Strategy to Increase the States Role in the Business Process Management on the Airport Service Market

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Abstract

The article identifies the causes and factors that prove the urgent need to increase the state’s role in developing and implementing strategies to introduce innovative technologies in the management of Russian airports. Solution of the problem of the international market entry and maintain there the required level of competitiveness of Russian airlines of various sizes requires the selection of optimal forms and mechanisms targeted on improving adaptability and competitiveness in the international systems of constraints and dynamics of indicators of demand for the services of the air carriers. This in the turn requires the substantiation of the choice of strategic directions of development of companies operating in the transport market, the development of tools that determine the characteristics of the relationship between marketing strategy and conditions for its implementation. In this connection, the authors examined the structure of the innovation cycle management and functions assigned to the recommended to the creation state airport management company. The article also refined the forms of airlines consolidation depending on the subject of cooperation, systematized agreements benefits for the joint operation of airlines for the passenger and the carrier. The authors consider methods to improve the efficiency of Russian air transportation market, including by reducing tariffs and the introduction of the economic process of airline low-cost carriers business models.

Keywords

Prorate agreements; Interline agreement; Code-sharing

Introduction

Analysing the airport network density indicators (number of airport complexes/million square kilometres of the country) in the various countries, it can be concluded that the Russian figure is among the lowest in the world (Figure 1). Thus, the degree of security of the Russian population by the airport complexes (the number of airport complexes/mln. People) today cannot be considered satisfactory.

Taking into account population density, environmental conditions and the condition of the road network in the RF the value of the indicator for the population provision with the airport complexes (the number of airport complexes/mln. People) (Figure 2) also cannot be considered satisfactory.

Despite the taken by the State government financial support measures, implemented in 2014 (Figure 2) a comparative analysis of the air transport of the Russian Federation and neighbouring countries (regions) shows that the air transport system in Russia has been steadily transformed into peripheral sector of the global airport system [1].

Comparative analysis of the indicators of the state air transport systems of the Russian Federation (Table 1) and prognostic estimates (until 2030) of the dynamics of indicators of cargo and passenger traffic, carried by Russian airlines convincingly demonstrate the urgent need to enhance the role of the state in the development and implementation of the strategy for the implementation of innovative technologies in the management process of the Russian airports [1].

Method

The national transport market of each country in the current and future conditions, in fact, is a segment of the international market. At the international level, today there is such Air Transport Association as [2]:

a. ICAO (ICAO - International Civil Aviation Organization - has developed and implements the Annexes to the Chicago Convention on International Civil Aviation);

b. IATA - International Air Transport Association - in 2003 created a program of the International Operational Safety Audit IOSA, which has become a common, internationally recognized system of airline safety audit.

c. ECAC - European Civil Aviation Conference - facilitates the safe and consistent development of civil aviation in Europe.

Solution of the international market entry problem and maintain there the required level of competitiveness of Russian airlines of various sizes requires the selection of optimal forms and mechanisms of securing targeted on improving adaptability and competitiveness in the international systems of constraints and dynamics of indicators of demand for the services of air carriers [1].

This in the turn requires the substantiation of the choice of strategic directions of development of companies operating in the transport market, the development of tools that determine the characteristics of the relationship between marketing strategy and conditions for its implementation.

Geopolitical interests of modernizing the Russian economy, identified in the regulations, in the orientation of the strategic development of the national economy, in particular, the strategy “Innovative Russia-2020” determined that an essential condition for economic growth is the development of air transport one of the most advanced areas of science, engineering and commercial activities.

Targets of the state strategy of creating scientific and technological potential in the field of aviation science are presented in Table 2 [3].

The current system of today state regulation rendered by civil aviation services in Russia is presented in Figure 3.

The aim of the structure design strategies to improve the state’s role in the management of business processes in the market of airport services is to create a public airport management company (PAMC) in order to meet the interests of airport companies and balancing them with the interests of the environment. This approach is positive and synergistic [4].

By formulating and implementing specific strategies we should understand the rules of the process design in the materialization of some system description (concept, the concept of the project), in which PAMC can be created in reality. Strategy of management structure formation is the rules for the head’s plan implementation in various states of its formalization. Accounting for the impact of changes in the environment in modern conditions involves understanding the nature of the PAMC functions, as a reflection of the environment in the process of interaction with the PAMC [3].

At the same time the effective control by the state PAMC of the each airport company combines market and administrative coordination.

