The impact of Internet technologies on the airline industry: current strategies and future developments
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Strat. Change 12: 31–47 (2003)
Published online 13 January 2003 in Wiley InterScience
(www.interscience.wiley.com). DOI: 10.1002/jsc.618
The impact of Internet technologies
on the airline industry: current
strategies and future developments
Ronan McIvor,∗ Dolores O’Reilly and Sharon Ponsonby
School of International Business, University of Ulster, UK
• This paper examines the impact of Internet technologies on value creation in the
airline industry and focuses on the Internet strategies of two European low-cost and
two traditional operators.
• Four notable value drivers in the aviation context are identified, namely efficiency,
complementarities, lock-in and novelty.
• The Internet represents a powerful technology for commerce and communication
between airlines and consumers and the paper highlights the implications for corporate
strategists as customer expectations increase over time and the boundaries of the airline
industry become increasingly blurred.
Summary
This paper examines how Internet technologies are impacting upon airline companies
at the customer interface. The analysis focuses on a number of airline companies that
have been exploiting Internet technologies. It is shown how airline operators are using
the Internet to provide innovative exchange mechanisms and transaction structures with
customers. The adoption of the Internet is increasing the expectations of customers as
to what and how these organizations offer products and services. In fact, the Internet
has become central to the strategic development of the airline companies analysed. The
scope and boundaries of the airline industry have become less clear as a result of the
adoption of Internet technologies at the customer interface. The offering of a range of
products and services is creating industry convergence that has significant implications
for the formulation of corporate strategy. Exploitation of the Internet at the customer
interface has become a key catalyst in the transformation of the airline industry. Further
exploitation of the Internet will lead to higher levels of sophistication that in turn will
increase the expectations of the customer on what and how these organizations offer
products and services. Copyright 2003 John Wiley & Sons, Ltd.
∗ Correspondence to: Ronan McIvor, Faculty of Business and Management. School of International Business,
University of Ulster (Magee Campus), Northland Road, Co Londonderry, BT48 7JL, Northern Ireland.
E-mail: R.McIvor@ulster.ac.uk
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 200332 Ronan McIvor et al.
Introduction
There is a growing
The increasing importance of innovative
Information Communication Technology dependence on the
(ICT) for economies and societies has been Internet for the
attracting considerable attention both from promotion and sales
academia and practitioners. In the past of travel services
two decades ICTs have deeply affected the
way business is performed and the way
that organizations compete (Porter, 2001;
Porter and Millar, 1985). In particular, the
is the largest single category of online pur-
advance of the Internet, with its vast range
chases by US consumers (Pappas, 2000). In
of potential services and applications, has
1999 it accounted for $4 billion of sales,
led to a transformation of corporate strategy
and forecasts for 2003 range up to $29 bil-
since the middle of the 1990s, as reflected
lion.
in the increasingly common use of terms
The analysis focuses on a number of airline
such as industry convergence, virtual cor-
companies that have been exploiting Inter-
porations and electronic commerce (Picot
net technologies at the customer interface.
et al., 1997).
For example, Evans and Wurster (1997), Particular attention is paid to the changes
using the private banking industry as an in the value chain and the integration of
illustration, argue that these technology new value-added stages as a form of cor-
developments will lead to a convergence porate strategy and their implications for
of industries and the unbundling of tra- corporate management. Findings are pre-
ditional value chains. In fact, traditional sented that emerged from analysis of a
industry boundaries are blurring as increas- number of established and low-cost airline
ingly many industries converge or overlap, operators. It is shown how airline oper-
especially in information technology indus- ators are using the Internet to provide
tries (Bettis and Hitt, 1995). These trends innovative exchange mechanisms and trans-
have had a marked effect on traditional action structures.
strategic thinking that considered industry The adoption of the Internet is increasing
structure as the primary determinant of com- the expectations of customers as to what
pany profitability (Porter, 1980). A signifi- and how these organizations offer products
cant challenge for management in exploiting and services. Exploitation of the Internet at
the Internet is to realize that these fun- the customer interface is a key catalyst in
damental changes are creating a situation the transformation of the airline industry.
where organizations are operating in an The findings highlight the importance of
increasingly global, technologically intercon- information as a critical resource for airlines.
nected and information-driven world (Sam- The scope and boundaries of the airline
pler, 1998). industry have become less clear as a result of
This article examines how Internet tech- the adoption of Internet technologies at the
nologies are impacting upon airline compa- customer interface. The offering of a range
nies. The airline industry was chosen because of products and services is creating industry
it is an area where the adoption of the Inter- convergence that has serious implications for
net has been growing rapidly. This growth the formulation of corporate strategy. It is
has major implications not only for the cus- argued that the use of Internet technologies
tomer interface but also on the structure of to integrate and leverage these resources in
the industry itself. There is a growing depen- a more innovative and powerful way than
dence on the Internet for the promotion and competitors will become a significant source
sales of travel services. For example, travel of value.
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 2003Internet technologies and airlines 33
Theoretical background to times of the day when most customers
were at work.
The Internet is a public and global com- However, gradually the principles of mass
munication network that provides direct production have become redundant in many
connectivity to anyone over a local area net- industries due to factors such as innova-
work (LAN) or Internet Service Provider (ISP) tions in technology, globalization, greater
(Turban et al., 2000). It is a public network levels of competition, and a more sophisti-
that is connected and routed over gateways cated customer. Organizations have become
that evolved from a software convention for more proactive in achieving innovations that
computer networking developed by the US directly benefit the consumer rather than the
Army’s Advanced Research Projects Agency. organization.
