airlines industry in europe_mba
TRANSCRIPT
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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