Saint Petersburg State University
Graduate School of Management
Master in International Business Program
Master thesis
“Customer value creation for airline carriers”
Master’s Thesis by the 2nd year student
Nikita Yaroslavtsev
Research advisor:
Assistant professor: Johanna Frozen
Saint Petersburg
2016
ЗАЯВЛЕНИЕ О САМОСТОЯТЕЛЬНОМ ХАРАКТЕРЕ
МАГИСТЕРСКОЙ ДИССЕРТАЦИИ
Я, Ярославцев Никита Сергеевич, студент 2 курса магистратуры направления 080200 «Менеджмент», заявляю, что в моей магистерской диссертации на тему «Создание ценности для
покупателей в авиакомпаниях», представленной в ГАК для публичной защиты, не содержится
элементов плагиата.
Все прямые заимствования из печатных и электронных источников, а также из защищенных
ранее выпускных квалификационных работ, магистерских, кандидатских и докторских диссертаций
имеют соответствующие ссылки.
Я ознакомлен с действующим в Высшей школе менеджмента СПбГУ регламентом учебного
процесса, согласно которому обнаружение плагиата (прямых заимствований из других источников
без соответствующих ссылок) является основанием для выставления за магистерскую диссертацию
оценки «неудовлетворительно».
________________________________________________(Подпись студента)
_____________25.05.2016___________________________________ (Дата)
STATEMENT ABOUT THE INDEPENDENT CHARACTER
OF THE MASTER THESIS
I , N i k i t a Ya r o s l a v t s e v, s e c o n d y e a r m a s t e r s t u d e n t , p r o g r a m
080200 «Management», state that my master thesis on the topic «Customer value creation for airline
carriers», which was presented for the public defense, does not contain any elements of plagiarism.
All direct borrowings from printed and electronic sources, as well as from master theses, PhD
and doctorate theses that were defended earlier, have appropriate references.
I am familiar with the study process regulations at Graduate School of Management of SaintPetersburg State University, according to which finding of plagiarism (direct borrowings from other
sources without appropriate references) can be the reason for master thesis to be evaluated as
«unsatisfactory».
________________________________________________(Student’s signature)
__________25.05.2016______________________________________ (Date)
2
АННОТАЦИЯ
ФИО студента
Ярославцев Никита Сергеевич
Тема магистерской диссертации
Создание ценности для покупателей в авиакомпаниях
Факультет
Высшая школа менеджмента,
Санкт-Петербургский государственный университет
Программа
080200 «Менеджмент»
Год окончания
2016
ФИО научного руководителя
Йоханна Пия Мария Фрёзен,
Доцент
Описание целей, задач и
основных результатов
исследования
Ключевые слова
Целью данного исследования является выявление
факторов, которые помогут бизнес моделям российских
авиакомпаний увеличить ценность для клиентов и создать
устойчивое конкурентное преимущество.
Исследователь изучает 5 авиакомпаний на основе хоста
бизнес модели, который широко используется для создания
дизайна бизнес моделей на основе ключевых партнеров,
компетенции, деятельности, ресурсов, взаимоотношения с
клиентами, каналов, потоков доходов, сегментов, структуры
затрат и предложения ценности, которые являются значимыми
для авиакомпаний. Наибольшее внимание следует обратить на
следующие элементы: ключевые партнеры, заемные средства,
структура расходов и ключевые ресурсы. Они помогают
авиакомпаниям оптимизировать свою текущую бизнес-модель,
создать высокую ценность для клиентов, выдержать
п о с л е д с т в и я э ко н ом и ч е с ко го к р и з и с а , о с т а в ат ь с я
конкурентоспособными даже с увеличением расходов и
доставлять до покупателей ценность, которая, в конечном
счете, хорошо ими воспринимается.
Сравнительный анализ бизнес моделей и ключевых
показателей индустрии позволили выявить важность
следующих факторов, непосредственно влияющих на создание
ценности для клиента: окраска самолетов и общая стилистика
авиакомпании, дополнительное вознаграждение агентам по
продажам, участия в альянсах, современное программное
обеспечение для управления расписанием, безбагажные
билеты, использование только операционного лизинга, участие
в благотворительных акциях, электронные посадочные талоны,
дополнительные услуги программы часто летающих
пассажиров, бесплатное специальное меню, свободные
спальные принадлежности, доступ в Интернет и мультимедиа
развлечений на борту
Авиакомпании, бизнес модель, холст бизнес моделей, дизайн
бизнес модели, конкурентное преимущество, создание
добавленной стоимости, присвоение ценности, предложение
ценности, сервисная компания, Аэрофлот, S7, UTair
3
ABSTRACT
Master Student’s Name
Nikita Yaroslavtsev
Master Thesis Title
Customer value creation for airline carriers
Faculty
Graduate School of Management,
Saint-Petersburg University
Program
080200 «Management»
Year
2016
Academic Advisor’s Name
Assistant professor: Johanna Frozen
Description of the goal, tasks and
main results
The objective of the current research is to identify the factors
that can make business models of Russian airlines able to increase
customer value and create a sustainable competitive advantage.
The researcher studies business models of 5 focal airlines on the
basis of business model canvas which is widely used to create
design of BMs in the context of key partners, competencies,
activities, resources, customer relationships, channels, revenue
streams, segments, cost structure and value proposition which
have proved to be significant for Airline companies. Biggest
attention should be paid to the following elements: key partners,
leveraged cost structure and key resources. They help airlines
optimise their current business model, create superior customer
value, withstand consequences of economic crisis, stay competitive
even with increased costs and manage to deliver value that is
ultimately well-perceived by the customers.
Comparative analysis of the business models and industry KPIs
have revealed the importance of the following factors that directly
influence the perceived customer value creation: plane colouring
and whole company style, additional bonuses to sales agents,
engagement in alliances, contemporary software for schedule
management, no-luggage tickets, using only operational lease,
participation in charitable events, electronic boarding pass,
additional services of frequent flyer program, free choice of special
menu, free sleeping items, on-board Internet access and multimedia
entertainment
Keywords
Airlines, Business model, Business model canvas, Business model
design, , Competitive advantage, Value creation, Value capture,
Value Proposition, Service company, Aeroflot, S7, UTair
4
Table of contents
1 Introduction................................................................................................................................................. 6
2
1.1
Background.................................................................................................................................... 6
1.2
Research main question and objectives......................................................................................... 9
Theoretical backgrounds of business models and customer value creation.......................................... 10
2.1
2.1.1
Business Model Concept and Definitions............................................................................. 10
2.1.2
Business model design elements and themes...................................................................... 15
2.2
3
Business model design................................................................................................................. 10
Elements of business models based on business model canvas approach................................... 19
2.2.1
Business model canvas concept............................................................................................ 19
2.2.2
Value creation.......................................................................................................................24
2.2.3
Value proposition..................................................................................................................26
2.2.4
Value capture........................................................................................................................ 27
2.3
Business models in service companies......................................................................................... 30
2.4
Summary...................................................................................................................................... 33
Empirical research................................................................................................................................35
3.1
Research methodology and design...............................................................................................35
3.2
Russian airline market overview...................................................................................................42
3.3
Airline case studies....................................................................................................................... 49
3.3.1
Aeroflot group...................................................................................................................... 49
3.3.2
UTair.................................................................................................................................... 53
3.3.3
S7......................................................................................................................................... 53
3.4
Comparative analysis of the focal airlines on the basis of business model canvas.......................54
3.4.1
Value proposition..................................................................................................................54
3.4.2
The company and its exchange partners (customer segment and relationships, channels and
key partners)........................................................................................................................................ 55
3.4.3
Key activities and key resources...........................................................................................61
3.4.4
Revenue streams and cost structure...................................................................................... 63
3.5
4
Business model canvas results and interpretation....................................................................... 65
Conclusions.......................................................................................................................................... 73
4.1
Theoretical implications............................................................................................................... 73
4.2
Managerial implications............................................................................................................... 73
4.3
Limitations.................................................................................................................................... 75
5
4.4
Recommendations for future research.........................................................................................76
List of References......................................................................................................................................... 77
1 Introduction
1.1 Background
Customers have to make decisions connected with choice on a daily basis. Is it better to buy a
coffee in Starbucks or go across the street and buy alike coffee in a Coffee Shop and even maybe
pay less for a less branded drink? Upon every buying decision a consumer faces a dilemma of
asking himself a question if he will receive a value worthy of giving up the other choice and the
benefits implied by having it. Another aspect the consumer’s mind is occupied with is the cost that
he or she must undergo in order to receive that potential value from the product or service.
Therefore, that exact value the individual connects and associates with a product or service
becomes the customer value for that offer (Woodruff, 2003). Customer value in reference to a
certain product is weighted against similar products and services on the market that potentially or
subjectively can substitute the original product by providing similar benefits. As a logical result,
the consumer will prefer the item with the highest perceived customer value on the market
(Kaplan, Norton, 2011).
As regards more formal and business approach to redefining customer value, science has a
number of definitions of customer value. For example, Zeithami in 1998 called it “low price,
receiving what is desired, receiving quality for what is paid, or receiving something in return for
what is given”. Whereas Woodruff in 2003 said that customer value is “a customer perceived
preference for and evaluation of those products attributes, attribute performances, and
consequences arising from use that facilitate (or block) achieving the customer’s goals and
purposes in use situations” (Woodruff, 2003, p. 153) and until now it is regarded as the most
commonly used and most popular definition.