This open standard, termed the Transmis- The Internet further raises the stakes in
sion Control/Internet Protocol (TCP/IP), was the relationship between the organization
adopted by a wide range of research, edu- and the consumer. In the past, consumers
cation and public sector organizations as a
means of integrating previously incompati-
ble computer applications. In the late 1980s The Internet further
a point and click, hypertext interface was raises the stakes in the
developed for the Internet which was called
the ‘World Wide Web’. This development led relationship between
to the explosion of interest in Internet usage the organization and
with organizations and individuals being able the consumer
to easily access and use the Internet.
This explosion in connectivity has already
resulted, and will continue to result, in determined the value of a product or service
changes in the way in which individuals and on the basis of some combination of quality
organizations interact with one another. The and price. Treacy and Wiersema (1993)
interaction patterns will differ significantly argue that the customer of tomorrow will
from those associated with other paradigms employ an expanded concept of value that
such as mass production where organizations encompasses convenience of purchase, after-
preyed on a largely naı̈ ve consumer. In sales service, uniqueness and reliability. The
fact, the way in which many organizations Internet represents a powerful mechanism
meet the needs of their customers is still for consumers to achieve this, thus becoming
heavily influenced by principles associated more powerful and increasing their leverage
with mass production. The earliest version of over organizations. In fact, in many business
mass production targeted ‘vanilla’ products sectors commercial organizations are no
at large-volume markets with little attempt longer dealing with a naïve consumer. With
to further satisfy the needs of a largely consumers becoming more sophisticated
ignorant consumer. The organization could they will no longer settle for whatever
afford to adopt such a strategy because the companies are offering. Instead, in the
consumer was less mobile in terms of ease relationship with organizations, consumers
of access to alternative sources of supply. will assume greater control. They now tell
Although the term ‘mass production’ implies product and service providers what they
the manufacture of physical products, its want, when they want it, how they want
principles have been prevalent in other areas it, and what they are willing to pay (Hammer
such as travel, education and banking. For and Champy, 1993).
example, the majority of bricks-and-mortar Coping with this kind of consumer
opening hours — especially in the area of requires a fundamental change in the atti-
banking and education — remained limited tude of employees and managers. Every
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 200334 Ronan McIvor et al.
activity within the company and its suppli- regardless of whether it is the firm, the
ers should be aimed at delighting the end- customer, or any other participant in the
customer. However, the benefits of the Inter- transaction who appropriates that value.
net — making information available; reduc- Their analysis led to the development of the
ing procurement, marketing, and distribu- value-drivers model that includes four factors
tion costs; allowing buyers and suppliers to that enhance the value creation potential
transact business more easily — also make it of e-business: efficiency, complementarities,
more difficult to for organizations to profit lock-in, and novelty as shown in Figure 1.
from those benefits. The Internet can alter Each of these value-drivers will be now be
industry structures in ways that reduce prof- discussed in turn (Amit and Zott, 2001):
itability, and it has a levelling effect on
business practices, reducing the ability of any • Efficiency: Transaction efficiencies in the
company to obtain a sustainable competitive form of lower costs can be obtained via
advantage (Porter, 2001). e-business technologies. The rapid access
Amit and Zott (2001) contribute to theory and transmission of information over the
development in the area of e-business by Internet can reduce customers’ search
investigating the theoretical foundations of costs and increase their bargaining power.
value creation in e-business. They draw on a The connectivity associated with the Inter-
wide body of literature in entrepreneurship net can enhance transaction efficiency
and strategic management and use cross-case by enabling faster and more informed
analysis of a unique data set they developed, decision making. Also, this connectiv-
in order to identify common patterns of value ity can provide greater variety at lower
creation in e-business. Amit and Zott’s model costs through reducing distribution and
adopts Brandenburger and Stuart’s (1996) inventory costs, and streamlining transac-
view of total value created as the sum of the tions, allowing customers to achieve scale
values appropriated by each party involved in economies through demand aggregation,
a transaction. Therefore, ‘value’ refers to the streamlining the supply chain, and speed-
total value created in e-business transactions ing up order fulfilment.
Novelty New transaction
structures
New transactional
content
New participants, etc
Efficiency
Search costs
Selection range Lock-In
Symmetric information Value
Simplicity Switching costs
Speed Loyalty programs
Scale economies, etc. Dominant Design
Trust
Customization, etc.
Positive Network
externalities
Direct
Complementarities Indirect
Between products and
services for customers
(vertical versus horizontal)
Between on-line and off-
line assets
Between technologies
Between activities
Figure 1. Sources of value creation (source: Amit and Zott, 2001: 504).
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 2003Internet technologies and airlines 35
• Complementarities: These relate to a impact upon both efficiencies and comple-
bundle of products and services provided mentarities. Amit and Zott (2001) argue
by an organization that provide more value that the potential value of an e-business
than the total value of having each of depends upon the combined efforts of all
the products or services separately. These these drivers.
complementary products may be vertical • Novelty: This refers to the innovative
(e.g. after-sales services) or horizontal (e.g. ways in which e-business technologies can
one-stop shopping) that are provided by affect the structure of the transaction.
partner organizations. This analysis can For example, the development of online
extend to the way in which an off-line auction models such as eBay and Price-
presence can enhance the on-line offer- line has created innovative ways of con-
ing. It is also possible for organizations to ducting commercial transactions. Value is
offer complementary products or services created through the connecting of pre-
that are not directly related to the core viously unconnected parties, eliminating
transactions. There are interdependencies inefficiencies in the buying and selling
between each value-driver. Improvements processes through the adoption of innova-
in efficiencies via Internet technologies can tive transaction methods. Again, there are
create the potential for the exploitation of inter-dependencies between novelty and
complementary products and services. For the other value-drivers. For example, nov-
example, when potential customers have elty is linked with complementarities. The
access to products and services that are primary innovation of some e-businesses
complementary to the primary product on resides in their complementary features
offer efficiency may be enhanced through such as the nature of products and ser-
vices they combine. Also, there are linkages
reduced search costs and improved deci-
between novelty and efficiency. For exam-
sion making.