The competitive level of services quality provided by the PAMC, will be achieved by improving the efficiency of business processes, upgrading the provided services on the basis of the norms of the use value, which will ensure their competitive properties in the interaction of elements of internal and external environment, formed on the basis of a strategy to improve the quality of services [5].

The professionalism of the staff and the cost savings will be provided by accelerating the development, through the introduction of innovative technologies and increasing the competence within the technology transfer with PAMC technology platform, the establishment of which should be provided during the organization of innovative processes management of provided services development and modernization [6].

PAMC structure organizes by grouping operators in accordance with the served markets. Operators are endowed with all the necessary features for this service, including the right to carry out procurement, production and marketing activities. This dispersal of functions minimizes the dependence of the operators in the industrial and commercial field from the airport management company - the management structure, so each of them can act as an economic entity [7].

However, between the management structure and the operators a certain relationship binding the organization together must exist. A key design feature is the dynamic balance maintained by the system of the interaction of operators with the environment control. The tools of control actions include: instructions, incentive innovation systems, standards of the financial management organization, system of financial and economic target specifications and limitations.

Adaptability of the PAMC manifests itself through the implementation of effective innovation. It is necessary to consider the role and influence on the PAMC adaptability various categories of administrative staff through their participation in the implementation of innovations.

The structure of the innovation cycle management structure involves three roles:

a. Innovator (author of innovative ideas);

b. Consumers (users of the results of innovation);

c. Innovation entities, implementing the process of turning innovative idea into the result that match the respective needs.

Consequently, the following functions of the PAMC management structure are:

a. Innovation and investment functions;

b. Control functions, keeping in mind control of organic growth projects made by the operator (control to the compliance with the budget, to the approved the criteria of the projects effectiveness, etc.).

Last (control) function can also be transformed into innovative - investment (while monitoring the results of innovation), if funding for projects of organic growth will be carried out from a single investment fund [7].

The current balance of today interests of airport services market participants and the state is presented in Table 3.

One of the arguments in favour of the centralized state control of the airport company is based on the fact that the creation of enterprise-wide strategic bonuses system and such a fund is justified in cases where the only control of the projects results of organic growth is insufficient and stimulation of innovation leaders activity on the basis of objectification of their economic responsibility should be implemented.

The ability of a state management structure to make an effective control and at the same time take into account the specific characteristics of operators is implemented on the basis of monitoring of their performance. Each unit Of PAMC should function as a single integrated system, the results of its function must be measured by a set of quantitative and qualitative criteria.

Decisions on the development and implementation of innovative projects (new strategic innovation projects, etc.) are made by the PAMC manager structure together with the management of airport operators on the basis of a company-wide system of strategic bonuses and transfer of innovation technology from PAMC platform [8].

Results

Projections for 2030 of the dynamics of indicators of cargo and passenger traffic performed by Russian airlines (Figure 4) clearly demonstrate the urgent need to restructure the network of airports in Russia based on the main airports restructure into large hubs using hub technology [9].

An example of such hub solutions is large European and Asian cities have that arisen around the modern, technologically equipped, airports (hubs) [10]. They are also related to the transport infrastructure and have the ability to successfully compete with the railway transport when transportation is over long and medium distances. The size of the country, the presence of regions deprived of land transport, and regions with underdeveloped land transport communications actualize the need for new technologies aimed at the interaction of consumers with airlines [11].

Today, the services provided by the members of the airport network are not limited to transportation of passengers and cargo. The main airport air transportation ground services are shown in Table 4.

In order to configure the management system in the right direction it is advisable to carry out the differentiation of “consumers” and “providers” of their capabilities and needs on favourable and unfavourable. In addition, the concept of “profitability” for the subjects must conform, ultimately, integration.

The process of the overall strategic positioning within the economic system is a multi-step process; with each step is the perception and refraction of the goals that are elements of a higher step [12].

State should act as a representative of the public interest. Its interests are defined as the functioning of the higher step. But so a lower tier saw the realization of its objectives as sub-goals of higher tier, a system of motivation is needed. The motivation should regulate the activities of “suppliers” in the process of inter-element interaction at the appropriate tier.

Motivation, expressed as a specific value of consumer behaviour alternatives has to be formed by the subjects of coordination so as to orient the activity of “provider” to “consumer”. Thus, the behavior rules serve as the setting mechanism of business relations in the interests of the negotiation mode for basic communication “provider” - “consumer” and are aimed at regulating the activities of the structural unit as a “consumer”.

The subject of coordination (“provider”) is not aimed at the restructuring (adaptation) of the structure of the economy, is not useful for the system, in terms of maintaining a normal level of management, and does not generate new results, so the provider must seek internal reserves for its development [13].

