Can Customer-Centric E-Business System Achieve Competitive Advantage for Airline Industry?

Mr Hongwei Jiang [HREF1], School of Aerospace, Mechanical, and Manufacture Engineering [HREF2] , GPO Box 2476V, RMIT University [HREF3], Victoria, 3001, Australia.george.jiang@rmit.edu.au

Abstract

The main objective of this study is to provide significant new insights into the development and implementation of e-business strategies that will lead airlines to a competitive advantage.


The success of application of e-business strategy to airline industry depends on the value added of e-business to airlines. Currently, many airlines are looking at e-business to protect their assets and to secure customer's loyalty, and to be successful in today's competitive environment. In view of the new features of Internet, the core question of this paper is:


Can an e-business system utilising Internet technology to achieve competitive advantages for airlines?


To provide an answer to this question, the researchers conducted an online survey and develop a Customer Centric E-Business (CCEB) System Model, using China ShenZhen Airlines as a case study.


The work in this paper is organised as follows: Introduction; Section 1: Research Goals, Literature Review, Research Methods, Original Contribution, and Research Outcomes; Section 2: Research Flow Chart; Section 3: Findings and Results; and Section 4: Other Considerations. Furthermore, the work presents some pertinent strategies for airlines based on Michael Porter's Five Competitive Force Model.


With respect to the typology suggested by Porter, the results indicate that Porter's model was essential in evaluating the airline industry under both descriptive and elucidative aspects.

Introduction

Many e-commerce principles were pioneered by the airline industry. These include the first business-to-business electronic information exchange and industry-wide electronic marketplace. This environment provided unprecedented opportunity for operations research (OR) modelling. Airlines continue to derive billions of dollars annually from these and derivative models. The availability of reliable, low-cost communications via the Internet is not only providing new modelling challenges within the airline industry, but it is also providing similar opportunities in other industries [1].


Electronic Commerce is defined as "buying and selling of goods and services through electronic technology utilising on line services such as Internet, interactive television, commercial online services and screen telephones so that an organization's objective can be achieved."[2]


In the 21st century digital technologies will push beyond the existing boundaries in all these spheres of our lives [3]. The transition from brick-and-mortar business to "clicks" business is happening in all sectors of the economy [4]. Any size business can have an e-commerce strategy; from a sports club selling T-shirts with their name on, to a medium-sized business selling widgets, through to a traditional retail behemoth like Wal-Mart [5]. Some e-commerce companies sell only over the Internet; others sell both over the Internet and in standard brick-and-mortar distribution channels [6]. Most airline managers realize that a major business transition is taking place. Some believe the various processes by which business strategies are developed will need to change. New value propositions are being promoted by e-commerce, and it is being used to give airlines competitive advantage.


Regardless of which business model airlines adopt, to be successful, airlines need to understand how the Web and e-commerce affects their business [7]. Airlines need to develop an overall strategy covering: strategic management, IT infrastructure, design, content, e-commerce systems, marketing and customer service. Airlines also need to be creative and entrepreneurial. As every entrepreneur knows however, you will only be truly successful if you provide genuine value to your customers and solve a problem for them.

Section 1. Research goals, literature review, methodology, original contribution, and research outcomes

Scope

The scope of this research was to create an e-business solution, which will concentrate on developing a Customer-Centric E-Business (CCEB) System Model for the Chinese Airlines.


Objectives of research


Research Question Answered


Can an airline increase market share and customer loyalty by achieve competitive advantage utilising e-business models?


Literature Review


Undoubtedly, one of the faster-growing business sectors is Internet-based commerce, commonly called e-commerce (electronic commerce) or I-commerce (Internet commerce). E-commerce includes both B2C (Business-to-Consumer) and B2B (Business-to-Business). The demand for e-commerce systems will translate into career opportunities and new challengers for systems developers, another name for systems analysts. Advances in technology have greatly expanded the role of e-commerce in business. Some business analysts believe that the Internet is changing consumer buying habits and reshaping the economy. E-commerce is changing traditional business models and creating new ones [8].


