In trying to review the existing literature, this dissertation will adopt the four-pillar approach as outlined by Osterwalder, et al (2005) in their nine business model building blocks structure (p.18). This will be necessary as it will induce a sense of focus and direction to the review and hence limit it to the study topic. In this regard the review will be limited to literature on the products offered by airlines industry how the industry stakeholders go about creating interactive customer interfaces the key strategies employed by the industry players the management of interactions infrastructure, and the core financial management tools employed by the industry players to maximize profits while keeping costs at manageable levels.
The aero-engines industry for instance is a unique industry in that, it entails large sums of capital to manufacture aero-engines, to build aircraft frames, to carter for fuels and labor expenses, as well as taxes paid to domestic and foreign governments for using their airspaces (Almeida, 1997). See appendices for a detailed table The high amount of capital may be prohibitive to industry players particularly during hard economic times. For instance, to fully assemble and equip an aero engine with the necessary parts and components requires more than 35 million while assembling a 7 x7 aircraft frame may costs a whopping 250 million. By fair terms these are relatively high costs which need to be distributed among a number of industry players so as to cushion the eventualities of shocks and risks.
These costs may even be much higher particularly if the aircrafts fail to reach its minimum operation lifecycle due to marketplace as well as natural calamities (Buxton et al 2006). In fact, it is known that aircrafts are prone to all manner of risks that range from human to natural catastrophes. For instance the industry is highly affected by extreme heat, extreme cold, fog, volcanic emissions, and hailstorms among other severe environmental conditions. Moreover, it is true that unlike automobiles, aircrafts undergo rigorous and regular maintenance and inspection. This is necessary as a small hitch on an aircraft can cause immense losses as opposed to the case of automobiles that can be fixed in the middle of a journey in the event of a breakdown (Farr, 2006).
Background of Aviation Industry
Two major events in the aviation industry in the United States have serious repercussions in the aviation businesses. Firstly, Scott et al (2006) and Buxton et al (2006) agree that the airline industry is faced by a barrage of financial and operational challenges. Apparently, the industry faces these challenges at a time it is being weaned from the close support it used to enjoy from the domestic governments. As a matter of fact, the state coffers have over the past been used to cushion the airline industry from marketplace challenges such as financial crunches as well as cut-throat competition. This is a trend that can be attributed to major airlines considered as national flag carriers that have in the past not exposed to the marketplace vulnerabilities. In the US for instance, an estimated 5 billion were distributed to a number of major airlines between 2000 and 2003. This was mainly done to prevent the airlines from going into bankruptcy as stipulated by the provisions of Chapter 11 of the US Constitution (Scott et al, 2006).
As such, there is no doubt that the state financial and administrative leverage played a huge role in streamlining the airline industry. However, this trend is slowly changing particularly following the realization that the Over-capacity and low yields lead to instability and the effects of any disturbances within the global economy cannot be absorbed through bailouts (Buxton, et al 2006, p.2). Needless to say this is a wakeup call to airlines as well as other major players in the industry to adopt more competitive and cost effective business models as a practical solution to the overreliance of support from the public coffers.
The other major event was the famous September 11terrorist attacks (Thompson, Strickland, Gamble, 2003 C-644). Because of low airline traffic, airline companies were financially affected so much so that many airline firms went into downsizing, cancelling orders of additional aircrafts, cutting down number of flights, went into borrowing money to cover cash trapped coffers, and as a last resort, filed for bankruptcy. It was a dark period in the history of U.S. aviation which also affected the aviation global business landscape. On top of this, the 2008 global financial crisis caused great financial crisis to the commercial aviation industry, still reeling from the after effects of the terrorist attacks. Such was the scenario in the last decade in this highly technical industry (Thompson et al 2003).
A combination of these two major events as well as a gamut of other marketplace impediments threatens the smooth operations of the airline industry and in particular the MRO aspect of the industry that apparently is directly responsible for between 10 percent and 15 percent of the overall airline expenditure (Knotts, 1999). Bearing in mind that the aero engines are the aerospace industry drivers that creates revenue for all the stakeholders through the normal engine flight hours (EFHs) and engine flight cycles (EFCs) as well as maintenance and consumables whilst in service there is a great need for aero engines to collaborate with aircraft frame builders, airline operators as well as other ancillary services providers (Buxton, et al 2006, p.4).
These collaborations may take the form of a complete or partial reinvention of their various ways aero engines industry conduct their business activities. Admittedly, the changing business scenario calls for drastic changes in the aero engine business models. No longer competitive by merely just trying to deliver products, conduct repairs, and go into overhaul, the industry has to explore new business approaches if it desires to be globally competitive. The industry has to adopt the changing market place and realities and adopt fast (Steffens Hollmeier, 2009). This kind of reflection on past business models, to determine which worked well or did not work, or even which should be re-invented or re-engineered must preoccupy aero- engine management nowadays if it desires to exploit market opportunities and take new directions on how to compete in the future.
In light of the above discussion, new and interesting directions suitable for the industry strategic positioning can be advanced. These are drastic reduction of new engines development and production costs revision of the value- added chain consolidation of the industry and entry into cooperative programs and product differentiation through innovative technologies (Steffens and Hollmeier, 2009). In addition, Steffens and Hollmeier suggest outsourcing MRO and engaging in strategic alliances with other corporate partners in the industry.
Let us take this one by one. In terms of drastic reduction of new engine development and production costs, there is a need to be cost-effective in coming up with new aero engine parts but at the same time not sacrifice quality. Where are the areas where costs can be drastically reduced These can be done in the variable costs as well as in the production costs.
Regarding product differentiation mentioned by Steffens and Hollmeier (2009) as one of the strategies to be adopted by the industry, this is affirmed by Porter (1985 14) who remarks, A firm seeks to be unique in its industry along some dimensions that are valued by the buyers. For the aero engine industry, this strategy can be translated as offering unique spare parts after-sales support system. Product differentiation can be a way to be ahead of the competition. When aero engine companies think of innovative and unique products, they are in actuality, trying to differentiate from other similar products manufactured by other competitors. On his part, Johansson (2004) acknowledges that it is true that for OEMs within the aerospace industry as well as other industries to wade through the murky global market economy they must embrace specialization. However, for this specialization to bear the fruits of innovation it needs to be collaboratively shared. In this regard aero engines OEMs, their customers as well as other industry players need to pool together their different specialities in what Johansson terms as open and amorphous networks of peers (p. 257).