As far as the value creation is concerned, business dictionary defines it as
the performance of actions that increase the worth of goods, services and even business itself
(Osterwalder, Pigneur, Tucci, 2005). Value creation is the primary aim of any business and
company. Creating value for customers helps a company to sell its products; creating value for
shareholders by having high stock price gives guarantees to long-term development in the future
(Favaro, 2009). Finance-wise the value is created when the company earns money in the form of
revenue that is bigger than the costs.
The common perception of value creation connected with financial aspects is connected with
managerial monetary restrictions usually aimed at cutting costs in order to meet the short-term
goals instead of long-term investment plans to foster growth and development. Consequently,
6
value creation is put as a cornerstone for all sta ff and all business decisions: “If you put value
creation first in the right way, your managers will know where and how to grow; they will deploy
capital better than competitors; and they will develop more talent than your competition. This will
give you an enormous advantage in building your company's ability to achieve profitable and
long-lasting growth” (Favaro, 2009, p. 231).
Therefore the key factor in achieving superior value creation is deep understanding of the
main drivers and sources of value creation in a particular industry, business entity and market. In
order to create the value managers should see its sources and concentrate capital and human
resources on the most profitable growth options (Kaplan, Norton, 2011). “If customers value
innovation and high performance, then the skills, systems, and processes that create new products
and services with superior functionality take on high value. “Consistent alignment of actions and
capabilities with the customer value proposition is the core of strategy execution" (Kaplan ,
Norton, 2011).
Value creation, value proposition and value capture are all connected with the concept of
business model that is vital in a competitive environment of mature industries. The business model
depicts “the content, structure, and governance of transactions designed so as to create value
through the exploitation of business opportunities” (Amit, Zott, 2001, p. 511). Further on the
scholars changed the definition of a BM to “a system of interdependent activities that transcends
the focal firm and spans its boundaries” (Amit, Zott, 2010, p. 216).
Business model topic attracts more and more attention from the scientific and business
communities due to the fact that emerging business model tools seem to cover the gap between
theory and practice. One of the most representative, complete and widely used frameworks that
are used in practice is Business model canvas. It is used for designing BM and has helped many
companies to customize their business model so that it answers their needs and considers their
key resources, partners and competitive advantages. Business model canvas is focused on the
basic principle customer value creation in exchange for the revenue (Osterwalder & Pigneur,
2010). The aim of BMC is to come up with the standardized approach to designing BMs
(Osterwalder & Pigneur, 2010). What BMC does is that provides a universal tool for creation of a
visually representative designed BM that allows for fast and easy communication. According to
the words of Pigneur (2009) BMC gives managers a new angle of looking at their business model.
Taking everything into consideration, the researcher studies the question of how exactly
airlines create value for their customers and what components in their business model allow them
to create superior customer value and competitive advantage. The geographical region that the
7
researcher will apply his study is Russia, what is a very interesting country form the point of its
size, population purchasing power and current market situation.
8
1.2
Research main question and objectives
This thesis is aimed at analyzing how airline carriers create value for customers and choose
the best business strategy that will allow the company to do so. The researcher will also take an
insight into the changes of business models of Russian airlines to evaluate the effectiveness of
certain business models from the point of customer value creation and provide background for
future researches that may elaborate a more precise analysis on what niches to take and what
market positioning to choose. Fortunately, customer value creation being a very well studied topic
has not yet been described and evaluated from the point of certain frameworks of business models
in regards to Russian market of airlines, as a result I feel that this particular analysis is of interest
and may unveil eminent results.
The main question of this thesis is:
What changes to their business models should Russian companies do to increase customer
value and gain a competitive advantage?
In order to answer this question the researcher sets the main goal of the research as:
“To find factors that can make business models of Russian airlines able to increase
customer value and create a sustainable competitive advantage”.
As by finding factors the researcher will be able to understand how changes in them can lead
to increased customer value and gaining a sustainable competitive advantage. In order to achieve
the main goal of the thesis the researcher needs to analyse the biggest Russian airline carriers with
the biggest market share and investigate the reason for their success. In order to do so the
researcher will look into their market positioning, business model, the resources that they have and
they way they utilise these resources. Additionally, the researcher will look at the dynamics of
Russian airline industry and individual airlines under crisis circumstances. The researcher will do
a multiple case study of biggest Russian airline companies on Russian market including Pobeda
that is the only Russian low-cost carrier. In order to do so, the researcher will do the market
research on the basis of primary data in the form of industry insiders’ interview and secondary
data in the form of company reports, available market information, Mc’Kinsey reports, CAPA
report, 2016s and mass media interviews.
The main objectives of this research are:
1) analyse value creation and business models literature
2) analyse existing airlines business model literature
3) find relevant factors constituting airline business models that are most appropriate for
Russian market
9
4) analyse Russian airline market and business models of 5 biggest Russian airlines
5) give recommendations on business models to focal airlines
The research gap of the thesis is “Elements of business models that help Russian airline
companies create customer value and gain competitive advantage”.
2 Theoretical backgrounds of business models and customer value creation
2.1
Business model design
2.1.1
Business Model Concept and Definitions
In recent years the scientific community has paid much attention to the business models.
Since 1996 more than 1100 articles were published in academic journals which concern the topic
of business model (Figure 1). Nevertheless, the scientific world is yet to develop the unified and
commonly approved and respected approach to examining the business model construct. Amit and
Zott (2009) have come to a conclusion that in spite of a big number of articles devoted to business
model (BM) there is no agreement between scholars on what BM is. Moreover, they have found
out that the literature on the topic forms clusters according to the scope of interest of scholars,
which are e-business, strategic issues that cover the value creation, competitive advantage and
company performance; and innovation and technology management.
Lastly, Amit and Zott emphasise that despite the difference in understanding of BM, scholar
agree that it is a new subject that requires holistic approach to how the company does its business
and that BM aims to explain not only the value creation, but also value capture.
10
Figure 1. Business model articles
Source: Amit and Zott, 2009
BM was addressed as a description (Applegate, 2000; Weill & Vitale, 2001), a statement
(Stewart & Zhao, 2000), a representation (Morris, Schindehutte, & Allen, 2005; Shafer, Smith, &
Linder, 2005) or an architecture (Dubosson-Torbay, Osterwalder, & Pigneur, 2002; Timmers, 1998)
etc. Nevertheless, only a third of articles define BM at all (Amit, Zott, 2009).
Therefore the lack of certain definition allows for a potential reason for misunderstanding and
confusion instead of cumulative result of BM research development. Table 1 (Zott at al., 2009)
comprises some of the most acknowledged definitions of BM with the reference to the articles
they were taken from:
Table 1. Selected business definitions.
Source: Zott et al. 2009
Author/year
Definition
The business model is “an architecture of the
Paper citing
product, service and information flows, including a
Timmers,
description of the various business actors and their
1998
roles; a description of the potential benefits for the
Hedman & Kalling, 2003
various business actors; a description of the sources
of revenues” (p. 2).
11
The business model depicts “the content, structure,
and governance of transactions designed so as to
create value through the exploitation of business
Amit & Zott,
opportunities” (2001, p. 511). Based on the fact that
2001; Zott &
transactions connect activities, the authors further
Amit, 2010
evolved this definition to conceptualize a firm’s
business model as “a system of interdependent
activities that transcends the focal firm and spans its
Hedman & Kalling, 2003;
Morris, Schindehutte, & Allen,
2005; Zott & Amit, 2007, 2008;
Santos, Spector, & Van Der
Heyden, 2009; Bock, Opsahl, &
George, 2010
boundaries” (2010, p. 216).
Chesbrough &
The business model is “the heuristic logic that
Rosenbloom,
connects technical potential with the realization of
2002
economic value” (p. 529).
Chesbrough, Ahern, Finn, &
Guerraz, 2006; Chesbrough,
2007a, 2007b; Teece, 2007,
2010
Business models are “stories that explain how
enterprises work. A good business model answers
Peter Drucker’s age old questions: Who is the
Magretta,
2002
customer? And what does the customer value? It
also answers the fundamental questions every
manager must ask: How do we make money in this
business? What is the underlying economic logic
Seddon, Lewis, Freeman, &
Shanks, 2004; Ojala &
Tyrväinene, 2006; Demil
& Lecocq, 2010
that explains how we can deliver value to customers
Johnson,
Christensen, &
Kagermann,
2008
at an appropriate cost?” (p. 4).
Business models “consist of four interlocking
elements that, taken together, create and deliver
value” (p. 52). These are customer value
Johnson & Suskewicz, 2009
proposition, profit formula, key resources, and key
processes
“A business model articulates the logic, the data
and other evidence that support a value proposition
Teece 2010
for the customer, and a viable structure of revenues
Gambardella & McGahan, 2010
and costs for the enterprise delivering that value”
(p. 179).
The conclusions of Zott al al. reveal that BM is mainly used to address the strategic issues of
the company such as value creation, competitive advantage, company performance and
innovation. Therefore the research of the master thesis will proceed with the focus on the value
creation and capture as one the main strategic issues addressed by the BM.
