Travel Advisor: The difference between innovators and disruptors

In Israel, the three airlines – El Al, Israir and Arkia – have never been thought of as disruptors.

By
July 30, 2017 02:27
A look inside the new El Al Boeing 787 Dreamliner

A look inside the new El Al Boeing 787 Dreamliner. (photo credit: EL AL)

The latest sexy, cool description that has entered the lexicon of start-up and veteran companies is “disruptors.” It makes listeners perk up and readers take note. Astute commentators love dropping the word.

No longer used only to describe an obnoxious toddler in his ‘terrible threes,’ individuals and companies are waxing gleeful in describing themselves as disruptors. Traditionally, “disruptive” has negative connotations. Synonyms include troublesome, rowdy, wild and turbulent. Think Donald Trump’s behavior at any World Summit.

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It looks like we’re going to have to rethink our interpretation, because disruptive now means innovation, ingenious and original – and has fast become the new buzzword in business.

People are sometimes confused about the difference between innovation and disruption. It’s not exactly black and white, but there are real distinctions, and it’s not just splitting hairs. Think of it this way: Disruptors are innovators, but not all innovators are disruptors – in the same way that a plane is a form of transport, but not all forms of transportation are planes. Still with me?

Innovation and disruption are similar in that they are both makers and builders. Disruption takes a left turn by literally uprooting and changing how we think, behave, do business, learn and go about our day-to-day lives. A disruptor displaces an existing market, industry, or technology and produces something new and more efficient and worthwhile. It is at once destructive and creative. In fact, the travel industry is so ripe for disruption, that disruption is the new normal.

Travel disruptors allow industry to grow. Uber and Airbnb “complement” traditional industry players, actually enabling the travel industry to expand and attract more customers. In reality Uber is an extension of renting a car.

A remote, often misunderstood country, Iceland has become one of the hottest tourist destinations. So, how did one airline company disrupt the airline industry through a low-budget carrier?

Iceland is anticipated to have more tourists than their entire population this year. This is quite alarming, since a mere six years ago Iceland’s tourism population was declining.

The country used headlines from a volcanic eruption that led to a week of European flight cancellations in 2010 to actually draw positive attention to Iceland. Through a social media campaign, Iceland got on the map and tourists flocked there. Noting increased demand, the airline, WOW Air, saw an opportunity to capitalize on this tourism travel disruption.

WOW became the budget airline to Iceland, offering flights at a reasonable price from Europe as early as 2012. In 2015, the budget airline expanded to the United States and now offers promotional prices below $500 with baggage, almost 75% off the original cost of travel in 2010 of $1,500.

The low pricing is a reflection of the details and the vision for the company. Here are the details of being a low-cost carrier: they have very little overhead; they never compromise on safety or security; they leverage technology in every aspect; they have a new fleet that’s more cost-efficient and burns less fuel. When you take all of this into account, it adds up pretty quickly. So they’ve succeeded in having a small team in Iceland that can challenge the big legacy airlines.

With the airline industry struggling to keep consumers through mergers, data center outages, TSA complaints and now a-la-carte baggage pricing, the tourism industry has vastly changed.

Southwest Airlines was an industry disruptor 40 years ago, operating point-to-point flights to less congested secondary airports with a uniform fleet of Boeing 737s, thus creating a cost advantage by maximizing flying time and employee productivity while keeping expenses at a minimum.

Following in Southwest’s footsteps are the next generation of industry innovators, including Allegiant Travel, Spirit Airlines and Frontier Airlines. These emerging carriers are considered ULCCs, (Ultra-Low Cost Carrier) a concept borrowed from Irish carrier Ryanair. An ULCC offers bare fare with add-on services; this a la carte strategy is primarily built around lean operations, low fares, and a great number of ancillary add-ons appended to a bare fare. The ULCC inherited the point-to-point flights from Southwest’s LCC model, without resorting to the hub-and-spoke model used by the legacy carriers.

The airline industry has entered an anticompetitive phase characterized by contained overcapacity and profitable growth.

Passenger air transportation is a quintessential cyclical industry operating in an intensely competitive market.

First, the industry nature of capital intensity may at first glance lead people to think of prohibitive barriers to entry, but the occasional inroads made by new entrants indicate that the barriers are penetrable. The services provided by the industry are commodity-like, with zero proprietary rights. Brand name and frequent flier programs are not effective enough to create meaningful switching costs.

Second, being in the service sector, the airline industry is labor intensive; however the unions representing pilots, flight attendants, baggage handlers, dispatchers and enplanement customer service are strong. The price of aviation fuel is subject to volatile gyrations in the oil market, which the airlines can do little about.

