3. Confronting Strategies 1 Competitiveness in the 1990’s

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_________________________________ Confronting strategies

3. Confronting Strategies

3.1 Competitiveness in the 1990’s

Competitive success lies in the capability to change and to accomplish key tasks by using resources more efficiently and more effectively. Airlines must be innovative and, at the same time, control their costs. Sustainable competitive advantage, however, needs the whole organisation to be focused, fast, flexible and friendly.

Being focused requires investment in core skills and competencies, together with a search for new opportunities for applying the skills and constantly improve them; managers throughout the organisation should be strategically aware and innovative. They should own the organisation’s mission, which, by necessity, must be communicated widely and understood.
Fast airlines move at the right time, and are not caught out by competitors. Ideally they will be proactive, innovating constantly to open up and sustain a competitive gap, being gradual improvements likely to be more popular with customers than radical changes. The organisation culture must be appropriate (see Chapter 5).
Flexibility concerns the search for continual improvement. The implication is a learning organisation where ideas are shared and continually questioned and collaboration between functions and divisions generates internal synergy. Internal synergy can be achieved with cross-functional teams and special projects, and by moving people around the organisation in order to spread the best practices. Internal constraints which restrain performance must be highlighted and confronted. To be effective this requires a clear and shared vision and purpose for the organisation, decentralisation and empowerment.
Friendly organisations are closely linked to their suppliers and customers to generate synergy through the added value chain. Such external collaboration may be in the form of strategic alliances.
3.2 Visioning the business

Lord King wanted BA to become the first truly global airline, a vision the company pursued through most of the 1980s. In the mid-1990s, after King has been succeeded by Sir Colin Marshall, and then Robert Ayling the vision is partly close to fruition. For several years BA has promoted itself as “The World’s Favourite Airline”.

The idea is that the world industry will be dominated by 7-8 global carriers supported by a network of local airlines plus several independent regional carriers. The place of BA is of course within those 7-8 world airlines.
Virgin Atlantic Airways was built on the vision of a niche airline, specialised on few routes and dedicated to premium customers which could do anything to satisfy them. His vision was that of an airline which could provide value for money, cared for its employees and looked for long term growth at the expense of prevailing short-termism.
This vision has been successfully accomplished with Virgin being one of the preferred carriers on its routes. A new vision tends now to reposition it as a global carrier trying to compete seriously with British Airways.

3.3 Mission statements

A vision has to be translated into a mission statement, containing key result areas by which organisational effectiveness could be estimated.

The point of a mission statement is to define where a company is going and what it stands for. This is especially essential to imbue the staff with a sense of direction. It has very much to do with the values (culture) of an organisation and its strategies.
A likely mission statement for an airline is to be the best at something by:

  • focusing on customers’needs, expectation and safety;

  • continually striving to improve the quality of the service provided;

  • looking for cost savings which can be passed on to customers as lower prices but which do not threaten safety and quality standards;

  • empowering and rewarding employees to ensure the service is delivered.

British Airways’ mission statement is about becoming the first true global carrier in the world and can be summed up as:

To be the World’s Favourite Airline”

Virgin Atlantic’s mission statement is about the development of an intercontinental network concentrating on those routes with a substantial established market and clear indication for growth potential. It sticks with the “small is beautiful” concept and says:

We don’t want to be the biggest, just the best!”
3.4 Globalisation and niche marketing

There is a critical mass below which world airlines cease to compete effectively as global carriers. In the pursuit of its global strategy British Airways operates on a world-wide basis participating in major geographic markets, with its own resources and a network of franchisees and allied who extend its global reach.

The alternative for a carrier not meeting this critical mass is to become a niche carrier competing on the basis of serving the needs of a specialist niche market. This niche can be based on geography (e.g. feeder airlines or regional airlines), on a particular pursuit (packaged holidays) or a careful selection of the most profitable routes (Virgin Atlantic’s cherry picking strategy) promoting a particular image in certain long-haul markets.
Even if previously considered a niche carrier, Virgin Atlantic is about to expand further its global reach covering new profitable routes all over the world and diversifying in short-haul no-frills operations in Europe setting up a subsidiary in Brussels called Virgin European Airways. It is also attempting to integrate his airline with high speed rail link bidding for a new link to the Channel tunnel and to operate the Eurostar rail link between Brussels and London.
Virgin Atlantic is most likely to reposition itself as a global carrier in open competition with British Airways in the next three years. It plans to position itself as the fourth largest long-haul carrier after BA, Singapore Airlines and Cathay Pacific and it will operate through separate subsidiaries to be called Virgin Africa and Virgin Pacific. In the past years it has amassed landing rights at London airports to launch services to Bangkok, Peking, Moscow, Mexico City and Buenos Aires and has recently applied for other 18 destinations.
3.5 Strategies for growth