In general, the management system is affected by a large number of constantly changing factors. In today’s world there are huge in scale and long-term effects changes that define the conditions of operation of the business, industry and enterprise management systems, industry. If the basic factors surrounding businesses and industries change, the change should take place both within the company and in the management of enterprises.

Analysis of international experience shows that an effective method of mutually beneficial cooperation between enterprises of all sizes of business of any industry sector (including airlines and airport complexes) is the formation of alliances, cluster systems and other forms of cooperation with each other, providing the increase in short-term and long-term sustainability in the cluster or an alliance of individual companies.

Soft forms imply joint activity while retaining the founders of legal and economic independence (for example, in the form of a consortium). Severe forms (loss of legal and economic independence of the individual companies) are most common when combining air carriers at the national level.

Forms of airlines consolidation are different; we propose to allocate several separate groups, depending on the subject of cooperation. The first group of agreements between airlines may be called an agreement on joint operation of airways. Such agreements are the most common form of co-operation between domestic and foreign airlines, whose main aim is to smooth relations between competing companies, obtaining a wider market entry.

The following Table 5 is compiled by us classification of existing forms of airlines cooperation with each other that will further allow taking into account the market situation, to form a more effective interaction. Classification features defined by us is a form of consolidation that allows separating soft and hard forms.

Another group of agreements between the airlines has another object of interaction - traffic sales. These agreements make it possible to expand the agency network, these include interline agreements and an agreement on a general agent. There are another group of agreements between the airlines - these agreements are on joint participation in the programs.

Within the framework of code share and interline between airlines there are prorate agreements for special rates on all routes, may also be a program for regular customers.

In Table 5 we systematized benefits of agreements on joint operation of airlines for the carrier and the passenger.

Hotel complexes can be airline partners. Mutually beneficial partnership of hotels and airlines is popular and frequent in many Western countries. Specially organized programs can encourage passengers’ frequent fly on certain airline flights, as well as the tourists, who are regular guests in the hotel [3,14].

In Russia, such programs are rarely used. One of the first projects was the cooperation of the four-star hotel “Ambassador” (St. Petersburg) and “UTair” airlines. Such cooperation in 2012 under the program «S7 Priority” concluded between airline “Siberia” and hotel chain HELIOPARK Hotels and Resorts [15].

The program allows airline passengers to earn points when staying in hotels network and use them in the future as bonuses.

Thus, one of the ways of increasing the efficiency of the Russian air transport market may be an attempt to smooth out the stiff competition through the cooperation of consumers to the airlines.

The process is carried out by the contract design. Organizing the project is the core, connecting by long exchanges and cooperation methods of adaptation with the interaction subjects. Methods for adaptation, including the rules of coordination of conflicting interests can detect and use a “corridor” of possible changes, leaving the agreed collaboration, so the changes could make not only the participants of the convention, as well as other subjects of the medium.

Analysis of the interaction between air carriers at national level implies:

1. Analysis of the administrative, economic and social relations with the elements of the environment that affect the sustainability of airports.

2. Analysis of the coordination system of information flows in the inter-element interaction and interests of the subjects of interaction as system forming factor. Under the interest we consider the subject ratio to the resource, the more the increment of the objective subject function in possession or using resources; the greater the interest is to it.

Meeting the needs of users (clients) will be achieved through the management of innovation processes - efficiency and technological standards based on the category of the use-value, which is determined according to the level of satisfaction of the needs with rational price / performance ratio and offer additional services. All of this is carried out within a pricing strategy that is being developed centrally and accelerate customer information (advertising).

An important trend in increasing profitability as the network airlines and low-cost airlines are now: the “splitting” of basic services - passenger transport by extracting from it separately chargeable aviation services (registration, reservations the particular place and etc.), inclusion in the sale additional non-aviation services, such as services related basic services; greater emphasis on pre-emptive use of its websites as channels of direct distribution of its services. At the same time, airlines are not yet ready to give up the distribution through the agency network, sales of air transport services in the world still take up 50% of total sales [16].

The research on the published indicators of air carriers show that the proportion of low-cost carriers around the world in 2014 increased by 26% by the total number of seats on all flights. Low cost carriers occupy a market niche that they created themselves by including new clients that had not used the services of air carriers previously due to the high cost of tariffs into the passenger turnover. With a set of all the activities aimed at reducing the costs for one passenger, low-cost airlines are able to achieve much lower costs than traditional airlines, and the difference can amount to more than 50%.

