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The Impact of Mobile Services on the Interaction between Airlines and Passengers

by Markus Biedermann (Author) Doron Levy (Author)

Term Paper 2013 28 Pages

Business economics - Offline Marketing and Online Marketing

Excerpt

Table of contents

List of Tables

Abbreviations

Abstract

1. Introduction

2. PEST analysis of the European airline industry
2.1. Political factors
2.2. Economic and ecological factors
2.3. Social factors
2.4. Technological factors

3. SWOT analysis of Lufthansa
3.1. Strengths of Lufthansa
3.2. Weaknesses of Lufthansa
3.3. Opportunities of Lufthansa
3.4. Threats of Lufthansa

4. The value chain of an airline
4.1. The impact of mobile services on operations
4.2. The impact of mobile services on outbound logistics
4.3. The impact of mobile services on marketing and sales

3. Conclusion

References

Figures and Tables

List of Tables

Table 2-1 PEST analysis of the European airline industry

Table 2-2 SWOT analysis of Lufthansa

List of Figures

Figure 2-3 the Generic value chain

Figure 2-4 Airline value chain related to Lufthansa

Abbreviations

illustration not visible in this excerpt

Abstract

The purpose of this paper is to research how mobile services impact the interaction between airlines and passengers. The paper begins with a PEST analysis of the European airline industry and focuses on technological changes. It continues with a SWOT analysis of Lufthansa, where we interlink mobile technology as a platform which could reduce costs for the airline. In-depth research on mobile services and their impact on the interaction between airlines and passengers is performed by evaluating different mobile services along Lufthansa's value chain, namely the airline's activities in operations, outbound logistics and marketing and sales.

We claim that the interaction through mobile services is limited to one-way interaction, where airlines embrace the mobile services to perform cost reduction along their value chain, and neither offer two-way interaction with their passengers nor asking them to co-create the brand or the product. The current wireless mobile services are already offered via the internet, and allow a better and direct service for passengers. Mobile services are necessary for airlines, so they are not seen as out of date, but it does not mean that having mobile services contributes to having a competitive advantage. On the contrary, not having mobile services results in strategic disadvantage.

1. Introduction

Mobile wireless devices such as smart-phones and tablets have changed the way people interact with each other and the way they conduct shopping. New mobile wireless technologies have enabled users all over the world to stay connected to the online world by using their own personal mobile devices. Business processes are influenced by this trend too. Companies are now changing the way they interact with each and every customer by interacting personally to the customer's mobile device. Various mobile services are now available for use in various different industries. In some industries, the offered mobile services have changed the company-customer interaction. Amazon, for instance, allows real time price comparison by scanning a product's barcode while shopping. Airlines offer various mobile services to their passengers. It is now well common to check in for a flight and issuing a boarding pass using numerous airlines' mobile applications. However, questions rise – How do mobile services impact the interaction? Is this a new and improved interaction? Who is taking the stand in this interaction, and do these services provide any strategic competitive advantage for airlines?

This paper aims to answer these questions. We do so by steps, going from macro to micro. We begin by analyzing the external environment airlines operate in, and go deeper by analyzing an airline strategic position internally, and how mobile technology might assist airlines in overcoming financial obstacles. We then examine the interaction level mobile services have between airlines and passengers on selected activities in an airline's value chain and conclude. In order to have a better scope, we chose to focus on the European airline industry for our external analysis and on Lufthansa for both the internal analysis, as well as for the activities related to the value chain.

2. PEST analysis of the European airline industry

The aim of the following PEST analysis is to enable the reader a good understanding of the current external macro factors influencing airlines in Europe. PEST stands for the political, economic, social and technological factors shaping and influencing the economy as a whole and a specific company's own industry in particular (Shaw 2011).