ple, efficiency elements of an e-business
• Lock-in: This is associated with the extent
may be due to the novel resources (such
to which customers are motivated to
as increased knowledge of the customer via
engage in repeat transactions and by the
transaction analysis) that can be created in
extent to which strategic partners have
a virtual context.
incentives to maintain and improve their
associations. Lock-in can be accomplished
in a number of ways including loyalty Methodology
programmes or building trust mechanisms Management research is often characterized
into the relationship. Allowing customers as being soft, applied and divergent and is
to customize products, services or informa- undertaken in complex organizations that
tion to their individual requirements can exist in a dynamic environment (Tranfield
enhance lock-in. Virtual communities can and Starkey, 1997). This makes it very diffi-
also enhance lock-in to a particular organi- cult to apply the more traditional positivist
zation by facilitating frequent interactions approach with its emphasis on replication to
on a range of topics and thereby create test for validity. As a consequence, a great
loyalty and facilitate repeat transactions. deal of research in the management of orga-
For example, Amazon has adopted various nizations makes use of the inductive case
community features such as its ‘commu- study approach (Yin, 1994; Bourgois and
nity of interests’ allowing its customers Eisenhardt, 1988). The case study approach
to write book reviews (Kotha, 1998). The provides richness and multiple perspectives
efficiency and complementary features of of the many managers involved with regard
an e-business can also facilitate lock-in to the data collected and is thus largely qual-
via attracting and retaining customers. itative in nature. Unlike positivist research,
Also, the creation of lock-in can positively however, the analysis of case study data is
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 200336 Ronan McIvor et al.
essentially interpretative and inductive. From (2001) model of four potential sources of
the qualitative data, narratives or stories are value creation in e-business was used as the
developed which are examined for patterns. framework for analysis. A structured ques-
From these patterns inferences are drawn tionnaire was developed based upon the four
which yield propositions and can lead to spe- drivers of value creation to analyse the fol-
cific hypotheses. Such hypotheses can then lowing issues:
be tested in other situations and indeed if suf-
ficiently specific can be tested via the more • The benefits of buying the product/service
traditional survey methods of social science. on-line (e.g. price discounts, extra bonus
To obtain an understanding of how Inter- for frequent flyer account etc.)
net technologies have been impacting the • The range of complementary products and
airline operators and their customers, an services being offered.
in-depth analysis of four airline opera- • The extent to which complementary prod-
tors — two no-frills players — Ryanair and uct and service providers have incentives
easyJet, and two established ones — British to maintain and improve their associations
Airways and Aer Lingus, was conducted. with the airline operators.
• The range of non-complementary products
and services being offered.
• How the Internet presence enhances the
An in-depth analysis of value of the core product (i.e. reserving the
four airline seat) by providing a bundle of supporting
operators — Ryanair products and services.
easyJet, British • The mechanisms used by the airline
Airways and Aer operators to reduce the switching costs
of customers that purchase on-line.
Lingus, was conducted • Other on-line businesses that facilitate the
reservation of an airline seat.
• How the Internet presence reduces infor-
Companies from both the no-frills and estab- mation asymmetries between the passen-
lished sectors were selected in order to ger and the airline operator through the
analyse the level of value being obtained from provision of rich information.
the exploitation of Internet technologies. A
research team using information gathered
Findings
from multiple data sources conducted the
primary analysis. Data was gathered from All four e-business value drivers proposed
publicly available sources including annual by Amit and Zott (2001) were apparent in
reports, investment analysts’ reports, and the analysis: efficiency, complementarities,
company web sites. Techniques for both novelty and lock-in. While all were found
within-case analysis and cross-case analysis to be very much interrelated, each of the
were used (Eisenhardt, 1989; Yin, 1994). key value drivers is discussed separately
Within-case evidence was acquired by taking below for the purpose of clarity of exposition
notes rather than by writing narratives. For (see Table 1).
this purpose, the research team conducted
the analysis through integrating and trian-
Efficiency
gulating facts from the aforementioned data
sources. The focus of the study was on how Efficiency is a fundamental component of
the Internet was impacting the relationship overall service quality (Parasuraman et al.,
between these airline operators and their 1985). Efficiency has been identified as a key
end-customers. Also, the effects on industry value driver in the decision phase of the con-
structure were also analysed. Amit and Zott’s sumer buying process as well as being a key
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 2003Internet technologies and airlines 37
Table 1. Impact of Internet technologies on the value of the air transport offering
Source of value Key findings in aviation context
(Amit and Zott, 2001)
Efficiency: 1. Real-time decision-making mechanisms
(e.g. search costs; selection range; 2. Up-to-date information for buyers and sellers
symmetric information; simplicity; speed; 3. Reductions in customers’ search and
scale economies) transaction costs
4. Reductions in the communication and
transaction costs of the seller
Complementarities: 1. Bundling products and services through
(e.g. between products and services for vertical and horizontal collaboration/
customers; between on- and off-line /partnerships/alliances to form more valuable
assets; between technologies; between holistic travel package
activities) 2. Offering additional services not directly
related to the core travel offering (e.g.
financial services)
3. Reducing communication and promotion
costs
4. Taking equity stakes in on-line agencies
Lock-in: 1. Offering low(er) prices/discounted fares (e.g.