Table 6 shows the indicators of low-cost carriers cost items as a percentage of the cost of similar items indicators of traditional airlines, which indicators are taken as 100% (Table is drawn up based on the analysis of the report data published by world airlines) [5,12,15,17].

The choice of a business model has its disadvantages. Low fares of low-cost airlines imply the absence of service classes and the services of seat selection, paid services of catering and luggage transportation, hand luggage is limited, no customer loyalty programmes. Among the inherent parameters of a LCC company is high punctuality of transportation, new fleet, direct flights to regional airports.

High safety standards are an essential condition of LCC-companies operation and the ability to maintain them at a high level is ensured by the non-aviation income of these companies. Vueling, for example, pays a lot of attention non-aviation income and new technologies, in May 2014 it introduced an option to purchase and use flight tickets via mobile Internet technologies. As a result, in May, non-aviation revenues of Vueling from the introduction of these technologies increased by 142%, and in July, with the introduction of an iPhone application – by 404%.

Thus, it is necessary to develop a semantic model of airport business with a glance of its specialization and to determine to whom, how and at what rates will be provided the airport services to potential users.

Discussion

Tariff reductions and the introduction of low-cost business models in the airlines business process. For example, such major European low-cost airlines as Ryanair and EasyJet allow air transport services market participants to expand its customer base and market share. At the same time new customers and new markets increase the level of competitiveness and efficiency of economic activities of the airlines.

As a rule, the state provides air traffic control at the airport and in the terminal area, as well as security functions, ensuring of which becomes the most urgent task at reduction of the cost transportation by low-budget airlines.

When LLC companies enter the aviation market, the issue of safety in air transport has a higher degree of relevance and its solution is monitored at the state level. Its relevance only increases due to the increased number of passenger traffic every year. The activities of airlines for passenger security organization is regulated by a number of legal acts of the Russian Federation, such as: public safety program of civil aircraft, transport strategy for the period up to 2030 and other [2].

The complexity of market penetration by the air carriers, which provide low-cost services, must not escape our attention. The main difficulty is the opposition of traditional airlines. In order to keep their own air services market, traditional airlines use one or more of the following strategies listed below:

1. Opposition to the potential entry of low cost companies on the market via a dramatic reduction of prices together with the increase in productivity and/or frequent flyer programmes, this often leads to a price fight over the passenger.

2. Acquisition of low-cost companies (for example, in 2000 Air France bought Cityjet).

3. Creation of an independent low-cost company (the examples above, GO, Buzz, Germanwings, Centralwings, Clickair and Snowflake).

4. Creation of a subsidiary low-cost company within the framework of the traditional airline itself (for example, BMI and Bmibaby), which requires certain differences between the products (services) of the main and subsidiary companies.

5. Switching to more profitable markets, which have a network (transit, transfer) effect (for example, Swiss stopped its operation for several flights in the Geneva airport, when the low-budget EasyJet became the dominant carrier in that airport).

6. Radical transformation of traditional companies into low-cost air carriers (for example, Aer Lingus, Flybe, Ryanair).

When these opposition factors are combined with the factors dictated by a crisis in the country, a probability of bankruptcy of lowcost air carriers increases.

Sterling Airways, the Danish low-cost airline, and Sky Express, Russian low-cost air carrier, can serve as an example of the situation when traditional airlines oust out low-cost ones.

Thus, in 2008 the Danish low-cost airline Sterling Airways announced significant losses due to increased fuel prices. Later, the situation in the company was affected by the world financial crisis, because of which Icelandic investors could not find sufficient funds for its financial support.

Low ticket prices of the first low-cost airline in Russia – Sky Express – did not affect flight safety despite the stereotypes. In order to correspond to the low cost model of the company, Sky Express used the one-type fleet of Boeings 777, avoided transfer flights, carried out large-scale sales of cheap tickets, provided promotions and special offers from different airlines.

The main priority of the company is still flight safety. Sky Express aircraft regularly undergo maintenance. One of the partners of the company in this area is a famous Lufthansa Technik, the largest aircraft maintenance company in Europe. More than 370 airlines are the clients of Lufthansa Technik. More than 21,000 employees of the distributed network of offices and subsidiaries of the company provide the highest level of technical maintenance of aircraft.

The company has received a certificate of compliance with the IATA Operational Safety Audit (IOSA).