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Table 2-1, PEST analysis of the European airline industry

2.1. Political factors

The deregulation of the European aviation market has been implemented gradually since the mid 1980's using multilateral agreements between the member states. Currently, the domestic aviation market in Europe is a true open sky regime, allowing any airline registered in an EU member state to operate freely within the borders of the European Union. (Doganis 2008). The international aviation market for European airlines is different. European airlines can fly to any point in the United States, regardless frequencies, but are not allowed to operate domestically on US soil. European airlines are neither allowed to operate freely to Asian and African destinations, nor to set pricing and capacity (Doganis 2010).

European governments, generally, are not allowed to support airlines. The only allowed state aid is a 2 years financial support for an airline launching a new route or operating from a small sized airport with less than three million passengers annually. This support could be granted only after proving a successful business model (European Commission 2013).

Political instability and terror cause immediate decline in demand, spread fear and strengthen security regulation. The ban of carrying liquids on board, for example, was ruled after the 2006 plot to bomb international flights departing from London Heathrow. Because of harsh security measures, passengers sometimes chose a surface mode of transport where security measures are less onerous (Shaw 2011). In addition, Airlines across Europe are also required to take part in financing the security regulation (European Commission 2009).

2.2. Economic and ecological factors

A growth in the economy translates into growing demand for air transport. The EC forecasts a future growth of 1.5% in Europe GDP by the end of the year 2014 (European economic forecast 2013). This growth indicates a potential growth of two or three percent in air traffic in the continent (Shaw 2011).

The increase of air traffic has ecological consequences. More flights mean more pollution by gas emissions. The EC has decided to include aviation in the European emissions trading scheme (EU ETS). This decision is restricted to European airlines only, which now have to pay emission charges according to the amount of pollution they produce (European commission 2013).

2.3. Social factors

The population in the continent rapidly ages, and the family structure changes as well. There are more divorces than marriages across the continent (Eurostat 2012). It requires airlines to adjust their marketing mix and promotions in order to target one-parent families. In addition, the European airlines must acknowledge the rapid changes in their customer characteristics, caused by the changes in today's globalised life style, and perform an adjusted segmentation accordingly (Amadeus 2013).

2.4. Technological factors

Technological change has the power to influence the industry structure and to shape the competitive advantage of a company. A company can benefit from technological changes by implementing an innovative technological strategy (Porter 1995). New technology can improve the airline's operations and manifest new sources of distribution channels as well as driving the business model. New technologies have improved the way airplanes are manufactured and parts are assembled. Airlines can now enjoy state of the art aircrafts and reduce fuel costs (Flouris & Oswald 2009). However, better technology has also created a threat to the airline industry in form of video conferencing, which has made travelling less essential. It also helps firms to save time and money and it is expected to increase in the future, especially during recession periods in the economy (Shaw 2011).

Airlines in Europe are influenced heavily by wired and wireless internet technology and the platform of social media. Developments in IT have led to the emergence of E-commerce. E-commerce deals with the facilitation of transactions and selling of products and services online via the internet. This involves the electronic trading of physical or digital goods encompassing all the trading steps such as online marketing, online ordering and online distribution (Jelassi & Enders 2008, p 4). E-commerce benefits airlines in several ways. It allows airlines to cut their costs of distributing their products via conventional channels like travel agents, and deliver the flight ticket electronically with no human factor involved (Doganis 2008). E-commerce also allows airlines to be more passenger centric by monitoring the way the passenger shops online using their website, thus collecting valuable marketing information on him and offering him a suitable product in return (Taneja 2011). Wireless mobile commerce transactions using mobile devices are referred to as mobile E-commerce or M-commerce. Unlike traditional E-commerce using fixed-wired computers, internet enabled mobile devices allow the users to become time and location independent, and broaden the possibilities of E-commerce further (Jelassi & Enders 2008). Moreover, mobile adoption is outpacing personal computer adoption (Taneja 2011). The global growth of mobile devices indicates that by 2017 over 10 billion mobile-connected devices will dominate the market, with users using more data-traffic per month (2.7 GB) then the current situation nowadays (0.885 GB) (Cisco Systems 2013).