To figure out just how fast the Internet economy is growing, the Centre for Research in Electronic Commerce at the University of Texas at Austin conducted a study of over 2000 Internet companies. If found explosive growth from $322 billion in 1998 to $524 billion in 1999, a 68% increase. The fastest growing sector was e-commerce, which skyrocketed by 72% from $99.8 billion to $171.5 billion. According to researchers' estimate, over 50,000 companies make some or all of their money online. By 2002, over a trillion dollars in revenue will be generated through the Internet [4].


The number of Internet users surpassed 530 million in 2001 and will continue to grow strongly in the next five years. Most of the growth is coming from Asia, Latin America and parts of Europe. By year-end 2005 the number of worldwide Internet users will double to 1.12B [9].


Goldman Sachs has estimated that B2B e-commerce will generate as much as 1.5 trillion dollars in revenues by 2004, with some estimates running even higher [10].


Between 2001 and 2002, the proportion of Internet users that are shopping online has not increased. However, an increase in number of people online has helped to ensure that e-Commerce is growing [11].


Corporate spending for e-commerce infrastructure is increasing, despite the current economic slowdown. Worldwide spending on software and IT services are projected to increase nearly 36%, to $1.15 trillion, by 2003 [12].

Figure 1 and 2 show typical current e-business models used by airlines.

Figure 1. Generic Airline e-business model [1]

 

Figure 2. Integrated current e-business model of airlines [13]

The Customer-Centric Electronic Business (CCEB) system model for airlines industry is still in its infancy, therefore, there are limited resources available. Customer-Centric Management is related to what is called Customer Relationship Management (CRM). "CRM is defined as aligning business strategy, corporate culture and organization, customer information, and supporting information technology; so that all customer interactions promote a mutually beneficial relationship between each customer and enterprise." [14]


To some airlines especially airlines in China, over 95% of commerce is still conducted through traditional business models. Airlines are investing heavily to deploy customer centric management in traditional channels. Perhaps most significant, the Internet provide a completely new way for an enterprise to interact with its customer-the electronic channel, or the e-channel.
Figure 3 and Figure 4 show the differences between traditional business model (market-centric) and new business model (customer-centric). Figure 5 shows SAS (Scandinavian Airlines System) model to understand how to fulfil its customer's basic needs.

Figure 3.Traditional market-centric business model [15]

Figure 4. Customer-Centric business model [15]

Figure 5. SAS model to understand how to fulfil its customer's basic needs [16]

Although per-capita Asian Internet usage rates still pale by comparison to those of North America and Europe, the number of customers signing on to the World Wide Web is growing at an exponential rate. This is impart what the region's airlines are hoping to profit from as they take to the net in the same way as have their more advanced North American and European counterparts. Finally they hope to move forward with concrete online strategies. Apart from the region's e-business leaders-Cathay Pacific Airways and Singapore Airlines-many airlines have been slow to log on, although a rapid catch-up game is taking place. Airlines are seeing the benefits of not just selling online, but buying. In China, some airlines including China Southern Airlines have led the way in terms of online services through travel site Et-China.com, which it owns jointly with Australia's Et-China.com Investments [17].


In 1999, the average global load factors is 69%, United Airline's load is 71%, Cathay Pacific is 71.4%, China Eastern Airlines is 58.9%, other airlines in China average for 58.6%. There are two reasons behind low factors of airlines in China: one is the fewer application of Information Technology; the other is outdated marketing strategies. For example: there are advanced aircrafts in China Eastern Airlines such as A-340, the flight size is same as Cathay Pacific in 1999. Passenger transport quantity is approximately the same, but the revenue per year, revenue per employee is just a fraction of Cathay Pacific's. Comparing IT employees between China Eastern Airlines and Cathay Pacific, there are 450 employees in Cathay Pacific, only 80 in China Eastern Airlines [13].


Constraints and Limitation of Previous Models


On studying the current e-business models shown in Figures 1, 2, and 5, and through the literature review, most of the current research about airline e-business have the following limitations:

It is obvious that it is an urgent need for further research in the application and development of e-business models to airlines.