12
Business model has received a lot of attention from business scholars as a concept of
explaining company’s value creation, performance, and competitive advantage.
The concept of BM is widely used in explaining value creation in many fields, for example
Thompson and MacMillan (2010) proposed the framework aimed at not only economic, but also
social welfare improvement.
Value creation mechanisms frequently exceed the value created via the reconfiguration of
value chain (Porter, 1985), creation of strategic network among companies and the using the
company’s core competencies. According to Amit at al. (2001) there are 4 potential sources of
value creation that stem from the business model:
1. novelty
2. lock-in
3. complementaries
4. efficiency
These drivers are complementary, so that combined together they give a better result.
According to Hamel (2001) if business wants to be proactive it has to develop new business
models which will embrace the value creation and capture in a value network, that in its turn will
involve partners, suppliers, coalitions that extend and compliment company resources and
capabilities.
Representative of scientific community claim that companies do not utilise their BM in a
competitive vacuum (Hamel, 2000) and that companies can compete by the means of their BM
(Casadesus- Masanell & Ricart, 2010). Therefore the BM is a potential source of competitive
advantage for the company (Markides & Charitou, 2004). Therefore the results of a novel BM can
become superior customer value (Morris et al., 2005) that may disrupt the market and bring a new
generation of competition (Magretta, 2002).
BM can be key in explaining the performance of a company. Afuah and Tucci, for example,
define BM as the method by which a firm builds and uses its resources to offer its customer better
value and to make money in doing so” (2001). Afuah (2004) proposed a framework where the BM
is presented as a set of compounds that correlate with the main factor of firm’s profitability. Such
theory was then supported by Zott and Amit (2007) who have analysed the connection between the
firm performance and its BM. From their point of view the 2 separate effects determine the
interrelation BM and performance:
total value creation potential of the business model design
focal firm’s ability to appropriate that value
Moreover they have highlighted 2 “design themes” that play very important role- novelty and
13
efficiency.
Another empirical research by Amit and Zott (2008) was done to emphasise the role of BM in
mediating between company performance and product market strategy. Their study has revealed
the following ideas:
novel BM with positive impact on performance represent either the cost leadership or
differentiation principle
early market entry combined with novelty of BM give a positive performance effect
Another profound and scientifically acknowledged study was done by Giesen, Berman, Bell,
and Blitz (2007) who studied the connection between BM innovation and company performance.
They refer to 3 types of business model innovation:
1. industry models (innovations in industry supply chain)
2. revenue models (innovations in the way of value generation)
3. enterprise models (innovations in the role of the company in an industry supply chain)
The 2 main insights they found are:
1. each type of business model innovation can generate success
2. innovation in enterprise models which pays much attention to external collaboration and
partnerships is particularly effective in old enterprises in comparison with young ones.
BM also covers the central ideas of business strategy and is regarded among scholars as a
source competitive advantage that is separate from product market position (Christensen, 2001).
Companies that have the same product market strategy and satisfy similar needs of customers can
do so via different BM, therefore market strategy and BM are not substitutes; rather they
complement each other (Zott & Amit, 2008).
According to the scholars, BM is closely connected with customer-focused value creation
(Chesbrough & Rosenbloom, 2002; Mansfield & Fourie, 2004). BM comprises the way the focal
company does economic exchanges with external parties Zott & Amit, 2008). Also BM
emphasizes the key detail of company value proposition to the stakeholders and the system that
the focal company utilizes to create and deliver value to its customers (Seddon, Lewis, Freeman,
& Shanks, 2004).
Eventually, strategy literature and researches mainly concern 3 key aspects:
1. the networked nature of value creation
2. the relationship between BM and company performance
14
3. the distinction between the BM and other strategy concepts
Companies can look at BM not only as a mechanism to foster technological innovation, but
also as an innovation itself (Mitchell & Coles, 2003). Scientific community in majority favors the
idea that BM innovations are vital for company performance and see it as a mechanism of
company transformation (Johnson, Christensen, & Kagermann, 2008; Sosna, Trevinyo-Rodríguez,
& Velamuri, 2010). It is believed by some scientists that BM forms via the process of
experimentation that is different depending on the field (Hayashi, 2009; McGrath, 2010).
1
Conclusion
Taking everything into consideration, BM is a relatively new topic of analysis that is view
from different perspectives- closer to the company (Casadesus- Masanell & Ricart, 2010; Hurt,
2008), closer to the network of a company (e.g., Tapscott et al., 2000) or in the middle between a
company and a network (e.g., Amit & Zott, 2001). Many scholars in regards to the BM provide
holistic view on not only what business does, but also on how business does it. Also in the BM
concept scientists include activities done by focal company and its suppliers, customers and
partner’s conceptualization (McGrath, 2010; Teece, 2010; Zott & Amit, 2010).
Scholars see the BM as a company-centered and boundary-expanding activity system, what is
consistent with representational and systemic nature of the BM (Dubosson-Torbay et al., 2002;
Timmers, 1998).
Another conclusion drawn from the BM literature is that the scientific community has
changed the focus from value capture to value creation, where latter has become a valuable
complement of the former. The analysis of business model components proposed in the literature
reveals that the most frequent and important one is the concept of value. BM is a new unit of
analysis that is focused on activities and value creation in particular.
Therefore the researcher will look deeper into the concept of value creation, mechanisms of
value creation and main elements of business model especially in the context of service companies
in order to achieve the objectives of the research.
2.1.2 Business model design elements and themes
BM design- is architecture of the activity system with key design parameters that may help
managers and researchers create better BMs (Amit et al, 2009).
15
Main idea of BM design – “purposeful weaving together of interdependent activities,
performed by the firm itself or by its suppliers, partners and/or customers” (Amit et al, 2009).
The ultimate goal of a company BM is “to exploit the business opportunity by creating
value for the parties involved (fulfill customer needs) and create surplus while generating a
profit for the focal firm and its partners” (Amit, Zott, 2009). Such a purpose is mentioned in
value proposition and was described as “the value creating insight on which the firm turns”
(Magretta, 2006). So the activity in a company BM is the engagement of any type of resources of
any party in the BM that is needed to achieve the ultimate objective.
Therefore, the Activity System of the company is “a set of independent organizational
activities centered on a focal firm, including those conducted by the focal firm, its partners,
vendors or customers” (Amit et al, 2011).
So a BM can be viewed as an activity system - a system that consists of elements, connections
between these elements and dynamics (Afuah and Tucci, 2005). Afuah also saw BM as a set of
activities that the company performs in a certain way and time.
Another point of view on BM said that BM includes “training, development, manufacturing,
budgeting, planning, sales and service” (Johnson et al, 2005) whereas Mitchell and Coles
highlighted that BM is about how to provide customers with the product. According to
Chesborough and Rosenbloom BM defines the value chain structure and creates value.
Apparently, the scientific community supports the activity system approach to BM.
1.1.1
Design parameters of a business model
According to Amit and Zott (2011) the key parameters required for BM design are separated
into 2 groups:
1. design elements (content, structure and governance) that describe architecture of the
activity system
2. design themes (novelty, lock-in, complementarities and efficiency) that describe the
sources of value creation
BM design- is architecture of the activity system with key design parameters that may help
managers and researchers create better BMs (Amit et al, 2009).
Main idea of BM design – “purposeful weaving together of interdependent activities,
performed by the firm itself or by its suppliers, partners and/or customers” (Amit et al, 2009).
The ultimate goal of a company BM is “to exploit the business opportunity by creating value
for the parties involved (fulfill customer needs) and create surplus while generating a profit for the
focal firm and its partners” (Amit, Zott, 2009). Such a purpose is mentioned in value proposition
16
and was described as “the value creating insight on which the firm turns” (Magretta, 2006). So
the activity in a company BM is the engagement of any type of resources of any party in the
BM that is needed to achieve the ultimate objective.
Therefore, the Activity System of the company is “a set of independent organizational
activities centered on a focal firm, including those conducted by the focal firm, its partners,
vendors or customers” (Amit et al, 2011).
So a BM can be viewed as an activity system a system that consists of elements, connections
between these elements and dynamics (Afuah and Tucci, 2005). Afuah also saw BM as a set of
activities that the company performs in a certain way and time.
Another point of view on BM said that BM includes “training, development, manufacturing,
budgeting, planning, sales and service” (Johnson et al, 2005) whereas Mitchell and Coles
highlighted that BM is about how to provide customers with the product. According to
Chesborough
and
Rosenbloom BM defines the value chain structure and creates value.
Apparently, the scientific community supports the activity system approach to BM.
1.1.2
Design parameters of a business model
According to Amit and Zott (2011) the key parameters required for BM design are separated
into 2 groups:
3. design elements (content, structure and governance) that describe architecture of the
activity system
4. design themes (novelty, lock-in, complementarities and efficiency) that describe the
sources of value creation
The first group of vital BM design parameters is content, structure and governance that cover
bigger scope than the interrelations of activities and network scheme of the company (Zott et al,
2009):
1. Activity system content is responsible for a selection of activities that will then be
performed and that will constitute the BM of the focal company
2. Activity system structure tells how the activities are connected and emphasizes their
importance for the BM (i.e. it tells about their nature- core, supporting of peripheral).