On the hand, the revision of the value-added chain pertains to the life cycle of the product as well as whether the company make some changes either through new technology, or by coming up with some modifications in the whole value chain. Another way is to consolidate the industry and for companies to enter into cooperative programs. Industry consolidation and collaboration will demand that the companies within the industry should find ways to work cooperatively and collaboratively with one another. This is easier said than done. Entering into new cooperative projects involving other companies would mean getting into strategic alliances with them over the long term.
Current Trends in the After-Sales Service for Aero Engines
Innovative Business Models
Mabert, Ashok, and Campbell, (2006) identify a new source of income for the commercial industry that can be a source of competitive advantage. Farris et al (2005) likewise provide the aftermarket support practices and directions as well as the greater opportunities for supply chain management. Mabert et al (2006) pointed out that it is in aftermarket support that the opportunity to reap profits will emanate, not in the initial sales of spare parts for the aircraft. This is a radical way of thinking of how to compete. To think that they are an after support company, rather than just a company that delivers spare parts. Precisely, collaborative services between aero engines OEM, aircraft frame builders and airline operators should not only involve the conventional settlement of customer claims and warranty fulfillment, rather it should be holistic. It should encompass regular maintenance and overhaul services, procurement and timely delivery of spare parts, as well as other contract-long customer engagements. Such holistic after sales services are beneficial to both the end product companies as well as the OEMs. For instance, General Motors Corporation recently registered a huge profit from its 9 billion worthy of after sale services when compared to what it got with its 150 billion sales from its wide range of automobiles (Viardot, 2010). Ideally, technology and capital intensive companies have over the years managed to withstand market shocks by staging interactive and contract-long after services sales.
The underlying idea behind success from after sales services is that companies are able to supply their products and make conscious efforts to put in place strong preventive and supportive measures for such products (Bundschuh Dezyane, 2003). This helps to increase the value of the products sold while also creating strong customer relations for future business. As Viardot (2010) argues it is very easy for firms to find market for its products in segments that it already has strong relations as predicting market needs is easier than it is in new market segments. A case in mind is that of Toshiba where in 2002 the first month sales from warranty fulfillments went up by a margin of 37 percent, with overall sales averaging at 4 percent. The company had embarked on an aggressive drive to initiate an electronic based after sale services for its laptops. The drive entailed prompts to new users requesting them to create a profile that Toshiba used to make critical decision on the effectiveness of a range of warranties it offered (Viardot, 2010).
After-sales service activities in the consumer goods industry depict an orientation to improve company image, customer satisfaction and retention (Saccani et al 2006). This is highly important, indeed, and I agree with the authors in pointing out that the focus of companies offering after-sales service tasks should be to enhance the companys credibility and good image as well as make the customers happy and retain them through customer repeat purchases or their availing of the services. Besides, the after-sales service when done in excellent manner and of high quality would attract new clients. There are only a few big players in the global aviation industry and getting them to avail of the after-sales support service would redound to higher company earnings.
In support of this postulation, a study carried out by AMR Research, Inc. concluded that companies that practice after sales services are bound to realize up to an average of 24 percent in revenues and about 45 percent in profits. Rolls-Royce for instance registered a relatively higher profit margin (55 percent) in 2004 courtesy to its concerted efforts in practicing after sales services. Similar results were registered by Bombardier, another aero engines company where about 80 percent of present net value was recorded compared to 20 percent of the original investment value. Even so, this trend is not uniform across all aero engines and aircraft frame industries possibly due to the features of the after sale services model adopted. For instance, Airbus recorded a relatively low after sales services present net value of about 30 percent compared to its high values of about 70 percent of its new investment (Viardot, 2010).
Collaborative Business Practices
An intensive review of the literature on covering strategies employed by aero-engine companies reveals that they are now into collaborative business practices. These practices are comprised of strategic alliances, revenue and cost sharing practices, and virtual enterprise collaborations, which are enabled by information and communications technology. Scott et al (2006), supports this postulation when they argue that a combination of technical and financial snags pushes the aero engines OEMs into forming joint ventures. As it is now, the few major aero engines OEMs have formed joint ventures an indicator that indeed it is very difficult to survive as a lone ranger. On the other hand, such joint ventures are a blessing to the engine OEMs who pool their resources together and hence avoid the cut-throat market competition. It is indeed true that joint ventures do reduce the amount of profits realized by the individual aero engines OEMs however, given the inherent risks in the aerospace industry aero engines OEMs forming joint ventures gain a reprieve in the form of risk sharing than otherwise it would have been if they ventured on their own.
Larson et al (2010) acknowledge the importance of forming business alliances among OEMs. They assert that such alliances helps to influence their customers to make use of shared information, know-how, as well as other critical organizational materials. In their arguments they support the formation of Virtual Enterprises (VEs) which they argue accord OEMs an opportunity to choose which areas of their overall operational activities they should cooperate with their counterparts and which areas they should handle alone. A good example of an OEM in the aerospace industry that embraces this model is Rolls-Royce which pursues outsourcing and sometimes even outshoring about three quarters of its supply chain management while managing the remaining percentage. Specifically, Rolls-Royce ponders various aspects of the overall assembling of engines such as ... the hot end of the engine, the turbines, the compressors and fans and the alloys... and determines how they are made with view of outsourcing those elements that can be produced by others at a cheaper price (Johansson, 2004, p. 459).
Interactive practices speed up development cycle times, minimize and reduce product cycle costs. This is good news for other aero engine companies. They can now hook up with the virtual enterprise collaboration hub through an engineering portal. This is a virtual portal that at any moment can be accessed by strategic partners. This is the kind of collaboration that we are looking for in order to make the aero-engine industry globally competitive. It is good to know that MTU Aero-Engines has pioneered in this worthwhile strategic business alliance. If we look at the aviation industry three decades ago, this was not possible. The presence of the Internet today makes many things possible for the industry which otherwise were virtually impossible in the past.
