Sarosh Bhatti

Introduction and Definitions

Organizations’ successes and failures can traditionally be attributed to any of the following: not adopting technology, inefficiencies, high costs, not being innovative, econometric impacts, and the list goes on and on. No one realizes that these are just elements of a mosaic, and for a business to effectively compete and grow, the business model must make sense and should be well thought out. In this article, I will explore at a higher level what a business model is and then provide an overview of its applications in aviation, especially airlines and airports (further referred to as “A&A”).

To begin, let’s narrow down what a business model is. There are various definitions, and some are:

Magretta defines business models in terms of value chains: “Part one includes all the activities associated with making something: designing it, purchasing raw materials, manufacturing, and so on. Part two includes all the activities associated with selling something: finding and reaching customers, transacting a sale, distributing the product, or delivering the service. A new business model may turn on designing a new product for an unmet need or on a process innovation. That is, it may be new in either end.”

Alex Osterwalder defines it as: “A business model is really a set of assumptions or hypotheses, and is essentially an organised way to lay out your assumptions about not only the key resources and key activities of your value chain, but also your value proposition, customer relationships, channels, customer segments, cost structures, and revenue streams — to see if you’ve missed anything important and to compare your model to others”.

Business models are also often confused with strategies when comparing one model to another. To put it simply, a business model is a description and framework of how the business runs, and a competitive strategy is how you will out compete your competitors. A sound business model answers simple questions with clarity as to who the customers are, what they value, how the firm delivers this value, and how the firm differentiates itself from competitors when delivering value in terms of processes, products, services, efficiencies, and pricing.

The Rise of Disruption

A business model is like a mosaic in that you cannot look at individual sets but have to look at the total picture to understand what it’s trying to say. Start-ups and new market entrants are coming up with better business models, which are forcing the traditional firms to start thinking differently or risk losing market share to the point of closing the shutter. The point of disruption doesn’t appear overnight to businesses; instead, they start getting red flags quite early on. Initial symptoms such as high expense initiatives leading to little or no revenues, smaller improvements to core processes, less innovative ideas from inside the organisation, greater reliance on inputs for strategy and product offerings from external sources. These are just some of the indications which businesses should always be on alert for.

Business models for A&A may differ due to region, industry environment and structure, competitive environment, ownership structure, etc. In any case, the business must be clear and crisp of what its business model is. While there are various frameworks and structures that can help define a business model, here we will use Osterwalder’s nine building blocks to define airline and airport business models, as these are quite similar regardless of the type of ownership structure or region. The nine components are illustrated below:

Customer Segments

               Customers are the reason why A&A are there, so they are the centre of the business model. To better serve their customers, airlines and airports would group customers into specific segments to better cater to their needs. Some of the customers for airlines are first-, business-, or economy-class passengers; and for a hub or non-hub airport, customers include airlines, passengers, cargo operators, tenants, and real estate developers. Airlines and Airports then have to make a decision as to which segment they are going to target. Once a decision has been made, the business model would then have to be designed and developed around the customer’s needs. Some of the different types of customer segments are:

·        Mass market

·        Niche market

·        Segmented

·        Diversified

·        Multi sided platforms 

Value Propositions

The value proposition describes the products and services that the airline and/or airport are going to offer to the target business segment. This is what creates a niche and why customers will choose one airline or airport over another. Some important things to consider when designing value propositions are:

·        Which customers are we going to target?

·        What are their needs?

·        What value (products and services) are we going to deliver to them?

·        What percentage of customer needs are we going to satisfy through our value proposition?

 Values can be quantitative (price, speed of service) or qualitative (design, customer experience). 

Channels

Channels that needs to be considered for interface with the customer are communication channels, sales channels, and distribution channels. Usually channels are the customer touch points and account for customer experience. Channels serve function such as:

·        Raising awareness amongst customers regarding company’s products and services

·        Helping customers compare value propositions

·        Allowing customers to purchase specific products and services

Some important questions to ask are:

·        Through which channels do our customer segments want to be reached

·        How are we reaching them now?