Significant & Original Contribution


This work present a fist significant application of integrating System Engineering methods and marketing strategy to a real world situation using data from Chinese Airlines. Figure 6 demonstrates the key function of this integrated model, two top-level operations Marketing and System Engineering drive the model. Each operation satisfies its unique top level requirements e.g. the System Engineering addresses the 5 Cs: Complete, Cost-effective, Congruent, Consistent, and Correct, and Marketing the 5Ps: Passenger, Product, Price, Promotion, and Place. Model Output includes the Value-Added operations, i.e. the 5 Hs: High performance, High load factors, High profit, High market share, and High loyalty. It will help Chinese airline industry in pursuit of competitive advantages over its rivals, and lead it to profit, it will play a significance role for airlines in China, since airlines in China lost a lot of money since 1997, it is contradictive with the very strong economy growth of China.

Figure 6. Integrating Marketing and System Engineering Activity

 

Research Approach for This Work

System engineering and marketing approach

System Engineering Approach to gain a better understanding of customer's requirements and Marketing Approach to learn about customer's needs.


System Engineering:

Marketing:

On line survey (E-Survey)
For this research, an online survey was conducted to test the key hypothesis .500 airline passengers were chosen randomly as a sample both in Australia and China. The questionnaires were sent to them by email in February and March 2003. The total number of response was 66 (13.2%).


Case study
China Shenzhen Airlines was chosen as a case study. The developed model was aimed to work in conjunction with airline Customer Service Centre (CSC), which holds critical customer data. Data collection and analysis was done using MS SQL Server 2000 and MS Excel 2000.


Significance of Research Outcomes


The rationale for this research is to address the issue of application and development of e-business for airlines industry and the results of this research program will address needs of community, industry and the field of study.


Benefits to the Community and Industry
There are many benefits to be gained for airlines and airline passengers, firstly, passengers could book and check in through internet 24 hours, 7 days a week, at any time, any where. Secondly, airlines could reduce sales cost.
Significance derived from CCEB implementation will allow for new business model, based on the wide availability of information and its direct distribution to end-customers.

It is hoped that this search will provide information to assist Civil Aviation Authority of China (CAAC), China ShenZhen Airlines manager, and other airlines in China, to make an informed decision when they consider the application and development of e-business to Chinese airlines industry.


Contribution to the Field of Study
Chinese airline industry is one of the highest growth areas of world civil aviation industry; it is estimated 8.3% increase rate annually from 2001 to 2010. The most recent focus is the entrance to WTO of China, and 2008 Beijing Olympic Games. Recent research of application e-business in Chinese airline industry has pointed to a lack of subject matter, it is just at the stage of sale air tickets through websites. Furthermore, there is an absence of existing literature that explores the application of CCEB to both China airline industry and other airlines all over the world. Therefore, the current proposed research will open up a new area for further investigation and study of the airline CCEB system. The research can also be used as tool for community education, to generate meaningful discussion on particular findings, and assist with planning and policy developments for adopting particular strategies in application and development of e-business to both Chinese airline industry, Australia airline and world wide airline industry.


Section 2 Research Flow Chart


Figure 7 illustrates the research stages undertaken by for this work. Starting with needs analysis and closing the loop based on performance results.

Figure 7. The research stages

Experimental Hypothesis
Application of E-business Strategy could achieve competitive advantage for Airlines. (Research Question)


Design questionnaire and collect data
China ShenZhen Airlines (CSZA) provide some data including some on-line passenger list in Frequent Flier Programme (FPP); some On-line Customer Service Representatives list; some data about sales and promotion for this research.


For this research, an online survey was conducted. This survey includes 50 questions regarding the impacts if airline introduces the e-business process and strategy to improve passenger services and increase passenger loyalty. 500 passengers were chosen randomly as a sample. The questionnaire was sent to them by email in February and March 2003. 66 passengers response to this survey, the response rate is 13.2%. Some questions are as following:


1. Do you think Airline Website increase your satisfaction with airline?
A. Yes
B. No
2. Would you give up traditional booking if you have used Internet booking?
A. Yes
B. No
3. Web based chat room will increase your satisfaction with airline?
A. Yes
B. No
4. Web based FAQs will increase your satisfaction with airline?
A. Yes
B. No
5. E-mail newsletters will increase your satisfaction with airline?
A. Yes
B. No
6. Web based one-to-one services will increase your satisfaction with airline?
A. Yes
B. No
7. Web based ticket auction will increase your satisfaction with airline?
A. Yes
B. No
8. Personized Website will increase your satisfaction with airline?
A. Yes
B. No
9. Have you used the E ticketing option?
A. Yes
B. No
10. How do you think E-ticket?
A. Excellent
B. Good
C. Fair
D. Poor
E. Very Poor
11. How do you think E-check in?
A. Excellent
B. Good
C. Fair
D. Poor
E. Very Poor


Model Design

Model design includes:
1. System analysis and concept design (CASE tool: MS Visio 2000)
2. Design CCEB process (CASE tool: MS Visio 2000)
3. Detail design (Developing tools: Macromedia Dreamweaver 4.0; MS Visual Interdev 6.0; MS Visual Basic 6.0; MS SQL Server 2000; MS Excel 2000)
4. Analyse data and test hypothesis (Tools: MS SQL Server 2000; MS Excel 2000; SPSS 10)
5. Validate and simulate model

Because of constrains respect the length of this report, only two examples are given here. Example 1 " Design UGI " (Figure 8) and Example 2 "Design CCEB Process" (Figure 9).

Figure 8. Design User Graphic Interface

Figure 9. Design CCEB Process

Section 3 Findings


It was found that in order to provide an adequate answer to the research question "Can an airline increase market share and customer loyalty by achieve competitive advantage utilising e-business models?" One must fully understand the main features of E-commerce and their relevance to Airline competitive advantage.

Figure 10 identifies sixteen key features which need to be studied and relate them to business success. [18][19].

Figure 10. Features of E-commerce (F-Feature)

F1. Online/immediate/24-hour availability, directly connect buyers and sellers
A Web server is usually online 24 hours per day, and virtually immediately accessible (depending on line speed and network traffic, of course). This creates time independence and enables customer service to be decoupled from supplier availability. Such 24-hour availability is a strong facilitator of a global presence, overcoming time differences. As the customer is in the first instance interacting with an automated system, there is a set of service requests that can become 'self-service'


F2. Ubiquity
Global information networks (fixed and mobile, cable, satellite) promise to offer worldwide, large-scale and low-cost, access to electronic commerce.


F3. Global
It is often claimed that one of the largest changes brought about by the Internet is that it is global: companies get access to customers globally, customers get access to suppliers globally.


F4. Digitisation
The Internet and the communication and computer systems connected to it are all processing digital and digitised information. Digital information can be easily stored, transmitted, processed, mixed, transformed, in short manipulated in many ways, independent of its source or carrier.


F5. Multimedia

Closely related to digitisation is the aspect of multimedia, referring to the capability to deal with and deliver information in several ways: text, graphics, sounds, video, eventually tactile.


F6. Interactivity
As opposed to EDI, which is for application-to-application data exchange, the Internet offers person-to-person and person-to-application interactivity. Even if one side of the interaction is automated, through a Web-server program, the interaction possibilities are wide ranging and can be extremely varied and engaging.


F7. One-to-one
The Internet makes customer profiling fairly easy, by capturing and analysing customer characteristics. Technically, this can consist of storing some information about the customer on the customer's computer (e.g. a 'cookie'), which is retrieved when the customer returns to the site. This can be combined with more detailed information, partially solicited from the customer and partially collected by the merchant, e.g. the pattern of purchases. Many sites encourage potential customers to provide an e-mail address, personal data etc. Customer profiling technology can be complemented by 'intelligent agents' that assist in the sales process.


F8. Integration
Customer service is greatly enhanced by integrating the functionalities of the transaction parties on the basis of standardized information flows.


One-stop integration of functions-that is, integrating all the necessary functions for a transaction at a single point of access and with seamless flow of information between them, as illustrated by this example is, however, only one aspect of integration. Information integration is another opportunity to extract additional value by analysing data from various steps of the transaction or across transactions.


F9. Can be updated in real-time, therefore always up-to-date
F10. Reduce costs
F11. Increase productivity

Airline can gain significant productivity improvements by using business-to-business e-commerce to streamline and improve its supply chain processes. Airline can save time and money by purchasing supplies via the Web. Similarly, Airline can use e-commerce to communicate and transact with distributors and customers in a more cost-effective and timely manner than through traditional channels.


