TheAirport Airline Relationship and Airline Issues
TheAirport Airline Relationship and Airline Issues
Airportsare devices that facilitate the movement of goods and people todifferent destinations using aircraft. Airports have been gainingsignificance with the increase in popularity of the concept ofglobalization because they connect states and countries in all partsof the world. Airports expand their revenue by establishing a goodrelationship or attracting airlines to use their facilities at a fee(Isaka, 2012, p. 3). Deregulation of airport operations has been oneof the major threats to airport operators. This is becausederegulation removed the privilege of fixed charges and provided anopportunity for airlines to bargain for landing changes and anopportunity to select airports with low landing charges (Berechman,2000, p. 253). The increase in the number of low cost airlinespresented a new platform for airports to compete for these airlinesthrough negotiated contracts, but this generated the challenge of lowaeronautical charges. This paper will assess how London StanstedAirport has responded to the opportunities availed by the low costcarriers.
Background:London Stansted Airport
LondonStansted is an airport that is located in Uttlesford, Essex in thenortheast region of Central London. Operations in London Stanstedbegan during the Second World War, when the airfield was being usedby the U.S. Army Air Force and the Royal Air Force to conduct itsbombing operations (Ashurst, 2012, p. 1). Commercial operations werelaunched several decades after the war when airlines were allowed touse it as an alternative to avoid the high charges in other fields,including Gatwick and Heathrow. Initially, London Stansted was ownedand operated by Heathrow Airport Holdings before its sale to theManchester Airports Group in 2013 (Holland, 2013, p. 1). Stansted isrecognized as London’s largest hub for low cost carriers, such asRyanair, which operates approximately 100 destinations (Anna-Aero,2014, p. 1). This implies that low charges have been the major sourceof competitive advantage for London Stansted Airport. This hasallowed the airport to attract a large number of low cost airlinesthat acts as the major source of its revenue.
LondonStansted Airport has experienced different cycles of growth and fallin traffic and the number of passengers using its facility since itscommercialization. However, the last decade was characterized bycycles that can be used to project the future of Stansted. Theairport experienced a rapid increase in the number of traffic fromthe year 2000 to 2007 when the traffics declined significantly asshown in Figure 1. The year 2013 was the airport’s turning pointbecause it managed to reverse the trend and traffics startedincreasing.
Figure1: Changes in the number of traffic from 2000-2013
Source:CivilAviation Authority (2014, p. 1)
Similarly,the number of passengers using London Stansted airport increasedrapidly from 2000-2007, declined from 2007-2012, and then startedincreasing from 2013 as shown in Figure 2.
Figure2: Changes in the number of passengers using Stansted airport
Source:CivilAviation Authority (2014, p. 1)
Someof the key factors that enabled the airport operations, both theincrease in number of traffics and passengers include its capacity tocombine the full cost and low cost services, surface access to theairport, and excellent connectivity (London Stansted, 2012, p. 1).The decline was observed following the increase in completion fromthe other airports in the city.
Itis projected that the number of traffics and passenger using Stanstedairport will increase exponentially from the year 2013 to 2030 asshown in Figure 3. This shows that the management of Stansted hastaken the necessary steps to counter the stiff competition and takethe full advantage of the strategic location and connectivity of theairport to increase its productivity.
Figure3: Traffic forecast up to the year 2013
Source:Stratford(2007, p. 38)
Figure3 shows the trend of increase in traffic for London Stansted Airportwithin a period of about 23 years. The increase in traffic has beenmeasured in terms of million passengers per annum.
Stansted’sresponse to opportunities afforded by the low cost carriers
Airportsuse a wide range of strategies to take advantage of availableopportunities and increase their profitability amidst the stiffcompetition. It is widely believed that airports attract airlines bygiving landing discounts (Norwich International, 2007, p. 2). Some ofthe discounts are time-limited and are intended to encourage frequentand multiple freights (Kansai International Airport Co. Ltd, 2005, p.1-2). Research shows that the number of the low cost carriers hasbeen increasing steadily in the European air market and representsabout 18 % of the total supply, which is counted in terms of thenumber of seats offered (Dobruszkes, 2006, p. 252). This hassubjected the European airports to the challenge of capacityconstraint. This means that the rate at which the low cost airlineshave been increasing overwhelms the airport facilities. This gaveStansted an opportunity to increase its market share by expanding andupgrading its facilities instead of focusing on the issue of landingdiscounts (Stratford, 2007, p. 18). This has been achieved throughairport development projects referred to as generation and generation2. These projects increased the landing space and holding capacity ofpassengers to 35 million every year (Dash, 2006, p. 2). This meansStansted focused on increasing its capacity to serve more airlines.
