MGMT610 UMUC The technology innovations in the airline industry

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Rubric of the requirements for this research paper are attached. This paper is based on the attached Annotated Bibliography. Please read the requirements and checklist at the bottom of the rubric, to make sure all items are covered. This has to be in APA format. Thank you

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Assignment #5 Assignment 5 – Research Paper MGMT 610 – Organizational Theory first paper assignment Faculty Name Alissa Harrison Faculty Email: Alissa.Harrison@faculty.umuc.edu Assignment Title: Course/Section Research Paper 610 9042 Organizational Theory (2192) Assignment Description: Research Paper Assignment Five must involve the same topic, research question, and case study that you identified for Assignment Four. Apply what you learned from the scholarly articles in your Annotated Bibliography (Assignment 4) to the written case. Instructions: 1. After your introduction (including a statement of your formal research question), briefly describe (1 paragraph) what the organization did in relation to the issue. 2. Address your research question and analyze the effectiveness of how the organization handled the issue, referencing the scholarly articles you found on the topic (that were annotated in Assignment 4) and citing course concepts from readings and lectures. 3. Formulate recommendations you would make to the management of that organization to effectively handle this issue. Clearly list your recommendations. 4. Provide a detailed logical rationale for each of your recommendations. Your rationale should reference the scholarly articles you read on the topic to provide support for your position. It likely also will reference concepts/readings from class. (Note: This rationale is a significant portion of your paper; it should be at least 1-2 pages.) In all cases, cite your sources as required by the APA guidelines and include them in a reference list at the end of your paper. You should not include the full annotations you included in Assignment Four in the reference list at the end of Assignment Five. Note: with the exception of UCSP615 (Orientation to Graduate Studies), work for other courses – at UMUC or elsewhere – cannot be included in this paper. If you’re taking UCSP 615 concurrent with this course, it’s recommended that you use your topic for that course as part of this course, especially if it also relates to organizational theory. However, all work for this course and the paper itself must be original to the course. Your research should include information from relevant scholarly sources, professional journals, and peer-referred publications. Wikipedia or any sources from the Internet (e.g., from a Google search) may not be used. These are “open sources”, meaning that anyone – knowledgeable or not – can contribute. They are not subjected to the same form of editorial scrutiny that peer-reviewed articles are scrutinized for quality. Assignment #5 Assignment/Project Criterion: The following criteria will be used for Assignment 5. I. Assignment Coverage 1. Paper is a 10-12-page WORD document (does not exceed 3000 -3500 words) 2. Organization – Research Paper is APA outline and analysis content and includes title page, introduction, reference list, abstract, summary/conclusion, etc. a. APA style is required b. Use headings to organize the body of the paper c. Statement of formal research question d. Analysis of how organization handled the issues proposed e. Citing of course concepts from readings, lectures, articles, etc. f. Clearly list, discussion, and rationale of proposed recommendations II. Critical Thinking and Levels of Analysis 1. Complexity of Ideas a. Ideas demonstrate careful, nuanced, and original understanding of the topic b. Analysis of the topic offers information in a new, surprising, and convincing ways 2. Evidence a. Information cited offers credible, varied, and sufficient details b. Compelling research is presented in a sophisticated manner c. Clear and concise summary/conclusion III. Writing Quality/Mechanics 1. Grammar Mechanics a. Writing uses logical sequencing, clear statements, and transitions between ideas b. Ideas and concepts are explained clearly using scholarly terminology. c. Writing is free of grammatical, spelling, punctuation, and typographical errors and meets graduate level expectations 2. APA a. Substantial (at least five) and relevant reference sources; three of the references are within the last five years b. APA style is used throughout the paper (e.g., cover/title page, headings, spacing, citations, reference page) c. Paper is a WORD document and formatted with a cover page that includes a running head Assignment #5 Grading Criteria (The professor will include this as the first part of your graded assignment) Abbreviated rubric for Assignment #5 (Research Paper) 1 2 3 4 5 6 7 8 9 Criteria Submitted late: minus 5% per day Meets expectations for content and purpose of the assignment. Research paper organization includes, title page, abstract, introduction, research question, organization issues, recommendations, summary/conclusion and references. Outline: Topic sentence and headings Develops a clearly articulated and original thesis and/or main idea that are consistent with expectations of content and purpose. Topic sentence and paper is FOCUSED. Organizes ideas in clear and sequential paragraphs that logically reinforce the main idea. A paragraph is a collection of related sentences dealing with a single topic. Uses level 1, 2, and 3 headings as appropriate. Incorporates sufficient use of appropriate research, supporting evidence, and relevant sources (scholarly/peer referred). Sources are: (1) appropriate number as outlined for the assignment; (2) credible, varied, and demonstrate sufficient quality/reliability; and (2) support topic, research question and case study. Critically evaluates information and/or data within boundaries established by the main idea. Ideas demonstrate careful, nuanced, and original understanding of the topic, and analysis of the topic offers information in a new, surprising, and convincing ways. Conforms to APA and/or additional guidelines from the instructor. (Refer to the paper in Conferences, “Writing Papers That Are Easy to Grade.” Your paper should look like this paper.) Displays sound grammar, spelling, punctuation and appropriate conventions that meets graduate level expectations. See *NOTE below. Total Score 10 10 10 10 10 10 20 20 Where (depending on whether weight is 10 or 20: 1-6 or 1-12 = Not proficient 7 or 13-15 = Competent 8-9 or 16-19 = Above average 10 or 20 = Exemplary Checklist (make sure you do the following): • A paper consists of: title page, an abstract, introduction, text pages, recommendations, summary/conclusion, and references. • A strong first sentence which sets the stage for the paper. • Clear and concise research question. • Use Times New Roman 12 pt. font and 1” margins. • Double space (this includes the References). • Justify the text on the left margin with a ragged right edge • Indent all paragraphs ½”. • Put a header at top left margin of page and page # in top RH corner (see above). o Use headings at least level 1 and 2 headings. See section on 1st, 2nd, 3rd and 4th Level Headings. • Use the proper APA format for citations and the Reference List (double space with hanging indent). Note: Sources not cited in the paper should not be in the References. Wikipedia is not an acceptable Reference. • Avoid the use of the 1st person (“I” and “we” and “our”). • Proofread. Edit. (See next two bullets) • Fewer words are better than more. Shorter sentences are better than long. • Do not plagiarize. Give proper credit where credit is due. *NOTE: Papers that have a consistent misuse of grammar, punctuation (commas, semicolons, quotation marks) and spelling will not receive a grade higher than the low 80’s regardless of the quality of the content. Running head: THE AIRLINE INDUSTRY 1 How Have Technological Innovations Affected the Airline Industry? Student Name University Author Note THE AIRLINE INDUSTRY 2 This paper was prepared for MGMT 610 9042, taught by Professor Alissa Harrison. Technology Innovations Affecting the Airline Industry The purpose of this paper is to identify relevant sources that discuss the airline industry and the associated technology, and innovation strategies. The annotated bibliography provides five articles which discusses topics related to the airline industry. Various examples are given to enhance understanding and to relate or link multiple elements. It is evident that over the past two decades, the aviation industry has embraced information technology systems in order to enable the solving of problems such as uncommunicated flight delays, and poor logistics management. Such subsidiary businesses include catering, maintenance, and agency services. In this paper, the topic under question is, “How have technological innovations affected the airline industry?” The research according to the selected sources happens to be well-informed as it incorporates historical evidence and methods. Airlines such as the Brazilian airline, Emirates and Lufthansa have been selected and are developed to identify the technological efforts that have been implemented in the aviation industry. The relationship between technological advancement in the airline industry and the local and international market has also been discussed at length identifying the enormous impact that technology has made, for example, in governing passengerairline relationship. The five sources are quite relevant to the question at hand regarding the effects of technological innovations in the airline industry. They are therefore fit for use in the main research. THE AIRLINE INDUSTRY 3 N. Redpath, J.F. O'Connell, D. Warnock-Smith. (2017). The strategic impact of airline group diversification: The cases of Emirates and Lufthansa. Journal of Air Transport Management 64 121e138 This article looks at the airline industry as one large sector that incorporates other subsidiary businesses such as catering, maintenance, and travel agencies. While researching on the diversification of the airline industry, the authors make critical observations concerning the benefits that have been tapped from incorporating technological systems, such as quick responses and notifications in the two major airlines which include, Germany’s Lufthansa group and Dubai’s Emirates group. The authors use historical evidence and methods to describe technological advancement and innovation in the airline industry. Using this article, useful information can be obtained regarding diversification as a strategy, financial risks, marketing power, knowledge gain, and business trends. Denise Santos de Oliveira, Mauro Caetano. (2019). Market strategy development and innovation to strengthen consumer-based equity: The case of Brazilian airlines. Journal of Air Transport Management 75 103–110 The article incorporates various research methods aimed at identifying the link between tactics implemented by Brazilian airlines in the domestic market and being able to strengthen consumer-based equity. In the research, the authors conducted two major surveys to ascertain the claim that quality and credibility add value to airline services. The first survey includes 33 managers from some of the top Brazilian airlines. The second survey includes four hundred and eighty passengers from six separate and diversified airports in Brazil. The article is fit for use as a research material as it provides evidence regarding joint investment as a crucial tool for innovation in service and price addition. The issue of marketing strategies is discussed, and THE AIRLINE INDUSTRY 4 criteria that should be followed while setting marketing strategies developed. However, innovations in services are found to be ineffective for brand associations due to multiple drawbacks experienced by Brazilian airlines. Jill Schachner Chanen. (2000). The Business of pleasing Travelers: Airlines, hotels, and agencies are going the extra mile to keep customers happy with high-tech innovations. The article begins by stating some of the challenges that are faced in the airline industry. Such challenges include missing flights, flight delays, escalating flight fares, and lost hotel reservations. This source discusses the problems faced in the airline industry and focuses on some of the technological innovations and advancements that aid in overcoming aviation-related challenges. In the source, the author uses examples to show how some of the solutions that have been devised work. For example, regarding flight delays, the author introduces a way of knowing whether an individual’s flight is going to be timely. The innovation discussed is “a text-based pager” whereby Biztravel.com sends information about flight delays and cancellations an hour before the flight is scheduled to depart. Innovations regarding comfort have also been discussed in this article which enables clients to work while flying without discomfort. Unlike in the past, around two decades ago, where a passenger could lean his seat inside a plane and cause discomfort to the person behind him/her, nowadays, this problem has been solved in an effort of ensuring comfort. The article generally describes innovations that have occurred to ease the drawbacks in the subsidiary sectors of the airline industry. Robin C Sickles, & Ila M. Semenick Alam. (1998). The Relationship Between Stock Market Returns and Technical Efficiency Innovations: Evidence from the US Airline Industry. Journal of Productivity Analysis, 9,35-51 THE AIRLINE INDUSTRY 5 This article is quite specific on the analyzation of the link between returns in the stock market and absolute nominal productivity. The information from this article is crucial for use in research since it incorporates data from eleven airlines in the United States of America. Linear programming techniques have been used in the derivation of technical efficiencies. In this source, unique technical