Innovation At Airline Industry In India Management Essay
Innovation can be the introduction of improved goods or services through the enhancement in attributes. According to a 2007 National Knowledge Commission report on “Innovation in India” 17 percent of the large firms rank Innovation as the top strategic priority and 75 percent rank it among the top 3 priorities. Service innovation can occur through an offering not previously available to a firm’s customers resulting from additions to the service concept (Menor et al., 2002). Several service industries have seen a surge in competition due to innovation schemes, and airlines are no exception. Although the main service provided by airlines is transport, considerable innovations have taken place to make it a profitable proposition.
While considerable literature is available specifically on Innovation, this paper is an attempt to develop an understanding on Innovation in an emerging market like India, implications for airline services and impact of Low Cost Carriers on the competition landscape.
Keywords: Innovation, Airline Industry in India, Low-Cost Carrier Model
In creating competitiveness, the most important dimension is imagination. The Economist, in an article on 4th December, 1999, pointed out why, in the global context, the bigger companies are afraid of the smaller companies. It said:
“Innovation has become the buzzword of American management. Firms have found that most of the things that can be outsourced or re-engineered and have been (worryingly, by their competitors as well) the stars of American business, tend today to be innovators such as Dell, Amazon, and Wal-Mart, which have produced ideas or products that have changed their industries.”
With liberalization and globalization, organizations are facing incessant change and competition. To sustain in this ever changing environment, it is imperative for organizations to innovate at every level, be it technology, processes, or products. Innovation has become an essential component of organization development. It initiates and focuses change in organizational action within the range of possibilities created by innovative potential. It is thus a strategic element of organizational survival and development.
In today’s environment, every business wants to be more creative in its thinking. According to a study, 75 percent of Chief Executive Officers of the fastest growing companies claim that their strongest competitive advantage is unique products and services and the distinct business processes that power them to market- innovation by another name (Smith, 2005). In another survey, Boston Consulting Group reported that 90 percent of organizations believed innovation to be a strategic priority for 2004 and beyond. Leading companies continuously seek out and institutionalize the insights and tools they would need if they were to stay at the leading edge and be top-rated stars in their sector. Some companies build enduring capacities for breakthrough innovation.
The airline industry has been plagued by several factors such as overcapacity, commoditization of offerings, cut-throat rivalry exacerbated by the entry of low-cost carriers, and intermittent periods of disastrous under-performance (Costa et al., 2002). In 2006, the global airlines industry suffered a net loss of USD 500 million or 0.1 percent of revenues, accumulating net losses of USD 42 billion between 2001 and 2006 (International Air Transport Association, 2007). In 2007, the airline industry made a modest net profit of USD 5.6 billion on revenues of USD 490 billion, equivalent to less than 2 percent margin (International Air Transport Association, 2008). The outlook from 2008 onwards remains bleak. Not surprisingly, the industry is regularly rated as one of the worst performing industries in the Fortune Global 500 rankings (Heracleous & Wirtz, 2009).
WHAT IS INNOVATION?
Innovation is an old but evolving phenomenon. And it has accelerated with the Industrial Revolution of the 21st century (Caraca et al., 2007). It may be defined as “the process of bringing new problem-solving ideas into use” (Glynn, 1996). It is an application of new ideas to the products, processes, or any other aspect of a firm’s activities. It is concerned with the process of commercializing or extracting value from ideas; and is in contrast with “invention” which need not be directly associated with commercialization. In economic terms, “innovation” can refer to technological advancement, or to the process by which companies create new economic value by using resources more effectively (Randolph, 2006). Innovation is a process by which organizations use their skills and resources to develop new goods and services or to develop new production techniques and operating systems so that they can better respond to the changing needs of the customer (Burgelman & Maidique, 1988). Innovation is a specialized kind of change. It is a new idea applied to initiating or improving a product, process, or service (Van de Ven, 1986).
