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.
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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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