methods are used to describe the link that exists between the valuation of a firm and efficiency in its utilization of resources. An innovation, the timing mechanism, has been described in the source as a tool that can increase returns in the industry without exposure to risks. Airlines such as Delta Airlines, United Airlines, and Continental Airline have been used to describe this relationship. Duliba, Katherine A., Robert J. Kauffman, Henry C. Lucas, Jr. (2001). Appropriating Value from Computerized Reservation System Ownership in the Airline Industry. This source discusses information systems concerning the airline industry and discusses some of the features of the information technology systems that make them either good or bad tools for use in the airline aviation industry. The kind of competition that exists in the industry and more so in airlines that have adopted the use of information systems is considered to be unhealthy since the systems can easily be substituted with other resources or imitated. The innovation that has been devised in the travel agencies involving installation of computer reservation systems has aided in returns in information technology. The source explains the benefits associated with the incorporation of such systems which include increased efficiency, and ease of access. According to this article, big airlines have benefited from computerized reservation systems. The source provides extensive information about reservation systems. It provides information regarding the first system to be incorporated in the American airline, and also discusses the technological innovations that have taken place in time. 6 THE AIRLINE INDUSTRY Conclusion Based on the information from these five sources, it is evident that information systems have succeeded in solving problems experienced in the airline industry. However, their use does not bring about competitive advantage as they can be imitated. Problems such as flight delay can now be identified an hour before the set departure time hence enabling clients to wait and follow up. 7 THE AIRLINE INDUSTRY References Denise Santos de Oliveira, Mauro Caetano. (2019). Market strategy development and innovation to strengthen consumer-based equity: The case of Brazilian airlines. Journal of Air Transport Management 75 103–110 Duliba, Katherine A., Robert J. Kauffman, Henry C. Lucas, Jr. (2001). Appropriating Value from Computerized Reservation System Ownership in the Airline Industry. Jill Schachner Chanen. (2000). The Business of pleasing Travelers: Airlines, hotels, and agencies are going the extra mile to keep customers happy with high-tech innovations. N. Redpath, J.F. O'Connell, D. Warnock-Smith. (2017). The strategic impact of airline group diversification: The cases of Emirates and Lufthansa. Journal of Air Transport Management 64 121e138 Robin C Sickles, & Ila M. Semenick Alam. (1998). The Relationship Between Stock Market Returns and Technical Efficiency Innovations: Evidence from the US Airline Industry. Journal of Productivity Analysis, 9,35-51 Journal of Air Transport Management 64 (2017) 121e138 Contents lists available at ScienceDirect Journal of Air Transport Management journal homepage: www.elsevier.com/locate/jairtraman The strategic impact of airline group diversification: The cases of Emirates and Lufthansa N. Redpath a, J.F. O'Connell a, *, D. Warnock-Smith b a b Centre for Air Transport Management, Cranfield, University, Cranfield, Bedfordshire, England, MK43 OAG, UK Division of Logistics, Transport and Tourism, University of Huddersfield, Queensgate, Huddersfield, England, HD1 3DH, UK a r t i c l e i n f o a b s t r a c t Article history: Received 9 November 2015 Received in revised form 22 August 2016 Accepted 23 August 2016 Available online 3 September 2016 The airline industry is a diverse sector, requiring the support of a varied range of ancillary businesses such as maintenance, catering and travel agencies to carry out its activities. Many of these supporting businesses demonstrate the potential to drive wider profit margins despite generating lower revenues than the airlines themselves, making them attractive investment opportunities in a sector prone to volatile and often lacklustre trading. This study investigates two of the largest diversified airline groups, Germany's Lufthansa Group and Dubai's Emirates Group, each adopting a distinct approach towards diversification that may serve as a model for airline groups worldwide. The areas investigated were Cargo, Maintenance, Catering and Travel Services. The research found that whilst diversification may not always present the most attractive option financially, strategic factors can often outweigh such concerns. Business units studied were found to have variable prospects; particularly in the case of Catering, a sector on the rise e versus in-house Maintenance, which for airlines, is likely to see decline. The pursuit of third party revenue streams to offset weak internal trading and growth in competencies were found to be the key drivers of success. Interplay between segments was also apparent, showing that a well-organised diversification strategy can achieve robust cross-functional benefits and deliver significant value to the parent organisation. © 2016 Elsevier Ltd. All rights reserved. Keywords: Airline diversification Airline groups Strategic direction Vertical integration 1. Introduction Corporate diversification within the airline business has a long history. Many of the first airlines were initiated as related subventures by existing transport-focused organisations; such as United Airlines, which can trace its lineage to Boeing Air Transport in 1927 (Rodgers, 1996). As the industry grew and matured, Pan American World Airways came to epitomise the concept of a global aviat ion services empire, with subsidiaries such as Pan Am World Services and the still active Intercontinental Hotels brand, allowing it to strategically extend its reach into higher margin sectors, whilst supporting the objectives and needs of its core business. In a highly-cyclical business such as air transport, it is arguably difficult to maintain a long-term strategic scope whilst managing non-core assets effectively. The Emirates and the Lufthansa Groups are both highly successful airline conglomerates but given the propensity for diversified business units to often outperform the * Corresponding author. E-mail address: frankie.oconnell@cranfield.ac.uk (J.F. O'Connell). http://dx.doi.org/10.1016/j.jairtraman.2016.08.009 0969-6997/© 2016 Elsevier Ltd. All rights reserved. core passenger business of an airline, the question arises as to what their overall contribution to the bottom line are. This will be investigated through a specific analysis of the Lufthansa and Emirates Groups, both individually and comparatively. Each has been chosen due to their industry prevalence and ability to serve as emblematic representations of legacy carriers, acting as bellwethers for broader industry trends. The business units focussed upon have been chosen on the basis of the scale of their overall revenue share in each group (top 3). These units are shown in Table 1. The study's specific research questions are to discover how diversified business units drive airline parent company strategy and vice versa, how the strategic value of an airline business unit is measured and how individual business units belonging to larger airline Groups succeed or fail. The overriding aim of the study is to investigate how the present state of airline business diversification has been achieved at both Lufthansa and Emirates using a mix of qualitative and quantitative methodologies. The data and methods strategy is firstly summarised in Section 2. Initial context is then provided through a review of selected company interview data and airline diversification literature 122 N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 Table 1 Business units investigated. Company Business unit Market sector Emirates SkyCargo DLM and Travel Services Catering Logistics Technik LSG SkyChefs Cargo/air freight Travel Flight Catering Cargo/air freight Maintenance Repair and Overhaul Flight Catering Lufthansa blueprint for other carriers considering diversification as a strategy. Through the use of a number of commonly used strategic analysis tools the two Groups’ diversified businesses could be compared in order generate recommendations for a uniform or a non-uniform approach to vertical integration. The Strategic Scoring Method, employed for this study was based upon a selected series of strategic and financial criteria employing quantifiable insights as referenced against the BCG and SWOT matrices. One overall busi- Fig. 1. Methodology outline. (Section 3). Thematic areas for further analysis stemming from the literature/interview review process were merged together with a quantitative assessment of Group financial records and trends for the period 2009e2014 along with a unique Strategic Scoring Method especially adapted for this study (Sections 4 and 5). Commonly applied BCG and ANSOFF frameworks (Section 5) are finally devised for the two airline Groups to arrive at a set of reliable conclusions and recommendations (Section 6). Excerpts from expert interviews for this study are continued throughout the analysis sections (Sections 4e6) in support of the quantitative analysis. 2. Data sources and methods The study uses a mix of qualitative and quantitative methods as described below in Fig. 1 with industry expert views being combined with an innovative scoring system to facilitate judgements around the impact of airline diversification strategies. Two case study airline groups Lufthansa and Emirates were selected for strategic and financial assessment on the basis that both are well established conglomerates that could possibly act as a ness unit ranking based on an average composite of standardised factors was then determined. It was intended to be primarily allegorical and illustrative, producing an ‘Indicative Result’ that was subsequently analysed and critiqued. The majority of factors were quantitative, with a number of qualitative exceptions, which are based on clear statements of fact drawn from industry reports and expert interviews exclusive to this study. Each business unit analysis in Section 5 is presented with a summary table, showing an Average Score and Indicative Result.1 Using the example of LSG SkyChefs, the way the strategic scoring system works at the business unit level is shown below in Table 2. The factors measured are informed by the following criteria:  Parent Company Revenue Growth is taken as an average. Neither Lufthansa Group nor Emirates Group achieved higher than 30% year-on-year growth, hence the capping of this scale at 1 Full tables showing all business units can be made available upon request to the corresponding author frankie.oconnell@cranfield.ac.uk. N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 123 Table 2 LSG SkyChefs scoring table. LSG SkyChefs Underachiever Weak performer Strong performer Best in class Parent company revenue growth (avg. 2009e2014) Parent company profit growth (avg. 2009e2014) Business unit revenue growth (YOY) Business unit market share BCG position Historical market growth Market outlook Number of strategic options available Average score Indicative result Negative to 5% Negative to 5% Negative to 5% 0-5% Dog Less than 0e5% Weak 0 2.6 1 Consider resale or restructure 6e10% 6e10% 6e10% 6e10% Question Mark 6e10% Fairly weak 1 11e20% 11e20% 11e20% 11e15% Cash Cow 11e15% Fairly positive 2 21e30% 21e30% 21e30% 16e20% Star 16e20% Positive 3 2 Retain and review 3 Invest in BU and build value 4 Divest or leverage          30%. Revenue is used as a proxy for the earnings potential of the parent and as such the cash resources available to its Business Units. Parent Company Profit Growth follows an identical logic. Profit is employed as a proxy for assessing the viability of the parent and as such, the stability of the Business Unit's position in the group (e.g. weak profits may incentivise the parent to sell Business Units). BU Revenue Growth indicates the trend followed by the business unit and its base financial value to the group. A figure for Profit is not included as this is not published by the Emirates Group, so it would not be possible to standardise with Lufthansa Group results. BU Market share illustrates the Business Unit's strength in its respective market. BCG Position further underpins BU market share by noting the combination of relative market share and market growth to find its overall positioning in the market, as per BCG matrix rankings (Dog, Star, etc.). Historical Market Growth observes the trend followed by the market in which the Business Unit operates. Market Outlook accounts for the potential of the business unit, which is based on whether the market that the business unit operates in is expected to grow, contract or remain static. This serves to underwrite the 'Parent Profit Growth' metric in assessing future prospects. Strategic Options Available relates to the number of Strategic Options identified by the Ansoff matrix as areas for potential development e a low number of options may indicate a business unit with little potential for growth. Average Score denotes the average of the above rankings to provide a final positioning. The Indicative Result category is adapted from the options found in the BCG matrix ('Product Development', 'Divestment' et al.) to provide a notional understanding of the business unit's strategic value Interviews were conducted with a mix of experts from inside and outside the two selected Airline Groups all of which were carried out in the year 2014. They were open ended, semistructured interviews that were carried out face-to-face and over the phone. The intended purpose of the interviews was to provide an enhanced narrative to the financial and strategic numerical data on the two airline conglomerates and to provide an opportunity to triangulate evidence against key concepts as discussed in Section 3. As such, key excerpts from the interviews are located across Sections 3e6 in support of or in contrast to literature and data obtained from secondary sources. The types of experts consulted were sourced for their 'on-the-ground' knowledge of the airlines themselves (e.g. Ram Menen, Fabio Prestijacopo and Laurie Berryman of Emirates and Herr Sadiq Gallani, Director Corporate Strategy, þ þ þ þ þ Lufthansa Group), as well as broader industry oversight (i.e. more objective view) from figures such as Giovanni Bisignani from IATA. Each interview lasted between 1 and 2 h as open ended thematic discussions on diversification as an airline strategy. 