Bubner (2001) defines innovation in organizations as a series of processes that are designed and managed to create and apply ideas and knowledge, directed at value creation, and capture and lead to new and different products or services, processes, technologies, ventures, and business systems. His assertion is that innovation is a process and not an object or an outcome and hence, it refers to both ideas and knowledge.
All innovations involve change, but all changes do not necessarily involve innovation. All organizations should innovate as innovations can result in spectacular success for an organization. Apple Computers changed the face of the computer industry when it introduced its personal computer. Honda changed the face of the small motor bike market when it introduced small 50 cc motorcycles. Toyota revolutionized the car production system to increase product quality. The importance of innovation is increasing through shorter product life cycles, increased competition, changing customer behaviour, and technological progress (Leimeister & Glauner, 2008).
If Innovation becomes successful, it can drastically change the organization. But, it also involves a high level of risk because the outcome of research and development activities is often uncertain. Most innovations are costly and the cost of faulty assessment of innovation may prove to be fatal for the organization. Therefore, the organization needs to weigh each idea carefully. Of all kinds of revolutionary change, innovations have the best prospects for long term success but also greatest risks. Therefore, the way in which organizations can stimulate innovation, and can manage the innovation process to increase the chance of successful learning taking place is very important.
Service industries are sometimes characterized as low-value, low-skill sectors that do little to advance the economy’s competitive position. The service sector, of course, encompasses a broad range of highly diversified activities (Gellatly & Peters, 1999). Some innovations involve new products; others involve new processes (Baldwin & Gellatly, 1998). The fact that a firm claimed to have ‘innovated’ need not mean it developed its own innovation(s). According to a study of innovators (Howells & Tether, 2004), about half the firms claimed that they had mainly developed their own innovations, with a third declaring the innovations were developed jointly with others, and about a fifth admitting they were mainly developed by others. These proportions differed significantly between sectors, with the external development of innovations being most common in transport services.
Innovation is the successful exploitation of new ideas. Firms innovate in order to gain an advantage over competitors, perhaps by becoming more cost-efficient, by tailoring products to meet unique customer requirements, or by improving access to service in remote areas (Gellatly & Peters, 1999). This applies to all firms in the economy and is equally relevant to innovation in the airline industry (Xinhui, 2008). Although the main service provided by airlines is transport, considerable innovations have taken place to make it a profitable proposition. Stiff competition has made innovation as an everyday occurrence, and has resulted in the emergence of Low-Cost Carrier (LCC) model. These cheap, no frill carriers (Ryanair, EasyJet) have revolutionized the airline industry, making air travel affordable for all and forcing the established carriers to reengineer their operations. The LCC model has surely been one of the most successful things to happen in the airline industry. Innovation is particularly important for airline services, as one of the key features of successful experiences is considered to be continuous renewal or refreshment of the experience to keep exceeding customer expectations.
The first LCC to rival major carriers was Southwest in the United States of America. Introduced in 1971, it implemented the low-cost model comprising low fares, high frequency service, no free food on board, no assignment of seat during check-in; and flights to secondary airports (Anon, 2006). However, it was in 1990s that the European airlines started to catch up when EasyJet and Ryanair entered the market. After this time, there was a surge of competition as LCCs became a common phenomenon. Air travel had been synonymous with luxury and catered to upper class of the society but this was redefined by the low-cost airline model, because one key objective of low-cost carriers has been to increase their reach to a larger segment and provide services at an affordable rate.
INNOVATION- AN INDIAN PERSPECTIVE
India’s recent growth has been impressive, with real GDP rising by over 8 percent a year since 2004; accompanied by an increase in innovative activities. Growth has been driven by rapid expansion in export-oriented, skill-intensive manufacturing and, especially, skill-intensive services. The literature on Innovation in India has largely been silent on the specific experiences of the services sector with Innovation. With the changing composition of the Indian economic growth to be increasingly services led, National Knowledge Commission sees Innovation playing a crucial role in this growth.
