STRATEGY DOJO II: Strategy Design in Competitive Environments (cont.)

Objective: The goal of this application exercise is to design a business strategy for a company under stress as the result of intensive competition. Apply critical thinking and balanced judgment regarding the best way to design an efficient and effective business model in a given historical context within a particular industry.

Mini-case: Debornair and the European Airline Industry

1. Industry Analysis: The European Airline Industry in the 1990s

-- Extracts From the EU report European Experience in Air Transportation Liberalization:

Prior to the process which led to the establishment within the EU of the single market in mid-1990s, the air transport market across the whole of Europe was a collection of national markets. Domestic air services within each country were governed by national rules which varied enormously in the degree to which competition was permitted or promoted. International air transport in Europe was governed by the bilateral air services agreements between each pair of countries, frequently allowing only one airline from each country to operate services, often on a limited number of specified routes. International fares were generally agreed between airlines under the auspices of IATA and both international and domestic fares were usually subject to government regulation.

Real progress towards full liberalization was made by the EUs institutional framework, which generated an impetus towards economic integration. A process of progressive liberalization swept away the pre-existing institutional barriers to entry and competition and created a genuinely single market within the EU. Regulations introduced in 1993 established common rules for the allocation of slots at congested EU airports aimed at facilitating competition in particular through encouraging and giving a degree of priority to new entrants in the allocation of available slots. The market for ground-handling services at EU airports was progressively opened to greater competition in the expectation that this would lead to reduced operating costs for airlines and improved quality of handling services.

In 1994, the European Union introduced a comprehensive package of airline liberalization measures. Under the package, carriers were given full freedom to set fares. Any company was allowed to start an airline provided that it had majority European ownership, adequate financial backing, and the ability to meet safety requirements. The package permitted any European airline to fly any route between two EU countries and, starting in 1997, any intra-country route between two European cities. Deregulation brought a new wave of competitors. One hundred thirty-one (131) new carriers entered the European market between 1994 and 1998 despite a shortage of landing slots at primary airports and a crowded air traffic control system. The wave of entrants included a set of low-cost, low-fare carriers. These carriers included both entrepreneurial start-ups and spin-offs of established airlines such as British Airways.

Ten years after the beginning of the decentralization process in the EU region, a study found that 64% of intra-EU routes were still served by just one airline, 30% by two airlines, and 6% by three or more carriers. Of the 131 entrants in 1994-98, 57 were still flying at the end of 1999, but less than 13 of them were still operational by 2004.

2. Business Analysis: Debonair

-- From Wikipedia:

Debonair (1996-99) is a defunct British airline which operated mainly from London Luton Airport offering flights to and from Spain, France, Germany and Italy. It ceased operations in October 1999 due to financial difficulties. Debonair was founded in 1996 by Franco Mancassola and on its first day of operations offered all passengers free flights. From the beginning, Debonair tried to be a more upmarket version of the traditional budget airlines and in 1998 introduced ABC (short for "Affordable Business Class") on some of its routes.

It floated shares on the Easdaq stock exchange in July 1997 and raised $40M. The Debonair business concept of offering budget airline travel, whilst keeping the frills (free drinks and snacks) associated with national carriers, was not a financial success. On 1 October 1999 the airline ceased operations due to financial problems. Debonair operated a fleet of used BAe 146 aircraft, later supplemented by three Boeing 737-300s and a leased BAC One-Eleven.

-- From BBC News, Oct 1, 1999:

Debonair's dream brought down to earth

Debonair's aim was always to be "the best little airline in the world". But with the receiver called in and its planes grounded, that dream appears to have been shattered by the harsh realities of an increasingly cut-throat budget airlines market. Debonair was created in 1996 to what seems to be a blueprint for the budget airlines born out of the market deregulation in the early 1990s. It was led by a serial entrepreneur. If Virgin has Richard Branson and easyJet has Stelios Haji-Ioannou, Debonair has no less than Franco Mancassola. Franco is the archetype of the self-made man, an Italian who came to England to find his fortune, started out sweeping floors and ended up as a big player in the US Continental Airlines.