3. Diversification as a strategy: examining the case and historical evidence Although diversification is a well-researched phenomenon in academic literature, having been explored by noted economists (Schumpeter, 1942 in Dinopoulos, 1994; Ansoff, 1957; Porter, 1980; Teece, 1986), there is a relative dearth of material relating directly to the topic of airline diversification strategy from a group, or umbrella-company viewpoint. Case-by-case analysis has been carried out in recent years (Heracleous and Wirtz, 2009; Lindst€ adt and Fauser, 2004; Jones, 2007), with attention paid to their individual contributions. Aside from the core competency of flying passengers, airlines have sought to diversify and extend the reach of their capabilities and revenue streams. It has been shown to have a significant impact on company fortunes (Hitt et al., 1997), provided the nature of the firm's strategy is ‘related’ (Geringer et al., 2000) in some way to its core competency. Where firms engage in ‘unrelated’ diversification e whereby Business Units (BU's) lack commonality and fail to support the core competency e potential for sharing of benefits is reduced, resulting in an inflation of cost and dilution of management expertise and organisational resources (Campbell, 1992). Common airline diversification strategies have encompassed Cargo, Maintenance Repair and Overhaul (MRO), Catering, Information Technology (IT) and Leisure Management/Travel Agencies (Jenkins et al., 2012; O'Connell, 2007; Suen, 2002). As such, related diversification within the air transport industry seeks to support passenger operations with business units providing relevant or aligned services. For example, cargo may be seen as a direct byproduct of airlines' seeking to leverage otherwise unused bellyhold capacity e with some then diversifying further into purefreighter operations. Additionally, an integrated IT business unit may serve to support an airline's booking system, upon which it is heavily dependent. The motives behind airline group diversification are closely linked to strategic market positioning (Porter, 1980) and growth (Ansoff, 1957). Ansoff notes that a company's avenues to growth are fourfold: enhanced market penetration, market stimulation, product development or diversification e the latter carrying the most risk if mishandled, but the least if executed competently. However, Ansoff's growth solution does not account for the need to negate strategic threats. As a standalone business, a company may not be able to respond to competitors through core activities alone. Here diversification may aid in fulfilling Porter's need for a company to ‘relate to its environment’ to achieve strategic success. A group's 124 N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 Table 3 Emirates' response to Porters 5 forces. Force Threat Competitive rivalry Very Fast growing local competition High Legacy carriers successfully reducing costs Moderate Strong global MRO sector controlled by competitors Need for flight caterting at all points of call High Increasing dominance of online price-comparison Supplier bargaining power Buyer bargaining power Threat of potential entrants Threat of substitutes High Low Reason(s) Response(s) Joint-venture with Qantas Establishement of EK Engineering as a regional leader Global covergage of Dnata catering operations Growth of Emirates-owned direct sales channels Rise of well-financed rivals: Etihad, Qatar, Turkish and Launch of flydubai to tackle Air Arabia and reduce threat from other current and Air Arabia would-be LCCs Launch of Emirates Executivea Teleconferencing growth prompted by financial crisis Focus on Business Rewards Programme (with growing number of participating partners) a Emirates Executive is a response in part to Qatar Executive and Etihad ‘The Residence’ product. Source Author research/interviews. ability to exhibit strength in all aspects of Porter's ‘five forces’ model will inform and validate its underlying ability to deliver profits (O'Connell, 2007). An example of an airline group successfully engaging with the five forces through leveraging non-core business units can be seen in the Emirates Group's diversification strategy, as illustrated in Table 3. Here it is observable that in addition to responding to the threats of ‘Competitive Rivalry’ and ‘Potential Entrants’ with corecompetencies, the remainder of Emirates' diversified structure aids in creating a stronger platform to bolster its strategic position within Porter's forces framework. In each instance, Emirates is able to deliver an in-house solution from its diversified portfolio to meet strategic issues relevant to its passenger transport business, despite said solutions not directly involving the transport of passengers. For example, services arm Dnata is able to cover much of Emirates' global catering needs whilst also generating incremental revenue by supplying the needs of competitors. This is known as ‘Economies of Diversification’ (Berger and Humphrey, 1991. Grosskopf et al., 1992; Chavas and Kim, 2010), whereby the economies of scale and scope provided by growing the business to supply the market at large ultimately serve to make Emirates' own catering more costeffective, strengthen its strategic standing and delivering tangible returns to the core-business. Beyond strategic positioning, it is important to note the desire of airlines to avoid over-specialisation in a high-risk, low-margin industry. Diversification empowers airlines to avoid dependence on one product line, to achieve greater stability of profits, to make greater use of an existing distribution system and to acquire value chain know-how. Kock and Guillen (2001) assert that the diversification strategy pursued by a firm is inherently informed by its competencies by default. This may be seen in the air transport industry through the proliferation of related ventures helping to drive the core strategy of an airline group. For example, Lufthansa Group has grown its expertise derived from the need to deliver internal Information Technology solutions through establishing and growing its IT division. This supports the airline's need for cost-effective IT projects, but is controlled by the corporate principals of the Lufthansa Group.2 Associated benefits include the elimination of the need to constantly reinforce service level agreements with third party suppliers, as well as a corresponding reduction in the number of potentially difficult to control variables in its IT supply chain (Jones, 2007), such as software development and systems maintenance. Ketler and Walstrom (1993) note that outsourcing is impacted heavily by organisational characteristics, as well as vendor and 2 Personal interview with Harald Heppner, Manager Corporate Strategy, Lufthansa Group. contract issues. Within the airline industry, evidence exists to illustrate that diversification represents a more controllable (Pakneiat et al., 2010) and more administrable (Heracleous et al., 2004) alternative for carriers which possess the scale to fully realise the benefits of its adoption. MRO serves as a useful example of a revenue stream that can provide significant tangible benefits, but also incur large costs. With the potential to represent 10e15% of an airline's operational overheads (Al-Kaabi et al., 2007; Kilpi and Ari, 2004; CAPA, 2014a,b), MRO presents a compelling case for pursuing an outsourcing strategy when viewed at face value. However, where in-demand technical competency can be married to the prospect of generating incremental revenue, in-sourcing functions such as MRO can pay notable dividends e provided the business unit is capable of supplying third parties to a meaningful degree of revenue generation. An example of this may be seen in Delta Airlines' investing in AeroMexico for the primary purpose of building its MRO portfolio (CAPA, 2011). Heracleous et al. (2004), Heracleous and Wirtz, 2009) highlight the notion that related diversification into higher margin sectors not only provides healthy alternative revenue streams, but also in their analysis of Singapore Airlines Engineering provide practical evidence of a business unit simultaneously servicing the core business (Singapore Airlines), as well as improving group-level costs and reinforcing group service standards. Where a carrier lacks the scale to profitably support its own needs and sell to third parties, the prospect of diversification may seem less attractive (Heikkil€ a and Cordon, 2002); conversely a carrier of Lufthansa's scale arguably allows it to overcome high competitive density, with seven out of ten of its major competitors operating major MRO businesses in close regional proximity (Aviation Week, 2012). As such, when applied in scale, diversification presents a sensible strategic option, especially if viewed from the perspective that MRO in particular is a more stable business than passenger transport e positioning it as an offset against the cyclicality of the airline business (Kilpi and Ari, 2004). Ansoff supports this notion, noting, “if (a firm's) diversification objective is to correct cyclic variations in demand that are characteristic of the industry, it would choose an opportunity that lies outside” (pg. 122, Ansoff, 1957). However, emerging trends in this market such as the encroachment of Original Equipment Manufacturers (OEM's) will begin to erode the position of even strong providers like Lufthansa, with Airbus already predicting 25% of its revenues to be generated by MRO sales by 2020 (Aviation Week, 2012). The strategic benefits of diversification benefits can formally be broken down into the mitigation of financial risks, marketing power, and knowledge gain. N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 3.1. Mitigation of financial risks The sharing of financial risk across a diversified corporate structure presents an additional positive aspect to this concept when applied in a controlled, related manner (Lubatkin and Rogers, 1989), due to the sharing of associated costs between business units. For example, much of the infrastructure required for cargo operations overlaps with those required for passenger transport, reducing the overall exposure to financial risk and investment, whilst collapsing operational costs over two revenue streams.3 However, it has also been argued that such units may reduce risk €dt and Fauser, 2004; by being responsible for their own P&L (Lindsta Taneja, 2004), due to the supposed greater duty of financial responsibility this places on each unit. A useful case illustrating the strength of pursuing related supporting ventures such as MRO, Catering and Information Technology over units more subject to industry cyclicality, such as subsidiary airlines (as per Kilpi and Ari, 2004) is Swissair. Related diversification into low-margin sectors, such as starting or purchasing other airlines may serve to “increase, rather than diversify risk” (Suen, 2002), as opposed to non-flying, high margin business units, which demonstrably serve to counter this, as can be inferred from Suen's analysis. Suen (2002) comprehensively illustrates the manner in which Swissair's investment strategy was misguided with the assertion that SAirLines was grossly outperformed by its services divisions e comparing returns of 0.9% for SAirLines in 2000 versus a high of 32.4% for its cargo division SAirLogistics. The ability of its highmargin, non-flying subsidiaries to absorb financial risk is apparent from their EBIT between 1997 and 2000 e showing that non-flying divisions almost consistently delivered a greater combined result than the airline itself, culminating in an average earnings ratio of approximately 2:1 against passenger operations. Arguably, had the SAir Group focussed on these types of business, rather than investing in loss-making equity airline partners such as the chronically unprofitable Sabena, then it may have been better positioned to respond to the spate of disasters that befell it between 1999 and 2001. Looking towards the future, investment into middle-ground investments that may arguably straddle the fields of related and unrelated diversification within the air transport industry has not yet seen much academic discussion. Krishnan and Ellis (2008) note that Berkshire Hathaway serves as an example of a business with aviation interests that pursues a highly successful, yet largely unrelated investment strategy. They additionally argue that competent management can adapt to running any business. However, a criticism of this viewpoint could be seen in the fact that Berkshire Hathaway is specifically geared towards investment and has no central core proposition that necessitates support from its ventures. As such, any investment made is predicated solely on the basis of a tangible and expected financial return. Conversely, analysis of Delta Airlines' investment into the Trainer Oil Refinery has yet to play out an either significantly positive or negative impact. Purchased for USD 150 million in 2012, the refinery had lost USD 136 million by mid-2013, however the correspondent drop in Delta's fuel price-per-gallon of 5.4% and second quarter 2014 profits of USD 13 million (CNBC, 2013; CAPA, 2013a,b) reveals potential for the investment, but it is crucial to note that profits must significantly improve to offset acquisition and initial loss expenditure. The facility's ability to service one of its primary strategic threats (the volatility of oil prices) could be seen 3 Personal interview with Ram Menen, Divisional Senior Vice President, Emirates SkyCargo (retired). 