The innovation gap: a co-operative solution? June 1998

Innovation is at the heart of every global industry — but aviation seems to be an exception to this rule. Louis Gialloreto takes a look at the current aviation innovation gap and examines what solutions may be available to the industry.

Initially, innovation in the aviation industry was primarily technology–driven — and technological improvement continued as the basis of innovation until the mid–1970s, when it was the turn of management technique to take over. Through the 1980s this led to ideas such as frequent user schemes, capacity and asset optimisation models and even a focus on cost consciousness.

The barren 1990s

But enter the 1990s and it is difficult to spot a major trend in innovation, with the possible exception of electronic ticketing. Indeed, it can be argued that the aviation industry is stuck in a period of managerial complacency in terms of innovation.

Economic upturn tends to foster complacency anyway, and globally we have yet to see an innovative breakthrough that has been present in other decades. But just how much of an innovation gap is there?

One way of answering this question is to examine the innovations that have been seen at other industries during the 1990s.

These have included the following developments:

• The creation of cyclical management strategies;
• Development of consistently high quality service products;
• Re–personalisation of the service process;
• The recession–proofing of assets and customers;
• A reassessment of alliances as being a long–term rather than a short–term strategic option;
• and, The adoption of new relationships between users and makers of assets.

To some extent or another airlines are considering these issues. But their approach tends to be incremental rather than revolutionary. Perhaps for airlines that have embraced so much change in the 1980s and 1990s, a period of refinement and optimisation is necessary. We are, after all, seeing second, third and fourth generation FFPs, yield management and scheduling systems, among others. And indeed some airlines are achieving success by simply applying incremental conventional strategies in the areas of branding, capacity & asset optimisation and logistics etc.

Incrementalism versus evolution

But is this enough? The major concern is that if all innovation is constrained to an evolutionary process, where will the next major breakthrough come from? Incrementalism is fine as long as original and revolutionary activities (or so–called pure research) are taking place somewhere else in the airline — but that is rarely the case, even in the most sophisticated airlines.

Other commentators have come to the conclusion that anything other than the targeted application of research (i.e. incrementalism) is no longer affordable in an industry where thin margins are the maximum rewards for the chosen few during even the good times.

Is there a solution to this fundamental conundrum? Undoubtedly there is, and by looking at the way other industries have handled innovation, airlines may be able to exploit alternative strategies.

The first lesson to be learned is that innovation must be developed and launched quickly into a market in order to produce some chance of a sustainable competitive advantage. The cost of innovation has to be capitalised and funded in the period prior to effective amortisation, thus raising another barrier to entry to under–funded market pioneer aspirants.

A co-operative strategy

Bearing this point in mind, an appropriate model from which to draw some lessons is the concept of co–operation. In hi–tech, consumer electronic and an increasing number of manufacturing–based sectors, co–operative research has often produced breakthroughs that are then commercialised in differing fashions by various industry players.

The co–operative model is one of the reasons that the Japanese have (until recently) been able to stay one step ahead of other competitors, who either each individually spend a huge proportion of revenue on research or else go without.

From the experience of other industries, it does seem that a co–operative approach to innovation pays dividends, but the key question is — could this also work for airlines?

A lesson for airlines?

Airlines do not have to look far for a model of co–operation that directly impacts them — namely, the aircraft and aviation systems manufacturers that are sharing research and development among larger and larger pools of aligned players.

Perhaps, therefore, some of the emerging global alliances could at least split funding of innovation between partners (as has already taken place in an initial form at the Star alliance)?

However, there remain major obstacles to this theory becoming practice. In an aviation alliance, even when the innovation effort is shared and co–ordinated, airlines must have complete faith in the alliance in order to allow an innovation they have thought up to be maximised commercially by other airlines.

They must also believe that successful innovation elsewhere will be quickly distributed to other alliance partners.

The strength and depth of the alliance is key. The R&D workload can only be shared among an alliance of airlines — allowing each particular carrier to pursue one avenue of innovation — if each airline not only trusts its partners, but is also confident that the rewards of successful innovation will flow back to it as well.

The reverse of this is the problem of innovation failure. If an airline tries out a new concept and it fails, will the financial cost of failure be spread among all the airlines in an alliance? If not, the airline may be reluctant to search for innovations. And even more important than financial cost is loss of face. If a small airline tries an innovation and it fails, financial recompense may not be enough to overcome the blow of failure. It is much easier for a 100% owned subsidiary to experiment with a new concept because 100% of the risk (and return) is carried by the parent.

And then there is the problem of co–ordination. The alliance must ensure that innovation effort is not duplicated, or that airlines ignore riskier innovation efforts and leave them to other alliance members. In an alliance where innovation effort is shared, airlines may be tempted to concentrate on innovations which are most likely to be adopted by others, at the cost of ignoring areas which appear more risky but may well prove to give greater rewards. Co–ordination of innovation on a long–term basis is therefore essential.

Even if an innovation is successful, it must be realised that alliance partners may not want to adopt it, or may not be capable of adopting it for themselves. For example, there is little doubt that Virgin’s innovative service and Upper Class pitch has been very successful.

But in a code–share or alliance situation, very few airlines would want to standardise their service concept with Virgin. Yet despite all these potential problems, it is probable that a co–operative system would provide innovation at a lower cost per airline and allow quicker, cheaper access to the benefits of being first in. For aviation, whether this co–operative approach to growth occurs within mega–alliance groups or on an industry- wide consortium basis remains to be seen.

But what is certain is that without some kind of co–operative effort, the innovation gap between aviation and other industries will continue.