Social media is the set of online communities where people socialize or exchange information and opinions. Among this set of online communities, popular social sites such as Facebook and Twitter can be found (Kotler & Armstrong 2012, p165). Social networking catches 7% of data consumption in a user's mobile device (Cisco Systems 2013). Social media is becoming a world phenomenon with increasing number of users. The power of social media is due to the fact that marketing information and social user behaviour can be gathered. This process of data mining can give airlines an advantage in the way they manage their relationship with their customers in real time (Taneja 2011).

3. SWOT analysis of Lufthansa

The SWOT analysis is a tool for analyzing the internal and external environment of a company. The term SWOT refers to four key elements, namely strengths, weaknesses, opportunities and threats (Panagiotou, 2003). The internal view consists of strengths and weaknesses and describes core competencies and problematic issues the company has to deal with, whereas analyzing external factors, which includes the opportunities and threats, relates to the model of competitive advantage (Porter 1995).

Lufthansa is Germany's national flag carrier and the largest airline in Europe. Lufthansa has announced its strategy of becoming the leading IT service provider in the airline industry (Lufthansa annual report 2012). The airline has a business segment dedicated solely to IT services, and provides an interesting case study for the purposes of this paper.

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Table 2-2, SWOT analysis of Lufthansa

3.1. Strengths of Lufthansa

Lufthansa is the major airline among Star Alliance's 28 airlines, which altogether fly a total of 727.42 million passengers a year (Star Alliance, 2013). This Alliance gives Lufthansa a competitive advantage and a strong strategic position worldwide. Lufthansa has shown in 2012 an increase in sales and revenue of 5.7% in all of its traffic regions (Lufthansa annual report 2012). Lufthansa also enjoys its Miles&More frequent flyer programme which was introduced in 1993, and currently has more than 23 million members worldwide. This solid programme allows Lufthansa to manage its customer relationship better and ensuring the occurrences of repeated passengers.

Focusing on the technology side, Lufthansa has its own innovative IT department, which lets the company achieve sustainable cost reductions in all business areas, making Lufthansa independent of external IT service providers.

3.2. Weaknesses of Lufthansa

Despite the fact that Lufthansa is profitable, it is suffering from a continuing decline in operating profit. The airline's operating profit has declined from 629 million Euros in 2010, to 349 million Euros in 2011 and it has fallen to 258 million Euros in 2012. The major fall in profit was generated by the passenger service sector, which makes this specific sector the weakest sector of the airline. Financially, Lufthansa is facing a dangerous situation where it is unable to outpace the expenses with its generated revenue. Last year's revenue was 0.6% higher than overall costs (5.7% revenue vs. 5.1% expenses). Lufthansa cargo business section also shows signs of weakness. The cargo market itself has to deal with overcapacities and at the same time decline in demand. The operating result of the cargo area fell by 58,2% last year, which results in a fall of 8,7% in revenue compared to 2011.

The airline, facing those financial downturns, was looking for a way to confront its weaknesses by introducing an internal cost reduction programme called SCORE. However, up until now, the programme has not been improving the airline's financial performance, as it was supposed to do. Though Lufthansa claims for positive effects of the SCORE programme in its annual report, it fails to provide certain financial figures of improvement to support its claim. In addition, Lufthansa CEO, Christopher Franz, who is in charge of the program and has been driving the programme forward, leaves the company by March 2014 (Aviationweek 2013).

3.3. Opportunities of Lufthansa

The total passenger air traffic worldwide is rising and outperforming a weak global economy. People fly more and the market is growing (IATA annual review 2013). This fact gives Lufthansa potential opportunities to deal with the bad performance of its passenger sector. The main market growth comes from emerging markets in Asia, Latin America and Africa. Lufthansa already has a strong position in its home market in Europe. It now has the opportunity to emerge and develop into those emerging markets, thus increasing its traffic volume.