125 as a long-term remedy for this. However, the argument could be made that Delta lacks the organisational competencies and infrastructure to mitigate the risk of investing in Trainer (a view espoused by former IATA CEO and Director General, Giovanni Bisignani4), despite Krishnan and Ellis' argument that good management could win out. 3.2. Marketing power In contrast to Pakneiat et al. (2010), Aaker (2004) suggests that the establishment of a ‘brand umbrella’ allows firms to enter new markets more quickly regardless of a lack of prior expertise, with a reduction in risk due to the established strength of the central brand. Although it is important to note that the brand must possess widespread consumer familiarity, the associated benefits of an ‘elastic’ brand5 have allowed airline groups such as Virgin and Emirates to market a wide range of services based on a perception of ‘prestige’ (Park et al., 1986). Limits may be placed on the elasticity of a brand by consumer trends (Monga and John, 2010), resulting in a lifestyle brand being perceived as past its prime; however, the Virgin Group in particular has leveraged its brand equity to successfully sell into a range of sectors such as airlines, consumer retail, media and finance simultaneously, largely on the basis of positive brand perception (Pringle and Field, 2008). The positive aspects of diversification, regardless of whether it is related or unrelated, are ultimately connected with the group's ability to project its brand across multiple sectors, consequently increasing consumer awareness. Even the cessation of trading by the headline brand arguably did not harm many of the sub-brands of the SAir Group. Many of Swissair's business units continue to be active in the marketplace, including Swissport, Gate Gourmet, Rail Gourmet, Balair (reorganised as Belair), Swissotel, SR Technics and Crossair (reorganised as Swiss International Air Lines). It may be inferred from the example of the SAir Group that the often stronger earning potential of higher-margin, non-airline subsidiaries may provide greater benefits to the lower-margin airline itself, than vice versa. The integration of so-called “invisible assets” (Teece et al., 1997) refers to the intangible benefits reaped by marketing in a diversified business which lend themselves to the individual survival of SAir's units, not so much for their linkage to an admittedly tarnished brand, but due to their ability to leverage existing commercial and consumer relationships built under the group's original brand umbrella. 3.3. Knowledge gain The ability for subsidiaries to inform learning across the business is made apparent by Heracleous et al.'s (Pg 38, 2004) assertion that Singapore Airlines (SIA) benefits from a notable “transfer of learning” between subsidiaries through staff job rotation. This encourages greater group-level oversight of the organisation, as opposed to business-unit level compartmentalisation. The net gain of employee competency and knowledge of multiple areas can be spread throughout the wider business. Support for this enhanced ability to inform the business' capabilities through cross-sharing of knowledge can be found in Day (1990), who defines the concept of corporate ‘capabilities’ as a “complex bundle of skills and 4 Personal interview with Giovanni Bisignani, former CEO and Director General, IATA. 5 The American Marketing Association defines ‘brand elasticity’ the ability of a company's brand to ‘stretch’ to sell a diverse range of often unrelated products under the same marque. (AMA, 2010). 126 N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 accumulated knowledge that enable firms (or strategic business units) to coordinate activities and make use of their assets”. As such, the greater a firm's ability to leverage knowledge gained through diversification, so too will follow its strategic capability to deal with a broader range of threats. If Porter's argument, that a company must ‘relate to its environment’ to flourish strategically, is applied to Heracleous and Wirtz (2009) and Day (1990) assertions, then the intangible benefits of group-level knowledge gain must be viewed as particularly important in informing the positive aspects of adopting a diversified strategy. There are also some key pitfalls related to following a diversification strategy. Jenkins et al. (2012) study of Air Asia refers to the concept of ‘dominant logic’ within a group as a driver of how it pursues its strategy of diversification. If a group's prevailing logic is geared towards taking a purely strategic approach to diversifying and supporting core competencies with relevant business units, then related diversification occurs as its default mode of strategic growth. However, when the dominant logic of a group is primarily ‘philosophical’ in nature (Pakneiat et al., 2010) and diversification is approached on the basis of pursuing growth opportunities for financial returns regardless of sector, then whilst general capabilities and knowledge may grow, the ability to leverage centralised strategic gains does not e resulting in unrelated diversification. Where errant corporate logic is present, a firm's need to diversify may be ill-informed or unable to adapt to rapidly changing market conditions. This in effect mirrors the stock-market concept of a ‘value trap’, whereby an investment may appear to be sound in isolation, but can prove toxic to a portfolio due to consistent underperformance, or in this case its inability to aid the business in relating to its marketplace, as per Porter. Ansoff also supports this notion, arguing that companies may generate new competition through diversification from strong incumbents that it is underequipped to counter. 4. Overview and business trend analysis 4.1. Lufthansa Group The Lufthansa Group operates under a relatively simple structure, with the overall group being constituted of five main ‘business segments’: Passenger (relating solely to the passenger carrying activities of Lufthansa airlines, excluding ventures such as Germanwings), Logistics (cargo), Technik (maintenance), IT Services and LSG SkyChefs (catering). Each reportable segment operates as a standalone P&L centre, with detailed results of revenue (both ‘internal’ e i.e. revenue gained from servicing clients within the Group e and ‘external’, accounting for third party work), capital expenditure, profit, operating margins and employee strength being published. Comparative analysis of Lufthansa's business units has been benchmarked against performance figures for its core Passenger division, which accounts for the dominant share of group revenue (Fig. 2 below). As the group's largest operational entity, Passenger can serve as a bellwether for tracking Lufthansa's fortunes against the wider market. Additionally, the Group's business units are dependent on both the airline's fortunes and the wider market as a measure of demand for their services, given that they tender for contracts on a competitive basis both within and outside of the Lufthansa Group.6 Measures of productivity employed in the following analysis are largely centred on the split between internal and external revenue 6 Personal interview with Harald Heppner, Manager Corporate Strategy e Lufthansa Group. Fig. 2. Lufthansa group BU revenue contributions. Source adapted from LH group annual report 2013e2014. delivered by business units, operating profit margins and employee productivity. All of these factors are compared to Passenger division results to show the degree to which Lufthansa Group's business units are able to offset weak trading in the group's core competency, as well as demonstrate their generally stronger earning potential. Although it is important to note that these business units would likely not exist without the Passenger division, they do not draw the majority of their revenue from servicing it. Comparative analysis of business units highlights areas of strong performance and a general trend for higher margins over Lufthansa's core passenger business, as seen in Fig. 3 and Table 4. MRO initially appears to be particularly strong, but further analysis in Section 4.1.2 illustrates the underlying factors that may suggest its future could be in doubt. Indeed, headline figures for all revenue contributions require closer analysis. Whereas Fig. 4 (below) may show Logistics to have the highest percentage of external revenue (99%), it is important to note that this is achieved by default, as Logistics lacks internal trading partners. This is followed by LSG SkyChefs at 76%, which possesses a dominantly outward-looking revenue stream and a fairly static overall revenue contribution. Conversely, MRO and IT's ability to balance internal and external revenue, with a trend towards external growth in each demonstrates they have high growth potential as standalone units, with a bias towards financial rather than purely strategic. 4.1.1. Logistics: business trends analysis Cargo presents a mix of fortunes for any airline group, Laurie Berryman, Vice President UK, Emirates Airline, asserts that it is arguably one of the only diversified revenue streams available to airlines “by default”. Harald Heppner, Manager Corporate Strategy, Lufthansa, agrees, noting that cargo is an “in-built, ready-to-use Fig. 3. LH group comparative operating margins 2009e2014. N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 127 Table 4 LH group comparative average operating margins 2009e2014. Passengers Logistics MRO Catering IT 1.9% 1.9% 8.4% 3.3% 3.6% Source(s) Adapted from LH Group Annual Reports 2013e2014. Fig. 5. Logistics revenue trend 2009e2014.7 Source adapted from LH group annual reports 2009e2014. Fig. 4. LH group external revenue as %. Source adapted from LH group annual reports 2009e2014. asset”. The ability to enter the cargo market is available by virtue of already possessing bellyhold capacity that would otherwise be left solely for baggage or mail transport. In spite of this low initial barrier-to-entry, it is also a notoriously challenging sector, particularly due to its sharing of fuel cost with passenger operations (Holloway, 2008). Although this has the potential to cross-subsidise operations in both areas, inefficiencies inherent to the cargo arena can be difficult to overcome. Flexibility may be built into the model by introducing pure-freighter aircraft to offset gaps in the passenger network (Flight Global, 2013), but the costs of freighter introduction and operation often outweigh the benefits of leveraging bellyhold capacity if operational scale is insufficient (Morrell, 2007). Global cargo market downturn towards 2011e2012 (Flight Global, 2013) has seen Logistics’ operating margin collapse from a 2010 high of 11.4% to a 2009 low of 8%; both the respective highest and lowest of any Lufthansa Group business units. Despite scaling back pure-freighter growth plans (Flight Global, 2013), revenues recovered in 2013 to gain USD 500 million on 2009 levels, however this is still a decrease year-on-year versus 2012 (USD 3.49bn) and 2011(USD 3.9bn). A side benefit of this could be seen in the elimination of competitors, particularly in the pure-freight arena, where Air France/KLM has withdrawn the majority of its fleet (CAPA, 2013a,b), although this has also benefited fast-growing competitors in the Arabian Gulf. The Logistics' margin growth figures noted in Table 4 indicate that negative revenue growth (Fig. 5 below) has in fact been outstripped by negative margin growth, combined with negative employee growth e which suggests an organisation becoming progressively more inefficient year-on-year. This is further compounded by 2014 revenues outstripping those of competitor Emirates by USD200 million. Although it was able to generate more revenue on fewer FTK's (Freight Tonne Kilometers) than Emirates e with 278,528,303 to Emirates' 337,219,971 (CAPA, 2014a,b) e this is not necessarily indicative of wider efficiencies. When its negative profit-to-negative-revenue-growth is considered, Logistics ability to deliver margins arguably fails to overcome this small bonus. Although Logistics is presently seeing a downturn and is subject to a high degree of cyclicality, it is nevertheless able to deliver benefits to the wider group even when its own financial prospects are challenged e this demonstrates a particular strength of diversification. IATA noted moderate growth of 1.8% in the cargo market in 2013, with the trend expected to continue into 2014 (IATA, 2014). As such, although the cargo market is currently weak, Logistics’ cost cutting should position it well to capitalise on a sector predicted to rebound. 4.1.2. Technik: business trends analysis Despite producing healthy results and a proven ability to offset losses made by other divisions, analysis of wider industry trends indicates attractiveness of the MRO sector may be subject to erosion. Mr. Heppner notes the cost-effectiveness of in-house solutions from airframe and engine manufacturers (OEM's) presents an attractive prospect to customers, due to an in-house MRO's natural fit within its value chain. Indeed, OEM's consequently achieve “double digit” margins, versus an MRO industry average of 7%. When viewed against the trend of negative airline profitability (Aviation Week, May 2013), the lower-cost alternative of OEM's in the space traditionally occupied by companies such as Technik will serve as a growing cause of concern for the Lufthansa Group. This is highlighted by the fact that over 80% of customers for General Electric's ‘LEAP’ geared turbofan engines have purchased ‘TotalCare’ packages, providing lifetime care for maintenance and spare parts, bypassing MRO's. Indeed Chris Doan, CEO of consultancy, TeamSAI expects OEM to achieve “overwhelming mastery of the market” in the near-term (AFM, 2013; Flight Global, 2011). Within this sphere, a natural alliance between OEM's and independent MRO providers may develop, with a strong potential for marrying the “intellectual property” required for spare part manufacturing of the OEM to the “local knowledge” of MRO's (Aviation Week, Nov 2012). This ultimately serves to squeeze providers like Technik in the middle. The threat to Technik here may be inferred as an erosion of its ability to provide an end-to-end service to clients that is competitive in both price and global reach against OEM/independent joint-ventures. Technik's reliance on volume of checks performed to inform the scale of its business (Aviation Week, May 2012) allows it to realise 7 Logistics External Revenue (USD 3,423,850,000) contributes 99% of Total Revenue (USD 3,457,416,000). 