3. Activity system governance tells us who does these activities.
Ultimately, the BM as an activity system characterises how companies do their business.
Design themes of a business model
Another type of parameters that describes the activity system is design themes that concern
the main drivers of value creation in the focal company.
Design themes are configurations of design elements are related to certain design themes
17
(Amit et al, 2009). Both empirical and theoretical researches have proved that there are 4 main
variable elements of an activity system: novelty, lock-in, complementarities and efficiency:
1. Novelty- the key principle of novelty-focused activity is the adoption of new activities
(content) and/or connection of old activities in a new way (structure) and/or new ways of
controlling those activities (governance).
2. Lock-in- it is an activity system that constitutes the power of a focal company to attract 3 rd
parties into being BM participants. The lock-in power may be connected with switching costs and
a potential loss of externalities, content and/or governance of the activity system
3. Complementarities- represent the idea that the activities create a synergy when performed
together and prove less effective separately.
4. Efficiency – this parameter of design themes states how efficient the focal company uses
activity system design by cutting costs. Companies can become more efficient via their activity
system and structure. For example, low-cost airlines get rid of activities to lower the cost.
The following table (figure 2) summarizes the activity system design framework:
Figure 2. Activity system design framework
Source: Amit et al, 2009
Conclusion
A BM can be looked at as a framework how the company does business, how it delivers value
to its stakeholders and how it links factor and product markets (Zott et al, 2009). The activity
system approach relates with all of these issues, providing managers and academics with a tool to
communicate and fond the best solution.
The activity system in BM is useful for managers as it gives them a framework of BM design.
18
Moreover, it encourages them to use holistic and systematic approach to creating the BM instead
of isolated decisions like whether to buy or make something. Last advantage of activity system is
the possibility for further theoretical development and amendment (Amit, Zott, 2009).
The following steps of the research will get a deeper look at the Michael Porter’s concepts of
competitive advantage, competitive strategy and value chain, that represent valuable concept for
BM and strategy analysis. The next step in the literature review is devoted to airlines BM and their
key components that are represented in the business models literature. Theoretical research
outcome will lead to the synergy of emerged theoretical junction of BM activity system, airline
BM frameworks, Porter’s value competitive advantage and strategies and the concept of value
creation that as it was found previously constitutes an important part in BM structure.
2.2
Elements of business models based on business model canvas approach
2.2.1
Business model canvas concept
The Business Model Canvas (BMC) describes the characteristics of BMs and attempts to
see the entire picture (Zott et al., 2010). The main aim of BMC is to bring the ultimate language
that would describe BMs in reality and test the applicability of a certain BM (Amit, 2011).
Therefore BMC offers a universal way to describe a BM in a visually and logically
comprehensive way (Osterwalder & Pigneur, 2010). In order to get an understanding of BMC
the following definition of a business model itself was used during creation of BMC- “A
business model describes the rationale of how an organization creates, delivers and captures
value” (Osterwalder & Pigneur, 2010). Another definition of a BM formulated by Osterwalder is
“a conceptual tool containing a set of objects, concepts and their relationships with the objective
to express the business logic of a specific firm” (Osterwalder et al., 2010). This definition
describes the BM as tools for capturing, creating and delivering value and is compatible with
BMs of other companies.
BMC is a tool that aims to ease the design of BM and an incentive to managers to think
differently about their BM (Osterwalder, 2004). In order to achieve this goal Osterwalder and
Pigneur (2010) created a canvas that is from their point of view is applicable to every BM. The
structure of the BMC consists of 9 blocks that can be structured according to the BM
dimensions:
value proposition (value proposition)
architecture of the relation between the firm and its exchange partners (customer
segment, channels, customer relationship and key partners)
19
architecture of what a firm is doing (key activities and key resources)
financial aspects (revenue stream and cost structure).
These building blocks provide an insight into what should be in the BM, yet the main block
is the value proposition, so that “other blocks are supportive to deliver, capture and activate the
value proposition” (Osterwalder and Pigneur, 2010). The balance between the blocks and the
combination of their interrelation and mechanism of functioning creates the unique
BM(Osterwalder and Pigneur, 2010). The following figure 3 depicts the visual representation
MBC. In order to get a better understanding of the concept each element of the business model
canvas will be analysed further.
Figure 3. Business Model Canvas
Source: Osterwalder and Pigneur, 2010
BMC elements are divided into 4 main groups: value, architecture of how the company
functions, architecture of what the company is doing and the financial aspects.
1.1.2.1
1.1.2.2
Key Element: Value proposition
Value proposition
According to Osterwalder (2004) value proposition is in the center of the BMC and is
designed to satisfy the customers. In case it does not meet the customer needs, the company will
cease to exist in the long run. Therefore the customer is a key factor for the business. So that the
value proposition has to be defined very carefully and refer to the main value created for the
20
customer: “the value proposition bundles products and services that create value for a specific
customer segment” (Osterwalder & Pigneur, 2010). Examples of value offers include the
following- cost reduction, risk reduction, price and presumably better performance (Osterwalder
& Pigneur, 2010).
1.1.2.3
Key Element: Architecture of the relation between the firm and its exchange
partners
Customer segment
The value proposition is designed for a certain customer segment that is defined as
“different groups of people or organizations an organization aims to reach and serve”
(Osterwalder & Pigneur, 2010). Obviously, the customers make the company survive therefore
the company must know what they want. In order to create a bundle of the products the
company has to have a customer segment as this segment represents a group of customers with
similar needs for which the value proposition was created. Otherwise the company proposition
may not be considered valuable. Customer segment must be defined in terms of size, variety and
type of customer. Then according to the segments must be identified in regards to the relations
with customers, distribution channels and revenue structures. Should all these be identified, the
customer segment is created. Next step is to verity if the customer segment correlates with the
value proposition and a BM to provide successful delivery of value proposition (Osterwalder &
Pigneur, 2010).
Channels and Customer relationship
Osterwalder and Pigneur (2010) use channels and customer relationships in BMC in order to
communicate and deliver the value proposition. The Channels block is defined as ‘how a
company communicates with and reaches its Customer Segment to deliver a Value Proposition”
(Osterwalder & Pigneur, 2010). In this block the authors define communication way, sales
strategy and distribution as the factors that create customer awareness of the value proposed.
Also the channels are responsible for the support of this value to clarify its maximum potential
(Osterwalder & Pigneur, 2010).
The neighbor block of Channels is the Customer relationships block that also bridges the
value proposition and customers. This block is responsible for the way how customer are
connected with the company. The purpose of this block is to sell more by enhancing customer
loyalty and increasing the customer base.
21
Key Partners
Due to the fact that a firm does not possess all needed resources and activities within itself to
create the value proposition, the network activity is set as one of the main things in the BMC.
Logically, the Key partners arise, that is “the network of suppliers and partners that make the
business model work” (Osterwalder & Pigneur, 2010). Such a network of suppliers and partners
can give positive outcomes in the form of risk and cost reductions and unique or rare resources
(Osterwalder & Pigneur, 2010). According to Zott et al (2010) the key partners block
complements the company resources. Moreover, the BM also creates value for the partners and
suppliers (Brandenburger & Stuart, 1996).
1.1.2.4
Key Element: architecture of what a firm is doing
Key resources and Key activities
This block is defined as “describes the most important assets required to make a business
model work” (Osterwalder & Pigneur, 2010). Resources are crucial for sustainable
competitiveness of the company as they are used to create, communicate and deliver the value
proposition (Barney, 1991). Therefore every business has different resources that can be in the
physical or intellectual form. Other resources are human and financial (Osterwalder & Pigneur,
2010). Yet resources alone are not sufficient and the company needs key activities that are
defined as “the most important things a company must do to make its business model work”
(Osterwalder & Pigneur, 2010). These activities that create value are production problem
solving and network activities (Osterwalder & Pigneur, 2010).
1.1.2.5
Key Element: Financial aspects
Revenue stream and Cost structure
All mentioned block are connected with delivering value to the customer. The company’s
aim is to make profit what is to increase revenues and decrease the costs. The BMC reflects this
principle in the building block Revenue streams and captures the value created on the right side
of the BMC.
Revenue streams block is defined as “represent the cash a company generates from each
Customer Segment” (Osterwalder & Pigneur, 2010). The pricing policy is included in this block
as the revenues are initiated by the money paid for the delivered value.
The blocks Key Resources, Key Activities and Key Partners are responsible for value
creation and capture (Osterwalder & Pigneur, 2010), but they need costs to be incurred in order
to function. The Costs block is described as “the Cost Structure describes all costs incurred to
22
operate a business model” (Osterwalder & Pigneur, 2010). The cost structure can be defined as
cost-driven, value-driven, fixed costs and variable costs. Finally, the revenues minus costs lead
to the profit that represents the added value created by the BM of a company (Osterwalder &
Pigneur, 2010).