Today, India is acknowledged as an innovator at a global scale particularly for services. However, there is heterogeneity in the Indian economy and therefore innovation in Indian context demands a broader definition of innovation. This definition could refer to innovation that distinguishes between “new to the world” innovation (creation and commercialization), “new to the market” knowledge (diffusion and absorption), and explicit promotion of innovation to reduce poverty (inclusive innovation). India is emerging as a global hub of Innovation. Recent acquisitions by Indian companies in the global market also signify an increasing trend in Indian companies to leverage the various possibilities of Innovation that the global market offers. The inherent reasons for India’s innovative activity are the existence of an open society, a technology base, democracy, diversity, an environment that allows experimentation, a vibrant capital market, availability of young population necessary as human capital to fully reap the demographic dividend, full and free competition in the private sector, opportunities for technological leapfrogging as well as the availability of necessary infrastructure.
AIRLINE INDUSTRY IN INDIA
The history of Civil Aviation in India started with its first commercial flight on February 18, 1911. In December 1912, the first domestic air route was opened between Delhi and Karachi by the Indian State Air Services (in collaboration with Imperial Airways of the UK). This marked a new beginning in India. Three years later, Tata Sons started a regular airmail service between Karachi and Madras. At that time, there were a few transport companies operating within and also beyond the frontiers of the country, carrying both air cargo and passengers. Some of these were Tata Airlines, Indian National Airways, Air Service of India, Deccan Airways, Ambica Airways, Bharat Airways, and Mistry Airways. The Tata Airlines was converted into a public limited company in the year 1946 and renamed Air India Limited. In 1948 a joint sector company, Air India International was established by the Government of India and Air India, which was headed by J.R.D. Tata. In 1953, the Parliament passed the Air Corporation Act. Air India International and Indian Airlines Corporation came into formal existence and Air India International was nationalized. In 1991, the Indian economy began to liberalize. It became more open and market-oriented, and the process of deeper integration with the world economy had begun. These reforms were extended to the civil aviation sector in 1994 when the Air Corporations Act of 1953 was repealed. This enabled the entry of private carriers who could now offer scheduled services. The market did not grow large enough for all these players to compete. There was a shake-out and many airlines went bankrupt. Jet Airways and Sahara Airlines (which became Air Sahara in 2000) were the only surviving carriers (Natarajan & Sridevi). These developments in Indian Airline Industry can be divided into three stages (Anon, 2009b):
Stage I: Till mid 1990s
Although several private players like Jet Airways, Air Sahara, ModiLuft, Damania Airways, NEPC Airlines, and East West Airlines entered the market, but still the primary motive was the protection of national airlines. Tremendous restrictions put on these carriers led to the collapse of the entire airlines industry. All the players died except Jet Airways and Air Sahara.
Stage II: Period of Inaction (1995-2003)
This was a period when no attention was given to the airline sector. It was marred by too many regulations and total neglect. Even national airlines faced the shortage of capital. Aircraft purchases of these flag carriers were suffering and at the same time there was no infrastructure development carried out. During this phase, Europe saw the emergence of low-cost carriers, which transformed the airline travel and initiated a period of traffic boom in other markets. This period was marked with a clear lack of strategic intent and this put India far behind the rest of the world.
Stage III: Period of rapid action (2004 onwards)
It was a period when the airline sector got the attention it deserved. India’s first low-cost, no frill carrier Air Deccan was allowed to start operations in South India. Kingfisher Airlines, SpiceJet, GoAir and Paramount Airways entered the industry. Open skies agreements were established with many countries allowing Indian carriers more access abroad. Now, aircraft carriers with a minimum of 5 years of operation and 20 aircrafts can operate on international routes.
According to India Brand Equity Foundation (Anon, 2009a), the Indian aviation industry is one of the fastest growing aviation industries in the world having a growth rate of 18 percent per annum. The government’s open sky policy has led to many overseas players entering the market and the industry has been growing both in terms of players and the number of aircrafts. Today, private airlines account for around 75 percent share of the domestic aviation market. India has jumped to 9th position in world’s aviation market from 12th in 2006. The scheduled domestic air services are now available from 82 airports as against 75 in 2006.