128 N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 strong profits. However, its status as a ‘major’ purchaser of OEM aftermarket equipment does simultaneously fuel its main competitors' revenues. Over time, it is arguable that this will contribute to thinning margins, as OEM's grow in stature. Technik aims to negotiate access to OEM intellectual property and ultimately begin fabricating components itself. If successful, then it may be able to sustain its present market position, but this does represent its only major tactic to mitigate the growing OEM presence. However, if it fails in this objective, then Walter Heerdt, SVP of Marketing & Sales for Technik notes that the setback would be “difficult to overcome” (Aviation Week, May 2012) e suggesting steadily worsening prospects for Technik's viability in a fast-changing MRO landscape. MRO contributes the healthiest operating margins within the Lufthansa Group, averaging 8.4% between 2009 and 2013, comfortably more than double the five year averages for all other business units, including passenger. It is also one of the most consistent performers in terms of margin growth (Fig. 6 below), showing a dip following cuts made in 2009, but recovering towards 2013. Technik's strong results may be illustrated by solid revenue contribution (Fig. 7) and its operating profit in 2013, which matched 81% of the Passenger division's own profit. Similarly, in 2011 the Passenger made an inverse 81% of Technik's operating profit. Technik requires a relatively low capital expenditure versus revenues, averaging USD 160 million from 2014 to 2009, although it is worth noting that much of its assets e particularly facilities e are grandfathered and as such, amortised over a long period of time. As such, these low legacy costs position Technik as a solid investment for the Lufthansa Group. However, it is arguable that the capital costs for any other carrier wishing to move into this sector for the first time would be very high (Flight Global, 2011), negating the benefits currently seen by Lufthansa. The case may be that MRO is a strong sector for businesses with existing operations, but the financial barriers to entry are high, dampening the potentially solid margins it is capable of achieving otherwise. It is also an employee-intensive operation, requiring 20,000 staff e which despite being less than half of Passenger's requirements, does still show that it has the second lowest productivity-peremployee rate within Lufthansa Group. This is exacerbated by a costly, entrenched union structure (Irish Independent, 2013), which when combined with the OEM dilemma, may play their part in reducing the attractiveness of Technik as an investable asset in the long term. 4.1.3. LSG SkyChefs: business trends analysis Much of SkyChefs' currently robust financial position was foreshadowed by results leading up to 2010, with operating profit and revenue increasing year-on-year (8% and 2% respectively) e however the impact of Lufthansa's cost-cutting programme (known as ‘SCORE’) on SkyChefs' becomes apparent when it is considered that 2010's operating margin and operating profit were decreasing significantly as costs and revenue increased. As such, the efficiency gains seen are tangible and indicative of a company now operating in a more competitive manner. Mr. Heppner notes that SkyChefs' is “required to competitively bid for all Lufthansa Group business, nothing is taken as given”, with an average of 76% of its revenue generated externally (Fig. 8 below), showing no reliance on Passenger operations to generate business. It may be reasonable to infer that in light of Lufthansa's continued need for cost cutting, SkyChefs' need to win Group business by being the lowest bidder (and therefore depressing yields) may not always be in the Group's best interest, if it can instead generate stronger returns from winning external business. Ultimately, despite LSG's market leading position8 Lufthansa Group has investigated options for divestment e initially in 2012, with no success in securing a bidder. Morgan Stanley notes that Lufthansa views SkyChefs' as ‘non-core’ e and that an increasing appetite for consolidation in the catering market was likely to push Lufthansa towards sale (Morgan Stanley, 2012). Following the divestment of unprofitable subsidiaries as part of the SCORE programme (e.g. BMI British Midland), the Group turned its attention to the sale of profitable assets, as part of a broader strategy to Fig. 6. Technik operating margin. Source adapted from LH group annual reports 2009e2014. Fig. 8. SkyChefs revenue. Source adapted from LH group annual reports 2009e2014. Fig. 7. Technik revenue. Source adapted from LH group annual reports 2009e2014. 8 LSG SkyChefs is the single largest airline catering business, accounting for 30% of the global marketplace worth up to USD11 billion (LSG SkyChefs, 2014). N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 realign its core competencies (DW/Reuters, 2012). Indeed, a potential bidder for the business emerged in the Emirates Group, which has remained open to purchasing the business should it be offered again (Bloomberg, 2013). The sale of a profitable, market leading business unit to a primary competitor could be observed as a strategic threat to the Lufthansa Group. However, it could also represent a significant opportunity due to the potential for Lufthansa Group to sell SkyChefs at a time of predicted market growth,9 maximising the sale value of the business unit. Equally, Lufthansa Group could miss out on the opportunity to retain a newly cost-efficient, market leading business unit poised to deliver strong returns. Although employee numbers have increased by 4000 from 28,000 in 2009 to circa 32,000 in 2013, initially suggesting cost inflation, measurement against operating profit and total revenue shows increasing productivity. This is particularly impressive when viewed against the fact that comparisons with previous years are not like-for-like; with 2013 showing a greater operating profit per employee than 2012, concurrent to an increase in operating margin of 0.4% despite adding 2000 employees to the business. Although these gains are not significant, it shows that SkyChefs has controlled costs whilst expanding revenues, driving investment (capital expenditure increased significantly in 2013 versus previous years) and headcount, falling into line with SCORE's stated objective of maximising value ‘at all suppliers’ (LH SCORE Expert Session, 2013), specifically including internal suppliers. SkyChefs has a large global presence and often operates in regions where Lufthansa has no passenger division presence. The benefits of SkyChefs' high degree of independence can be seen in its financial results, with growth in operating results outstripping revenue growth between 2009 and 2013, despite mixed results for its parent company during that period. Although it has been subject to the SCORE programme, its ability to independently control costs has allowed it to nuance its approach and deliver progressively greater financial value to its parent. The strategic discussions presented here for each of Lufthansa's featured business units have been summarised into a SWOT table after going through a short validation process with the expert interviewees (Table 5). 4.2. Emirates Group In order to assess Emirates’ diversification strategy, the structure of how results are accounted for within the Emirates Group must be clearly understood. Ram Menen, the retired founding executive of Emirates SkyCargo notes the Emirates Group has “a very different model”, with revenue being generated by two distinct entities: Emirates Airline and Dnata. Both entities share common Finance, IT and Human Resources to generate economies of scope. Functions such as Finance and IT are administered as part of Dnata, but act on behalf of the entire group. A simplified visual interpretation of how the business units of Emirates Group are structured can be seen in Fig. 9. Some revenue streams report under Dnata exclusively, or jointly between Emirates Airline and Dnata (Destination & Leisure Management and Travel Services), depending on their degree of interface with the passenger airline business. For example, within the Emirates Group, both Emirates Airline and Dnata operate travel businesses, noted as ‘Destination & Leisure Management (DLM)’ by the airline and ‘Travel Services’ by Dnata. However, both areas 9 The global catering market is set to grow explosively e up to USD16.5 billion by 2016, counteracting several years of static and negative growth. Despite growth in passenger numbers, catering spend has remained static, due to airline budget cuts (PRWeb, 2013). 129 perform very similar functions, with those under the airline umbrella servicing its specific needs more closely and those under Dnata providing services to a wider range of clients. As such, this section analyses DLM and Travel Services and other such overlaps as one overall area contributing a net benefit to the Emirates Group as a whole. Benchmarking of Emirates Group results presents a different challenge to analysis of Lufthansa Group by virtue of the complexity of its organisational structure and less comprehensive financial reporting. No in-depth financial statistics on individual business units are published, despite operating them as P&L centres. Instead reporting is limited to evaluating Group level performance, with additional commentary on the revenue contributions of its business units. This absence of published operating ratios for business units limits comparison with Passenger division results (as per Lufthansa Group's methodology), as revenue alone does not offer insight into the strategic benefit delivered by each unit to the Group. To generate insight into Emirates’ strategy and the trends it is subject to, this section explains relationships between Group business units and their role in driving the Group. Revenue generation will be utilised as a KPI for each unit, cross-referenced against personal interviews conducted with senior executives across the Emirates Group to form a picture of both their performance and strategic value to the Group. The overall split in revenue between Emirates Airline and Dnata within the group is heavily weighted towards Emirates, with Dnata accounting for an average of 8% of Group revenues between 2009 and 2014 (Figs. 10 and 11). However, Dnata's profit margin is on average more than double Emirates Airline's, at 14% versus 5.7% (Emirates Financial Reports, 2009e2014). Such margins are particularly impressive when it is considered that up to 40% of Dnata's workforce is based outside of the UAE (Emirates Group Annual Reports, 2014), where labour cost is one of the core drivers of the Emirates Group's cost advantage (CAPA, 2014a,b). Additionally, the intangible contribution of Dnata's service divisions to Emirates Airline's bottom line cannot be underestimated, with the carrier dependent on much of the infrastructure it provides, despite not having to directly bear the cost of their operation e arguably distorting the picture. It may not be unreasonable to infer that this cross-functionality, combined with the healthier margins of Dnata as a whole present an attractive case for diversification within the Emirates Group, with a greater bias towards strategic value, rather than the financial bias evident within Lufthansa. 4.2.1. SkyCargo: business trends analysis Emirates' SkyCargo division has achieved the remarkable feat of expanding its business in a shrinking global freight market, achieving growth “against the industry norm” (SkyCargo, 2014a,b). In 2014 it delivered 15% of group transport revenues with a total uplift of 2.3 million tonnes of cargo in (Emirates Annual Reports, 2009e2014), comfortably remaining the Emirates Group's largest non-core business unit as well as the world's largest cargo airline by available freight tonne kilometres (CAPA, 2014a,b). SkyCargo has largely grown through the natural introduction of bellyhold capacity from Emirates Airline's passenger growth, as well as utilising pure freighters10. The freighters in particular provided what Mr. Menen calls a “clear and independent distribution capability” with which to significantly grow the business at a time 10 Freighters are operated as a mix of wholly-owned or leased aircraft (Boeing 777-200LRF) and wet-leased Boeing 747-400ERF's on Aircraft, Crew, Maintenance & Insurance (ACMI) contracts originally from Atlas Air and later, TNT Airways (TNT Airways, 2012/Airline Cargo Management, 2013). 