensionsremainbetweenEUrulesandthepoliciesof

na(onalgovernments.

Theyalsoseetwomajorfactorshaveproducedthecondi(ons

thatwillmakemergerac(vitymuchmorelikely:

1. RisingFuelPrices-causinghighermarginpressure2. OpenSkiesAgreement,-crea(ngmoreinterna(onal

compe((on

3. CarbonEmissionsTradingSchemeETS)DisadvantagingEuropeancarriersMallan,2009)

Consolida1on(2004onwards)

InEurope,theexpertssaidtherewouldeventuallybeonly

threeairlines.Thathasnothappenedyet,butweareonour

waytoit.Thebigairlinesareworryingthattheywillmiss

theopportunityiftheydontbuypoten8alcandidatesnow.

Ithasbecomearace.

BCDTravelseniorvicepresidentforsupplierrela(onsinEurope,MiddleEast

andAfricaThomasStoeckel,2009).


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TherecentOpenSkiesagreementbetweentheUSandtheEU,

effec(veasof30March2008,isthemostambi(ousairservicesdealevernego(atedEuropeanUnion,2008).

ItpermitsUSandEuropeanairlinestomaketransatlan(c

flightsbetweenanytwoairportsineachregion,meaningthe

Europeanflagcarriersarefacinggreatercompe((onbythe

USthroughtheremovalofmarketaccessrestric(ons.

AirFrance-KLMGroupandDeltaAirLinessignedajoint

ventureagreementon20May2009:

Thepartnerswilljointlyoperatetheirtrans-Atlan(croutes,therebysharingrevenuesandcosts.

AirFrance-KLMwillachievearound25%ofthetotaltrans-Atlan(ccapacity,andannualrevenueses(mated

at12billiondollarsAirFranceCorporate,2009).

OpenSkiesAgreement(2008onwards)

Thetwobiggestavia8onmarkets,encompassing60

percentofworldtraffic,willcooperatecloserinallfields

ofavia8onpolicy.BuildingonthesuccessoftheEuropean

internalavia8onmarket,thisagreementisanimportant

firststeptowardsthenormaliza8onoftheinterna8onal

avia8onindustry

EuropeanUnion,2008)


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Services airlines arepredominantly former flagcarriers/

na(onalairlines.

Theycanhaveverydifferentbusinessmodels:

Luhansa:

-Strongmul(hubnetworkFrankfurt,Munich,Vienna)-Focusonthenumberofhubs- Largest number of strategic all iances throughStarAlliance

- Innova(ve services, through restructure andoutsourcingtosistercompanies

-Favourablecoststructure,throughkeepingaircratypestoaminimum

- Acquisi(ons of strategically similar airlines SWISS,Austrian,Brussels)

AirFrance/KLM:

-TwocoordinatedhubsatdevelopingairportsParisandShipol)

-Focusonthesizeofhubs-Apowerfulandlargenetworkofdes(na(ons-UniquepartnershipwiththeNorthAtlan(c-PartnerinthesecondlargesairlineallianceSkyteam)


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OldWorldvsNewWorld


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An LCC is an airline that offers generally low fairs in

exchange for elimina(ng many tradi(onal passenger

servicesbudgetairlineguide,2009)

Typicallow-costcarrierbusinessmodelprac1cesinclude:

-Asinglepassengerclass-Asingletypeofplanereducestrainingandservicingcost)- A simplefairscheme, such aschargingone-way (cketshalfthatofreturntripstypicallyfaresincreaseastheplane

fillsup,rewardingearlyreserva(on)

- unreserved sea(ng encouraging passengers to boardearlyandquickly)

-Flyingtocheaper,lesscongestedsecondaryairports- Flying earlyin themorning orlateat night toavoidairtrafficdelaysandtakeadvantageoflowerlandingfees.

- Fastturnaround(mesonthegroundallowingmaximumu(liza(onoftheaircra)- Simplified routes, emphasizing point-to-point transitinsteadoftransferathubs

- Emphasis indirect salesof (cketsvia internet avoidingcommissionpaidtotravelagentsandcomputerreserva(on

systems)

-Encourageduseofelectronic(cket- Free in-flight catering and other complimentaryservices areeliminated, andreplacedby op(onal paid-for

in-flight food and drink which represent an addi(onalprofitsourcefortheairline)

- Unbundling of ancillary charges showing airport fees,taxes,lugguagefee,asseparatecharges,tomakeheadline

farelower)


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CurrentChallenges


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WhatdoestheTheorysay?