Thesecond alternative that London Stansted Airport has used to takeadvantage of the business opportunities presented by the increase inlow cost airlines is the negotiation of contracts with establishedcarriers. The deal to increase traffic by 50 % within the next tenyears is one of the recent successful negotiations between the LondonStansted Airport and Ryanair, which is one of the leading low-fareairlines (Osborne, 2013, p. 1). This deal was expected to increaseRyanair’s traffics from 37 to 43 and flying routes from 116 to 120.The deal will benefit both the airline and the airport, which willgain from the increase in passengers who prefer Ryanair to otherairlines from 13.2 million to over 20 million per year (CAPA CenterAviation, 2014, p. 1). Therefore, the deal will result in asignificant increase in revenue earned by Stansted. This implies thatnegotiated contracts are one of the strategies used by the LondonStansted Airport to exploit opportunities availed by the increase inlow-fare airlines.
Althoughthe Civil Aviation Authority has powers to regulate the charge, sucha decision has not been effected in Stansted Airport. In a recentstatement, the authority stated that price controls are no longerbeing required at Stansted, which is patronized by the low-fareairlines (Tophan, 2014, p. 1). This is because it is perceived thatStansted does not have significant market power. In addition,Stansted has already signed a ten year contract with its largestcustomer, Ryanair, which means that the volume and charges arecontained by terms of agreement. This implies that the requirement tocut charges in airports had no effect on Stansted Airport.
Effectof an increase in airport charges
LondonStansted Airport serves customers who are highly sensitive to changesin landing and parking fees. This means that a slight increase infees leads to a significant drop in the number of airlines using theairport while a slight decrease in charges attracts a large number oflow-cost carriers. For example, the announcement by Stansted that itwould increase charges by 6 % in 2013 would immediately affect thevolume of each airline served by the airport (Ensor, 2013, p. 1). Forexample, Ryanair reiterated by announcing that it would cut itsannual flights from Stansted Airport by 9 %, which would in turnreduce the number of passengers using the airport by 1.1 million andthe loss of 1,000 jobs (Ensor, 2013, p. 1). However, the airport iscurrently focusing on the issue of parking discounts to enhance itsperformance (Stansted Airport, 2014, p. 1). The decision to increasecharges would affect the revenue of both the airlines and theairport.
Thefuture of airlines and the London Stansted Airport
Therevenue for both the airport and the airlines it serves is morelikely to increase in the future than to decrease. Currently, theairport is operating at fifty percent of its total capacity comparedto other airports that operating at 99 % on average (Essex CountyCouncil, 2012, p. 1). This suggests that the new entrant of airlineswill favor the Stansted Airport, thus increasing its market share andrevenue. The change of ownership and the management of StanstedAirport also gave a new hope for the airlines. The new owner of theairport, the Manchester Airports Group, has announced an investmentworth £ 230 million, which will be used to upgrade the airportfacilities (Harrison, 2014, p. 1). This is expected to increaseefficiency in delivering services to passengers, which will increasethe number of customers for the airlines and in turn increase thenumber of flights. This will increase returns for the airport and theairlines.
Thefuture benefits offered to the airlines in the future will depend onoperational efficiency as well as low and negotiable landing andparking charges. Although Stansted began its commercial operationswith the main focus on low-cost airlines, it has increased itscarrying capacity over the years. Currently, the airport canaccommodate all kinds of aircraft, including the Boeing 747-8s andA380s (Essex County Council, 2012, p. 1). This means that the airportcan serve the long-haul destinations, in addition to the short-hauldestinations. Legacy carries (such as the British Airways) misses theprivilege of paying low cost charges at Stansted for its long-hauldestinations that are currently offered by the airport.