130 N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 Table 5 SWOT summary for Lufthansa's featured business units. Logistics Strengths Economies of scope with passenger network (broad bellyhold network) Cash cow market position Opportunities Cargo downturn has eliminated some competitors Freighter re-fleeting programme Technik Strengths High margins relative to group average Limited legacy costs Resilience against external shocks Opportunities Potential to partner with OEMs Acquisition of intellectual property SkyChefs Strengths Market leader Largely independent of LH for revenues Economies of scope with LH group Opportunities Strong market growth predicted Ability to service clients throughout the LH group Fig. 9. Emirates Group Business Units e Lines of Reporting. Source Authors, derived from Emirates Group Annual Reports, 2009e2014. Weaknesses Poor profit margins High overheads of pure freighter fleet High capital expenditure Threats Weak global cargo market Growing strength of Gulf cargo carriers Weaknesses Employee intensive High average wages Low margins relative to OEMs Threats Encroachment of OEMs in MRO market Failure to acquire ‘intellectual property’ Weaknesses Servicing parent company not guaranteed Weak market (at present) Manpower intensive business Threats Divestment strongly considered by parent Growth of new suppliers N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 Fig. 10. Emirates group revenue contributions. Fig. 11. Emirates group comparative margins. Source adapted from Emirates group annual reports 2009e2014. when other airlines have been reducing freighter fleets. He also points out that this independence is seen in SkyCargo being granted full P&L on freighter operations and a remit to operate as “an airline within an airline”, driving efficiency. Mr. Menen looks to ‘speed’ as a core strength, believing that in the time-sensitive arena of global logistics, whenever speed is lost, cost creep sets in and competitive advantage is lost. This underpins the strategic nature of Emirates' investment in the SkyCargo business, which despite delivering large volumes of revenue to the Group in its own right, is also key to aiding the justification of the passenger route network. Mr Berryman notes the “significant added value” of cargo operations to passenger routes due to its ability to provide a more dynamic product mix at a limited increase in cost-of-sale. The Group's strategy of centralising core-functions enabled Mr. Menen and his team the “freedom” to significantly reduce cost, expedite decision times and attain the speed-to-market necessary to outmanoeuvre competitors. SkyCargo often competes for group financial resources, with the company noting that “Emirates' management monitors the operating results of its business units for the purpose of making decisions about resource allocation” (Emirates Group Annual Reports, 2014). Mr. Menen argues that instead of hampering progress, the need to propose a robust case to compete for resources has strengthened the analytical capability of Emirates' divisions e enhancing their business acumen (a form of ‘knowledge gain’, as discussed in Section 2), which he believes sees significant transfer to other commercial processes within the division, resulting in a more effectively run overall business. 131 This analytical nous and quick speed-to-market has seen revenues increase from USD1.8bn to USD3bn. Further to this, since the division's inception in 1985, revenues have grown from 10,000 tonnes of freight (http://skycargo.com/SkyCargo.com, 2009) to 2.5 million tonnes carried (Emirates Group Annual Reports, 2014). Average year-on-year growth stands at approximately 13% between 2009 and 2014, with the most significant growth occurring between 2009 and 2010 at 27%, versus 8% for most other years (Fig. 12). This leap in earnings can be attributed to the introduction of the Boeing 777-200LRF pure freighter in March 2009 (http:// skycargo.com/SkyCargo.com, 2009). SkyCargo's dependence on Emirates Airlines' bellyhold capacity e which accounts for 74.8% of total cargo tonnage capability, can present drawbacks. The relative tonnage gap (35%) between an Airbus A380-800 versus the longer Boeing 777-300ER means that as more A380 destinations come ‘online’, overall cargo tonnage may decrease in key ports-of-call. Mr. Menen is unconcerned by this development, noting that the proliferation of A380 operations is often offset by the introduction of new frequencies and growing parallel opportunities. Mr. Berryman explains further, noting that should London Heathrow be overbooked for cargo, the company's scale enables it to transport freight to other UK destinations by road, such as Gatwick, Birmingham or Manchester e thus leveraging spare capacity to retain business and offsetting capacity losses (Boeing World Air Cargo Forecast, 2013). Similarly, SkyCargo's movement of the entire pure freighter fleet (Aviation Week, 2014a,b) to the new Dubai World Central (DWC) has seen it successfully grow operations between split hubs, with ample room to grow built into one of the world's largest cargo facilities (SkyCargo, 2014a,b/Boeing World Cargo Forecast, 2013). This is underpinned by comparison with the mixed fortunes of Lufthansa Logistics, whereby SkyCargo's business model demonstrates that its core principal of independent financial operation, mixed with capabilities often being sourced at Group level provides a high degree of dynamism and fast reaction times. 4.2.2. DLM & travel services: business trends analysis Emirates' reputation as a ‘travel agent friendly’ airline (Arabian Industry, 2014) is underpinned by an integrated value chain servicing as many elements of the customer journey as possible. Fabio Prestijacopo, Vice President of DLM describes the company's ‘Emirates Holidays’ unit as a tour operator, but one whose primary mission is “to add value to the airline” by acting as an in-house direct sales channel. DLM units such as Emirates Holidays allow the Group to sell a complete package over which it has greater control. Primarily, this avoids the need to monitor Service Level Agreements, as has been discussed with reference to MRO and Catering. Fig. 12. SkyCargo revenue. Source adapted from EK group annual reports 2009e2014. 132 N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 Moreover, according to Laurie Berryman, it allows the Group to provide more competitive pricing, due to a reduction in servicing costs, such as GDS usage fees and agent commissions. Mr. Prestijacopo notes a correspondent benefit in gaining “greater ownership of the customer journey”, allowing Emirates DLM to enhance service control and quality at a lower cost. From a financial perspective, DLM provides healthy, but relatively small revenues to the Emirates group, indicating that its true value is observed in its ability to support customer journeys, as observed above. Measurement of trends is somewhat limited by a fragmented business structure that until recently has been subject to a degree of duplication11 with multiple business units possessing similar capabilities. However, this can also have a highly positive impact on revenue, as seen in the acquisition of European Online Travel Agent (OTA) ‘Travel Republic’ (Travel Weekly, 2012) and the Gold Medal Travel Group (Dnata, 2014), a former unit of the Thomas Cook Group, which currently operates Netflights.com, a leading OTA in the UK market (Travel Weekly, 2012). The 2014 Group Financial Report (Emirates Group Annual Reports, 2014) observes that the acquisition of Travel Republic was instrumental in driving a revenue increase from USD153m in 2011 to UD210m in 2012. Mr. Berryman asserts that a further significant increase in the business will be seen in 2015, following the integration of the Gold Medal. The Group Financial Statement supports this, noting that “the full year impact … will be reflected only in the next financial year” (Emirates Group Annual Reports, 2014). DLM and Travel Services revenue has more than doubled from USD109m in 2010, to USD231m in 2014 (Fig. 13 below), with a relatively small corresponding increase in staff numbers e indicating the sector's ability to grow fast without incurring steep increases in cost. The Emirates Group sees potential to segment the direction of its DLM units, with Gold Medal continuing its role as an exclusive facilitator of Thomas Cook's car rental and air services needs, whilst integrating its objectives with the Emirates Group's overall aim of “continued tourism growth in the UAE” (Dnata, 2014). The end benefit to the Emirates Group can be inferred in Mr. Berryman's expectation that Gold Medal has the potential to drive larger numbers of Thomas Cook passengers to Emirates flights, as well as underpinning Mr. Prestijacopo's comments about enhancing Emirates' capacity to provide in-house, integrated end-to-end journeys for its customers. Travel Republic will remain within the pure OTA arena, with Emirates Holidays serving direct customers seeking an integrated package. This move towards specialised segmentation allows Emirates to maintain a significant presence in the travel services market, whilst re-orientating this customer stream towards direct sales e reducing dependency on the travel agency partners that have long played a vital role in Emirates’ commercial fortunes at a high cost-of-sale.12 4.2.3. Catering: business trends analysis The Emirates Group has seen its activity in the catering sector increase dramatically between 2014 and 201113, despite experiencing the same depressed market as LSG SkyChefs. Following Dnata's acquisition and integration of the Alpha Catering Group (Emirates Group Annual Lufthansa Group Annual Report, 2013) it 11 Fabio Prestijacopo points out that the functions of its Emirates Holidays and Dnata Travel brands have often overlapped in the past. 12 Personal interview with Laurie Berryman. 13 Catering was not reported as an individual revenue stream by the Emirates Group until the 2010e11 financial year, reflecting the acquisition of the Alpha Catering Group. Fig. 13. DLM & travel services (combined) revenue. Source adapted from Emirates group annual reports 2009e2014. Fig. 14. Emirates & Dnata Catering (combined) revenue. Source adapted from Emirates group annual reports 2009e2014. was catapulted to the position of the fourth largest global catering provider. Prior to this, revenues were largely earned from the supply of third party clients at DXB. The financial context of this situation can be seen by growth between 2009 and 2014 totalling 900%, or an increase from USD29m in 2010, to USD317m in 2014 (Fig. 14). The 2011 acquisition of Alpha reflects this in a 438% increase in business between 2010 and 2011, with revenue moving from USD29m in 2010 to USD157m in 2011. The full integration of Alpha may be seen as having ‘bedded down’ in 2012, with a further increase to USD331m, realising the full potential of Alpha's revenues on the Group's balance sheet. Additionally, a dip for 2014e2013 may be explained by revenue sharing activities with the Lufthansa Group (see below). The Group's move away from a localised catering operation with limited third party capacity, to a globally orientated business resonates with the overall trends seen across other business areas of pursuing robust in-house capabilities, leveraged to their full potential by internationally focused third party revenue generation. Despite this, Emirates adopts a similarly pragmatic line to Lufthansa in its awarding of service contracts. Mr. Berryman points out that despite Alpha's global capabilities, the bidding process is still competitive e for example, Emirates Airlines' catering needs at London Heathrow have been fulfilled by Do&Co, an Austrian firm with worldwide operations, instead of Alpha.14 14 Personal interview with Laurie Berryman. N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 In the pursuit of cost-effective solutions, joint-ventures have emerged. 2012 saw the integration of Alpha's UK operations with those of LSG Skychefs, to form Alpha LSG (LSG SkyChefs, 2014) e a UK only business, delivering USD512m in revenues with over 3000 staff. Both Dnata and the Lufthansa Group retain a 50% stake in the business and will share revenues which was formed with the intention of combating a particularly “challenging” marketplace in the UK and being able to meet new entrants more effectively (DFNI, 2012). This suggests that the growing presence of Do&Co in the UK has become a sufficient enough cause for concern to the major incumbents to provoke a strategic response. Further expansion may come in the form of LSG SkyChefs itself e a potential acquisition target for the Emirates Group's catering portfolio. Dnata has noted its interest in taking a stake (up to 49%), or total ownership of SkyChefs, should the Lufthansa Group ultimately opt to divest this business unit. Given the two organisations prior experience of joint venture co-operation, it may be inferred that such an acquisition would be a good cultural and commercial fit for the Emirates Group. Furthermore, with the catering market poised to grow to USD16 billion by 2016 (PRWeb, 2013), such an acquisition would position Emirates as the global leader in a period of significant market recovery and growth. This underpins The Emirates Group's strategy of leveraging business units for internal and external gain, with the majority of revenues ultimately being earned from third part work. The Alpha LSG joint venture, or any part-purchase of LSG SkyChefs also illustrates the pragmatic nature of its approach in a similar vein to its acquisition of Gold Medal Travel e showing that it is willing to work with or for competitors such as SkyChefs or Thomas Cook and fuel their revenue generation, provided the strategic return to Emirates is sufficient to justify the investment. The strategic outlook for Emirates' featured business units is summarised into SWOT assessments after going through a short validation process with the expert interviewees as shown below in Table 6. 5. Strategic analysis and positioning 5.1. Market growth and relative market share The BCG Matrix has been constructed on the basis of each BU's ‘relative share’ within its own market versus the growth rate for that market.15The highest growth rate was seen in the ‘Travel Services’ sector at 12% and the lowest in Flight Catering at 2%, with relative shares falling between 100% (for market-leaders such as SkyChefs) and less than 1% (Emirates DLM) (see Fig. 15). The positioning of Emirates' BU's may initially appear surprising, with the majority achieving ‘Dog’ or ‘Question Mark’ status. However, the issue of potential is not fully covered by the BCG. For example, market growth rate is predicated on past, rather than predicted performance. The individual growth rates for business units is also not accounted for. The below Strategic Scoring Method establishes encouraging prospects for all of Emirates' business units. Conversely, although Lufthansa Technik may presently be a ‘Cash Cow’, it is unlikely to retain this positioning, with a slide towards ‘Dog’ or ‘Question Mark’ territory already evident from the BCG. The following section analyses the market positioning established by the BCG, with added context from the Trend Analysis and SWOT summaries (Section 4) to establish strategic value and direction for each BU, the options available, as well as their associated risk. 15 Market growth rate is posited as an average of year-on-year growth figures between 2009 and 2014, sourced from company industry reports. 