F12. Improve level of customer service
Airline can improve it's level of customer service by allowing customers to access "help" information, complete application forms, pay invoices, or change their account details via it's Web site, at their own convenience.


F13. Strengthen customer relationships
Airline can strengthen relationships with existing customers by allowing them to access - via it's Web site - previously inaccessible decision-support information, such as detailed research reports, product specifications and price comparisons.


F14. Enhance business intelligence
Airline can use its Web site to collect valuable intelligence about customer needs, buying habits and preferences. This intelligence can be a valuable input to the development of new, profit-enhancing processes, products and services. Similarly, Airline can use the Web to research new markets and to gather valuable intelligence about its competitors.


F15. Increase direct sales of products or services
The Web enables businesses to reach customers all over the world, 24-hours per day, 7-days per week. Airline can use the Web to create a "self-service" environment that allows Airline to offer lower prices and provide more detailed product information than that which Airline can offer in the real world.


F16. Generate advertising, sponsorship or brokerage revenue
Many "content" and "infomediary" sites generate revenue through advertising or sponsorship arrangements with other sites. Infomediary sites provide useful information and act as springboard to sponsoring Web sites. Infomediary sites offer earn brokerage fees on transactions that result from the information or service they provide.


Linkages between these features and airline competitive advantage


Airline industry is one of the most competitive industries within the economic environment. Within industry's boundaries actors have more or less recently and with significantly different patterns of action undertaken efforts to achieve an integration of the internet platform and its applications. In this section, we explore the effects of electronic commerce and its potential for competitive advantage for airline industry by using Michael Porter's seminal work on industry analysis as a framework (Figure 11).

Figure 11. Sources of Competitive Advantage [20]

Airlines do conform to those which Porter describes: Cost Leadership, Differentiation and Focus. The proposition is that airlines that can successfully work in one of these areas will be able to establish and sustain a competitive advantage.


Cost Leadership (F10, F11, F15, F16)

Airline can generate significant cost savings by sending tickets, newsletters, quotes, and other documents via Internet, rather than by post or facsimile. Airline can use Web site to publish - in a cost-effective way - public domain documents such as annual reports, product brochures, positions vacant, contact details and other important Airline information. Airline can save on the cost of running "bricks and mortar" outlets and can reach global markets without having to develop a physical global distribution network. Most importantly, Airline can save on customer service costs by enabling customers to serve themselves.
American Southwest Airlines CEO, Gary Kelly said the Web site is playing a major role in mitigating the rise in unit costs affected by high fuel prices. It's 10 times cheaper to deliver to customers through the online service than through a travel agent, Kelly said, and costs 5 times less than using Southwest's own reservation staff. The booking cost per passenger online is "well under $1," said Kelly, and is scaling down even further. He said Internet use by passengers was helping the carrier keep fares at low discount levels [21].


Massive investment in both business-to-business (B2B) and business-to-customer (B2C) information systems is expected to translate into important cost savings in procurement, sales, billing and other support activities. The airline's fully automatic ordering system, for example, should reduce order processing costs by 90%, according to Chairman/CEO Juergen Weber of Lufthansa Aviation Group [22].


Differentiation (F1, F2, F3, F4, F5, F6, F8, F9)

E-ticketing, the issue of a booking code at the conclusion online transition that replaces the traditional airline ticket. E-ticketing seems to be a 'win-win' solution for the airline business. It offers the airline the chance to make considerable savings in both trade terms as well as in invoicing and internal accountancy procedures. Moreover, it helps to fight the downward profit spiral that has affected the industry for years. Secondly, it is very attractive to customers, who may benefit from a service offer both technologically advanced and of high intrinsic value.


Focus (F7, F12, F13, F14)-Case Study FedEx

The airline industry gives us a perfect example of successful Focus strategies - that is the so-called "Integrated Operators" of the air freight business. FedEx, the integrated cargo carrier, was the pioneer. Having developed a very efficient and fully computerised system for tracking individual parcels anywhere on its network it took the next logical step. In 1994, through its website, it allowed its customers to book and pay for its services without restriction via the Internet [23].
The e-Commerce infrastructure developed by airlines allows collection and central storage of sales and marketing data. Airlines use this data to drive decision support tools for planning and marketing.