Inmost cases, organizations operate in industries that have more thanone player and with high demand for continuous improvement. Decisionmakers in organizations are constantly searching for techniques thatcan lead to improve quality and corporate performance (Dattakumar,2003, p. 176 and Chan, 2006, p. 638). Although benchmarking is not anew concept, it has gained popularity in the recent in achieving thispurpose. Benchmarking is defined as the process used by organizationsto enhance performance by comparing the successful practices andoperations of other organizations and learning from them (Holloway,2009, p. 1-2). This involves a comparison of key practices that havesignificant contribution to the success of the organization withother units of the benchmarking organization or other organizationswith comparable processes in the context in which they are consideredto be relevant. Benchmarking is a process, not an event that involvesthe adjustment of internal processes, monitoring performance, makingnew comparisons with the best performers, and exploring furtherchanges with the objective of achieving the status of the world class(Holloway, 2009, p. 1-2).
Themain purpose of benchmarking is to help the management teams inlearning how excellence is achieved and then match or surpass it.This process is mostly used by organizations that exist assubsidiaries of others (Raymond, 2008, p. 786). Some of the keyobjectives that the organizational management intends to achievethrough benchmarking include the assessment of the presentperformance, souring new ideas, financial improvement, and searchingfor excellence. Although benchmarking is a process that involvescomparison of practices, the benchmarking organization should notcopy excellent practices from other organizations. The benchmarkingorganization should assess whether the best practices used byexcelling organizations can be leveraged with more sensible practicesin the environment of the benchmarking organization (Lapide, 2005, p.1). In essence the goals of benchmarking process are to improve thecompetitive advantage of the organization in the long-run, enhancethe effectiveness of the organizational strategies, and improve thequality of strategic planning and overall business performance(Shahin, 2006, p. 3). Moreover, the process of benchmarking enablesthe organization to identify practices that are no longer need in itsoperations (Berghout, 2009, p. 2). Therefore, the purpose ofbenchmarking is to improve the existing practices, adopt new ones,and avoid obsolete practices.
Differentforms of airline benchmarking can take
Benchmarkingthat is applied in airlines can be broadly classified into internaland external benchmarking. Internal benchmarking entails a two waycommunication between different units of the same organization orsharing of opinion between the different organizations that operateas subsidiaries of one parent company (Ajelabi, 2010, p. 3). Thebetter performance that has been achieved by part of the organizationis used other units to learn how it was achieved. In other words,internal benchmarking is a process used in identification of the mostappropriate in-house practices in a given organization anddissemination of those practices to other units of the organization(Fernandez, 2001, p. 8). Some of the benefits that airlines can getby conducting internal benchmarking include an opportunity to dealwith organizations or units that share a common culture, language,and system easy access to required data and the provision of abaseline for comparison in the future (Kay, 2007, p. 23). This meansthat airline companies should assess the best practices with itsdepartments before conducting external benchmarking.
Externalbenchmarking involves the comparison of the performance of a givenorganization with performance of a different organization. Externalbenchmarking is used to discover new methods, ideas, services, andmethods (Lankford, 2001, p. 59). The primary objective of conductingan external benchmarking is to enhance performance of theorganization compared to that of other firms. There are three formsexternal benchmarking that can be used by airlines, namely industrialbenchmarking, generic benchmarking, and functional benchmarking.Industry benchmarking is the process, setting benchmarks by lookingat the achievement of other organizations in the same industry(Association of Chartered Certified Accountants, 2012, p. 3). Forexample, airlines that adopt this approach should only compare theirachievements with other firms operating in the aviation industry.This involves competitor and non-competitor benchmarking.Non-competitor benchmarking may involve the comparison of performanceand practices of airlines operating in different airports.
Genericbenchmarking can also help airlines in comparing their performancewith external organizations. Generic benchmarking refers to theprocess of comparing the same business functions regardless of theindustry that different firms operate (Meade, 2007, p. 303). Forexample, airline companies can compare their accounting functionswith similar functions in firms operating in different industries(such as manufacturing). This type of benchmarking is preferred whenfundamental reforms in the organization are required (Jain, 2006, p.44). Functional benchmarking differs from generic benchmarking inthat it facilitates the comparison of organizational performance ofsimilar organizations or firms in different industries, butundergoing similar problems (Kay, 2007, 23). For example, an airlinecompany can compare its capacity to deal with financial challengeswith a different company that has undergone financial constraint.