1.1.2.6
1.1.2.7
Business Model Canvas and Strategy
1.1.2.8
The scientists differentiate the designing of BM and its implementation in a
company in a way that it will make a company successful. The application of a BM is related to
the environmental factors of the company. SO the analysis and the adaptation to such conditions
is a corporate strategy (Zott, 2009). There are 4 ways of strategic perspectives of BM: “BM
Environment, Evaluation of BM, BM Perspective on Blue Ocean Strategy and Managing
Multiple BMs” (Osterwalder and Pigneur, 2010). An approach provided by these scholars
implies that these elements can be seen as the steps to follow to best adjust the BM to the
environment. Consequently, the BM is seen as a dynamic concept that needs to constantly
assessed and changed in case it does not comply with the environment (Osterwalder and
Pigneur, 2010).
1.1.2.9
Management is considered as a crucial component upon the implementation of a
new BM. The current decisions will greatly influence the results of implementation, nevertheless
the process of constant and relevant adjustment of the BM and the evaluation of its results is
paramount (Osterwalder & Pigneur, 2010).
1.1.3
Strengths and limitations based on academic literature
1.1.4
The main strength of BMC is the visual comphensiveness and ease of
understanding of the focus on value and full coverage of different BM aspects. The main
limitations are the absence competition, imitation and market forces blocks. Though it can be
compensated by more thorough description of Key activities and Key resources blocks. Another
significant limitation is low level of applicability of BMC for NPO, what shows the limited
strategic purpose aspect of the proposed framework.
1.1.5
Generally, BMC has limitations when it comes to combining the strategy with BMs
as the strategy is not mentioned in the canvas and therefore appears to out of the scope of the
concept. Nevertheless the strategy and BM literature sees these concepts as inextricably connected
as “value creation mechanism is based on the competitive advantage on competition”
(Brandenburger & Stuart, 1996). The way the company utilized its capability to stay competitive
defines the difference in positive performance in respect to the competitors (Magretta, 2002).
23
1.1.6
Ultimately, the theoretical limitation of the BMC is insufficient coverage of strategy
aspect. The following table (Table 2) summarizes the strengths and limitations of BMC:
24
Table 2. Strengths and limitations based on alternative business model tools
Source: Beltramello et al., 2013
As a part of the research goal is to find the BM factors that can increase the customer value
the model that the researcher aims to consider value creation and value proposition parameters.
Value creation is at the heart of any business model; businesses typically capture value by seizing
new business opportunities, new markets and new revenue streams (Beltramello et al., 2013). The
value proposition is typically concerned with the product and service offering to generate
economic return (Boons and Lüdeke-Freund, 2013). Value capture is about considering how to
earn revenues (i.e. capture value) from the provision of good, services or information to users and
customers (Teece, 2010). Therefore, the next part of the theoretical analysis in this research will be
value. The following literature review will focus on the mechanisms of value creation, proposition
and capture.
2.2.2
Value creation
A lot of attention was paid to value when new digital technologies emerged when resulted in a
demand on new mechanisms of value creation based on
a network of partnerships and
connections with partners and customers (Zott et al., 2010). Some scholars consider BM as a
mechanism of value creation (Amit & Zott, 2001), whereas the rest believes that BMs are a
mechanism for value capture (Zott et al., 2010). Scholars regard value as a central part of a
business model. Value is the means of measure of performance of a company BM. If the delivered
25
value is perceived higher than the price, it will be bought (Anderson & Narus, 2004). Additionally,
the business model must create the value that is bigger than the costs incurred for its creation
(Anderson & Narus, 2004). The overall value creation by a BM is the total value of all
stakeholders- partners, suppliers, customers (Brandenburger & Stuart, 1996).
According to Chesbrough & Rosenbloom (2002) BM is like a “hypothesis” of how to deliver
value to the customer, yet not a precise plan of how to run the company. “Value creation and
capture mechanisms take place in a network of value of the company where the network partners
complement the company resources” (Zott et al., 2010, p. 21).
Nowadays the way of creating value is different because customers can provide a feedback
and impact the value creation process. The question changes from “What we can do for you?” to a
more proactive “What can you do with us?” (Wind & Rangaswamy, 2001, p. 21). Nowadays
customers are no longer an isolated group of people, but a party closely connected with business, a
party that is well informed and active (Prahalad & Ramaswamy, 2004). The customer’s role has
evolved from an external element to a co-producer of value (Zhang & Chen, 2008). All these
concepts are depicted in Figure 4:
Figure 4. Contemporary interrelation and information exchange between companies and
customers
Source: Zhang & Chen, 2008
Value creation mechanisms are in the base of interrelation between customers and companies
nowadays. The BM literature gives a valuable insight into a decent number of mechanisms of
value creation that offer new effective ways how the classic interrelation may be changed and
improved. For instance, co-production is transformed in the process where the customer is
engaged into the production process of the product or service (Lusch, 2007; Lusch & Vargo,
2006). By doing this, the company integrates customer resources in the creation of the product.
Vargo and Lusch (2006) have claimed that customer resources may be very successfully and
26
beneficially used for company’s improvement of design, promotion, pricing and distribution.
Zhang and Chen (2008) proposed 4 main value creation activities which include involvement
customers in marketing and sales procedures, new product development, hiring customers as parttime employees and using their feedback to improve the service quality.
In 2007 Sheth and Uslay have introduced co-conception, co-consumption, co-maintenance,
co-disposal and co-outsourcing as the certain steps or part of mechanisms of customer value
creation. With these concepts in use the role of the customer undergoes a total change making him
a not only a payer, but a provider of insight, information-holder and an assistant.
2.2.3
Value proposition
Value Proposition is created to satisfy customers and match their needs. If the value
proposition fails to do so, a company will not survive the competition, therefore the customer
becomes the main element for the business. Value proposition should be formed very carefully
and should contain the value in the form of services and products for the customers. According to
Osterwalder and Pigneur (2010, p. 22) “Value Proposition bundles products and services that
create value for a specific Customer Segment”. Value proposition is basically an offer that
answers the needs of the market or certain customer groups or certain customers. The examples
of value proposition comprise risk and cost reductions, price and positive performance
(Osterwalder & Pigneur, 2010).
Value proposition not only helps to deliver the message about the main advantages and
beneficial features of their market offer, but also give an opportunity to focus on the inside
processes to facilitate the process on transition of this value to consumers. From this point of view,
customer value propositions is a capacity to establish a reliable, undistorted and clear connection
between an organisation and customers (Webster, 2004).
Lanning and Michaels (1998) emphasised 2 main activities in this theory: the creation of
value delivery system and creation of value proposition. The main focus is on increasing the value
for the customers with the least losses. Moreover, customer value proposition should be based on
the most effective utilisation of the resources that the company has in comparison with its
competitors, what may result in a sustainable competitive advantage (Rintamaki, Kuusela, &
Mitronen, 2007). Lanning and Michaels (1998) have highlighted 3 main processes in customer
value creation and proposition: divide customers in groups in accordance with their perceived
value from the product/service and then analyse these groups, evaluate if particular organisation
segments are capable of delivering more value and finally make a pick with the value proposition
27
that would make the above-mentioned opportunities possible (Frow & Payne, 2011). Eventually,
customer value propositions may be a key to success and a competitive position of the company
on the market (Anderson, Van Rossum, 2006).
Customer value proposition can be used as a powerful tool to evaluate the potential of value
creation mechanisms that a company can undertake. It helps the business to understand if certain
value creation mechanisms are able to facilitate the delivery of value proposition (Frow & Payne,
2011). It is crucial to understand that customer value proposition bears responsibility for the very
existence of the company, because it is responsible for the perceived value that defines if the
product is popular or not (Frow & Payne, 2011). From this point of view, value creation is always
followed by value proposition. So the customers putting their additional resources into copromotion, co-design, or co- development create a huge change in the classic relation between a
company and a customer (Anderson, Narus & Van Rossum, 2006). By doing this the business
attracts additional non-monetary resources to value creation and its delivery (Figure 5).
Figure 5. Integrating additional customer resources to the delivery of the company’s customer
value proposition.
Source: Anderson, Narus & Van Rossum, 2006
Auh, Bell, McLeod, and Shih (2007) came up with 3 main determinants that seem to be vital
for effective co-production: the task must be clear, easily comprehensive and simple, customer
must be able to cope with it and customer must have a proper level of motivation and desire to
fulfil such a task. Co-production is a good idea because it is very straight-forward, simple and
effective tool how to clearly deliver economic value to the customer.
2.2.4 Value capture
“Value capture is about considering how to earn revenues from the provision of good, services
or information to users and customers” (Teece, 2010).
28
Value capture (VC), also defined as value appropriation or claiming, is determined by the part
of exchange rent that a company can capture (Gulati and Wang, 2003). VC comes from the ability
of a company to gather the rents were generated in the exchange process (Verwaal et al., 2009).
VC allows the company to secure the resources that permit the company invest in future value
creation (Wagner et al, 2010).
VC as well as value creation is the very basis of the company functioning and financial
performance. The aim of VC is to is to secure profits what would let companies to invest in R&D,
resources and business relations and so on, what would in its turn gain a competitive advantage.
VC is a crucial to the company value creation and is not its sub-product therefore requires a
lot of attention from the managerial point of view. The scientists propose to utilise the specific
scheme for discussing, testing and planning VC (Harrison et al, 2010). There are 5 methods how
to connect the value creation and value capture, in particular this method emphasizes different
ways of interacting with other businesses. Moreover, both suppliers and customers may be
engaged in this (Ford et al., 2003).