Affordable ticket prices in this company are related to other factors. First, cheap flights of the airline are sold during promotions and sales to attract passengers and get publicity, and during the advertising campaign, all indicators should be at a high level. Second, low fares are offered to passengers by low-cost carriers, which can afford it due to a certain business model: for example, refusal from secondary services, direct sales channels (Internet and a call-centre) and the absence of agency fees, relatively close routes. Since 2007 such business model had been implemented by the Russian air carrier Sky Express.” It is this model that allowed Sky Express to make their flights affordable to almost all the population strata.

However, in autumn of 2008, Rosaviation announced a possible withdrawal of the license from Sky Express due to its debts to creditors. Let us recall that in 2008 due to the crisis and high fuel prices, more than 25 airlines worldwide had gone bankrupt.

In 2011, the company went bankrupt; ticket sales of the airline were making a loss, there was a decrease in average revenue and negative average net cash flow. “Rosaviation” revoked the certificate of Sky Express. Then a decision was made to merge it with the Kuban airline. In October 2011, the Sky Express company had stopped flights under its own flag. It continues to carry out their own routes that have been kept under the auspices of the “Kuban” airline. The base is located in the Moscow airport “Vnukovo”.

In this regard, an increase in the number of low-cost airlines and/ or their size created the tendency to consolidation in order to guarantee growth and domination on the market. A typical example is AirBerlin that bought dba in 2006 and LTU in 2007. However, the main question is as follows: Will these companies continue their activity or\and will they be able to keep their current expenditures structure? A sudden activity growth of traditional airlines can become a threat to the concept of the low-budget sector and generate a bigger salary and a more complex management structure. In addition, in case with AirBerlin that bought the LTU charter company, the following question appears: Have the savings increased from the merge? Even though LTU has the right to a significant number of comfortable slots in over busy airports (for example, in Dusseldorf).

Conclusion

As shown in the article, the business model of low-cost air transportation is based on the operation in the low-cost air transportation sector, which allows making their fares cheaper than the fares of direct competitors and at the same time allows the operator to produce revenues. Airlines follow different strategies to lower expenditures, but four main factors are evident: network operation, technologies, expansion of route network and service.

A popular company Ryanair and other low-cost airlines follow the principle of simplicity: simplicity in the product development, simplicity of processes and simplicity of the organization. Accordingly, the main ideology of low-cost airlines is “no excesses”. There is no business class, first class, seats assigned for passengers, there is no free catering on board, free luggage allowance and discounts for frequent flyers, tickets can be bought only online.

The main activity directions of the government of the Russian Federation envisage increasing the indicator of transport mobility of population by 40% by 2018. Lowering the fares on air transportation, expansion of the market hare of low-cost air carriers play a decisive role in achieving this result.

According to the direction to increase transport mobility of the population, the Irish airline Ryanair, the largest low-cost carrier in Europe, received a permit to carry out flights from Moscow and Saint Petersburg to Dublin. Ryanair started regular transportation by the above-mentioned routes in the end of March of 2014. Besides, the question of creating airports for low-cost air carriers in the Moscow aviation node (Vnukovo) and in Ermolino, situated in the Kaluga region 100 km from the Moscow Ring Road. Due to that, for example,Ermolino will become a dual basing airport: before it serviced only airplanes of the Ministry of Defence and the Ministry of Internal Affairs. A terminal for low-cost air carriers can be created in Pulkovo-2. As announced by the general director of LLC “Air gates of the Northern capital” (OOO Vozdushnye vorota Severnoy Stolitsy), Sergey Emdin (Federal target programme “Development of the transport system in Russia (2010-2015)”.

At the same time, there are a number of factors limiting network expansion of LLC-companies, which cannot be easily overcome. They significantly slow down the establishment of low-cost air carriers. For example, nowadays in the Russian Federation there is a requirement to have minimum 8 planes to obtain an air carrier certificate.

Thus, having conducted the analysis of international experience we can formulate a series of principles of the state legal regulation of lowcost air transportation:

a. Possibility to obtain an operator certificate without the minimal number of aircraft in the fleet, which is stated in the requirement.

b. Relief of restrictions on the development of international destinations for Russian low-cost air carriers in the first years of activity.

c. Subsidizing of airport and air transportation activity by the subjects of the Russian Federation, municipalities interested in developing regular flights and inbound tourism.

d. Changes in the legal framework of free pricing, ticket pricing, baggage allowance, additional services, etc.

Tables at a glance

Table 1 Table 2 Table 3 Table 4 Table 5 Table 6

Figures at a glance

Figure 1 Figure 2 Figure 3 Figure 4

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