(e.g. switching costs—loyalty for on-line bookings only, or
programmes, dominant design, trust, relationship-based pricing)
customization; positive network 2. Customizing offerings to suit individual
externalities—direct and indirect) customer needs
3. Amalgamating rewards/bonuses for loyal
customers within business networks
4. Building consumer trust
Novelty: 1. New transaction structures play integral role
(e.g. new transaction structures; new in lowering transaction costs for airlines and
transactional content; new participants) customers
2. Disintermediation and reintermediation of
the travel agent
3. Emergence of novel retail partners (e.g.
Internet cafés)
source of value in product or service usage transaction cost efficiencies for both buyers
(Sheth et al., 1991; Holbrook, 1999). In and sellers of air transport, as evidenced in
accordance with Williamson’s (1975) trans- the following areas:
action costs economics theory, Amit and Zott
(2001) proposed that the higher the trans-
action efficiency gains, the lower the costs, Real-time decision-making mechanisms
and the greater the total value of an interac-
tion — the total value being the sum appro- Real-time flight reservations can be pursued
priated by every party involved in a transac- directly without reliance on bricks and mor-
tion. The analysis of the airlines’ exploitation tar agents’ opening hours or ability to access
of the Internet provided evidence to support the Computer Reservations Systems (CRS) at
this proposition. Since the on-line activi- the time when a customer wishes to pur-
ties of airlines enable search activities (pre- chase. Buyers and sellers receive instant pay-
purchase and usage) and remote transactions ment details and confirmation, thus instantly
(purchase and usage) to take place, transac- appropriating mutual value symmetrically.
tion efficiency was found to be a fundamental Airlines have the potential to re-enforce their
value driver of the electronic business activ- brand values and trustworthiness through
ities of the airlines. The analysis provides this direct interface with customers. On-line
evidence that the Internet yields increased customers may place more trust in their own
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 200338 Ronan McIvor et al.
purchasing decisions and may be more con- Reductions in customers’ search and
fident that the information content of the transaction costs
site is up to date, and that the booking is
error free. Decision making is further facil- On-line buyers benefit from better selec-
itated by access to a wealth of information tion in terms of choice (of airlines, flights,
on complementary travel services such as schedules, destinations, levels of service and
hotel accommodation and car-hire on both complementary services); speed (time, con-
the airline’s web site and those of on-line venience of access capabilities on the Inter-
agents. As a result of the reduction of infor- net); and reduced transaction costs (mone-
mation asymmetries, sellers have the ability tary, effort, mistakes). As a result of offer-
to make quick decisions and generate rapid ing complementary services, customers can
responses to customer needs, particularly avail themselves of the one-stop-travel-shop
in terms of direct communications mecha- facilities of airlines. In terms of speed and
nisms. For example, Aer Lingus has claimed efficiency, there is evidence that both Aer
that its new online presence has enabled the Lingus and British Airways have expended
airline to provide ‘better value and respond tremendous effort in simplifying the trans-
more quickly to market conditions’ (Anon, action structure, and the content of their
2001a). Airlines can also gain rapid feedback websites. For example, by removing Java
on promotional effectiveness and demand applet and heavy script, British Airways man-
structures, in addition to having the abil- aged to reduce the loading time of the
ity to monitor the behaviour of competitors airline’s home page by 75% (Anon, 1998).
and respond appropriately in a timely fash- Aer Lingus recently restructured its web-
ion. Information efficiencies further reduce site to ease simplicity of navigation for
transaction costs and increase total value. the user and combined this with improved
ticket structures and lower fares. This speed,
simplicity and flexibility facilitate user flow
Up-to-date information for buyers and
and subsequently customer transaction and
sellers
search costs. Ryanair and easyJet have won
All the websites evaluated contained up-to- many awards for site simplicity and supe-
date information on flights, schedules, pro- rior design.
motions and complementary services. This According to Feldman (1998) ease of use
commands a reduction of information asym- was considered to be a ‘big hang-up’ because
metries when compared with a printed sea- customers sought more than ‘menu-driven
sonal travel brochure and has potential to text’. For example, Ryanair.com received the
eliminate travel agent bias. Customers can overall Readers Award, EsatNet Award and
compare prices of individual flights with dif- Best International Award in 2000 and also
ferent airlines, from different airports in the the Irish Transport Users Council award for
same cities/towns and evaluate the compo- the best on-line information in 2002.
nents of alternative offerings relatively easily. All the websites analysed made provision
Consequently, customers also benefit from for price-sensitive customers by enabling
having access to more perfect information. direct access to the lowest fares available on
For example, real-time flight (e.g. sched- particular routes. This enhances transaction
ules, flight status) and complementary infor- efficiencies by further decreasing the time,
mation (e.g. hotel accommodation, press energy and effort required to be expended
releases, ticket restrictions) is available to during the search phase of the customer
the on-line air transport customer. This in buying process. All of the airlines promote
turn complements the convenience of the ‘lower fares’ which are achieved as a result
speed and flexibility of on-line decision mak- of the reduction of the airlines’ distribution
ing and reduces search and other significant costs, the simplification of transactions, scale
transaction costs. economies and streamlined supply chains.
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 2003Internet technologies and airlines 39
There is clear evidence of the established control over, and enhanced efficiency in
airlines directing customers to their Internet terms of sales, capacity, the quality and the
presence. Both British Airways and Aer quantity of information relayed to buyers.