LOW-COST CARRIERS (LCC’S) IN INDIA
In 1970s, the low-cost carrier model was introduced by Southwest Airlines, a major carrier in the United States. Later, in 1990s, this business model was introduced in Europe, and in India, the model was introduced in 2003 by Air Deccan. Much to the detriment of traditional network airlines in North America, Europe, and Asia, well-capitalized start-ups have entered the low-cost carrier market, and existing no-frills carriers have grown rapidly. These carriers are exploiting a powerful, previously-untapped market opportunity to leverage low unit costs to stimulate demand among more price-sensitive travellers with lower fares; and to seize market share from less agile competitors saddled with legacy labour and infrastructure costs.
According to the IBM Business Consulting Services Report released in 2004, the LCC model has demonstrated its ability to consistently deliver operating margins exceeding those of full-service airlines. Even if they continue their downward trend toward Southwest’s long-term average of 10 to 15 percent, this remains an unreachable territory for the majors in all but the best years. Low-cost carriers have been able to demonstrate consistent profitability- 31 years of consecutive annual profits for Southwest, 13 for Ryanair, 6 for EasyJet, and 3 each for both JetBlue and Virgin Blue.
Until about a few years ago, there were only three scheduled domestic carriers in India- Jet Airways, Indian Airlines, and Air Sahara. Then, on August 25, 2003, India’s first low-cost airline, Air Deccan started service with its maiden flight between Bangalore and Hubli. It was launched by Gorur Ramaswamy Gopinath, an ex-Army officer who ran Deccan Aviation Private Limited, India’s largest private heli-charter company. Deccan Aviation did reasonably well in selling the concept of chartering private helicopters as a means of transportation, and had built a reputation for providing speedy and reliable heli-services for company charters, tourism, medical evacuation, and off-shore logistics. Gopinath launched the airline with a clear focus: offer rock-bottom fares, fly to every destination possible (including Kandla, Pathankot, Tuticorin, Vijaynagar, Raipur), and make the common man fly (Chowdhury, 2008). Within three years, Deccan covered 65 airports, was operating 350 flights a day with 43 aircraft, and had captured 20 percent of the market.
On board the Air Deccan flights, food was not free and travellers had to pay for their meals. The tickets did not carry seat numbers, so those who came first could opt for the best seats. The inaugural fare for the Delhi-Bangalore route was 30 percent less than those offered by its rivals such as Indian Airlines, Air Sahara, and Jet Airways on the same route. The cheap tickets became the unique selling proposition and the fares offered were half of what were offered by all its competitors. The travellers had never seen such low fares before and as a result, air travel started to be looked upon as a substitute to train travel. But, other carriers including Jet publicly declared that the low-cost model was sure to fail. Unlike the United States and Europe, India did not have separate low-cost airports with cheaper landing and parking charges, which are essential to cut costs. Another argument these airlines gave was that cutting out on meals would save some money, but not enough to offer such low prices and still make money.
Later in 2007, Jet acquired Air Sahara for Rs 1450 crore and turned it into a ‘value carrier’ called JetLite. It further went on to launch a new all-economy, no-frill service called JetKonnect which was another low-cost service with low-cost fares. The services were the same except that no food was served on flight. In 2008, Kingfisher Airlines, which had positioned itself as a premium service provider, bought Air Deccan and renamed it as Kingfisher Red; thus retaining its low-cost identity.
The success of Air Deccan spurred the entry of more than a dozen low-cost airlines in India, including Kingfisher Airlines, SpiceJet, GoAir, Paramount Airways, and IndiGo.
RIVALS AS PARTNERS- MERGER OF AIR DECCAN AND KINGFISHER
A wholly owned subsidiary of Deccan Aviation, Air Deccan, is considered to be India’s first low-cost carrier. It had a vision to enable every Indian to fly and adopted the mascot of the common man of Cartoonist Laxman. The common man identity represented the airline’s simple and no frills approach. Tata Motors recently created a stir in the Automobile industry by launching Nano; the world’s cheapest car, priced at USD 2500. Air Deccan did a similar thing long before, by revamping the Aviation industry in India and shifting people from rail travel to air travel. This was made easy by the drastic reduction in prices of air tickets and introduction of a new segment of travellers, the first time travellers.