Airlinecompanies may also conduct other types of benchmarking (including thebenchmarking process, strategic benchmarking, and performancebenchmarking) depending on the business situations. Processbenchmarking is accomplished through the identification of effectivepractices in firms with similar functions (Markovic, 2011, p. 318).An organization that improves its basic process enhances itsperformance, which leads to an improvement in productivity, improvedsales, and reduction in cost of production. Performance benchmarkinghelp the management teams to assess competitive position, which isaccomplished by comparing different products and services. Strategicbenchmarking focuses on long-term patterns and the identification ofwinning strategies in successful companies. Strategic benchmarkinginvolves the evaluation of long-term strategies (such as newproducts, core competencies, and service development) that increaseorganization’s capacity to deal with change (British QualityFoundation, 2014, p. 1). This means that airlines can applybenchmarking in different ways depending on the goals they want toachieve.
Challengesof benchmarking exercise
Althoughbenchmarking is widely accepted as a means of assessingorganizational performance, there are three major challengesassociated with its application. First, benchmarking is not an end,but a means to the end. This means that the whole exercise ofbenchmarking, which consumes a lot of organizational resources onlyindicates where the organization needs to improve, but fails to givefull information on how improvement can be achieved (Derek, 2014, p.1). This means that the benchmarking organization should conductanother research excise to identify the means of improving areas thathave been identified through the benchmarking exercise. In addition,the benchmarking exercise fails to give information about the causeof shortcomings (Association of Chartered Certified Accountants,2012, p. 8). This can result in a scenario in which theorganizational management becomes defensive by criticizingcredibility of the target. It is challenging to convince someorganizational management teams on the significance of thebenchmarking exercise.
Secondly,benchmarking exercise faces data issues that include the difficultyof accessing data from different organizations and the challenge ofobtaining quality data (Kosar, 2011, p. 1-2). Research shows thatbenchmarking attracts political and technical issues of accessingdata, which require the benchmarking organization to a goodpartnership with organizations expected to provide the data(Holloway, 2003), p. 16). This can be challenging, especially in thecase of benching the organization with its competitors. The dataobtained from secondary sources (including the business magazines)may not be accurate or reliable for an effective benchmarkingexercise. In addition, the process of analyzing to data to obtain ameaningful comparison from the data obtained from the benchmarkingexercise. Other data issues may include the definition of comparableorganizations, specification of the period, and measurement of inputsas well as the output (Ondrej, 2012, p. 1). Moreover, the issue ofcomparability, which includes the determination of suitable partnersand comparability of data that has been collected is a commonchallenge in the benchmarking exercise. This lack of ability tocompare information that should be strictly comparable is consistentwith a common observation that benchmarkers often do it on their owninstead of participating or networking with other people (Arrowsmith,2004, p. 227). Issues related to data collection and analysis mayaffect the credibility and reliability of the benchmarking exercise.
Third,resource constraints are another challenge that affects thebenchmarking exercise. Resources required for successful benchmarkinginclude money, time, and expertise (Francis, 2000, p. 25). Theshortage of any of these resources limits the entire benchmarkingprocess, thus reducing the ability of the benchmarking teams toaccomplish the pre-determined target. For example, an organizationmay have sufficient money to conduct benchmarking, but lack ofexpertise may lead to collection of unreliable data and misleadinginterpretation of the data collected.
Therelationship between airports and airlines is continually becoming animportant aspect in the field of aviation. This is mainly caused by arapid increase in competition between different airlines and airportsthat compete to attract the low cost carriers. Benchmarking is one ofthe strategies can be used by competing firms in the aviationindustry to assess their individual competencies in comparison withthose of other players in the industry. Although airlines haveseveral alternative forms of benchmarking, internal benchmarking andcompetitive benchmarking are inevitable. These processes can help theairlines in identifying their competitive positions with respect tothe position of their competitors.
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