After leaving Continental, he set up his own airline, Discovery Airways, in Hawaii. He sold Discovery in 1990, and then began looking around for the capital to set up in Europe. He put in 500,000 of his own money, and raised a further 14.5m with the help of long-time associate Anthony Silverman. Franco became the face of the airline, notably through Debonair's "Franco Says" advertising campaign. With his latin charm, appealing manner and penchant for racing cars, Franco matched his Virgin and easyJet counterparts in the charisma stakes.

When British Airways launched Go in 1998, Franco Mancassola tried, and failed, to get a European Commission ruling that it was operating uncompetitively - aware of the threat that such a big player offered in such a small market. Debonair was one of the first companies to float on the pan-European Easdaq stock market, but forecasts that it would be making 16m a year by 1999 failed to materialise and its share price plummeted.

In the last year, Debonair has seemed to be caught between two stools. Where other budget airlines such as easyJet have gone all out for the no-frills, low-cost angle, Debonair has tried to be a budget airline that offers non-budget extras. A bid to attract business travellers by offering Business Class perks backfired as it failed to attract enough corporate clients while deflecting it from the budget market and giving it higher costs than its rival.

The future of Debonair now depends on it finding a buyer - probably one of the larger airlines that has been its competitor. Whether "the best little airline in the world" really was the best, it was certainly little - and appears to have found out the hard way that in some businesses, size really does matter.

-- From The Irish Times, Oct. 2, 1999

Debonair crashes in airline price war

Low-frills Debonair Airways grounded all its planes yesterday after a court ordered administrators to take charge of the loss-making British airline. A day after Debonair's shares were suspended on the European Easdaq stock exchange, passengers were given the bad news when they arrived at Luton airport, the airline's main base north of London.

"As a result of its financial position the company has suspended all scheduled flight services," Debonair's statement said. Debonair, which has 14 aircraft, has failed to turn a profit since it began operations in 1996. But its chairman, Mr Franco Mancassola, had been upbeat about prospects after losses for last year declined to 13 million sterling from 16.5 million, and turnover rose 39 per cent to 43.2 million.

Industry analysts said it fell victim to the cut-throat battle between a growing number of budget airlines competing for European business. On Thursday, before the High Court administration order, industry sources said Debonair was looking for a "white knight" to rescue it. Germany's Lufthansa and Swissair, which already have operating agreements with Debonair, were seen as possible candidates.

Ryanair said yesterday it had no interest in buying Debonair and claimed the loss-making airline had used a flawed business model. Essentially they're flying expensive aircraft, smaller aircraft, flying through expensive airports," said Ryanair's commercial director, Mr Michael Cawley. "There was never a question but that they'd go out of business."

Mr Cawley claimed Ryanair would carry more passengers in three weeks than Debonair in a year. "They're an entirely different operation. They've been doing `low fares' business traffic - that's a contradiction in terms."

Debonair was the second budget European airline to fail in quick succession. On Thursday AB airlines, which went into administration on July 30th, said its operations had been suspended. Analysts said Debonair failed to keep its costs low enough. Unlike most budget airlines, it operates a frequent flier programme and provides business class. It paid among the best salaries in the sector. But two airlines - Easyjet and Virgin - quickly blamed Debonair's demise on British Airways, the giant which has its own no-frills airline called Go. In a statement yesterday, Easyjet said BA had "blood on its hands" because it was subsidising Go until all the other players were forced out of business. The Virgin spokesman said Debonair's crisis had confirmed Mr Branson's "worst fears" about Go. "There's nothing wrong with competition as long as it's fair and doesn't involve larger competitors using their muscle unfairly," the spokesman said. There was no immediate reaction from BA.

Debonair passengers arriving at Luton were told yesterday to contact their travel agents to seek alternative flights. If they bought their tickets direct and were suffering financial loss, the passengers were told to write to the administrators. "The administrators are unable to comment at present on the likelihood of passengers' claims being reimbursed," a statement said.

Assignment Questions: For the sake of this exercise, lets assume we are in 1999 and have been hired by Franco Franco Mancassola to help him avoid bankruptcy. What would be your advice to him? Is there any way Debonair can survive in this highly competitive industry?