The long term pressures will push airlines further towards mergers, acquisitions and partnership agreements. Yields (revenues received per each mile a passenger is carried) are in long term decline and are expected to reduce further in real term and since the 80s fares have been kept low by competition. Despite expectations for traffic growth (2 billion in 2015) the pressure to cut costs will continue. Purchase of aircraft is one of the main area where to reduce costs through bulk purchase as both British Airways (30 new orders plus 30 options) and Virgin (£3 billion worth of aircraft for about 24 aircraft) are supposed to do within the next months. But the main solution will be found in further efforts to combine individual airlines’ strengths to develop profitable synergies. Airline partnership, in its various forms, can enable carriers to eliminate the number of aircraft flying on a route, rationalise the use of their resources, extend the range of destinations offered and access new pools of customers.

The major players in the new alliances for the future will be United and Delta for America, BA, Lufthansa and KLM for Europe, Qantas, Thai, Malaysian, Singapore, JAL and All Nippon Airways in the Far East and Pacific.
The globalisation pursuit can be served in different ways, organic growth being the least viable or better the more difficult in this industry. Major growth strategies tend to include long term commitments such as strategic alliances, reinforced by equity participation, franchising and short-term marketing alliances.

3.5.1 Organic growth

Organic growth is reached through expansion based on the airline own resources. For both British Airways and Virgin Atlantic organic growth has been pursued in the first stage of their life as a key element for growth. Today’s saturated markets have left less opportunities for organic growth and airlines are looking for alternative paths for growth, usually characterised by the opportunity to rationalise the use of resources within growth.

3.5.2 Direct acquisition

Direct acquisition can be both in the form of a 100% ownership, as when British Airways acquired Danair to strengthen its UK-based domestic and European services and reinforce its presence at Gatwick in addition to Heathrow, or in the form of a major shareholding (>50%), as Virgin Atlantic is about to buy a 80% stake in the European carrier European Belgian Airlines (EBA). Direct acquisition is less viable nowadays both for the huge amount of money implied, which however a cash rich company as Virgin can afford, or for legal restriction to foreign ownership posed by some countries (U.S. legislation provides a ceiling of 25% to foreign carriers owning a stake in US carriers).

There are some rumours in Europe about possible acquisitions of other European carriers both from Virgin and British Airways. Virgin Atlantic in particular is diversifying in low cost no frills transport. EBA is the second Belgian carrier after Sabena and covers the most profitable leisure routes in Europe from Brussels. It offers no-smoking single-class flights and serves only tea, coffee and biscuits. There are no tickets or brochures, travel agents are given a photocopied timetable. The new operation however will count on the well known Virgin brand and it might also attract alliance with long-haul carriers. Last year Virgin made a study into the feasibility of taking on the big, mostly state owned Continental carriers in their own backyard attracting both business and leisure traffic. EBA current routes will constitute a basis for further expansion to cover new routes in Europe.
3.5.3 Mergers

Mergers are not very frequent in the airline industry, the most likely obstacles being cultural differences between single airlines, its more a world of take-overs of small or bankrupted carriers and strategic alliances. British Airways was a result of a merger in 1974 between the home and European operations (BEA) and intercontinental operations (BOAC). In 1987 BA merged with British Caledonian which was operating as Caledonian Airways.

3.5.4 Franchising

Franchising consists of an airline flying with the colours of another airline, maintaining independence apart from the obligation to provide a level of standards in line (consistent) with that of the franchiser.

The advantage for franchisees is that they are given access to the things that make the franchiser unique in the minds of the customers - logo, livery, products and service standards. The advantage for the franchiser is to quickly expand its network without devoting too many resources. But the risk remain high as failure to meet franchiser’s standards could result in major damages for its image. The selection of suitable airlines and follow up policing are therefore key to ensure airline and customer expectations are met fully.
British Airways’ attempt to increase its presence in all six markets involve massive growth that BA on its own could not achieve. Franchising is especially used in smaller markets, the domestic market to provide feeder services to those of BA itself and to complement BA’s own services in certain geographic locations, and permits BA to spread its name and branding more widely and rapidly without incurring costly overheads and creating an unwieldy structure. Franchising gives partner airlines access to British Airways’ unique livery, products and service standards, and especially its name. It also includes taking BA flight code, ground handling, selling, revenue accounts, computer systems and services, and the frequent flyer package. The use by such airlines of the BA aircraft livery and of cabin crews in BA’s uniform effectively communicate BA service standards to potential customers.
British Airways has franchising agreements with Gatwick based City Flyer Express and Scottish carrier Loganair, which operate as British Airways Express and Maersk, which operates from Birmingham as British Airways and Manx Airlines. In addition, Plymouth based Brymon Airways, though wholly owned, is managed as a franchise. Together, the franchise partners operate a total of 46 domestic and European routes with a fleet of some 30 aircraft.