On his part, Hill (1994, pp. 466-467) points out that strategic alliances for global manufacturers are a way to build trust between firm and suppliers. Trust is built when a firm makes a credible commitment to continue purchasing from a supplier on reasonable terms. It can be seen that for the aero-engine strategic alliances, there are advantages that can be derived if the companies adopt this strategy. However, there are also their attendant disadvantages. For instance, (Farris et al 2005) remark, strategic alliances involve greater risks, dependency, and rewards than do tactical alliances. Similar sentiments are shared by Buxton et al (2006), when they postulate that an agent-based business model not only reduces unnecessary costs but helps to predict future market trends. However, they are quick to point out that such model needs committed product managers capable of reading through market trends and making sound and timely judgements. In addition they champion for the VIBES (Virtual Interactive Business Simulator) tool that they argue can be successfully intertwined with the agent-based model to come up with new business alliances that can be utilized build future markets. Precisely, they envision a model where the modeller focuses less on event sequences and instead aims to capture the behaviour of each actor in a system as an agent with a degree of autonomy. Combining these three different modelling approaches together enables complex business environments to be modelled.
Scott et al (2006) offers that performance among aero engines OEM increases with MRO services high fliers in the industry are those that embrace proper MRO policies. In explanation they use a scale that shows peak financial achievements at either end of the curved scale. This can be perceived as a support to two of their three business models of virtual airline and aviation business group they advance in the same work. In this regard it can be deduced airlines practicing traditional business models are at a disadvantage as it becomes very difficult for them to compete at a level ground with their counterparts who have embraced new innovation particularly those that involve the delivery of non-conventional and opportunistic services to industry players.
Another model of collaborative business practices that I was able to find in the literature (Steffens and Hollmeier, 2009) is that of the European consolidation along the lines of a European System. They call it the European System Coordination and Management Company. In my opinion, such a European management company may be disadvantageous to the United States aviation industry, though. But I believe that it is a good move to take in order to consolidate and ensure that collaboration is effective and well coordinated.
Forecasting and Simulation Models in the Aero Engine Industry
Because of the uncertainty and great risks entailed in the aero engine industry, companies have tried to develop forecasting and simulation models to predict eventualities related to spare parts planning, scheduling, repairs and overhaul. Marbert et al (2006) mentions a forecasting model for spares demand planning using the SAP Advanced Planning Optimizer (APO) software system. Buxton et al (2006) focus on life cycle cost simulation. Stranjak et al (2008) presents the Overhaul Prediction Model and Scheduling Tool for simulation of complex aero engine operation.
On the other hand, the forecasting tool as described by Stranjak when compared with other forecasting models earlier mentioned appears to be powerful in terms of its capabilities to predict whole engine corporate risks, work scheduling, scenario modelling, and conducting what if analysis. These are the kinds of forecasting techniques that management need to enable them to mitigate unforeseen circumstances and events. These are statistical techniques that perform simulation and through this process, are able to predict events.
Another forecasting model is the dynamic modelling technique the the Global Manufacturing Networks (GMVNs). GMVNs are virtually volatile organizations that aids in integrating companies so as to enhance the sharing of critical resources. The advantages of GMVNs are their being highly flexible system with low barriers to entry and exit, geographic flexibility, low costs, rapid technological diffusion, high diversification, and exceptional economies of scale (Monroy Arto, 2008). Geographical flexibility calls for virtual teams deployed in some key areas in the globe that can respond with ease and speed.
But when we use this network, there are risks involved and we have to be wary of them. These are risk of contract manufacturers developing their own end-products in competition with their customers the risk of technology transfer, and the risk of losing process expertise. (Monroy Arto, 2008) I think this can happen when they will outsource manufacturing processes more and more to the network and a memory loss might occur. Caution is therefore called for in this instance.
Driouchi et al (2008) suggests that dynamic risk management policies for designing and appraising flexibility in service planning and provision should be adopted to allow for better decision making in the face of uncertainties. Dynamic forecasting models are indeed just that, management should have to evaluate the most effective prediction model for the company to adopt. This kind of forecasting technique uses non-linear dynamical models to capture fluctuations in demand and scheduling that cannot be captured by linear statistical models. In addition the authors indicate that services and products are merging and manufacturers are seeking to grow and protect their profitability by enhancing the service elements of their customer offerings. They give the example of Rolls-Royce Power by the Hour contract. Instead of selling aero engines to customers, these contracts enable the customers to pay for the engine capability, based on the hours flown, while the manufacturer retains the responsibility for maintaining the engine.
Modern Models of Business among Airlines and Aircraft Framers
Drawing from Doganis (2001) work, Scott et al (2006) advance three major business models adopted by major airlines in the world traditional airline virtual airline, and aviation business group. The traditional airline is a major business model that is being pursued by large airlines such as British Airways, Delta, and Iberia. This business model is more or less atypical to the government controlled airline that enjoys immunity from marketplace shocks. Practically, it entails regular and uninterrupted access to air travel services that involves collaboration between airlines where airlines agrees to run connection legs for other airlines within the same operation alliance. Again, through the alliance the airlines make it possible for their clients to book their travel arrangements through a single point even if the travel arrangements covers a relatively large route which is obviously not served by a single airline.
A good example of traditional airline model is the star alliance where 18 airlines share codes, marking, airside maintenance, and other relatively low costs services. Basically, This accords the clients to numerous benefits as it reduces the hassles of flight interruptions, long waits for flights connections, costs incurred in car hires, and most importantly it allows for the cross transfer of air travel points that are calculated based on the number of travels using any of the alliance airlines as opposed to a single airline. The large network of routes also eliminates the chances of flight cancellations and also accords the airlines the opportunity to enjoy the economies of scale hence maximization of profits while still offering other ancillary services such as meals and entertainment for their customers at subsidized charges or even free of charge for some special flights.
According to Scott et al (2006), virtual airline model of business entails exceptionally low prices, a feat that is achieved through concerted efforts to cut down operational costs as well as the scrapping of a number of costs such as in-flight meals and entertainment passed on to the customer in traditional business models.