133 5.2. Strategic value & directionality: Lufthansa Logistics is a ‘Cash Cow’. The downturn in the freight market has resulted in low market and business unit growth, but its high relative market share in such a market demonstrates an ability to perform against wider trends. Additionally, a fairly positive future market outlook and a reduction in competitors due to the downturn present a healthy number of strategic options, including the ability to grow outside of Emirates SkyCargo's traffic flows. Logistics performs below the group average of a 4.3% margin, but a reinvigorated freight market could reverse this. Exposure to risk in the form of pure-freighter operations may be seen as a drain or a bonus but trading could improve if Lufthansa turned to pure bellyhold operations, due to the sharing of costs with the passenger division. Lufthansa may wish to retain Logistics and conduct a strategic review of operations. However, at present the cargo market remains a solid investment, so investment and building value may be viable options. Technik is a ‘Cash Cow’ with the potential to slip into the ‘Dog’ or ‘Question Mark’ quadrants. Relatively flat BU and market growth and the prospect of OEM's eroding a currently strong relative share present a weak outlook. Technik's own admission that it is unwilling to pursue joint-ventures with OEM's and a risky play for intellectual property rights compounds this. Financially, Technik is a strong performer with outstanding margins backed by Lufthansa Group's steadily increasing profitability, although it must be noted that sluggish Group revenue growth may hamper cashflow and present Technik as a target for divestment in the face of future downturns. Technik may wish to review its strategic direction. If successful, it could stand to continue earning from presently strong margins and mitigate the influence of OEM's, but if it does not succeed, then sale may be an option in the long term. SkyChefs is a ‘Cash Cow’, with the potential to move into ‘Star’ territory e this is due to its position as a market leader and forecasts of highly positive growth in the catering market. This establishes high potential value, which may not be fully accounted for in the rankings. The strategic benefits of controlling in-house catering operations are apparent, but the potential for sale underpins its financial value as well. However, a buyer could be Emirates, which could deliver value to an already strong competitor, diminishing the strategic attractiveness of selling the unit. Based on current market and business unit growth, it may appear to be an underachiever, but its strong future prospects may support retention as a prudent strategic and financial option in the short term. SkyChefs sits across boundaries, with an indicative direction pointing towards review and investment pending a decision regarding divestment. The intangibility of future prospects precludes a higher ranking, but Lufthansa may wish to retain and leverage the up-turn of the catering market. 5.3. Strategic value & directionality: Emirates Group Emirates SkyCargo is a ‘Cash Cow’. Market growth is low, but SkyCargo is growing rapidly against trends (and is the market leader, with a positive market outlook predicted). This is facilitated by drawing marketshare away from competitors. A cost-efficient structure, high revenues, a large flexible network, a new hub and a low risk of product and service development (see Section 5.4.2) result in a high number of strategic options. Volatility in the global cargo market, partial reliance on Emirates Airline's operations and not always securing priority use of internal resources may present financial challenges, but the strength of its parent serves to mitigate much of this. Emirates may wish to invest further in SkyCargo and build value through an increased global presence, as well as more robust dedicated freighter operations e reducing reliance on 134 N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 Table 6 Emirates' featured business units SWOT summary. SkyCargo Strengths Speed to market Autonomy Broad Emirates network (Bellyhold) Opportunities Fast growing parent company Weakened competitors DWC hub growth DLM and Travel Services Strengths Integral to Emirates Airline strategy Customer ‘ownership’ No need to monitor Service Level Agreements Opportunities Fast growing global market Gold Medal acquisition Growing market preference for direct sales Catering Strengths Positioned for global growth Alpha flight catering's broad portfolio Opportunities Potential to acquire LSG SkyChefs Strong market growth predicted Alpha-LSG joint venture in UK Weaknesses Partial reliance on passenger airline A380 vs. B777 bellyhold disparity Threats Weak and volatile global cargo market Weaknesses Fragmented business structure Relatively small player in a big global market Threats Travel market can be volatile Strong incumbents (particularly OTAs) Weaknesses Servicing parent company not guranteed Weak market (at present) Manpower intensive business Threats Growth of new suppliers (e.g. Do&Co) Fig. 15. BCG Matrix for EK and LH Business Units. Source Author, from company & industry reports. bellyhold capacity. DLM & Travel Services is a ‘Question Mark’ e low share in a large, fast growing global market obscures its true value. This sector is of high strategic value to Emirates by virtue of its high degree of integration with the passenger airline business. The acquisition of Gold Medal and future growth may provide necessary traction to transit to ‘Star’ territory, aided by average business unit growth of 137% between 2009 and 2014. However, high costs, a somewhat fragmented and duplicated business structure and a volatile marketplace serve to moderate its financial performance. Potential for significant strategic and financial rewards is high should Emirates invest in this sector e pursuing product and market development as priorities, as well as reviewing the business structure of the segment. Emirates' Catering unit is a ‘Dog’ which could rapidly progress to being a ‘Star’. Forecasting of a significant rebound in the catering market and the acquisition of Alpha Flight Catering (the results of which have not yet been fully realised) may serve to rapidly add financial and strategic value via increasing marketshare in a growing market. Potential acquisition of LSG SkyChefs would consolidate a position as a highly profitable market leader, but this remains only a possibility at present and cannot be fully accounted for in the rankings. To prepare for growth, Emirates may invest in its Catering division and attempt to build value through pursuing N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 the acquisition of SkyChefs. If this is not possible, then it must retain Alpha and grow it with the market. The BCG along with the other strategic scoring factors presented in Section 2 were put together for each of the two groups' features business units are a summarised below in Table 7. 5.4. Strategic options & risk The Ansoff matrix can be useful for honing the strategic positioning as developed above into actionable, sustainable strategies and supplementing the directionality established by the Strategic Scoring Method through the identification of specific areas for development by assessing value-to-risk relationship between new and existing business areas. 5.4.1. Lufthansa Market development for Lufthansa Group presents an issue in light of the fact that progression of the business may be dependent on retraction or significant review in some areas (notably MRO), as opposed to further market penetration or product and market development. However, as no Lufthansa Group business unit fell into the ‘Consider Sale’ category, room for review and assessment of the risk of continuing in such sectors means that value can still be drawn from the Ansoff matrix (see Table 8). A lower risk alternative for Lufthansa Group could be developing new maintenance bases in areas of market growth, such as South East Asia, which has seen a proliferation of LCC's with a preference for outsourcing. Consequently, the region's market value is predicted to see growth to USD73 billion by 2023 (AFM, 2013). Additionally, new markets for Logistics that lie outside of the east-bound traffic flow directionality of gulf carriers, such as Eastern Europe, could prove lucrative with little risk. Spares manufacturing represents another high risk strategy. Although Technik does currently hold a limited stake in spares manufacturer HEICO Aerospace (Lufthansa Group Annual Report, 2014), Section 4 showed that far greater investment in this sector is required to effectively combat the entrance of OEM's. The risks to making further investments in a declining sector are apparent, however, should Technik be successful in acquiring greater manufacturing capability, or the intellectual property rights necessary to become a significant spare parts manufacturer, then the benefits may well outweigh the risks. Finally, the pursuit of recovering growth trends in existing markets could be taken advantage of by Catering and Logistics. The 135 fact that both have survived market contraction and retained market leading positions may allow them to leverage this advantage into drawing marketshare away from weakened competitors. 5.4.2. Emirates The Emirates Group's strong positioning as shown earlier provides a positive outlook for the development of all of its BU's. However, expansion is nevertheless subject to risk, especially where the financial and strategic gains are likely to be largest, by virtue of the capital outlay required to diversify (see Table 9). Expansion into the youth travel market may open new opportunities for DLM and Travel Services, whilst utilising its existing infrastructure e partially financially de-risking the move. The youth travel market is expected to grow to 73% from present levels to USD 320 billion by 2020 and represent up to 20% of global tourism (SYTA, 2012), representing a highly fertile segment in which to expand. Cargo's continued growth could be facilitated by expanding to new pure freighter markets e reducing its reliance on Emirates Airline's network expansion for growth, by adding capacity in high potential regions such as South East Asia and expanding trucking operations (Boeing World Air Cargo Forecast, 2013). The acquisition of LSG SkyChefs e should Lufthansa opt for sale e represents a significant gain for Emirates, however the significant capital outlay required to meet its 2012 estimated valuation of USD 1.1 billion (Morgan Stanley, 2012) and the prospect of projected market growth failing to materialise increase the risk of pursuing this option. It is nevertheless offset by the potential to move into ‘Star’ territory, should acquisition prove possible and successful. DLM and Travel Services may opt to continue growing organically through its integration with Emirates Airline. Laurie Berryman notes that one of the strongest areas for growth in Emirates' portfolio has been “three and four star” travel, as opposed to Dubai's typical association with five star luxury. This growth in lower value, fed by organic volume growth in line with the carrier's ambitious expansion plans could significantly grow marketshare, contributing to its move into the ‘Star’ BCG quadrant. Similarly to Lufthansa Logistics, its survival of the global cargo market downturn, the subsequent elimination of competitors and its market-leading presence position it well to continue growing within a relatively static market at the expense of its competitors. As a parallel opportunity to developing new pure freighter operations, it may also continue to rely on the organic growth of its bellyhold network. Table 7 Lufthansa and Emirates business unit strategic scoring summary. Lufthansa Logistics Average Score Indicative Result Lufthansa Technik Average Score Indicative Result LSG SkyChefs Average Score Indicative Result Emirates SkyCargo Average Score Indicative Result Emirates DLM and Travel Average Score Indicative Result Emirates Catering Average Score Indicative Result Underachiever Weak Performer Strong performer Best in Class 1. Consider Sale or Restructure 2. Retain and Review 2.5 3. Invest in BU and Build Value 4.Divest or leverage 1. Consider Sale or Restructure 2. Retain and Review 2.3 3.Invest in BU and Build Value 4.Divest or leverage 1. Consider Sale or Restructure 2. Retain and Review 2.6 3. Invest in BU and Build Value 4.Divest or leverage 1. Consider Sale or Restructure Services 2.Retain and Review 3 3. Invest in BU and Build Value 4.Divest or leverage 1. Consider Sale or Restructure 2. Retain and Review 3 3.Invest in BU and Build Value 4.Divest or leverage 1. Consider Sale or Restructure 2. Retain and Review 2.75 3. Invest in BU and Build Value 4.Divest or leverage 136 N. Redpath et al. / Journal of Air Transport Management 64 (2017) 121e138 Table 8 Lufthansa group Ansoff matrix. Table 9 Emirates group Ansoff matrix. 6. Recommendations & conclusions This study has uncovered that firstly the strategic value of a diversified portfolio of related, non-core subsidiaries can be illustrated by Emirates' investment in Travel Services as a cost-effective method of feeding its core passenger transport business through exercising greater end-to-end control over the consumer journey. In the case of LSG SkyChefs, the Lufthansa Group informs strategic value somewhat differently. Despite LSG primarily adding financial value to the ...
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Explanation & Answer