Air Deccan airlines merged with Kingfisher Airlines and decided to operate as a single entity from April, 2008. This came to be known by the name Kingfisher Aviation and Air Deccan after merger with Kingfisher came to be known as Kingfisher Red. The merger was based on recommendations of Accenture, the global consulting firm. KPMG was asked to do the valuation and the swap ratio was decided accordingly. The merger came through as Vijay Mallya from Kingfisher airlines bought 26 percent of the stake in Air Deccan. The unification of the two carriers had to be sanctioned not only by the two panels, but also by the institutional investors, independent directors, and other shareholders.
After the merger, the company had a combined fleet of 71 aircrafts, connected 70 destinations, and operated 550 flights in a day. The combined entity had a market share of 33 percent. Gopinath continued as the Executive Chairman and Mallya took charge as Vice Chairman. The charter service of the respective airlines was hived off and operated as a separate entity. Post merger, Kingfisher would operate as a single largest (private) airline in the sub-continent. Besides, operational synergies (engineering, inventory management and ground handling services, maintenance, and overhaul), the management, and staff of both the airlines would be integrated. They would be stronger vis-à-vis lesser aircraft manufacturers (Airbus in this case), and will also spend less on training and employees.
Costs associated with maintenance of aircraft would also reduce. The savings in cost would be lower by about 4-5 percent (Rs 300 crores), which is a large sum. It would result in a saving of 3 billion in the first year itself through the sharing of aircraft and workers. Further, by devising a more optimal routing strategy it could help in rationalizing the fares. Before the merger, Air Deccan recorded a net loss of Rs 213.17 crores on revenue of Rs 437.82 crores for 2006-07.
FUTURE OF LOW-COST CARRIERS
As the profits of traditional carriers evaporate, so does their ability to invest in the next generation of aircrafts and systems that might go some way to helping them out of their misery by providing lower running costs as well as a better experience for passengers. By contrast, low-cost carriers know exactly what they are offering and to whom. They know their customers are willing to forgo the traditional ‘frills’ of flying in exchange for a much cheaper ticket (Manning, 2006).
The scenario where the consumer was the king with fares hitting a new low everyday while the airlines continued to incur losses has changed over the past year. Despite the bullish traffic growth estimates for India, past experiences suggest that it is extremely difficult for a market to absorb as many new entrants as the sector was witnessing in India (Shukla, 2007). The first mover advantage enjoyed by Air Deccan was short-lived, and soon several carriers emerged. But, the costs for their management increased due to the poor airport infrastructure and manpower shortage. The real trigger for the consolidation process for airlines came after the acquisition of Air Sahara by Jet Airways.
According to the Centre for Asia and Pacific Aviation’s (CAPA) India unit, India is potentially a ten airline market, consisting of two-three full service carriers, two-three large national low-cost carriers operating a fleet of more than 70 aircraft each, and three-four niche regional operators with aircraft of less than 80 seats. The growth that the sector will see in near future will come from International routes. Airlines in India are bound by limitations as to where they can fly within the country. There are a few big airports which can handle Boeing 737s and Airbus A320s. For the smaller airports, aircraft like the turboprops or the regional jets make sense and the key metro routes like Mumbai-Delhi are already saturated. On the other hand, airlines can command better realizations and margins on international routes. International traffic will grow at a rate of 15 percent till the end of this decade. Domestic traffic is expected to grow at a higher rate and is expected to grow between 25 to 30 percent per annum.