Lowering air travel prices among airlines that practice virtual airline model is also made possible by a relatively high visibility of support service costs where the airline only partakes of doing those activities that are absolutely necessary and which it can do with minimal costs and with great ease while liaising with other stakeholders in the industry such as aero-engine manufacturers, aircraft frame builders, human resource consultancy firms, and others in bid to optimize efficiency while keeping the operation costs at a manageable level. Such close business liaison eliminates the notion of fixed costs as it offers costsprices alternatives for critical services such as repair, maintenance and overhaul of aero engines parts. Some airlines such as the Ryanair of German have already indicated that it will ponder the possibility of offering absolutely free flights as part of its virtual model pursuits. Low air tickets prices compounded with free meals and entertainment goes a long way in building a strong customer confidence and loyalty. Even at the backdrop of economic downturns this business model has attracted significant results among airlines that have been practicing it.
Graf (2005) supports this business model when he holds that airlines that have been practicing this form of business model are cable of realizing profits and hence remaining competitive during economic downturns.
For instance, airlines practicing conventional models of business in the US for instance have registered significant operational problems in adjusting to economic shifts when compared to their counterparts in German such as Ryanair and EasyJet that are better known for their relentless commitment in pursuing the virtual airline model (Scott et al 2006). On the other hand, airlines that opt to drop their traditional business models have got a chance to reap multiple benefits. They have an opportunity to penetrate relatively low-cost market segments hence maximizing their revenue base. Again, by moving their aircrafts, capital, employees, as well as other assets from traditional to virtual model of business, the airlines stand a better chance to forgo huge costs that they may have otherwise incurred. This is due to the inherent success and benefits associated with the virtual airline model (Graf, 2005). As a matter of fact, this evidential success has enticed big airlines in the world such as the KLM as well as Southwest (Scott et al 2006).
Lastly Scott et al (2006) discuss aviation business groups as their third business model practiced by airlines. In this model they argue that when looked from the customer viewpoint, this business model is more or less similar to the traditional model given that they both employ a collective ticketing. This business model however, indulges agents as well as online services to sell and carry out market promotions targeting mostly travellers on business trips. Practically, and in bid to maximize revenue creation this model also involves other services apart from those targeting business travellers. For instance, it also provides connection services to other airlines particularly to destination in the interiors of major business hubs. Riding on the wave of outsourcing g in the airlines industry particularly among airlines practicing the virtual airline model, the aviation business group business model seems to offer sound returns to airlines practicing it. For instance, Lufthansa and Singapore airlines provide a good example of airlines that have cut themselves niches by riding on the wave of outsourcing that has hit the contemporary airline industry. By being a potential outsourcing services provider for other airlines practising the virtual airline model aviation business group model airlines can utilize its staff as a source of revenue generators as well as doing their in-house maintenance.
2.2.5. Recent Aerospace Industry Models
Yusuf, Gunasekaran, and Abthorpe (2004) argue that contemporary market economies have changed over the years. Such changes has occasioned significant change of marketplace operations to an extent that internationalization is inevitable. They argue that initially companies were only concerned with creating quality products and selling them at reasonable prices. However, this is not the case in the contemporary marketplace. Companies must offer more than quality and affordable goods and services. They must ensure that their services are flexible and realistic to market forces such as diminishing sales, increased competition, high costs of production, etc. while still ensuring quality and value for money.
Using the case of Rolls-Royce the authors demonstrates how Enterprise Resource Planning (ERP) can be applied in the aerospace industry with satisfying results. Rolls-Royce had struggled for a long time with different operations systems without achieving significant results. The company incurred huge costs, despite the products being practically inefficient and incompatible with modern aerospace industry trends. However since it adopted the ERP model, Rolls-Royce handles all its complex operations in more efficient and predictable ways (Yusuf et al, 2004). The gist of the model is that it links together all processes involved in the critical production processes such as finance, human resource, procurement, manufacturing, inventory, supply, etc. this helps to cut down inventory levels, reduces redundancy, as well as inducing efficiency (p. 264).
According to Almeida (1997, the US aero engines industry has lost a significant chunk of its past glamour. It used to occupy the global number one position in the manufacture of original aircraft equipments, however du e to he calls uncertainty (p.2). However, given that two of the global leading aero engines OEMs, Pratt and Whitney General Electric continue to command significant market presence indicates that they have devised ways of mitigating this uncertainty. It is arguable that mitigating such uncertainty demands sound marketing strategies, risk management strategies, and above all organization integration strategies. Such organizational integration which entails close partnership between aero engines OEMs can go a long way in stabilizing prices as there are no threats of some company pricing its goods at lower prices to woe customers. Again, organizational integration allows for joint financing of key production processes and materials making the companies to reduce their overall cost of production considerably.
It should be noted that the demand for aero engines and aero engines parts is not high given the high prohibitive costs involved in its overall assembling, a thing that makes ownership of aircrafts a preserve of the societies most wealthiest. As a matter of fact, aero engines industries serve only four major categories of customers aircraft frame builders, airlines, governments, and armed forces. By fair terms this is relatively a small market. Consequently, aero engines companies that do not engage in organizational integration practices may find themselves playing second fiddle to their rivals. Again, basing on the fact that the aero engines market is highly cyclical (Almeida, 1997, p.4) it can be very difficult for companies to break such existing cycles particularly if it does not offer competitive services. In competitive services aero engines companies can offer high discounts to their customers on condition that they also include binding after services sales contracts.
This arrangement is advised by the unique nature of the aero engines industry where engine manufacturers gain up to three times the value of the engines from the normal sale of spare parts and maintenance services during the lifespan of the aero engines. As of 1997, Pratt earned from half to two times from the proceeds of the value of engines it sold through after sales services (sale of spare parts and maintenance), GE earned about three quarters of the value of the sold engines, while a PW earnings from spare parts sales amounted to 40 percent of the total earnings before taxation (Almeida, 1997). Similar sentiments are shared by Ward and Graves (2005) though using a different terminology, through-life management (p.4). The through-life management model entails the life-cycle management of products, services and activities required in delivering a fully integrated capability to the customer, while reducing the costs of ownership for the customer (p. 5). The bottom line of this model is that the customers are accorded more value for their money throughout the product life.