Attached.

Running head: AIRLINE INDUSTRY

1

Airline Industry
Student’s Name
Institution Affiliation
Course

AIRLINE INDUSTRY

1. Abstract
a. Paper is about technological innovation in the airline industry
2. Introduction
a. Problems affecting the airline industry
b. Historical summary
c. Thesis statement
3. Body
a. Action of the organization regarding the issue
b. Technology issues
4. Recommendations
a. Involve Information technology professionals.
b. Hiring cybersecurity experts.
c. Securing the advice of a system analyst to advice on the proper system.
d. Budget on an appropriate and convenient system.
e. Benchmark on airlines which have already adopted technology
5. Conclusion
a. Need for technology innovation
b. Affirmation of the thesis statement

2


Running head: AIRLINE INDUSTRY

1

Airline Industry
Student’s Name
Institution Affiliation
Course

AIRLINE INDUSTRY

2

Abstract
This paper discusses the technology innovations in the airline industry. It uses the
example of three major airlines, i.e. Germany’s Lufthansa Group, Dubai’s Emirates Group, and
the Brazilian airlines. Within the paper, various technical issues and problems in the airline
industry are discussed. The association of these problems and the need for technological
adoption is also discussed at length. Some of those problems include flight delay, missed flights,
and escalated flight fares.

AIRLINE INDUSTRY

3

Technology Innovations Affecting the Airline Industry
The main focus of this research paper is to identify the effects of the incorporation of
technology and the related innovations in the airline industry. The airline industry has undergone
an advancement in technology in its daily operations. Multiple internal and external factors have
pushed the need to adopt technology in the airline industry. Some of these factors include flight
delays, missing flights, escalating flight fares, lost hotel reservations, catering mismanagement,
and loss of cargo. All these factors together with the need for providing a suitable working
environment has led the airline industry to switch from the traditional methods of operation such
as the manual booking of hotels to technological driven operations, e.g. digital hotel booking.
The airline industry is notably one of the most diverse industries incorporating other
subsidiary firms such as catering, travel services, and maintenance. For the successful operation
of the entire industry, and to ensure quality and credibility, it is crucial that these ancillary
businesses are governed professionally and that they are continually improved through creativity
and innovation. For example, regarding the travel services, flight delays have for a long time
(approximately two decades ago) been a massive drawback in the airline industry. However, as a
result of innovations such as the “text-based pager,” flight delays and cancellations are made
known to the clients an hour before the set departure time through information send by
Biztravel.com.
Technology innovation has also been viewed as an enabling tool which hastens the
relationship between the airline industry and its consumers. The marketing strategies adopted by
any airline industry matters a lot when it comes to customer satisfaction and their willingness to
pay premium tickets for their flights. The Brazilian airline, having been picked to affirm this
claim, identifies that joint ventures are crucial for innovation, promotion of price and event

AIRLINE INDUSTRY

4

sponsorship. Apart from only benefiting the airline industry, innovations have also been of much
benefit to the clients (Jill Schachner Chanen, 2000). Wastage of time in airports has been
identified as a major drawback that customers faced about two decades ago. The loss of laptops
was also a major drawback which necessitated the installation of computer gateways containing
flat panel monitors in hotels hence benefiting the consumers.
The action of the Organization Regarding the Issue
The airline industry, having identified the drawbacks resulting from not using
technological systems in its operations, took some considerable measures to ensure that these
drawbacks were done away with. Various airports, under the study, had been faced by many
problems for not having automated most of their systems and those of the ancillary businesses.
For example, considering the case of the Lufthansa group and the Dubai Emirates group, the
cons experienced in the industry included flight delays, missing flights, and escalating flight
fares. These cons had a huge impact on consumer satisfac...


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