The premium and business travel segments have a share of 27% of the air travel revenue (IATA annual report 2012). Lufthansa has products directly intentioned on capturing those segments (prioritized personal boarding on short-haul flights, for example), which put the airline in a good opportunity situation to attract an even higher number of high yielding travellers. Premium travellers also tend to be early adopters – people that tend to have new technologies at first, which also include wireless mobile devices. The mobile services market for aviation is growing (SITA Airline IT Trend survey 2013), and Lufthansa has the opportunity to utilize its own IT business department in developing innovative products, thus differentiating itself from its competitors.

3.4. Threats of Lufthansa

The increase of air traffic in Asia, Africa and Latin America, mentioned in the previous section, is also seen as a sign of threat for the airline. Those emerging markets are far away from Lufthansa's home market. Lufthansa simply does not have widely spread infrastructures there. It would be very cost intensive once Lufthansa tries to emerge or enter those rising markets. In addition, the continuous consolidation in air traffic outside those markets increases the competition with the traditional markets and puts even more pressure on pricing. A major threat is also seen by the low demand for air freight, which impacts Lufthansa cargo.

Regulatory acts impose a major threat to Lufthansa. The deregulation of the European aviation market, mentioned previously in the PEST analysis, has paved the way for low cost competitors which take sufficient amount of domestic traffic volume from Lufthansa. In addition, Lufthansa must pay emission charges on its domestic routes, where its competitors from the Middle East or Asia simply do not. Last year, for example, Lufthansa has spent more than 20 million EURO on emission trade in the year 2012 (Lufthansa annual report 2012).

Lufthansa's long operating history proves to be a disadvantage when it comes to labour costs. Many employees have old contracts of former times, where the airline industry had had much higher revenues and therefore the social conditions and salary of those employees are relatively high above the business average. Strong labour unions in Germany and Europe put pressure on the airline's costs, making it difficult to implement changes (Spiegel 2012).

The cost efficiency program SCORE could at the end be less successful than expected. Moreover, the Euro crisis and the very low interest rates at the moment put pressure on Lufthansa. The economy has not recovered yet from the Euro crisis, and the low interest rates make it impossible to gain the necessary interests from the financial market needed to cover the costs for the pension plan of Lufthansa's employees. Lufthansa also has to deal with rising fuel and air traffic fee costs affecting all its operation fields directly.

Though Lufthansa focuses seriously on the mobile technology trend, this technology changes rapidly and new mobile devices are being marketed fast. If an airline wishes to achieve either cost reduction or differentiation by using modern IT technique like mobile devices, it has to be the first among its competitors to do so. Unless Lufthansa acts quickly, it could lose this market to its competitors and not achiev the advantages of a first mover. Those advantages could translate in improving Lufthansa's reputation as a pioneer and a leader in technology, especially in mobile services, defining the standards of the technology and ensuring patents on the technology it invents (Porter 1995). Nevertheless, mobile software innovations made by Lufthansa could be copied very easily, so that the costs of innovate this technology could not be sufficiently compensated by the differentiation effect it would have.

4. The value chain of an airline

The value chain model was created by Michael Porter in the 1980's. It represents the collection of activities performed in order to design, produce, market, deliver and support a product of a given company (Porter 1995, p36). The value chain is based on how processes are viewed in a firm. The firm is seen in this model as a system built of many different sub-systems. Each of the sub-systems has its own inputs and processes, and produces outputs. Along the chain, the outputs of one sub-system interlink with the inputs of the downstream sub-system.

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Details

Pages
28
Year
2013
ISBN (eBook)
9783656887553
ISBN (Book)
9783656887560
File size
715 KB
Language
English
Catalog Number
v288252
Grade
Tags
impact mobile services interaction airlines passengers

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Title: The Impact of Mobile Services on the Interaction between Airlines and Passengers