Innovation: The winning formula to regain profitability in aviation?

Abstract

Most airlines have overcome the immediate effects of the recent global aviation crisis partly because of economic upturn and partly because of massive restructuring. Legacy network carriers had to take on the challenge of low-cost carriers, and regain competitiveness in short- and mid-haul business through considerable cost cutting and more flexible pricing models and are now profitable. On the other hand, many airlines do not make a reasonable profit, and the majority of carriers do not earn their capital cost. Airlines claim that they are still squeezed between their neighbors in the aviation value chain that leverage local monopolies (such as airports) or oligopolies (such as aircraft equipment manufacturers). Many legacy carriers, however, have not properly prepared for an era of deregulated and changing markets. They have not yet taken appropriate steps to escape from there positions between the few successful premium carriers and low-cost carriers. This middle position has little differentiation potential, an unsatisfactory growth perspective, and poor profitability prospects. Further, despite ongoing liberalization, the regulatory framework still does not enforce far-reaching consolidation, leaving the industry in a fragmented status with massive overcapacities. Consequently, the industry needs to further leverage external deregulation as well as internal restructuring to establish more efficient and competitive business models. Aside from basic cost cutting, innovation may become the decisive driver of progress, comprising advanced business models, customer segmentation, and technologies (Franke, M., 2006. Innovation: the winning formula to regain profitability in aviation? Speech at the Hamburg Aviation Conference, Hamburg).