With Air Deccan’s low-cost strategy experience having seen results, the concept is seen as a strategy that will work in the Indian skies. Jet Airways developed JetLite (Air Sahara) as a value carrier with frills that offers low fares on some of its domestic routes. SpiceJet points out that the 15 percent of the cost savings for low-cost carriers come from utilizing the aircraft better compared to full service carriers and another 8 percent from cost-effective ticket distribution. All LCCs sell most of their tickets on the Internet and do not have to spend on providing commission to agents. In contrast, full-service carriers sell only 23-30 percent of their tickets online. LCCs are paranoid about their costs. While Kingfisher will shift some aircraft to Kingfisher Red, some of them will still have entertainment systems and other frills which will increase the weight of the aircraft and thereby the costs. IndiGo uses a lighter exterior paint to keep the weight of its aircraft as low as possible (Gupta and Chowdhury, 2009). The industry further forecasts that LCCs will have a market share of 70 percent by 2010, which would probably be the highest in the world.
Different low-cost airline operations around the world- Southwest Airlines in the United States, Ryanair in Europe, AirAsia in Malaysia, Gol in South America, and AirArabia in the United Arab Emirates; are not just a new business model, but a distinct structure of policies and procedures. Typically, airlines are required to take a long-term investment approach and to place greater importance on the inherent loyalty benefits of a frequent flier program. Maintaining a competitive edge is also an early and important factor in the decision making process and is used to evaluate whether or not to launch a program (Sorensen, 2006). The influx of low-cost airlines across the globe has roiled the industry, and incumbents are scrambling to respond. In Asia, the most recent region to confront this disruption, new entrants and traditional carriers alike can profit from assessing the successes and failures of their North American and European counterparts. Clear success factors include an innovative customer experience, balanced growth, simplicity and efficiency from route structure to fare structure, and effective corporate governance. In a far more volatile environment than ever before, three new imperatives emerge for winning the airline margin game: refine the core value proposition, achieve a greater variable cost component, and improve infrastructure responsiveness.
Every worker’s performance is affected by the constant interplay of perceptions, emotions, and motivations, which is triggered by everyday events though; it remains elusive and invisible to management. Nowadays, all companies talk about innovation, and the importance of “doing” innovation, many actually try to “do it”, and only a few actually succeed in doing it. The success of companies is based on creating a culture of innovation, developing structures, and human resource pool necessary to support, and nourish a climate of creativity and innovation, and above all, bench marking the best innovative practices to gain competitive edge in the market place. Organizations should understand by now that the skills of human resources and the motivational level make possible involvement of people, creative suggestions, different proposals, and research activities to build up innovations.
Low-cost carriers are shedding their “no frills” personalities and are adding amenities as competition increases with established airlines and even other LCCs. These airlines are reaching out to capture business travellers with services normally associated with legacy airlines. These added value services include premium cabins, seat assignments, airport lounges, meal service, and frequent flier programs. Other regions of the world, where the LCC phenomenon is in its infancy, show less loyalty marketing activity. Most frequent flier programs begin as a cost centre for the airline. The expense of developing and operating programs will initially exceed the partner revenues generated by a just-launched program. Surprises do exist in the marketplace and LCCs can sometimes negotiate attractive signing bonuses with banks wishing to secure a co-branded relationship with a growing airline.
The Indian Civil Aviation market grew at a compound annual growth rate (CAGR) of 18 percent, and was worth USD 5.6 billion in 2008. The Centre for Asia Pacific Aviation forecasted that domestic traffic will increase by 25 percent to 30 percent till 2010 and international traffic growth by 15 percent, taking the total market to more than 100 million passengers by 2010. By 2020, Indian airports are expected to handle more than 100 million passengers including 60 million domestic passengers and around 3.4 million tonnes of cargo per annum. Moreover, significant measures to propel growth in the civil aviation sector are on the anvil. The government plans to invest USD 9 billion to modernize existing airports by 2010. The government is also planning to develop around 300 unused airstrips.
The success of LCCs depends on the formula of innovation, adaptation, and flexibility. The low-cost carriers are developing outside the traditional view of what a low-cost carrier should look like. Some are of the view that the changes taking place act as a sign that this model has run its course. However, extending the geographic reach and expanding diversity of this model is a sign of strength. It is a step forward in the transformation from a closed, one-dimensional industry to an open, competitive multi-dimensional industry.