Online tickets are a significant means of
reducing transaction costs. An online ticket
There is clear evidence purchased from an airlines site typically costs
an airline $1–3 in overhead, whereas dis-
of the established tribution fees airlines pay to intermediaries
airlines directing or third party vendors are typically $25
customers to their per ticket (Croft, 2001). Both the low-cost
Internet presence and established airlines have adopted these
approaches. For example, Aer Lingus pro-
mote E-ticketing on some key routes and the
low-cost airlines offer a confirmation number
Lingus offered more attractive prices to
as opposed to a ticket. Aer Lingus began phas-
customers using the Internet than those
ing the introduction of the ticketless travel
booking by telephone or through travel
concept for on-line customers travelling on
agents. However, while travel agents will be
the Dublin to London route and plan to intro-
able to access the website to place bookings
duce more routes to the network, therefore
for customers, the low-cost fares would only
offering more on-line customers the benefits
be available to them on a non-commission
of ticketless travel (Anon, 2001b).
basis. The strategy being adopted by Aer
Lingus is similar to that of the low cost
airlines such as Ryanair which offer low-cost Complementarities
fares for direct booking (Irish Times, 2001). Central to the transaction cost efficiency
The new pricing strategy of Aer Lingus is enhancement is the concept of the value
claimed to be a move towards direct booking bundle composed of complementary prod-
that reduces the commission paid to travel ucts and services. The total value of an
agents and enhance the ability to retain more offering can be increased through bundling
of the fare and cut the costs of distribution products and/or services, which when put
(Irish Times, 2001). Since 15 May 2000, together are perceived to be of greater value.
Ryanair guaranteed the lowest fares on the In competitive terms, the resource-based
Internet and promised to refund double the view of the firm promotes the idea that the
difference to customers who can find a lower firm is a unique bundle of value-creating
rate on the Internet for travel on the same capabilities and resources (Barney, 1997).
day, at similar times, dates, and the same Therefore, when the key capabilities and
IATA designated city airports (Anon, 2000a). resources of several complementary firms
form unique value chains which in turn gen-
Reductions in the communication and erate unique value propositions, opportuni-
transaction costs of the seller ties for gaining competitive advantages, dif-
On-line information enhances the efficiency ferentiation, cross-selling, scale economies,
value of a transaction for the customer in market-driving behaviour and premium pric-
terms of physical search costs and time or ing may arise.
convenience. Twenty-four-seven accessibility Value-adding complementarities can be
for on-line customers means that real-time directly related or non-related to the core
reservations can be made at a time when offering. Analysis of both the low-cost and
the customer wants to purchase, not at established airlines identified vertical, hor-
the discretion of an agent or within times izontal and others not related to the core
stipulated for reservations made direct with offering. All the airlines analysed offer some
an airline by telephone. The seller has more form of travel package or bundle that
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 200340 Ronan McIvor et al.
includes flight, hotel accommodation or car work within 48 hours. Reciprocal partner-
hire, which the customer can tailor to meet ship promotion will also reduce communi-
his or her individual needs or wants. Most cations costs for the seller. For the buyer,
offer financial services, up-to-date informa- when access is available to complementary
tion on currency, weather or destination offerings to the primary offering of inter-
guides, in order to reduce search costs est, search cost efficiencies and improved
and build trust. For example, Ryanair pro- decision-making benefits arise.
vides a link to Ryanair hotels (in associa- As well as entering into partnerships
tion with needahotel.com). Needahotel.com and alliances the airlines have been taking
offers Ryanair customers a selection of more equity stakes in companies in order to
than 12,000 hotels in over 90 countries. The offer complementary products and services.
link enables the customer to book accom-
modation ranging from two-star to five-star
luxury. Ryanair customers can also avail
themselves of car rental deals from Hertz, Airlines have been
Ryanair’s exclusive car-rental partner. Cus- taking equity stakes in
tomers can use the car-rental service pro- companies to offer
vided through partnerships with Avis and complementary
Hertz. British Airways’ customers can also
obtain foreign currency as a result of the
products and services
airline’s partnership with Travelex. There
was also evidence of the airlines offering
non-complementary products and services British Airways has been particularly active
via their Internet presence. Ryanair and Vir- in this area. It has taken a minority stake in
gin offer a series of financial services, both Biztravel.com in 1999. This award-winning
related and unrelated to the core offering website specializes in facilitating booking
(such as travel insurance, home insurance) and planning business travel (Anon, 1999).
using business-to-business relationship net- The airline was the first European carrier
works and integrated value chains. to buy a share in an online travel agency.
There was evidence of the alliance part- Biztravel.com targets specifically the growing
ners promoting each other’s products and small-office and home-office market (SOHO)
services to provide the convenience of a (Anon, 1999). According to the Chairman
global seamless service. For example, Aer and CEO of Rosenbluth International and
Lingus and British Airways provide a link Rosenbluth Interactive, this relationship is
to the Oneworld site, while Aer Lingus cus- purported to have contributed to Biztravel’s
tomers can trace lost baggage as a result goals to be globally utilized and recognized as
of the airline’s partnership with mylost- the premier site for business and individual
bag.com (Anon, 2001c). After the customer travel (Anon, 1999). In 2000, British Airways
has reported baggage missing to airline per- formed a partnership with GetThere.com
sonnel, he or she is issued with a baggage ref- and launched a new on-line business travel
erence number. The customer then clicks on management system for SMEs in the UK.
the lost baggage link on the airline’s home- GetThere.com was the leading supplier of
page to review the status of the lost baggage. Internet-based b2b travel systems in the
Also, Ryanair has a partnership with sim- United States.