The aero-engines industry for instance is a unique industry in that, it entails large sums of capital to manufacture aero-engines, to build aircraft frames, to carter for fuels and labor expenses, as well as taxes paid to domestic and foreign governments for using their airspaces (Almeida, 1997). See appendices for a detailed table The high amount of capital may be prohibitive to industry players particularly during hard economic times. For instance, to fully assemble and equip an aero engine with the necessary parts and components requires more than 35 million while assembling a 7 x7 aircraft frame may costs a whopping 250 million. By fair terms these are relatively high costs which need to be distributed among a number of industry players so as to cushion the eventualities of shocks and risks.
These costs may even be much higher particularly if the aircrafts fail to reach its minimum operation lifecycle due to marketplace as well as natural calamities (Buxton et al 2006). In fact, it is known that aircrafts are prone to all manner of risks that range from human to natural catastrophes. For instance the industry is highly affected by extreme heat, extreme cold, fog, volcanic emissions, and hailstorms among other severe environmental conditions. Moreover, it is true that unlike automobiles, aircrafts undergo rigorous and regular maintenance and inspection. This is necessary as a small hitch on an aircraft can cause immense losses as opposed to the case of automobiles that can be fixed in the middle of a journey in the event of a breakdown (Farr, 2006).
Background of Aviation Industry
Two major events in the aviation industry in the United States have serious repercussions in the aviation businesses. Firstly, Scott et al (2006) and Buxton et al (2006) agree that the airline industry is faced by a barrage of financial and operational challenges. Apparently, the industry faces these challenges at a time it is being weaned from the close support it used to enjoy from the domestic governments. As a matter of fact, the state coffers have over the past been used to cushion the airline industry from marketplace challenges such as financial crunches as well as cut-throat competition. This is a trend that can be attributed to major airlines considered as national flag carriers that have in the past not exposed to the marketplace vulnerabilities. In the US for instance, an estimated 5 billion were distributed to a number of major airlines between 2000 and 2003. This was mainly done to prevent the airlines from going into bankruptcy as stipulated by the provisions of Chapter 11 of the US Constitution (Scott et al, 2006).
As such, there is no doubt that the state financial and administrative leverage played a huge role in streamlining the airline industry. However, this trend is slowly changing particularly following the realization that the Over-capacity and low yields lead to instability and the effects of any disturbances within the global economy cannot be absorbed through bailouts (Buxton, et al 2006, p.2). Needless to say this is a wakeup call to airlines as well as other major players in the industry to adopt more competitive and cost effective business models as a practical solution to the overreliance of support from the public coffers.
The other major event was the famous September 11terrorist attacks (Thompson, Strickland, Gamble, 2003 C-644). Because of low airline traffic, airline companies were financially affected so much so that many airline firms went into downsizing, cancelling orders of additional aircrafts, cutting down number of flights, went into borrowing money to cover cash trapped coffers, and as a last resort, filed for bankruptcy. It was a dark period in the history of U.S. aviation which also affected the aviation global business landscape. On top of this, the 2008 global financial crisis caused great financial crisis to the commercial aviation industry, still reeling from the after effects of the terrorist attacks. Such was the scenario in the last decade in this highly technical industry (Thompson et al 2003).
A combination of these two major events as well as a gamut of other marketplace impediments threatens the smooth operations of the airline industry and in particular the MRO aspect of the industry that apparently is directly responsible for between 10 percent and 15 percent of the overall airline expenditure (Knotts, 1999). Bearing in mind that the aero engines are the aerospace industry drivers that creates revenue for all the stakeholders through the normal engine flight hours (EFHs) and engine flight cycles (EFCs) as well as maintenance and consumables whilst in service there is a great need for aero engines to collaborate with aircraft frame builders, airline operators as well as other ancillary services providers (Buxton, et al 2006, p.4).
These collaborations may take the form of a complete or partial reinvention of their various ways aero engines industry conduct their business activities. Admittedly, the changing business scenario calls for drastic changes in the aero engine business models. No longer competitive by merely just trying to deliver products, conduct repairs, and go into overhaul, the industry has to explore new business approaches if it desires to be globally competitive. The industry has to adopt the changing market place and realities and adopt fast (Steffens Hollmeier, 2009). This kind of reflection on past business models, to determine which worked well or did not work, or even which should be re-invented or re-engineered must preoccupy aero- engine management nowadays if it desires to exploit market opportunities and take new directions on how to compete in the future.
In light of the above discussion, new and interesting directions suitable for the industry strategic positioning can be advanced. These are drastic reduction of new engines development and production costs revision of the value- added chain consolidation of the industry and entry into cooperative programs and product differentiation through innovative technologies (Steffens and Hollmeier, 2009). In addition, Steffens and Hollmeier suggest outsourcing MRO and engaging in strategic alliances with other corporate partners in the industry.
Let us take this one by one. In terms of drastic reduction of new engine development and production costs, there is a need to be cost-effective in coming up with new aero engine parts but at the same time not sacrifice quality. Where are the areas where costs can be drastically reduced These can be done in the variable costs as well as in the production costs.
Regarding product differentiation mentioned by Steffens and Hollmeier (2009) as one of the strategies to be adopted by the industry, this is affirmed by Porter (1985 14) who remarks, A firm seeks to be unique in its industry along some dimensions that are valued by the buyers. For the aero engine industry, this strategy can be translated as offering unique spare parts after-sales support system. Product differentiation can be a way to be ahead of the competition. When aero engine companies think of innovative and unique products, they are in actuality, trying to differentiate from other similar products manufactured by other competitors. On his part, Johansson (2004) acknowledges that it is true that for OEMs within the aerospace industry as well as other industries to wade through the murky global market economy they must embrace specialization. However, for this specialization to bear the fruits of innovation it needs to be collaboratively shared. In this regard aero engines OEMs, their customers as well as other industry players need to pool together their different specialities in what Johansson terms as open and amorphous networks of peers (p. 257).