·        How are our channels integrated?

·        Which ones works best?

·        Which ones are most cost-efficient?

Channels have five phases:

·        Awareness: How do we raise awareness?

·        Evaluate: How do we help customers evaluate our value proposition compared to competitors?

·        Purchase: How do we allow customers to purchase our products?

·        Delivery: How do we deliver value proposition?

·        After sales: How do we provide post-purchase service?

Customer Relations

Customer relations are established and maintained with each customer segment. The main intents for building customer relationships are:

·        Customer acquisition

·        Customer retention

·        Boosting sales (up-selling)

In the beginning days of mobile technology, organisations were first focusing towards customer acquisition and then as market saturated, they started placing more focus on customer retention. One should consider the following:

·        What type of relationships do each of the customers expects from us?

·        Which ones have we established?

·        How costly are they?

·        How are they integrated with the rest of our business model?

Some of the categories of business relationships are:

·        Personal assistance: Through call centres or by email

·        Dedicated personal assistance: Personal bankers for high net worth individuals

·        Self-service: no direct relationship with the customer

·        Automated services: personal online profiles giving access to customised services

·        Communities: User communities to know more about their customers and solving those

·        Co-create: Getting customers

·        To create content and add value for example, Youtube

Revenue streams:

If customers are the heart of the business model, then revenue stream are its arteries. A successful business knows the price its customers are willing to pay for the value they get in return. How they are currently paying, how they would prefer to pay, how much each revenue stream contributes to overall revenues.

For airlines, the revenue streams are from passenger ticket sales, cargo carriage, and ancillary revenues from baggage, on-board sales, etc.

Typical revenue streams for airports are aeronautical revenue, which includes revenue like aircraft landing and parking and other related aeronautical activity; non-aeronautical revenue such as concessions, car parking, etc.; and non-aviation related revenue which may include real estate development, etc.

Basically, at a high level there are two types of pricing mechanisms: either a fixed menu pricing or a dynamic pricing. While airlines have introduced dynamic pricing in fares, airports are still pretty stagnant in the fixed pricing structure.

Key Resources

Key resources allow airlines and airports to create and offer value propositions, reach markets, maintain relationships with customer segments, and earn revenues. Key resources can be physical, financial, intellectual, or human resources.

Key resources for an airline are aircraft, ground support equipment, reservation and distribution systems, maintenance and repair overhaul facilities, etc.

Key resources for an airport to name a few are runways, terminal buildings, intellectual property rights, process efficiencies designs, cash and line of credit. 

Key Activities

These are the most important activities an airline or an airport must undertake to operate successfully and be profitable. Just like key resources, these activities create value propositions. For PC manufacturers like Dell, key activities include supply chain management; for consultancy groups like McKinsey, key activities include problem solving.

Key activities for an airline are the transportation of passengers and cargo from point A to point B and depending upon various airports business models, key activities include keeping capacity ahead of demand and delivering efficient services at each customer touch point.

Key Partnerships

These include suppliers and partners that makes a business model work. Three main reasons airlines and airports may enter into partnerships are optimisation and economy of scale, reduction of risk and uncertainty, and acquisition of particular resources or activities, for example ground handling companies.

Cost Structures

Cost structures includes all OPEX and CAPEX costs that are required to run the business. While cost is always an important element some companies are either cost-driven- or value-driven. Value-driven airlines are full-service carriers, and cost-driven are no-frills low-cost airlines. In the airport environment, the majority of the mega hubs are value/efficiency-driven, while spoke airports are cost-driven.

The above are nine key elements of A&A business models. Successful and forward-looking organisations have to ensure that they are aligning their strategies and aspirations to the business model, as any gaps will result in less than desirable results.

References

1.      What is a business model. https://hbr.org/2015/01/what-is-a-business-model

2.      When your business model is in trouble. https://hbr.org/2011/01/when-your-business-model-is-in-trouble

3.      Oasterwalder & Pigneur (2010). Business Model Generation.

4.      http://www.bmnow.com/business-model-innovation/