Model Performance Assessment


The developed model comprises of: Airline-Passenger Interaction Subsystem; Data Warehouse Subsystem; CCEB Operation Subsystem; Assessment and Forecast Subsystem.


The function of Assessment and Forecast Subsystem is to assess the performance of CCEB system; it was done by using MS Visual Basic 6.0, and MS Excel 2000. The performance indicators are:


Forecast function provides five years forecast for these indicators.

Section 4 Other Considerations

Some issues of e-commence

Internet commerce offers a range of advantages that collectively have been shown to be important enough to attract massive interest on the part of businesses, both as users of the technology and as providers of technology and solutions. Although, e-commerce is growing very fast, it was witnessed dot-com failure by the world in 2000. "Why did the dot.com e-grocers in the USA fail? The electronic copy of a supermarket did not work!" [24]. On one hand, New Economy cannot be built overnight - there are some (a few winners); On the other hand, it is segregated from the rest of the enterprise.


The potential of electronic commerce has been spotted by many and is one of the key factors behind the so-called "Internet Bubble" currently being exhibited within global stock markets.


There is still hesitation among many companies about committing any major effort to electronic commerce, let along about fundamentally rethinking their business strategy in line with the new opportunities. The reasons for this hesitation are summarized below by Timmers [18].


Process for formulating e-business strategy

According to Porter's overall approach, Harmon extend and give a new sense of dynamics. Figure 12 illustrates an e-business strategy process that is conceptualised as a continuos cycle. In effect, the strategy team never completes its task; it simply works to develop a temporary understanding, makes commitments, and then evaluates the results as it cycles through a subsequent cycle in order to arrive at a new understanding [25].


Figure 12. A cyclical process for formulating e-business strategy [25]

 

Conclusion

This research revealed that the Internet contributes more to the core of business process and transformation than other comparable technologies such as the telephone. Whilst the source of competitive advantage is changing - with information becoming a key resource and electronic commerce a key facilitator.


The success of airline applications and the communications, data, and control afforded by the Internet are encouraging. This is also supported by The Wall Street Journal, it summarized the situation: "Eventually, many suppliers are likely to use the Web's fine-tuned interactivity to perfect yield management strategies similar to the way airline tickets are priced today, slashing prices to avoid surplus inventory or to quickly respond to changes in customer preferences." [26]


The researchers have found that the development of the information economy is as much about strategy as it is about technology. The Internet is not just another medium or a distribution channel to reach customers. It is an important medium to find new customers and continue relationships with current customers. It is almost impossible for business and consumers to ignore this new technology. The users of Internet are not just so-called "techi's". They are people from all age group in many parts of the world.


This work demonstrated that integrating key operations such as technologies, marketing, and system solutions can assist the airline industry to achieve competitive advantages.

 

References

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Hypertext References

HREF1
http://www.rmit.edu.au/browse?SIMID=52ztetzj05gxz
HREF2
http://www.rmit.edu.au/browse?SIMID=7zfvsildns0n
HREF3
http://www.rmit.edu.au/
HREF4
http://silmaril.smeal.psu.edu/interfaces/eiz/sabre4_p.html
HREF5
http://www.c-i-a.com/pr032102.htm
HREF6
http://www.iconocast.com/issue/2000010603.html
HREF7
http://www.trendsreport.net/customers/2.html
HREF8
http://www.caac.cn.net/ztbd/e-business_strategy.htm
HREF9
http://www.itpapers.com/techguide/crmsolu.pdf
 

Copyright

Hongwei Jiang, © 2003. The authors assign to Southern Cross University and other educational and non-profit institutions a non-exclusive licence to use this document for personal use and in courses of instruction provided that the article is used in full and this copyright statement is reproduced. The authors also grant a non-exclusive licence to Southern Cross University to publish this document in full on the World Wide Web and on CD-ROM and in printed form with the conference papers and for the document to be published on mirrors on the World Wide Web.