On the hand, the revision of the value-added chain pertains to the life cycle of the product as well as whether the company make some changes either through new technology, or by coming up with some modifications in the whole value chain. Another way is to consolidate the industry and for companies to enter into cooperative programs. Industry consolidation and collaboration will demand that the companies within the industry should find ways to work cooperatively and collaboratively with one another. This is easier said than done. Entering into new cooperative projects involving other companies would mean getting into strategic alliances with them over the long term.
Current Trends in the After-Sales Service for Aero Engines
Innovative Business Models
Mabert, Ashok, and Campbell, (2006) identify a new source of income for the commercial industry that can be a source of competitive advantage. Farris et al (2005) likewise provide the aftermarket support practices and directions as well as the greater opportunities for supply chain management. Mabert et al (2006) pointed out that it is in aftermarket support that the opportunity to reap profits will emanate, not in the initial sales of spare parts for the aircraft. This is a radical way of thinking of how to compete. To think that they are an after support company, rather than just a company that delivers spare parts. Precisely, collaborative services between aero engines OEM, aircraft frame builders and airline operators should not only involve the conventional settlement of customer claims and warranty fulfillment, rather it should be holistic. It should encompass regular maintenance and overhaul services, procurement and timely delivery of spare parts, as well as other contract-long customer engagements. Such holistic after sales services are beneficial to both the end product companies as well as the OEMs. For instance, General Motors Corporation recently registered a huge profit from its 9 billion worthy of after sale services when compared to what it got with its 150 billion sales from its wide range of automobiles (Viardot, 2010). Ideally, technology and capital intensive companies have over the years managed to withstand market shocks by staging interactive and contract-long after services sales.
The underlying idea behind success from after sales services is that companies are able to supply their products and make conscious efforts to put in place strong preventive and supportive measures for such products (Bundschuh Dezyane, 2003). This helps to increase the value of the products sold while also creating strong customer relations for future business. As Viardot (2010) argues it is very easy for firms to find market for its products in segments that it already has strong relations as predicting market needs is easier than it is in new market segments. A case in mind is that of Toshiba where in 2002 the first month sales from warranty fulfillments went up by a margin of 37 percent, with overall sales averaging at 4 percent. The company had embarked on an aggressive drive to initiate an electronic based after sale services for its laptops. The drive entailed prompts to new users requesting them to create a profile that Toshiba used to make critical decision on the effectiveness of a range of warranties it offered (Viardot, 2010).
After-sales service activities in the consumer goods industry depict an orientation to improve company image, customer satisfaction and retention (Saccani et al 2006). This is highly important, indeed, and I agree with the authors in pointing out that the focus of companies offering after-sales service tasks should be to enhance the companys credibility and good image as well as make the customers happy and retain them through customer repeat purchases or their availing of the services. Besides, the after-sales service when done in excellent manner and of high quality would attract new clients. There are only a few big players in the global aviation industry and getting them to avail of the after-sales support service would redound to higher company earnings.
In support of this postulation, a study carried out by AMR Research, Inc. concluded that companies that practice after sales services are bound to realize up to an average of 24 percent in revenues and about 45 percent in profits. Rolls-Royce for instance registered a relatively higher profit margin (55 percent) in 2004 courtesy to its concerted efforts in practicing after sales services. Similar results were registered by Bombardier, another aero engines company where about 80 percent of present net value was recorded compared to 20 percent of the original investment value. Even so, this trend is not uniform across all aero engines and aircraft frame industries possibly due to the features of the after sale services model adopted. For instance, Airbus recorded a relatively low after sales services present net value of about 30 percent compared to its high values of about 70 percent of its new investment (Viardot, 2010).
Collaborative Business Practices
An intensive review of the literature on covering strategies employed by aero-engine companies reveals that they are now into collaborative business practices. These practices are comprised of strategic alliances, revenue and cost sharing practices, and virtual enterprise collaborations, which are enabled by information and communications technology. Scott et al (2006), supports this postulation when they argue that a combination of technical and financial snags pushes the aero engines OEMs into forming joint ventures. As it is now, the few major aero engines OEMs have formed joint ventures an indicator that indeed it is very difficult to survive as a lone ranger. On the other hand, such joint ventures are a blessing to the engine OEMs who pool their resources together and hence avoid the cut-throat market competition. It is indeed true that joint ventures do reduce the amount of profits realized by the individual aero engines OEMs however, given the inherent risks in the aerospace industry aero engines OEMs forming joint ventures gain a reprieve in the form of risk sharing than otherwise it would have been if they ventured on their own.
Larson et al (2010) acknowledge the importance of forming business alliances among OEMs. They assert that such alliances helps to influence their customers to make use of shared information, know-how, as well as other critical organizational materials. In their arguments they support the formation of Virtual Enterprises (VEs) which they argue accord OEMs an opportunity to choose which areas of their overall operational activities they should cooperate with their counterparts and which areas they should handle alone. A good example of an OEM in the aerospace industry that embraces this model is Rolls-Royce which pursues outsourcing and sometimes even outshoring about three quarters of its supply chain management while managing the remaining percentage. Specifically, Rolls-Royce ponders various aspects of the overall assembling of engines such as ... the hot end of the engine, the turbines, the compressors and fans and the alloys... and determines how they are made with view of outsourcing those elements that can be produced by others at a cheaper price (Johansson, 2004, p. 459).
Interactive practices speed up development cycle times, minimize and reduce product cycle costs. This is good news for other aero engine companies. They can now hook up with the virtual enterprise collaboration hub through an engineering portal. This is a virtual portal that at any moment can be accessed by strategic partners. This is the kind of collaboration that we are looking for in order to make the aero-engine industry globally competitive. It is good to know that MTU Aero-Engines has pioneered in this worthwhile strategic business alliance. If we look at the aviation industry three decades ago, this was not possible. The presence of the Internet today makes many things possible for the industry which otherwise were virtually impossible in the past.