VC can be looked at from different angles, e.g. from the point of negotiation stream. There it
depends on the interpersonal relations on the give and take basis that result in the contract between
the companies. The buyer and the representative of a supplier meet in order to bargain and
negotiate the deal (Bac, 2001; Kaufmann, 1987). Value creation as well as VC is realized at the
time of negotiations. The details of the signed contract are the usually quantitative and imply
monetary costs of the parties. The indexes of the performance like prices, discounts, volumes and
terms are subject to bargain. There are 2 types of bargaining one of which is integrative, that is
closely associated with value creation. It is characterized by learning, communication, collaborate
problem-solving, abstaining from conflicts etc (Bac, 2001; Kaufmann, 1987; Lax and Sebenius,
1986; Sebenius, 1992).
From another point of view, VC is perceived as negotiation process over an unchangeable
object (Neale and Bazerman, 1992; Sebenius, 1992). Therefore, the value in question is already a
prepared solution, service and the distribution splits the value between the supplier and buyer
(Fisher et al., 2011). The ability to capture value is connected with bargaining power what in its
turn stems from how independent the company is from the supplier (Bacharach and Lawler, 1994).
SO the manipulations with its bargaining power may guarantee the company better value capture
(Bacharach and Lawler, 1984; Lax and Sebenius, 1986).
29
Another point of view to look at value capture is resource based view (RBV). RBV firms use
their interior resources to create value for customers and get profits (Barney, 1991; Peteraf, 1993;
Wernerfelt, 1984). VC is connected with the competitive advantage that the company has and how
sustainable it is. Therefore the competition on the market is determined by huch value can be
captured from the whole customer pool (Bowman and Ambrosini, 2000; Lepak et al., 2007).
The key element of VC from RBV point of view is isolating mechanisms (Rumelt, 1997). The
firms with poor interior resources need to gain access to external resources to get to new markets
and customers (Alvarez and Barney, 2004). So the main RBV company objective is to protect the
resources from competitors to retain sustainable competitive advantage. Isolating mechanisms in
the RBV implies technological patents, trademarks, copyrights and property rights (Alvarez and
Barney, 2004). There is a balance between value creation and capture that stem from managerial
decisions whether to put resources into the product creation or to invest them into differentiation
in the form of advertising.
Another way to look at VC is the strategic alliance. The alliance is “any voluntary initiated
cooperative agreement between companies that involves exchange, sharing or co-development and
can include contributions of capital, technology or firm-specific assets by partners” (Gulati and
Singh, 2001). The ultimate goal of such alliance is to capture value from the collaboration and
avoid compromising the alliance (Gulati and Singh, 2001). VC from the collaboration comprises
common benefits based on the needs of the alliance and private benefits that consist of needs of a
certain company (Lavie, 2006). According to Lavie (2006) the benefits that stem from the
alliances are the internal benefits that concern certainty and specialization and external spillover
benefits that come from internalizing the resources of a partner within an alliance, what results in
building competitive advantage for the sake of a partner (Lavie, 2006).
A very important aspect of VC that draws scientific attention is the relation between the seller
and buyer in the form of trust and commitment (Deligonul et al. 2006, Wagner et al. 2010). If the
company abuses its customers with excessive VC techniques it can damage the customer and
supplier relations, ultimately affecting the performance (Deligonul et al., 2006). On the other
hand, thoughtful and respectful relations will create strong basis for mutually beneficial relations
(Deligonul et al., 2006).
30
2.3
Business models in service companies
One of the many definitions of a BM is “a set of which activities a firm performs, how it
performs them, and when it performs them as it uses its resources to perform activities, given its
industry, to create superior customer value (low-cost or differentiated products) and put itself in a
position to appropriate value” (Afuah, 2004). BM can be separated into 3 categories- abstract,
implemented and virtual. Abstract models represent generic approach to BM concepts, elements
and the interrelations that can be used in the processes and structures of the focal organisation.
Virtual models in their turn are implemented as sources of innovation and instructions in times of
change (Osterwalder, 2004).
BM of a service company is considered as a managerial tool that is defined by Osterwalder
(2004) as “conceptual tool that contains a set of elements and their relationships and allows
expressing the business logic of a specific firm” (Osterwalder, 2004).
Developed economies have more than 60% of work force engaged in services (Florea,
Andreescu, Uta, 2011). From the business model canvas proposed by Osterwalder the service
companies deserve particular attention in the context of the following dimensions: customers,
customer relations, partners and resources. Another additional aspect that needs to be taken into
consideration is Personnel due to the fact that customers interact with staff that require particular
attention in a BM of a service company. Another crucial part of a BM of a service company is
Pricing. As all elements must work in collaboration Simona Kleinhempel and Stefan Nitchi (2010)
have proposed to emphasise 5 main blocks of service business models (Figure 6):
Service- resources, customer value
Partners
Customers
Staff
Finance
31
Figure 6. Scheme of a business model for a service company
Source: Kleinhempel, Nitchi 2010
This figure represents the BM of a service company
that describes the conditions and
resources that are needed for creation, visualization, marketing and delivering the value by a team
of properly trained personnel (Simona Kleinhempel, Stefan Nitchi, 2010). A very crucial thing in
Service BM which infers the adoption of efficient and effective processes,
appropriation of the best practices among companies (Grant, 2010). Such process of
standartisation and gradual convergence is an integral part of competitive process
(Lieberman and Asaba, 2006) and highly characteristic of service industries (Grant, 2010).
Yet, the service industries like airline are mature, unprofitable, homogeneous and extremely
competitive, therefore the business strategy groups in such companies are always striving to find
the differentiation niche, at the same time being “in trend” with the best industry business strategy
moves and keep reasonable parity (Tarry, 2010). Ultimately, service business model configurations
and especially their resemblances are of paramount importance. The necessity to cultivate the
framework to coherently assess and describe business models of service companies has been
acknowledged (Mason and Morrison, 2008).
The existing approaches in the field share common principles by describing the business as
32
one implementing a set of “constitutional components and sub-dimensions” (Mason and Morrison,
2008). The things that differ in such approaches are number of components, model layers and the
contents of such categories. As far as the concept design is concerned, such frameworks are
divided into 3 to 8 elements. The majority of approaches allow seeing and therefore assessing and
describing the value creation system of the service organizations. The following table (Table 3)
depicts the overall concepts of a number of business model frameworks.
Table 3. Selected business model components for service companies
Source: Morris et al., 2005
Author
Number of
Main themes
components
Hamel, 2000
4
Customer interface, Core strategy, Strategic
resources, Value network
Alt and
6
Zimmermann, 2001
Weill and Vitale,
Mission, Structure, Processes, Revenues, Legal
issues, Technology
8
Strategic objectives, Value proposition, Revenue
2001
sources, Success factors, Channels, Core
Magretta, 2002
3
competencies, Customer segments, IT
Value
proposition, Customers, Revenue sources
infrastructure
Bieger and Agosti,
8
Growth concept, Organizational formation,
2005
Cooperation concept, Competencies, Coordination
concept, Communication concept, Revenue
Knyphausen-Aufsess
3
and Zollenkop, 2007
concept, Product/Service concept
Product-market-combination, Configuration of
value chain, Revenue generation mechanism
Richardson, 2008
3
Value proposition, Value creation, Value capture
Casadesus-Masanell
3
Policy, Governance, Assets
and Ricart, 2010
Al-Debai and
4
Value proposition, Value architecture, Value
Avison, 2010
finance, Value network
The elements of business model frameworks of service companies must be able to provide an
insight into the value creation system, so these elements have to be rather general, but deep and
33
take into consideration the specifics of an industry (Ulrich and Fluri, 2005). Eventually, these
requirements impose certain structural principles that determine the design of the frameworks.
The structural design of a service company BM layout has to be focused on differentiation of
decision-making levels in an organisation as of operating, tactical and normative layers (Ulrich
and Fluri, 2005).
BMs from Table 5 imply that the parameters of its compounds are subject to managerial
decisions thus become the basic instruments to design the business model (Seddon et al., 2004).
Unlikely the measures that are used in order to evaluate the efficiency of BM elements such as
profitability or loading have nothing to do with being a part BM rather they represent input factors
for service company BM (Seddon et al., 2004). These business model frameworks are applicable
to the level of business unit, so if the service company has a number of business units, the model
should be applied to each one as each one has its own value creation strategy (Seddon et al.,
2004).
Finally, business models and business model innovation for service companies have received
substantial attention in literature and industry and it is increasingly suggested that business model
innovation is a key to business success (Chesbrough, 2010, Lüdeke-Freund, 2010 and Zott et al.,
2011). With the rising global sustainability pressures, collaboration between firms and other key
stakeholders is becoming more important (Lowitt, 2013). Value is no longer created by service
companies acting autonomously, but by firms acting together with parties external to the firm
through informal arrangements or formal alliances (Beattie and Smith, 2013). The service business
model may be viewed as a new unit of analysis in business, which takes into account these
collaborative ties (Zott et al., 2011 and Beattie and Smith, 2013).