plyfx.com, the largest independent provider In July 2000, British Airways Executive Sec-
of foreign currency in the UK (Anon, 2000b). retary International Club was launched on-
This service enables customers to order line. This new electronic service, developed
and pay for foreign currency on-line, which by Black Sun Plc, was claimed to be the ulti-
is delivered to their home or place of mate dedicated travel website for personal
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 2003Internet technologies and airlines 41
secretaries and assistants (Anon, 2000c). Pre- customers the opportunity to earn points
viously, a newsletter was issued quarterly, from product and service providers such
but the airline’s research suggested that the as car hire and hotel reservations. These
role of corporate travel bookers was rapidly mechanisms also provide incentives to
changing and moving onto the Web. The booking on-line as opposed to traditional
site features news and information pages channels. Again, alliances between these
to keep customers up to date with the air- collaborating companies are a key part of
line’s developments; exclusive offers to esi this mechanism.
members; a one-stop-shop for British Air- The airlines have been using the Inter-
ways travel including access to the airline’s net to offer a more personalized service to
global flight timetable, hotel accommodation customers. British Airways loyalty club mem-
and car rental; and, hotlinks to the airline’s bers have access to customized accounts,
booking site (Anon, 2000c). the ability to manage their mileage points,
and special privileges promoted on-line, thus
Lock-in reducing information asymmetries, reduc-
ing search costs and simplifying the service.
Amit and Zott (2001) argue that the British Airways Executive Club members use
value-creating potential of an e-business is a PIN to enable access to the newly structured
enhanced by the extent to which customers site providing screens only available to these
are motivated to repurchase. While lock-in members. The personalized service includes
prevents the migration of customers or the membership details, promotions, news and
lowering of switching costs, strategic assets account summaries detailing miles and tier
such as brand image and reputation and points balances. The Internet has also been
trust between buyers and sellers can con- used as a vehicle to further reinforce the
tribute to this lock-in. From the preceding Oneworld alliance established by American
analysis, it can be seen that the airlines are Airlines, British Airways, Canadian Airlines,
attempting to create lock-in through both the Cathay Pacific Airways and Quantas Airways.
efficiency and complementary features of the The Oneworld alliance allows closer link-
e-business technologies. ing of frequent-flyer programmes to enable
Perhaps the most prevalent mechanism members of the five airlines’ frequent-flyer
used to create lock-in has been the further programmes to earn and redeem miles on
exploitation of the frequent-flyer programme any eligible flight and fare within the alliance.
via the Internet. Aer Lingus and British Top-tier frequent-flyer cards would be reis-
Airways frequent flyers benefit from the sued with new Emerald, Sapphire and Ruby
ability to amalgamate their frequent-flyer symbols to ensure that the members received
mileage points as a result of horizontal airline the appropriate recognition and privileges
alliances. These programmes are also linked which they had become accustomed to with
to other product and service providers via single airlines. Also, the participating airlines
the Internet. Customers can manage their in the Oneworld alliance have been using the
mileage points, gain and spend them with information on the specific needs of frequent
other firms whose offerings are not directly flyers to enhance service levels and provide
related to the core offering. a more customized service.
One-to-one relationships may develop
between airlines and their frequent,
Novelty
premium-paying customers who gain
privileged access through the sites to their There was clear evidence of the airlines using
customized account pages; thus retention the Internet to pursue novel approaches
rates may guarantee long-term returns for for serving the needs of their customers.
the airlines concerned. The low-cost airlines Both the established and low-cost airlines
are quite proactive in this area offering have integrated the technological benefits
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 200342 Ronan McIvor et al.
of the Internet with existing and new customers and further reducing the cost of
technologies. Aer Lingus and Ryanair have booking an airline seat.
striven to reach the mobile commerce The Internet was being exploited as a
market through their partnerships with Irish mechanism to fully automate the book-
telecommunications companies. Ryanair’s ing process with limited need for human
partnership with leading Internet cafés in intervention. The established airlines were
Dublin was an attempt to bring their offering employing the Internet to further under-
to the high street. mine the travel agents that in turn positively
Due to the ease with which these impacted the efficiency value driver. As well
approaches can be replicated it is quite diffi- as using it to reduce transaction costs, the air-
cult to sustain the novelty dimension. For lines have been using the Internet to enhance
example, it is clear that the Internet has the relationship with the customer through
played a major role in providing these low- the provision of more detailed and up-to-date
cost entrants with market growth and expan- information. This, in turn, has shown how the
sion opportunities. Ryanair and easyJet have capabilities of the Internet at the customer
invested heavily in the Internet to achieve a interface have been empowering the cus-
presence in new markets. However, such an tomer with greater information. For example,
approach can be easily replicated by compet- the customer is in a much stronger bargain-
ing low-cost airlines. It could be argued that ing position in their relationship with both
the innovative use of complementary and the low-cost and established airline operators
lock-in mechanisms could create novelty that via the undermining of the travel agent.
would be difficult to replicate. Previously, the travel agent’s competitive
position was based on exploiting the infor-
mation asymmetries at the customer interface
Discussion due to the physical constraints associated
There is clear evidence that all the airlines with the evaluation and selection process.
analysed are attempting to exploit the Inter- However, exploitation of the Internet gives
net along each of the value drivers identified both an opportunity and a challenge to
by Amit and Zott (2001). In fact, the Internet airline companies. The Internet provides a
has become central to the strategic develop- number of mechanisms to enable the airlines
ment of the airline companies analysed. In to build a direct and enhanced relationship
with customers. In fact, for the established
airlines this poses a challenge. In the past,
these airlines in many cases have been sell-
The Internet has ing their product (i.e. an airline seat) through
become central to the travel agents.
strategic development The adoption of the Internet by the airlines
of the airline may lead to the management of information
at the customer interface becoming a signif-
companies analysed icant source of competitive differentiation.