On his part, Hill (1994, pp. 466-467) points out that strategic alliances for global manufacturers are a way to build trust between firm and suppliers. Trust is built when a firm makes a credible commitment to continue purchasing from a supplier on reasonable terms. It can be seen that for the aero-engine strategic alliances, there are advantages that can be derived if the companies adopt this strategy. However, there are also their attendant disadvantages. For instance, (Farris et al 2005) remark, strategic alliances involve greater risks, dependency, and rewards than do tactical alliances. Similar sentiments are shared by Buxton et al (2006), when they postulate that an agent-based business model not only reduces unnecessary costs but helps to predict future market trends. However, they are quick to point out that such model needs committed product managers capable of reading through market trends and making sound and timely judgements. In addition they champion for the VIBES (Virtual Interactive Business Simulator) tool that they argue can be successfully intertwined with the agent-based model to come up with new business alliances that can be utilized build future markets. Precisely, they envision a model where the modeller focuses less on event sequences and instead aims to capture the behaviour of each actor in a system as an agent with a degree of autonomy. Combining these three different modelling approaches together enables complex business environments to be modelled.
Scott et al (2006) offers that performance among aero engines OEM increases with MRO services high fliers in the industry are those that embrace proper MRO policies. In explanation they use a scale that shows peak financial achievements at either end of the curved scale. This can be perceived as a support to two of their three business models of virtual airline and aviation business group they advance in the same work. In this regard it can be deduced airlines practicing traditional business models are at a disadvantage as it becomes very difficult for them to compete at a level ground with their counterparts who have embraced new innovation particularly those that involve the delivery of non-conventional and opportunistic services to industry players.
Another model of collaborative business practices that I was able to find in the literature (Steffens and Hollmeier, 2009) is that of the European consolidation along the lines of a European System. They call it the European System Coordination and Management Company. In my opinion, such a European management company may be disadvantageous to the United States aviation industry, though. But I believe that it is a good move to take in order to consolidate and ensure that collaboration is effective and well coordinated.
Forecasting and Simulation Models in the Aero Engine Industry
Because of the uncertainty and great risks entailed in the aero engine industry, companies have tried to develop forecasting and simulation models to predict eventualities related to spare parts planning, scheduling, repairs and overhaul. Marbert et al (2006) mentions a forecasting model for spares demand planning using the SAP Advanced Planning Optimizer (APO) software system. Buxton et al (2006) focus on life cycle cost simulation. Stranjak et al (2008) presents the Overhaul Prediction Model and Scheduling Tool for simulation of complex aero engine operation.
On the other hand, the forecasting tool as described by Stranjak when compared with other forecasting models earlier mentioned appears to be powerful in terms of its capabilities to predict whole engine corporate risks, work scheduling, scenario modelling, and conducting what if analysis. These are the kinds of forecasting techniques that management need to enable them to mitigate unforeseen circumstances and events. These are statistical techniques that perform simulation and through this process, are able to predict events.
Another forecasting model is the dynamic modelling technique the the Global Manufacturing Networks (GMVNs). GMVNs are virtually volatile organizations that aids in integrating companies so as to enhance the sharing of critical resources. The advantages of GMVNs are their being highly flexible system with low barriers to entry and exit, geographic flexibility, low costs, rapid technological diffusion, high diversification, and exceptional economies of scale (Monroy Arto, 2008). Geographical flexibility calls for virtual teams deployed in some key areas in the globe that can respond with ease and speed.
But when we use this network, there are risks involved and we have to be wary of them. These are risk of contract manufacturers developing their own end-products in competition with their customers the risk of technology transfer, and the risk of losing process expertise. (Monroy Arto, 2008) I think this can happen when they will outsource manufacturing processes more and more to the network and a memory loss might occur. Caution is therefore called for in this instance.
Driouchi et al (2008) suggests that dynamic risk management policies for designing and appraising flexibility in service planning and provision should be adopted to allow for better decision making in the face of uncertainties. Dynamic forecasting models are indeed just that, management should have to evaluate the most effective prediction model for the company to adopt. This kind of forecasting technique uses non-linear dynamical models to capture fluctuations in demand and scheduling that cannot be captured by linear statistical models. In addition the authors indicate that services and products are merging and manufacturers are seeking to grow and protect their profitability by enhancing the service elements of their customer offerings. They give the example of Rolls-Royce Power by the Hour contract. Instead of selling aero engines to customers, these contracts enable the customers to pay for the engine capability, based on the hours flown, while the manufacturer retains the responsibility for maintaining the engine.
Modern Models of Business among Airlines and Aircraft Framers
Drawing from Doganis (2001) work, Scott et al (2006) advance three major business models adopted by major airlines in the world traditional airline virtual airline, and aviation business group. The traditional airline is a major business model that is being pursued by large airlines such as British Airways, Delta, and Iberia. This business model is more or less atypical to the government controlled airline that enjoys immunity from marketplace shocks. Practically, it entails regular and uninterrupted access to air travel services that involves collaboration between airlines where airlines agrees to run connection legs for other airlines within the same operation alliance. Again, through the alliance the airlines make it possible for their clients to book their travel arrangements through a single point even if the travel arrangements covers a relatively large route which is obviously not served by a single airline.
A good example of traditional airline model is the star alliance where 18 airlines share codes, marking, airside maintenance, and other relatively low costs services. Basically, This accords the clients to numerous benefits as it reduces the hassles of flight interruptions, long waits for flights connections, costs incurred in car hires, and most importantly it allows for the cross transfer of air travel points that are calculated based on the number of travels using any of the alliance airlines as opposed to a single airline. The large network of routes also eliminates the chances of flight cancellations and also accords the airlines the opportunity to enjoy the economies of scale hence maximization of profits while still offering other ancillary services such as meals and entertainment for their customers at subsidized charges or even free of charge for some special flights.
According to Scott et al (2006), virtual airline model of business entails exceptionally low prices, a feat that is achieved through concerted efforts to cut down operational costs as well as the scrapping of a number of costs such as in-flight meals and entertainment passed on to the customer in traditional business models.