Third, there is a tug-of-war between the bargaining power of passengers, aided by online ticketing; the presence of low-cost or even ultra-low-cost carriers and customer-protecting regulations; and the pricing power of airlines on the back of industry consolidation and route domination. Frills such as free WiFi, a la carte meals, and passenger amenities mean little to most passengers when offered lower fares.

Lastly, the rivalry among existing players evolves along with the industry cycle. It can be very intense when numerous competitors vie for the same passengers with ever lower airfare, especially when times get tough in the economy, or can be mild after industry consolidation has eliminated extra capacities.

El Al discovered that when introducing the low-cost carrier UP. Replete with shiny new aircraft and filled with whistles and bells, it held little sway when passengers opted to pay less and fly with their competitors. If you’re swimming in shallow water, then you better hope that the primary determination for the consumer is price, not how pretty the view is. Otherwise you’re just making puddles.

Airline profit levels are sensitive to adverse changes in fuel costs, average fare levels, and passenger demand, which have historically been influenced by, among other things, the general state of the economy, international events, overall industry capacity and pricing actions taken by other airlines. The principal competitive factors in the airline industry are fare pricing, customer service, routes served, flight schedules, types of aircraft, safety record and reputation, code-sharing relationships and frequent flyer programs.

The history of the passenger air transportation industry centers around the fight between two competing interests, i.e., the airlines, which want to make money, and passengers, who want cheap, ubiquitous air transport. Policy makers attempt to balance these opposing forces with regulations. In the anticompetitive phase of the cycle, regulators allow airlines to make ample money by monopolizing routes, taking cities as hubs, and industry consolidation. This usually results in revolting passengers and surly politicians who call for more service for cheaper ticket prices, which inevitably makes it hard for the industry to remain profitable and eventually leads to losses and even bankruptcies.

Let’s call this the Open Sky policy, initiated in Israel successfully by government ministers eager to lower prices and increase the number of tourists visiting Israel. 2017 should see a record number of tourists visiting the country, proving the short-term benefit of having Open Skies. This is the juncture when policy makers reappear as the rescuers of the industry. They work energetically to create a less hostile environment in which extra capacity is absorbed and competition is eliminated through merger and acquisition. In such an environment, profit opportunities abound, so returns another cycle.

The airline industry is particularly prone to overcapacity due to some inherent bugs. During the expansive phase of the cycle, those airlines that add more airplanes and routes quicker tend to hold an edge over the rest of cohorts, which naturally results in a race and, before anyone realizes, the industry is in another bout of troubles.

It is not an easy job to manage an airline. The unions in the industry are notoriously strong on the negotiation table. Boeing and Airbus, the duopolistic suppliers, keep aircraft prices high. The revenue cycle and cost cycle tend to be out of sync, while fuel price volatility is subject to numerous economic and geopolitical factors that can be neither predicted nor controlled. Typically, airlines are managing demand to capacity, instead of capacity to demand; such a “capacity lead” model is destined to result in commoditization, thus sowing the seeds for another cycle of boom and bust.

The economics of a specific airline, such as El Al, are determined by its route structures; fleet composition; access to airports; cost structures with regard to aircraft leasing; labor and fuel; and a plethora of external factors including the economy, weather and so on. The number one and two cost items are, respectively, labor and aviation fuel.

The main revenue source is derived from ticket sales to business and leisure passengers, which tend to be influenced to varying extents by macro economy and consumer confidence. On top of ticket sales, airlines earn minor revenue from transporting cargo, selling frequent flier miles to other companies and up-selling flight services.

To be a disruptor, technology is the key component and the overriding reason why it has transformed the travel industry. There has been a digital revolution for the consumer, and technological advances see an increase of personalization.

For travel agents, the digital rise has severely disrupted the industry. Traditional travel distribution in which brick & mortar travel agencies played a dominant role was revolutionized with online travel agencies and direct distribution through airlines and hotels’ websites acquiring a key role. Low-cost carriers and online travel agencies were the clear winner of the online travel revolution over the past 15 years, changing the way today consumers plan and book their trips. Tour operators suffered the rise of independent travel and are today embracing the online and mobile channels in order to stay competitive.

While the Internet killed off many traditional travel agents, others have been forced to adapt to a very changing marketplace, with many embracing the Internet by introducing online bookings and focusing on enhancing agent skill sets through intensive courses and seminars in a daily battle to stay one step ahead of their clientele.

In Israel, the three airlines – El Al, Israir and Arkia – have never been thought of as disruptors. Far too prone to rest on their laurels, they are slow to embrace new technology, hobbled by a poor financial structure and a labor force that remains content to be coddled and closed-minded, too often feeling that any disruption they might offer could lead to dismissal.

It will take a tsunami-type force of disruption before any knowledgeable source will deem them disruptors.

Mark Feldman is the CEO of Ziontours, Jerusalem. For questions and comments, email him at mark.feldman@ziontours.co.il


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