2.4 Summary
In this chapter the researcher used different theoretical frameworks that are implemented in
the business society that help to find factors that can make business models able to increase
customer value and create a sustainable competitive advantage. The researcher has thoroughly
looked into BM definitions and concepts. The researcher studied the literature concerning business
models in the context of value, strategy, company performance and innovations in order to get a
full picture of the concept of an organization. Literature review includes theoretical analysis of
value in the context of value creation, proposition and capture due to the fact that value is a key
element of the business model of any company.
Additional literature review about the business model design elements and themes that views
the BM as am activity system (activity system is a set of independent organizational activities
34
centred on a focal firm, including those conducted by the focal firm, its partners, vendors or
customers) helped to reveal the BM insights that will help to achieve the objectives of the
research. During the literature review the researcher has arrived at a conclusion that value is key
element in the business model, therefore the literature review pays much attention to this concept.
The study of value has revealed the importance of value creation and proposition in the BM that
helps to achieve greater performance for the company.
The researcher has analysed the BM concepts and approaches that are respected and used in
scientific society in regards to the question if they help create superior customer value and gain a
competitive advantage. The researcher looked at the notions of business models, at the
frameworks of service companies’ business models and their parameters. All those frameworks
include elements that seek to provide an insight into the value creation system of a company. The
structural design of these business models is focused on differentiation of decision-making levels
in an organisation as of operating, tactical and normative layers. These decision levels cover both
functional and organisational levels in business.
The conclusion that the researcher has arrived at is that value creation is an important
component of a BM and needs to taken in consideration while creating the business model of the
company. In order to take into consideration the importance of value, avoid overlooking the
important design themes and elements and be able to comprehensively present the results of the
research Business Model Canvas framework was chosen. The researcher decided to take this
framework because it is visually representative, able to cover multiple dimensions of a BM like
customer segments, channels, cost structure and revenue streams. Moreover Business Model
Canvas is focused on the value that the company creates having one part devoted to value
proposition, another part to value creation, another to value capture and cost structure and revenue
streams at the bottom. The empirical part will prove the feasibility of this approach in assessing
the BM of airline carriers.
35
3 Empirical research
3.1 Research methodology and design
In order to describe the methodology implemented in my thesis, I have used the research
design suggested by Saunders et al. (2009). Figure 7 represents the research design choices taken
in order to reach the goal of the thesis.
Figure 7. Research design choices of study
Source: Saunders at al., 2009
Justification of the empirical methods of the research
In this master thesis a number of business model frameworks and methodologies of definition
were used in regards to the customer value creation. Research method that is commonly used for
case studies is qualitative. Qualitative approach is appropriate for this study as the problem of
research can be observed and interpreted, yet is difficult to quantify as the number of business
models as well as the airlines that represent an interesting case is not numerous. Another argument
in favour of qualitative approach is that a business model is e very complex phenomenon, whereas
the context of the study is focused on customer value creation.
Business models and their influence on customer value creation of Russian airline carriers is
an understudied field especially in the crisis period. Even the notion of the business model itself is
not well defined and has a number of interpretations in the scientific world. Therefore the
36
inductive study is perfectly appropriate for the purposes of this research. The goal of the inductive
study is to derive theories from the observation made from the cases studied.
As regards the sampling of the thesis, it fully answers the flexible research structure due to the
fact that in the beginning of the research there was no understanding of the business models on the
market.
Research philosophy
The research philosophy is the first and the most basic level of the research framework. Th
philosophy as can answer the question of how the author (researcher) sees the world, his
assumption about the human knowledge and his perception of the true nature of things. This
perception will vastly influence the research strategies and methodology that constitutes the part of
that strategy (Saunders, 2009).
The research philosophy taken by this thesis authors is used is realism as from the author’s
perspective the world exists independently of the mind. As what the researches can sense is
perceived by his mind through the prism of his personal views and experiences. Philosophic
realism was defined by Phillips (1987) as “the view that entities exist independently of being
perceived or independently of our theories about them”. There are 2 types of realism- direct and
critical. A researcher using direct realism believes that our senses provide us with correct
representation of the reality. On the contrary, a critical realism researcher states that the primary
perception of information via our senses is then distorted by out mind to the subjective direction.
Therefore the critical philosophy claims the necessity to dig deeper in the structures and
relationships of the perceived phenomena in order to discover the conceived complexity.
Therefore the data collection techniques and analysis conducting can be qualitative, quantitative or
both (Saunders et al., 2009).
Research approach
Deduction and induction are the main research approaches there are. Induction is the research
approach when the author is trying to understand what is happening and understand the gist of the
problem. Deduction on the other hand tests the theories via hypotheses.
In induction the researcher analyses the collected data what emerges into theory, what in its
turn becomes an isolated part of the real world that is aimed at explaining what is happening. In
general, induction is focused on a detached comprehension of the research context, the gathering
of qualitative data and rather flexible research structures that imply possible research changes
during its process (Saunders et al., 2009).
37
Research strategies
The research strategy that the author uses in this thesis is a multiple case study. Case study as
a research strategy includes the empirical investigation of a particular thing within the frames of
real life, what uses a number of sources of evidence (Yin, 2009). Taking into consideration the
relevance of case studies context, the limiting frames of the focal phenomenon and the context of
its research are necessarily well defined (Robson, 2002).
Usually, case study is an element of the exploratory research which main purpose is to
investigate the unexplored insights of the focal phenomena and look at it from a new angle
(Robson, 2002). Logically the case study answers the requirements of this case study.
Research methodological choice
Methodological choice describes the research design part that concerns the nature of data
collected by the researcher. The types of data are separated into 2 groups- qualitative and
quantitave. Quantitave data contains numerical information, however qualitative data consists of
other forms information but numerical, like photos, words and other types of visual representation
(Saunders et al., 2009).
The author has chosen multi-method case study for this research, so that a number of data
collection methods from different sources are utilized, yet all of them are qualitative. The
reasoning behind such choice is to triangulate the data collected to support the reliability of
research findings (Saunders et al., 2009).
Time horizon
The time horizon of the research can be cross-sectional or longitudinal. Cross-sectional
analysis is used when the research is taken to address a question or describe a phenomenon at a
particular point in time, whereas longitudinal time horizon attempts to study the phenomenon
during the extended period of time (Saunders et al., 2009). The researcher seeks to find factors in
business models that positively influence the companies’ performance at certain years, therefore
the time horizon of this research is cross-sectional.
Techniques and procedures
The last level of Saunders research design framework is techniques and procedures that are
utilized to describe what was done by the researcher to collect and then analyse the data of the
thesis. The following part will cover the decisions made in regards to the choice of data sampling,
data collection and data analysis.
38
Sampling
The ultimate purpose of sampling is to find cases that are likely to support and extend the
chosen theory. Therefore, for the case study method the sample must not be random, on the
contrary it has to be chosen specifically in order to support the development of theoretical
background (Yin 2009, Eisenhardt 1989). The choice of cases for the research should be done in a
way that they have to either predict alike research results, or on the other hand they have to lead to
diverse yet expected results (Yin, 2009). In general, the cases with diametric outcomes constitute
the best information provider for theoretical purposes in case studies (Eisenhardt, 1989).
The sample for data collection research consists of 5 civil Russian passenger airline carriers
that operate on the territory of The Russian Federation and are owned either by Russian
government or by Russian citizens. The total number of airlines that operate on the Russian
market is around 100 with the 14% of the market belonging to foreign carriers. The total market
share of 5 case companies amounted to 56% in 2015, what is a big part of the whole market and
constitutes a representative sample.
The sample choice process was done via the market analysis of Russian airline industry that
was conducted by the researcher. The main sources of information were reports from international
aviation agencies that gather information about the airlines and countries. Another source of data
was the mass media articles and interviews that cover the current situation on the market and most
powerful and interesting from the business perspective companies. Additional sampling sources of
information were airlines’ presentations and reports that include information about the market and
certain business specifics of the company itself.
The second screening round was concentrated on only 8 of these companies. The researcher
wanted to gather the maximum information in regards to the business models and value creation
principles of these companies. Such information was found in newspaper articles, business
journals, Internet articles and interview and industry and company reports. Such actions were
taken in order to ensure the triangulation and diversification of information sources that allow
proving the validity of data.
Out of those 8 airlines 5 were particularly suitable for the analysis conducted in the study.
Companies were not bankrupts, had more than 10 airplanes in their fleet, had a distinctive brand
name, reputation, did both domestic and international flights and their business models’
information is available in different sources.
39
Data collection
In general data collection methodology for case studies is quite flexible and very much
depends on the particular opportunities that are available to the researcher, therefore the data is
collected from all available resources. Case study usually composes diverse data collection
methods as of questionnaires, archives, interviews, observations are in either quantitative or
qualitative form. A thing that is very important is the triangulation principle that is crucial for
theory creation in case studies. The triangulation states that the data collected and analysed from
one source is compared with another source with the aim of verifying its quality (Eisenhardt,
1989).
The main data collection was conducted via semi-structured interviews with the airport
representatives and representatives of airlines. The interviews were based on the opened questions
to provide elaborate questions. The interviews were divided into several themes each consisting of
a number of questions in regards to the business model and value creation principles of the case
companies. The semi-structured interviews may vary according to the respondent as the type of
respondent is different and the company is different as well (Saunders et al, 2009).
Primary data concerning 5 focal case companies consist of 4 interviews with industry insiders.
