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Johannes Boroh

Disruptive innovations: The case of the airline industry

BY JOHANNES BOROH

According to academics and scholars – such as Clayton Christensen, the father of disruptive innovation theory – disruptive technologies or innovations have several attributes.

First, they introduce a different package of performance qualities from the current common technologies or products (underperforming the current ones). Second, they initially target small niche markets or customers, since mainstream customers are likely to see the disruptive technologies/innovations as inferior to their current familiar products and/or the disruptive technologies/innovations are seen as less attractive by the current customers.

Third, mainstream companies are initially likely to overlook or disregard disruptive technologies or innovations or even “be sceptical of disruptive technology”. Fourth, products or services resulting from disrupted technologies or innovations are more likely to be cheaper because of more efficient cost structures in order to stay profitable, be simpler, smaller, and more convenient to use, and are likely to involve improved technologies or business models that were not previously available.

Fifth, once the disruptive products or services are further improved, they are likely to attract mainstream customers, although remaining inferior to the current dominating products or services. Last but not least, when the disruptive technologies or innovations start dominating the markets, then it is said that disruptive technologies or innovations occur.

However, as Clayton Christensen stated, it takes time for disruptive technologies to fully emerge and be seriously considered as threats by the incumbents.

Understanding disruptive innovation in the airline industry
The attributes discussed above will be used to explain disruptive innovations in the airline industry, predominantly using the case of Southwest Airlines, as it is renowned as the disruptive innovator in the airline industry.

Inferior performance to the incumbents
The well-known Southwest Airlines started flying with inferior service standards to the incumbents; for instance, giving cash-register receipts as tickets, serving no meals onboard, and so on. According to Siobhan Creaton, the author of “Ryanair: How a Small Irish Airline Conquered Europe”, even Southwest’s founder himself once claimed that not even the incumbents would attack Southwest because its service is poor.

According to past researches, this inferior product and service in turn helped Southwest to lower its unit costs: reportedly 45% lower than its US legacy airline competitors.

Targetting small niche markets
Many papers explain that Southwest Airlines initially commenced its services on short-haul routes, which were not served by the incumbents, effectively targetting the bus passengers. Indeed the authors of “Nuts! Southwest Airlines’ crazy recipe for business and personal success” argue that “no carrier knows its niche as well as Southwest”. Similarly, Ryanair started its operations as a low-cost carrier by flying only to secondary airports in Europe.

Mainstream companies sceptical of disruptive innovations
Continental’s CEO, in response to Southwest’s low fares on intra-Florida, said, “Why were we trying to compete for those few passengers? Why waste a lot of resources trying to pry passengers off someone else’s planes and onto ours?” And in the case of Singapore Airlines, in 2004 then SilkAir’s CEO Mike Barclay said, “The SilkAir business model is clearly different to that of an LCC...” (as quoted from www.lite.orientaviation.com). If this same perception is still shared by many (incumbents) today, then it could be worrying.

Cheaper, simpler, more convenient to use, new business models
It is also well known that Southwest’s notable disruptive innovative attributes are its simple and low fares. Southwest is able to offer cheaper fares by implementing radical business models, such as fast turnaround time – reportedly as fast as ten minutes – no meals served onboard, simple boarding process, etc.

Passengers also have a sense of greater convenience because they are less likely to suffer from the delays that commonly occur in big airports, since the airline operates from quieter secondary airports and so forth.

In other countries including Singapore, there have been cases where startups tried to disrupt the airline industry but which ended up in failure, such as Okay Airways in China, Debonair in the UK, and Valuair in Singapore, just to name a few. Amongst other reasons, scholars argue that not being simple in their early operations but rather offering similar services to the incumbents is more likely to have contributed to the failures.

Eroding the incumbents’ business
Initially, Southwest Airlines (followed by other low-cost carriers in Europe and Asia) attracted new segments such as bus travellers. But as the airline has evolved, today it competes head-to-head with its full-service competitors. Many publications in academic journals also discover low-cost carriers have created problems for the traditional or legacy carriers.

Southwest Airlines has improved its performance in line with the disruptive attributes as well, by offering various kinds of service that passengers can usually also enjoy in full-service airlines, such as no extra charge for cancellation (to lure business travellers), international flights, onboard Wi-Fi, priority boarding, and others.

According to Alessandro Cento, author of "The airline industry: Challenges in the 21st century", it took more than 20 years for analysts and experts to realise the real threat of low-cost carriers to full-service carriers. And according to Flight Global, today Southwest has become the largest domestic carrier in the US.

Whilst within the Singapore market, CAPA reported low-cost carriers have conquered over 30% of the market in just nine years, from 2004 to 2013 – and nearly 60% of the Southeast Asian market in 2015. The growth of budget carriers have clearly eroded Singapore Airlines, as seen in the Kuala Lumpur and Penang routes, where the airline had to reduce its flight frequencies to Kuala Lumpur and completely hand over its Penang sector to its regional full-service airline, SilkAir.

So far, many incumbents have tried to respond to the renowned ‘Southwest effect’ by establishing their own low-cost offshoots without success, with the exception of Jetstar Australia. At home, Singapore Airlines’ low-cost arm, Tiger Airways, has so far shown mixed results. Although it recently reported brighter financial conditions, Tiger Airways still needs to prove that it can sustain rigorous financial reports for many years to come, which may be achievable with the help of Singapore Airlines’ grand strategies for both its low-cost arms, Scoot and Tiger.

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.

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Johannes Boroh

Johannes Boroh

Johannes has more than 23 years of experience in the airline industry on both full-service airlines and low-fare airlines in Asia and the Middle East. He is currently undertaking a doctoral study (DBA) in airline industry with the Alliance Manchester Business School.

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