Lowering air travel prices among airlines that practice virtual airline model is also made possible by a relatively high visibility of support service costs where the airline only partakes of doing those activities that are absolutely necessary and which it can do with minimal costs and with great ease while liaising with other stakeholders in the industry such as aero-engine manufacturers, aircraft frame builders, human resource consultancy firms, and others in bid to optimize efficiency while keeping the operation costs at a manageable level. Such close business liaison eliminates the notion of fixed costs as it offers costsprices alternatives for critical services such as repair, maintenance and overhaul of aero engines parts. Some airlines such as the Ryanair of German have already indicated that it will ponder the possibility of offering absolutely free flights as part of its virtual model pursuits. Low air tickets prices compounded with free meals and entertainment goes a long way in building a strong customer confidence and loyalty. Even at the backdrop of economic downturns this business model has attracted significant results among airlines that have been practicing it.
Graf (2005) supports this business model when he holds that airlines that have been practicing this form of business model are cable of realizing profits and hence remaining competitive during economic downturns.
For instance, airlines practicing conventional models of business in the US for instance have registered significant operational problems in adjusting to economic shifts when compared to their counterparts in German such as Ryanair and EasyJet that are better known for their relentless commitment in pursuing the virtual airline model (Scott et al 2006). On the other hand, airlines that opt to drop their traditional business models have got a chance to reap multiple benefits. They have an opportunity to penetrate relatively low-cost market segments hence maximizing their revenue base. Again, by moving their aircrafts, capital, employees, as well as other assets from traditional to virtual model of business, the airlines stand a better chance to forgo huge costs that they may have otherwise incurred. This is due to the inherent success and benefits associated with the virtual airline model (Graf, 2005). As a matter of fact, this evidential success has enticed big airlines in the world such as the KLM as well as Southwest (Scott et al 2006).
Lastly Scott et al (2006) discuss aviation business groups as their third business model practiced by airlines. In this model they argue that when looked from the customer viewpoint, this business model is more or less similar to the traditional model given that they both employ a collective ticketing. This business model however, indulges agents as well as online services to sell and carry out market promotions targeting mostly travellers on business trips. Practically, and in bid to maximize revenue creation this model also involves other services apart from those targeting business travellers. For instance, it also provides connection services to other airlines particularly to destination in the interiors of major business hubs. Riding on the wave of outsourcing g in the airlines industry particularly among airlines practicing the virtual airline model, the aviation business group business model seems to offer sound returns to airlines practicing it. For instance, Lufthansa and Singapore airlines provide a good example of airlines that have cut themselves niches by riding on the wave of outsourcing that has hit the contemporary airline industry. By being a potential outsourcing services provider for other airlines practising the virtual airline model aviation business group model airlines can utilize its staff as a source of revenue generators as well as doing their in-house maintenance.
2.2.5. Recent Aerospace Industry Models
Yusuf, Gunasekaran, and Abthorpe (2004) argue that contemporary market economies have changed over the years. Such changes has occasioned significant change of marketplace operations to an extent that internationalization is inevitable. They argue that initially companies were only concerned with creating quality products and selling them at reasonable prices. However, this is not the case in the contemporary marketplace. Companies must offer more than quality and affordable goods and services. They must ensure that their services are flexible and realistic to market forces such as diminishing sales, increased competition, high costs of production, etc. while still ensuring quality and value for money.
Using the case of Rolls-Royce the authors demonstrates how Enterprise Resource Planning (ERP) can be applied in the aerospace industry with satisfying results. Rolls-Royce had struggled for a long time with different operations systems without achieving significant results. The company incurred huge costs, despite the products being practically inefficient and incompatible with modern aerospace industry trends. However since it adopted the ERP model, Rolls-Royce handles all its complex operations in more efficient and predictable ways (Yusuf et al, 2004). The gist of the model is that it links together all processes involved in the critical production processes such as finance, human resource, procurement, manufacturing, inventory, supply, etc. this helps to cut down inventory levels, reduces redundancy, as well as inducing efficiency (p. 264).
According to Almeida (1997, the US aero engines industry has lost a significant chunk of its past glamour. It used to occupy the global number one position in the manufacture of original aircraft equipments, however du e to he calls uncertainty (p.2). However, given that two of the global leading aero engines OEMs, Pratt and Whitney General Electric continue to command significant market presence indicates that they have devised ways of mitigating this uncertainty. It is arguable that mitigating such uncertainty demands sound marketing strategies, risk management strategies, and above all organization integration strategies. Such organizational integration which entails close partnership between aero engines OEMs can go a long way in stabilizing prices as there are no threats of some company pricing its goods at lower prices to woe customers. Again, organizational integration allows for joint financing of key production processes and materials making the companies to reduce their overall cost of production considerably.
It should be noted that the demand for aero engines and aero engines parts is not high given the high prohibitive costs involved in its overall assembling, a thing that makes ownership of aircrafts a preserve of the societies most wealthiest. As a matter of fact, aero engines industries serve only four major categories of customers aircraft frame builders, airlines, governments, and armed forces. By fair terms this is relatively a small market. Consequently, aero engines companies that do not engage in organizational integration practices may find themselves playing second fiddle to their rivals. Again, basing on the fact that the aero engines market is highly cyclical (Almeida, 1997, p.4) it can be very difficult for companies to break such existing cycles particularly if it does not offer competitive services. In competitive services aero engines companies can offer high discounts to their customers on condition that they also include binding after services sales contracts.
This arrangement is advised by the unique nature of the aero engines industry where engine manufacturers gain up to three times the value of the engines from the normal sale of spare parts and maintenance services during the lifespan of the aero engines. As of 1997, Pratt earned from half to two times from the proceeds of the value of engines it sold through after sales services (sale of spare parts and maintenance), GE earned about three quarters of the value of the sold engines, while a PW earnings from spare parts sales amounted to 40 percent of the total earnings before taxation (Almeida, 1997). Similar sentiments are shared by Ward and Graves (2005) though using a different terminology, through-life management (p.4). The through-life management model entails the life-cycle management of products, services and activities required in delivering a fully integrated capability to the customer, while reducing the costs of ownership for the customer (p. 5). The bottom line of this model is that the customers are accorded more value for their money throughout the product life.
No comments:
Post a Comment