For example, the Internet provides an oppor-
tunity for established airlines to provide a
relation to the efficiency value driver both highly customized service to long-haul fre-
the low-cost and established airline opera- quent flyers. Via sophisticated customer pro-
tors were using the Internet to enhance their file databases it is now possible to automat-
competitive position. In the case of the low- ically inform staff of customer preferences
cost operators, the Internet was integral to such as aisle seats or in-flight entertainment.
their overall low-cost strategy by reducing Previously, such information may have been
transaction costs (including easy access to collected but not used to enhance the needs
information and lower booking costs) with of their most profitable customers.
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 2003Internet technologies and airlines 43 With information now being separable or are a source of competitive differentiation. from the transaction it has now become In many cases, value for the customer resides a key determinant in enabling airlines to in a combination of products and services satisfy the needs of customers. For example, provided by the airline rather than in a single customer requirements captured at a hotel or limited number of separable products or in one city will affect the services the next services such as the airline seat. time the customer stays with the same hotel Customers may not purchase a bundle of chain in another city. Therefore, information products or services primarily on the basis of can be captured, analysed, shared, and used whether one or a number of these products to enhance the next customer experience. or services are offered by the airline. No one Airline loyalty programmes have been the product or service is superior by itself but most prominent means of locking customers when combined with a range of products and to a particular airline. As evident from the services creates a powerful value proposition findings, these programmes are continuing for the customer. Therefore, it is extremely to play an important role in locking cus- difficult to identify separable products and tomers into an airline in the digital era. services offered by the airline as crucial in Airline loyalty programmes provide signifi- the eyes of the customer and that are also cant value to customers. This value can be a source of competitive differentiation. In used to attract both customers and providers effect, it could be argued that the airline of both complementary products and ser- companies are using the Internet to build vices. Both the low-cost and established their brand by creating a set of experiences airlines are using the Internet to offer com- for customers via the provision of a bundle plementary products and services to the core of complementary products and services. offering — the airline seat. In fact, the airlines The findings have emphasized the extent to are attempting to create a one-stop shop- which the traditional bricks-and-mortar travel ping experience for the customer with all the agent has been disintermediated. However, required travel products and services avail- there is also evidence of reintermediation able on-line. Through the provision of these in the relationship between airline oper- products and services, airlines are attempt- ators and their customers. Already, there ing to enhance the value of the core product are on-line travel agents such as Traveloc- and make it possible for customers to satisfy ity and Expedia with product and services all their needs on-line. traditionally offered by travel agents. Evans There was also evidence of the airlines and Wurster (1999) argue that reinterme- offering complementary products and ser- diation in some industries is likely to give vices on-line that were not related to the rise to the development of Internet-enabled core product offering. For example, it has ‘navigators’. Navigation can be a source of been shown that Ryanair’s website offered competitive advantage for many businesses. home insurance products to potential cus- Navigators assist and influence the customer tomers. The use of complementary products in the selection and purchase of products or and services also enhanced the efficiency services (Evans and Wurster, 1999). value driver by reducing the search costs and In the past, organizations exercised con- enhancing the convenience of concluding trol over the navigation function due to the the transaction. physical constraints on the customer in the A major challenge for the airlines is to evaluation and selection process. Sales advi- determine the optimum bundle of comple- sors, agents, advertising, branding and store mentary products and services they should layouts are examples of navigation functions offer to complement the core offering. It may in a physical context. The traditional travel be difficult to identify specific products and agent in the airline industry derived much services offered by the airline that are per- of its revenue through carrying out naviga- ceived as crucial in the eyes of the customer tion functions. However, these new on-line Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 2003
44 Ronan McIvor et al.
intermediaries are performing some of these product and service provider that meets
roles envisaged by Evans and Wurster (1999) these needs.
in their description of navigators. While these intermediaries have the poten-
It also must be emphasized that travel tial to become powerful participants in the
service intermediaries such as Travelocity travel industry, there are still some signifi-
and Expedia are not the only businesses cant inhibitors. They will have to build high
offering these services. Portal businesses degree of trust with customers and enhance
such as Yahoo! have been offering similar their ability to create rich customer portraits
services. For example, Yahoo! focuses on of customer requirements and provide an
attracting customers, gathering and analysing unbiased intermediary capability. Also, these
data on them, and linking them with both intermediaries will undermine their posi-
advertisers and vendors of products and tion with potential customers if they are
services. These portal businesses are also in affiliated with particular product and ser-
a powerful position through the possession vice providers.
of a rich repository of customer information
that can influence the flow of commerce on
Conclusions
the Internet.
The development of these intermediaries The evidence presented in this article has
is likely to provide immense challenges to the illustrated how the Internet represents a
airlines. It has already been shown that the powerful technology for commerce and com-
management of information at the business- munication between customers and airline
to-customer interface is a significant source companies. The Internet clearly enables
of differentiation within the airline industry. the customer to move from being a pas-
Therefore, it is crucial that airline operators sive participant to that of being proactive
do not lose their direct interface with end- and more sophisticated in their relationship
customers. However, it is quite possible in with airlines.
the future that these intermediaries may Further exploitation of the Internet will
pose a serious threat to airline operators lead to higher levels of sophistication, which
in this area. in turn will increase the expectations of the
With more customers purchasing travel customer on what and how these organi-
products and services through these inter- zations offer products and services. It must
mediaries, there is the potential for a shift in also be borne in mind that the Internet is in
the balance of power. For example, these its infancy with the underlying infrastructure
intermediaries would be in a position to having some way to go before full devel-
access valuable customer information such opment. For example, Internet search tools
as behaviour and spending patterns across a will become more sophisticated. Advances in
range of product and service providers. Tech- the Extensible Markup Language (XML) will
nology developments will enable these inter- make it possible to identify products, fea-
mediaries to perform more complex analysis tures, and prices with far greater precision.
