Harvard Case - Sky Airline: Business Model Transformation and Future Challenges
"Sky Airline: Business Model Transformation and Future Challenges" Harvard business case study is written by Jorge Tarzijan, Matko Koljatic, Joan E. Ricart. It deals with the challenges in the field of Strategy. The case study is 27 page(s) long and it was first published on : Jul 31, 2019
At Fern Fort University, we recommend Sky Airline adopt a multi-pronged strategy focused on digital transformation, sustainable growth, and strategic partnerships to solidify its position as a leading low-cost carrier in South America. This strategy will involve leveraging technology, optimizing operations, expanding into new markets, and fostering a culture of innovation.
2. Background
Sky Airline is a Chilean low-cost carrier that has experienced rapid growth since its founding in 2001. The company has successfully implemented a low-cost business model, focusing on efficiency and cost optimization. However, Sky Airline faces growing competition from established airlines and new entrants, as well as challenges related to economic volatility, regulatory changes, and environmental sustainability.
The case study centers on the leadership team of Sky Airline, who are grappling with the need to adapt their business model to meet these challenges and ensure continued growth. They are considering various options, including expanding into new markets, investing in technology, and developing a more robust corporate social responsibility strategy.
3. Analysis of the Case Study
Industry Analysis:
- Porter's Five Forces: The airline industry is characterized by high competition, low barriers to entry, and significant bargaining power of suppliers (aircraft manufacturers and fuel providers). The threat of substitutes is moderate, with alternative modes of transportation available.
- Competitive Landscape: Sky Airline faces competition from established airlines like LATAM and Copa Airlines, as well as low-cost carriers like Viva Air and JetSMART.
- Emerging Markets: The South American region presents significant growth potential, with rising middle-class populations and increasing demand for air travel.
SWOT Analysis:
- Strengths: Strong brand recognition, efficient low-cost model, robust network in Chile, experienced management team.
- Weaknesses: Limited international presence, dependence on fuel prices, potential for operational inefficiencies.
- Opportunities: Expanding into new markets, leveraging technology for cost optimization, developing a sustainable business model.
- Threats: Increased competition, economic instability, regulatory changes, environmental concerns.
Value Chain Analysis:
Sky Airline's value chain focuses on cost optimization at each stage, including:
- Inbound Logistics: Efficient aircraft maintenance and fuel procurement.
- Operations: Streamlined flight operations and minimal ground handling time.
- Outbound Logistics: Direct flights and minimal baggage handling.
- Marketing and Sales: Online booking and low-cost distribution channels.
- Customer Service: Basic service offerings and limited onboard amenities.
Business Model Innovation:
Sky Airline's success has been driven by its innovative low-cost business model. However, the company needs to adapt to the changing industry landscape and continue to innovate. This includes:
- Digital Transformation: Implementing advanced technology for booking, check-in, and customer service to enhance efficiency and customer experience.
- Data Analytics: Utilizing data to optimize pricing, route planning, and resource allocation.
- Sustainable Practices: Investing in fuel-efficient aircraft, reducing carbon emissions, and promoting eco-friendly practices.
4. Recommendations
1. Digital Transformation Strategy:
- Implementation: Invest in a comprehensive digital transformation strategy, focusing on:
- Online Booking Platform: Enhance the website and mobile app for seamless booking, payment, and management of travel itineraries.
- Personalized Customer Experience: Leverage data analytics to offer personalized recommendations, promotions, and services.
- Automated Processes: Implement automation for check-in, baggage handling, and customer service to improve efficiency and reduce costs.
- AI-powered Chatbots: Integrate AI-powered chatbots for 24/7 customer support and quick resolution of queries.
2. Sustainable Growth Strategy:
- Implementation: Adopt a sustainable business model by:
- Fuel Efficiency: Invest in fuel-efficient aircraft and optimize flight routes to minimize fuel consumption.
- Carbon Offset Programs: Partner with carbon offset organizations to neutralize emissions and promote environmental responsibility.
- Renewable Energy Sources: Explore the use of renewable energy sources at airports and other facilities.
- Sustainable Procurement: Prioritize suppliers who adhere to environmental and social responsibility standards.
3. Strategic Partnerships:
- Implementation: Develop strategic partnerships to expand market reach and enhance service offerings:
- International Expansion: Partner with airlines in other South American countries to offer seamless connections and expand international routes.
