Airlines and innovation

British Airways announced today the launch later this year of OpenSkies, a new airline that will fly from New York to various cities in Europe. Likely destinations include Brussels and Paris, although this has not yet been confirmed.

[Updated Jan 10 2008] I wrongly assumed initially that it was a business class only airline, but as more details emerge in the press it looks like OpenSkies has a 3-class configuration: business, premium economy, economy.

This looks like the perfect timing to publish a post I wrote a few months ago about airlines and innovation. It was initially meant to appear in Idris Mootee’s blog Innovation Playground.

Just two more things to add… First, the original post has been updated to reflect the new number of low cost airlines in Europe and the recent bankruptcy of business class airline MaxJet. Also in the spirit of full disclosure, I should mention that I have been working for various clients in the airline industry for the last ten years – boy, things have changed during these ten years! But my point of view remains external and hopefully unbiased. You be the judge…

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Innovation comes in many shapes and forms. Along with a strong brand, innovation is an essential way to create differentiation in an industry that is highly commoditized. Come to think about it: travelers are flying in the same planes; they eat food that was prepared in the same airport kitchens… even the schedules are not that different as airlines are coveting the same time slots. And you may even have noticed if you have flown different airlines on the same month: you often get the exact same selection of in-flight movies!

As a result of this standardization, innovation has been concentrated in a few specific areas: price, value for money and loyalty programs.

One major innovation came in the 1970s with Southwest Airlines, whose “no-thrills” model has been since then replicated by the likes of Ryan Air and Easyjet. At the last count on www.flycheapo.com, there are now 45 low cost airlines in activity in Europe [updated January 9, 2008]. The operational aspects of the low cost business model are well documented: minimize time on the ground, reduce maintenance and training costs through a standardized aircraft fleet.

What I find most fascinating about the Southwest story is that they did not try at first to compete with major US carriers. They wanted to lure consumers away from Greyhound buses, by offering a much shorter trip for a small additional cost.

As competition amongst carriers increased as a result of the 1978 deregulation, American introduced in 1981 the first loyalty program. Other airlines quickly followed suit, as the programs proved successful for both the airlines and for the consumers. Today with the proliferation of programs and the increased difficulty and costs associated with redeeming miles, there are clear signs of loyalty fatigue. Most rewards programs have to adapt and offer more inspirational experiences.

Major North American airlines with their unionized personnel, aging fleets and cost base could not compete effectively with the likes of Southwest and JetBlue. Events like the terrorist attacks of September 11 and the SARS crisis further contributed to depressing travel demand. In the five years between 2001 and 2006, these airlines undertook some drastic transformation to improve their competitiveness. For example, to respond to the price pressure on North American routes Air Canada recently introduced “prix fixe” coupons.

They also started to disengage from the highly competitive domestic market to focus on more profitable international routes – the domestic capacity for major US airlines steadily decreased from around 39% in 2001 to 33% in 2006. Their network is expanding beyond traditional high traffic destinations: Delta broke new ground by offering direct flights between New York and Accra, Ghana. Yet major US airlines have been in reactive mode, responding to innovation rather than driving it.

As the industry focus moved to transatlantic routes, so did the innovation drive. Low cost business airlines like EOS, Maxjet, Silverjet or L’Avion are targeting the highly lucrative business class traveler. They use an older type of plane (757 or 767) but fit them to fly only 50 to 100 passengers instead of 200. The price of a business class ticket is usually around 50% cheaper than on traditional carriers – a proposition especially attractive to business travelers who do not benefit from corporate discounts.

While Maxjet declared bankruptcy at the end of 2007, the other business airlines claim that they have been very successful, with occupancy rates already above 75%. Interestingly it looks like a large portion of their following comes from leisure travelers who are willing to pay a little more to escape the potentially dreadful experience of flying transatlantic in economy class. [paragraph updated on January 9, 2008]

With further deregulation under way with the “open skies” US-EU agreement, established airlines like British Airways and Virgin Atlantic are considering deploying direct business class only flights to other European cities than London.

Similar developments will probably soon see the light of day in Asia, the fastest growing air travel market in the world. Low cost airlines have appeared across Asia, most notably in China and India.

So what’s next – where is the next wave of innovation going to come from in air travel?

There is no disruptive technology on the near horizon. New supersonic jets or planes designed for sub-orbital flights are being developed but it will probably take decades before their actual introduction. In the meantime, most of the technological progress is incremental and aims at reducing the operational cost per mile per passenger.

It is a safe bet to assume that after changing the landscape for economy class and business class, the low cost pattern will soon be expanded to executive jet travel. The industry has already moved from a full time ownership model to a time-share model, made famous by NetJets. And Marquis Jets already made the executive jet time-share model more accessible by lowering the entry point to 25 hours a year.

Time will tell but the air travel landscape in 2015 will probably bear little resemblance to that at the beginning of the millennium.

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