in the capture of customer information and Customers will be able to set much more
the development of detailed profiles of indi- detailed search criteria, which gives them
vidual customers travel requirements. Access immediate access to even richer sources of
to this type of information is of considerable information. The implications of these trends
value to airline operators. These intermedi- are that airlines are dealing with a ’virtual
aries are in a position to assist customers in traveller’. These travellers have global access
obtaining maximum value from their infor- through the Internet to more products and
mation profiles by analysing selections they services than ever before and with instant
have made previously to determine which communications, typical constraints, such as
product or service would best meet their time and distance, are rapidly disappearing.
current needs, and then find the relevant The greater transparency that flows from an
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 2003Internet technologies and airlines 45
airline trading on the Internet will lead to Such a trend presents airlines with a
a greater reluctance on the part of these major challenge in their attempts to define
customers to pay full prices. As well as expec- and achieve areas of sustainable competi-
tations continuing to rise, these customers tive advantage. It has been shown that the
will become increasingly unpredictable. management of information at the customer
Clearly, these trends have major implica- interface presents the potential for com-
tions for airline companies who are now petitive differentiation. Airlines have already
dealing with a ‘virtual traveller’. While Inter- been exploiting Internet technologies to cap-
net technologies offer ways for airlines to ture and integrate critical customer prefer-
operate more effectively, and give customers ences across a range of products and services.
higher levels of service and sophistication, This exploitation of information technology
they also pose major challenges for corporate to manage information is already a key fea-
decision makers within these organizations. ture of the relationship between airline oper-
ators and their customers. Airline operators
that deal directly with travellers will have
While Internet to allocate resources towards analysing and
technologies offer determining their needs in order to build
successful relationships. The findings have
ways for airlines also shown the trend towards partnerships
operate more and alliances resulting from demands on the
effectively, they also part of customers for complementary offer-
pose major challenges ings rather than for individual products and
services. It is extremely difficult to identify
for corporate decision
which products and services offered by the
makers airline are a distinct source of competitive
differentiation. In fact, it could be argued
that the source of value creation resides in
The scope and boundaries of the airline networks of product and service providers.
industry have become less clear as a result The adoption of Internet technologies at
of the adoption of Internet technologies at the customer interface to facilitate transac-
the customer interface. The airline industry tions requires a network of capabilities drawn
is no longer the unit of analysis when airline from a number of sources including cus-
companies are analysing the competitive tomers, suppliers, complementary product
landscape. The findings have shown that and service providers and, in some cases,
companies from a number of industries competitors. Exploiting Internet technolo-
are involved in satisfying the needs of the gies to integrate and leverage these resources
traveller via the provision of a range of in a more innovative and powerful way than
complementary and, in some cases, non- competitors will become a significant source
complementary products and services. This of value. Therefore, corporate decision mak-
offering of a range of product and services ing by airline operators must span industry
is creating industry convergence that has and firm boundaries. However, the difficul-
serious implications for the formulation ties associated with this must be viewed in
of corporate strategy. This trend towards the context of the considerable complexities
industry convergence is leading to the and dynamics of these industry changes.
formation of a new market with a new
type of value chain. The value chain of
this new market is structured through a Biographical notes
reconfiguration of value chains from other
industries such as car hire, hotels, insurance Dr Ronan McIvor is a Senior Lecturer within
and finance. the Faculty of Business and Management
Copyright 2003 John Wiley & Sons, Ltd. Strategic Change, Jan–Feb 200346 Ronan McIvor et al.
at the University of Ulster. Ronan has car- Anon. 2001c. Review the Status of Your Lost
ried out extensive research in the area Baggage Online. Aer Lingus press release, 27
of supply chain management and informa- August.
tion systems. He is currently carrying out Barney JB. 1997. Gaining and Sustaining
research in the areas of outsourcing and the Competitive Advantage. Addison-Wesley:
application of electronic commerce at the Reading, MA.
buyer–supplier interface. Bettis RA, Hitt MA. 1995. The new competitive
landscape. Strategic Management Journal 16:
Dr Dolores O’Reilly is Professor of Inter-
7–19.
national Business Strategy in the School of
Bourgois L, Eisenhardt K. 1988. Strategic decision
International Business at the University of processes in high velocity environments:
Ulster. She is also Head of the School of Inter- Four cases in the micro-computer industry.
national Business and Director of the Interna- Management Science 34: 816–835.
tional Business Centre. Professor O’Reilly is Brandenburger AM, Stuart H. 1996. Value-based
Chairman of the Air Transport Users Com- business strategy. Journal of Economics and
mittee of the Chambers of Commerce of Management Strategy 5: 5–25.
Ireland. She has researched extensively in the Croft J. 2001. Airlines’ web portals prosper
area of European air transport with particu- despite third-party sites. Aviation Week and
lar reference to competitive strategies after Space Technology 154: 86.
liberalization. Eisenhardt KM. 1989. Building theories from
Sharon Ponsonby works as a Research case study research. Academy of Management
Assistant in the Faculty of Business and Review 14: 532–550.
Management at the University of Ulster. She Evans P, Wurster TS. 1997. Strategy and the new
has published in the Journal of Marketing economics of information. Harvard Business
Management and the Journal of European Review 75: 71–82.
Evans P, Wurster TS. 1999. Getting real about
Industrial Training and is on the editorial
virtual commerce. Harvard Business Review
advisory board of the Irish Journal of
77: 85–94.
Management. Her main research interests Feldman J. 1998. Pricing and cybersales (Internet
are in experiential value creation from airline ticket sales and reservations). Air
strategic and consumption standpoints. Transport World 35: 64–66.
Hamme RM, Champy J. 1993. Reengineering the
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