- Technology Providers: Collaborate with technology companies to develop innovative solutions for booking, customer service, and operations.
- Tourism Companies: Partner with travel agencies and tour operators to offer bundled packages and attract more customers.
5. Basis of Recommendations
Core Competencies and Consistency with Mission: The recommendations align with Sky Airline's core competencies in cost efficiency and operational excellence. They also support the company's mission to provide affordable air travel to a wider audience.
External Customers and Internal Clients: The recommendations focus on enhancing the customer experience, improving operational efficiency, and creating a more sustainable business model, which benefits both external customers and internal employees.
Competitors: The recommendations aim to differentiate Sky Airline from competitors by leveraging technology, promoting sustainability, and expanding into new markets.
Attractiveness: The recommendations are expected to generate positive returns on investment through increased revenue, reduced costs, and enhanced brand value.
Assumptions: The recommendations are based on the assumption that the South American air travel market will continue to grow, technology will continue to advance, and consumers will increasingly prioritize sustainability.
6. Conclusion
By embracing digital transformation, prioritizing sustainable practices, and forging strategic partnerships, Sky Airline can solidify its position as a leading low-cost carrier in South America. This multi-pronged strategy will enable the company to adapt to the changing industry landscape, attract new customers, and ensure continued growth in the long term.
7. Discussion
Alternatives:
- Mergers and Acquisitions: Sky Airline could consider acquiring smaller airlines or merging with a larger carrier to expand its network and market share. However, this strategy carries significant risks and may not be feasible in the current competitive landscape.
- Focus on Domestic Market: Sky Airline could choose to focus solely on the Chilean market, aiming to become the dominant low-cost carrier in the country. However, this strategy would limit growth potential and expose the company to greater risks from economic fluctuations.
Risks:
- Technological Disruption: Rapid technological advancements could render current investments obsolete.
- Regulatory Changes: Government regulations could impact pricing, operations, and environmental sustainability.
- Economic Volatility: Economic instability in South America could negatively impact demand for air travel.
Key Assumptions:
- The South American air travel market will continue to grow.
- Technology will continue to advance and provide opportunities for cost optimization and customer experience enhancement.
- Consumers will increasingly prioritize sustainability and eco-friendly practices.
8. Next Steps
Timeline:
- Year 1: Implement the digital transformation strategy, including the development of a new online booking platform and the integration of AI-powered chatbots.
- Year 2: Launch sustainable initiatives, such as fuel efficiency programs and carbon offset partnerships.
- Year 3: Explore strategic partnerships for international expansion and technology development.
Key Milestones:
- Achieve a 10% increase in online bookings within one year.
- Reduce carbon emissions by 5% within two years.
- Secure partnerships with at least two international airlines within three years.
By taking these steps, Sky Airline can effectively navigate the challenges of the airline industry and achieve sustainable growth in the years to come.
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Case Description
Sky Airline (Sky or the Company) had a traditional Full Service Carrier (FSC) business model (BM), under which the Company was struggling financially, mainly because it was competing with a more efficient airline: LATAM, the leader in the aviation industry in South America. To differentiate from competition and take advantage of value migration in the industry, Sky transformed its FSC model into a low cost carrier model (LCC). The transformation has proven to be successful. Financial results improved dramatically and the company´s market share in domestic operations is approaching 30%. However, in 2017 a new competitor, Jet Smart, started operations in Chile and has announced plans to expand operations to other countries in the southern cone of Latin America, the same markets in which Sky operates. In December 2017, Jet Smart announced the purchase of 76 new Airbus 320 family in a deal valued at US$8.4 billion. Airbus will deliver Jet Smart?s order between 2018 and 2026. The threat to Sky is credible given that Indigo Partners owns Jet Smart (Indigo is an investment fund specialized in operating ultra-low cost carriers ULCC) such as Frontier Airlines in the US, Volaris in Mexico, and Wizz Air in Eastern Europe). At almost the same time, the leading South American carrier LATAM announced it would initiate formal studies in April 2018 about the feasibility of starting up a new LCC. The market dynamics of these threats should bring further price pressures on the aviation market in the southern cone of Latin America. Thus, after successfully completing a transformation of its business model (1Q2017), the company faces additional challenges that may involve a further transformation of its BM.
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