A form of franchising technically called “wet lease” is also undertaken in conjunction with the American partner USAir, where few flights (4 in 1995) are equipped with

USAir aircraft and staff, but the liveries and the uniforms are those of British Airways, the difference between a code-sharing and a wet lease is paramount in terms of the image communicated to the passengers.
Virgin has since now relied on its own resource with the exception of two European operation: London to Athens operated by a Greek carrier and London to Dublin operated by CityJet. These operations will not be integrated in Virgin European Airways operations.
3.5.5 Strategic Alliances

Strategic alliances are sometimes an attempt to obtain the benefits of integrating two businesses without the potential drawbacks of a full merger (minority equity participation). In the same time it reduces the risk of highly damaging break-ups which are more likely to happen with simple marketing alliances (see code-sharing, joint frequent flyer schemes and other joint promotions). The difference between strategic and marketing alliances been meant in terms of long versus short-term commitment. Strategic alliances however are often underpinned by marketing ploys such as joint frequent flyer schemes and code-sharing

British Airways is using alliances with minority shareholdings to extend its market access and strengthen its position as a leading global carrier. In its attempt to build a seamless global network today it owns 24.6% of US Air, the 5th largest American carrier (operating from four hubs: Pittsburgh, Philadelphia, Charlotte and Baltimore), 25% of Australia’s international airline Qantas, 49.9% of the French regional carrier TAT has been obtained, together with an option to buy the remainder in 1997, 49% of second German carrier after Lufthansa, Deutsche BA and it has also entered a joint venture with Moscow based Air Russia.

The acquisition of a stake in USAir followed strategic considerations about the need for British Airways to increase its presence in the US after the two leading carriers, United Airlines and American Airlines and it gave BA access to 60, recently extended to 85, new destinations and contribute to BA feeding in the equivalent of a full 747 every day.

The North American market is key to British Airways accounting for 40% of all domestic air traffic in the world compared with just 3% in the UK.
The recent possibility of a bid for the acquisition of USAir was about in 1995 to offer British Airways the opportunity to increase its option for code sharing within the US and to form a partnership with the new owner. This take-over would have created the largest air carrier group in the US and the most powerful internationally. Any successful bidder would have been made to pay a full price for US Air. US Air is strong on the east cost while United in the Midwest, west and internationally.

When in November 1995 both US companies announced they didn’t see this as a suitable marriage BA has been forced to revise alternative solutions and it also scrapped in January the option to buy a further stake in USAir. The most likely alternative is an alliance with American Airlines which would give BA stronger ties with the lucrative Latin American market and complement Qantas’ coverage of the Pacific through American Airlines’ allied Japan Airlines. It also has more opportunities of success because of a better cultural fit. At the end of 1995 BA was supposed to be in secret talks to form a triple alliance with KLM and American Airlines. United Airlines would be the hardest choice to implement for its codesharing deal with BA’s archi-rival Lufthansa and its competition on West Coast-Pacific routes BA’s ally Qantas. In addition United has already access to Heathrow. A previous attempt to enter an agreement with United through an acquisition of a 15% stake and an already established marketing alliance failed in 1989 when United acquired Pan Am routes and therefore started to compete directly against BA. An alliance with Delta would make more sense for BA despite its links with Virgin.

One of British Airways weaknesses is the Pacific area where the partnership with Qantas is failing to provide the expected results. Another ally can therefore be taken into consideration. BA’s future growth may lay in the expanding markets of Asia where air traffic is expected to grow at above average rates of 8% a year.
Virgin Atlantic is more involved in marketing alliances, it started a partnership in the form of a code-sharing with Delta Airlines in April 1994, which has now been extended until April 1997 and which, according to the two airlines is likely to become a long-term commitment. This partnership implies Delta buying up to 20% of seats on Virgin flights to London from several major US airports. The additional advantage of this alliance is that it links Virgin to one of the most important partnership in the airline industry (Delta, Singapore and Swiss Air).
Virgin is also looking forward to reinforce its partnership with Malaysian Airlines, entered at the beginning of 1995, which permits it to operate to Sidney and Melbourne through Kuala Lumpur.
In the UK Virgin Atlantic is linked to the short-haul carrier British Midland.

Fabio Emanuele Noia, London March 1996

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