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Conclusion

Thetradi(onalairlinebusinessmodelsarechanging.

Theformerstand-alonestrategyofairlinesandtheir

intercon(nentalhubandspokenetworksisoutdated.

Challengesemergenotonlyfrominternalcompe((on,but

alsonowfromlowcostcarriersatthelowendandbusiness

avia(onatthehighendofdemand.

Tosurvivetheairlinesmustacknowledgeandunderstandthe

importanceofdownsizing,mergingandequityalliances.

Thiswillbringwithitlargescaleconsolida(on,andasaresult

theairlineindustrywillshapeupasamarketstructure,which

experiencesgreatconsolida(onandonlyafewmegacarriers.

TheEuropeanairlineindustryisenteringastageofreal

maturity.

Theconsolida(onprocessisforecasttogrowandthenumber

ofindependentcarrierswillgraduallydiminishAssocia(onof

EuropeanAirlines2008).

Interna(onalalliancesareforecasttocon(nuetoplaya

crucialroleandmayevenextendinscopeatleastinthefirst

fewdecadesofthe21stcentury.


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Part2


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WhatisDesignThinking?

WhatisDesign?

Symbolic&VisualCommunica(onGraphicDesign)

MaterialObjectsProductDesign.IndustrialDesign,FashionDesign)

Ac(vi(es&OrganisedServicesProcessorSystemsDesign)

ComplexSystemsandEnvironments.Living,working,playing,learningArchitecture,InteriorDesign,Urban

Design,Organiza(onalChange)


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Business&Design

Designorganiza1onsvaryfromtradi1onalfirms:

Tradi1onalFirm DesignFirm

1.Flowofwork Permanentjob Projectwork

2.Styleofwork MyResponsibility OurResponsibilityteam

work,collabora(on

3.Modeofthinking Induc(ve&deduc(ve

thinking

Abduc(vethinking

4.Sourceofstatus Bigbudgets,largestaff

numbers

Solvingwickedproblems

5.DominantAtude Constraintsaretheenemy Constraintsareachallenge

Source:RogerMar(n,2009,TheDesignofBusinessWhy

DesignThinkingistheNextCompe((veAdvantage


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Business&Design

Induc1vethinking:Provingthroughobserva(onthatsomethingactuallyexists

Premise:Allobservedcrowsareblack

Conclusion:Allcrowsareblack

Deduc1vethinking:Provingthroughreasoningfromprinciplesthatsomethingmustbe

Premise:Alldogshavefourlegs.Premise:Roverisadog,

Conclusion:Roverhasfourlegs.

Abduc1vethinking:ThelogicofwhatMIGHTbe.ThereisnotMUSTbe.

Canyouprovethat?


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Business&Design

BusinessSkillsandDesignSkillsareconverging

Designskillsarerequiredtoreach

intoambiguoussitua(ons

Newkindofbusinessenterprise Tradi(onalfirmsmustlookmorelike

designshops

Itsnotaboutthebusinessofdesign Businessneedstounderstandthe

designprocess

Source:RogerMar(n,2009,TheDesignofBusinessWhy

DesignThinkingistheNextCompe((veAdvantage


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TheProcess

Thedesignthinkingisacrea(veprocessbasedaroundthebuildingupofideas.

7Stages:

1. define2. research3. ideate4. prototype5. choose6. implement7. learn


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DesignThinking

Crea(ngideas Checkingideas


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Thankyou.

OtherReferences:

TimBrownwithBarryKatz,2009,ChangebyDesign,HarperBusinessPress,USA

RogerMar(n,2009,TheDesignofBusinessWhyDesignThinkingisthenext

Compe88veAdvantage,HarvardBusinessPress,USA

ThomasLockwood,2010,DesignThinkingIntegra8ngInnova8on,Customer

ExperienceandBrandValue,DesignManagementIns(tute,AllworthPress,USA

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