The initial goal was to conduct interviews with a representative of every case company, yet as a
result of unavailability of some managers and tight schedule of other company representatives, 2
interviews were conducted in person and 2 via phone (table 4):
Table 4. Interview information
interview
date
company
1
10.03.2016
A
Deputy PR
director
2
3
12.03.2016
05.05.2016
A
B
Business
Deputy
development Marketing
manager
manager
4
10.05.2016
C
Lean
manager
phone
phone
face-to-face
face-to-face
place
respondent
in Moscow
respondent
in Moscow
office
office
start time
duration
18:20
1 hour
12:00
45 min
19:00
50 min
19:00
45 min
title
type
Semi-structured interviews included all research topics and were conducted with people, who
have worked or work in the focal companies and have inside information about them. The
interviews were conducted in Russian and took place in the city. Telephone interviews were
40
conducted with Moscow. The data was recorded by a recorder for the telephone interviews and
was written down for the personal interviews.
The interviews were based on the opened questions to provide elaborate answers. The
interviews were divided into 3 groups (table 5).
Table 5. Questions from the conducted interviews
1) what business model does your company have?
2) what are the key elements of your business model?
company business
model
3) how does the company change its business model?
4) how does the business model differ from the ones of competitors?
5) what can you say in regards to these question about other companies?
1) How do you create value?
2) What are the main drivers of value creation in your company?
3) how do your engage customers in value creation?
customer value
creation elements
4) how do you reach your customers?
5) how do you educate your customers?
6) how do you capture value
7) how do you get feedback from your customers?
8) what can you say in regards to these question about other companies?
1) what are the competitive advantages of your company?
key competitive
advantage drivers
2) how sustainable are these competitive advantages?
3) how did the company manage to achieve theses compatitive advantages?
3) what can you say in regards to these question about other companies?
The secondary data collection was done through secondary data sources. The secondary data
mainly consists of materials provided by airlines’ reports and presentations, researches made by
CAPA (Centre for Aviation), Rosstat statistics, consulting agencies’ market researches and
interviews from reliable mass media sources like “Kommersant”, “RBK”. The researcher has
analysed the 17 articles by RBK, Verdomosti and Kommersant in regards to the industy and the
scope of the thesis. Another valuable source of numerical information was the Rosstat stitastical
agency that provides annual reports. The thesis also refers to the reports made by CAPA agency
based in Australia that prepares the global and country specific reports in regards to the aviation
41
industry and airlines in particular. Moreover, the research has vastly used the annual reports made
by the focal airlines themselves and posed on their web-sites. Another source of data were the
financial reports of the focal companies that allowed calculating the key industry indicators that
are then used to evaluate the effectiveness of business models among the case companies. The
indexes used in the thesis are globally recognised and are used by international airline carriers
around the world. The financial data was taken from the companies’ web-sites and their annual
reports in order to check the validity of the data presented by comparing the figures.
Data analysis
For each of the cases a number of topics were analysed. According to the theories of business
models the definition of business model, its main components and best model that can be used for
the mature civil aviation industry deserve significant attention in the research. The mass media
interviews with CEOs of the focal airlines as well as the marketing and consulting agencies’
reports will support the analysis phase as the airlines’ reports, seminars and presentations may
include the bias and require triangulation.
With the ain of achieving reliable results of analysis, the researched is to make a more
profound investigation that the first impression of the data (Eisenhardt, 1989). In the thesis, this is
achieved by cross-referring the impressions from the airlines’ reports and references about
themselves and the opinion about them from the competitors, mass media and different
information agencies.
The actual research objectives and proposition were not finalised when the data mining was
initiated rather they emerged during the process of data analysis. This is a regular phenomenon for
an inductive study due to the fact that imminent issues and questions appear and become evident
from the data (Saunders, 2009).
Initially, 5 cases of the thesis were studied individually by applying the research objectives to
each single case. As soon as the characteristics of each case were found, analysed and became
distinct and clear, so that the business model and main sources of customer value creation were
found, cross-case conclusions were made so as to achieve the research objectives and prove or
dispute the research propositions.
42
3.2 Russian airline market overview
The researcher starts this chapter with the short overlook of Russian economy that is crucial
for understanding the current situation in Russian airline market that will go afterwards. The last
year Russian federal budget and therefore economy was dependent on oil prices by about 50%. So
a huge drop in fossil fuels resulted in recession and stagflation, creating a big budget deficit. One
of the measures taken by the government is privatization and a sale of, for example, Aeroflot
stocks which is still mostly owned by the state.
IMF (International monetary fund) claims that Russian GDP contracted by 3.7% in the year of
2015, what was previously followed by several years of steady recession with GDP growth of
0.7% in 2014, 1.3% in 2013 and 3,4% in 2012 (IMF report, 2016). As a result of these statistics
many investors reacted negatively on the market conjuncture and withdrew their assets from the
economy what led to capital outflows of $153 bln in 2014 and $57 bln in 2015. The expectations
about the current year correspond with 2015, what is a somewhat good sign meaning that investors
are now less suspicious of Russian economy. That followed by low oil prices have devastated
RUR causing its drop by 44% vs. USD in 2014 and further 19% drop in 2015, but in the 1 st quarter
of 2016 it has recovered by 11% vs. USD (CAPA report, 2016).
Consumer inflation rate was pretty high with 16% in 2015 and so far keeps around 8% in
2016 in comparison with 2014 when it compounded only 5.5%. So the economy situation may
result in 2 possible macroeconomic interventions in the form of either increased tax burden or
budget spending cuts. According to the information from IMF on January 2016 Russian GDP is
expected to drop by 1% this year what is worse than the similar forecast done in October 2015
0.6% (IMF report, 2016).
Yet, regardless of hard economic situation the growth of airline passengers remained constant
throughout these years. From 2009 until now the average passenger growth rate remained around
14.5% per annum in both domestic and international sectors. The traffic growth was 13.2% in
2013, 7.8% in 2014 and 8% in 2015, what shows a negative trend, but still surpasses the world
trend (CAPA report, 2016).
43
Figure 8. Russian civil passengers in mln 2009-2015
Source: CAPA report, 2016
However, the traffic has been vastly influenced in 2015 by numerous factors such as terrorist
acts in Egypt, a conflict with Turkey, European sanctions and recession. SO in the first 9 months
on 2015 the traffic was down by 2.6% (Figure 8).
Apparently, the international destinations have suffered most by 15.7% dropping in 2015 due
to the fact that not only customers were affected by these circumstances, but also foreign carriers
withdrew their capacity as a result of cost of doing business and political situation. The first signs
of extinction of international destination traffic were observed in 2014 when it shows the growth
of 1.8% in comparison with previous 2-digit numbers. Fortunately, a big part of the international
flight decrease was balanced by a short increase in domestic flight growth of 16.2% in 2015
(Rosavia). The fact that the interdependence coefficient between GDP growth and traffic growth in
Russia is bigger than the average by 2 times reveals that Russians are more sensitive to economic
state as air travelers (figure 9).
According to the Russian Association of Air Transport Operators (Transport Operators
Association), the direct costs of the airlines increased by 25% in 2014, and fuel costs increased by
17%, while the lease payments increased by 45%, what made the financial conditions for the air
carriers even tighter and riskier (Aeroflot group 2015 results, 2016).
According to information available in February 2016 the seat number at least up to July 2016
is expected to fall up to 15-20% (CAPA report, 2016). Though should economy recovers, the
growth numbers will return to positive trend. Nonetheless, so far the Ukrainian war, European
44
sanctions, low oil prices, unstable RUR and war in Syria negatively affect the condition of Russian
economy and airline market in particular.
Figure 9. Russian GDP growth and civil aviation passenger growth 2010-2015
Source: Aeroflot presentation 2015
Russian airline market in very much consolidated and continues such trend until now. Top 5
Russian airlines ‘share has increased from 60% in 2010 to 81% in 2015 (Aeroflot group 2015
results, 2016). The reason for this consolidation is a number of acquisitions by Aeroflot in 2011,
difficulties encountered by market participants and revocation of a privilege to hold a flying
certificate and bankruptcy procedure of the 2 nd biggest Russian airline company Transaero.
Consequently, Russian airline leaders managed to augment its PAX (passengers approximately)
from 20.5% in 2011 to 35.2% in 9M2015 (Figure 10).
Figure 10. Share of passengers carrier by top 5 Russian airlines 2006-2015
Source: CAPA report, 2016
45
In 2015 the biggest player on the Russian market was airline conglomerate of Aeroflot group
that consists of Aeroflot itself (27.8%), Russia airlines (5.2%), Donavia (1.6%), Orenair (3.1%),
Avrora (1.2%) and low-cost carrier (LCC) Pobeda (3.2%). The total sum of Aeroflot group then
equals 41.1%, but if we take into consideration international traffic in drops to 35% (CAPA report,
2016, 2016). The runners-up were flat-broke Transaero (13%) and S7 (9%). The Aeroflot group
market share was 35% in 2015 in comparison to 30% a year earlier (Figure 11). This is the reverse
trend from the market that shrinked by 2.6%, because Aeroflot group transferred 13.3% more in
9M2015 than in 9M2014 (Rosavia). The whole year gave Aeroflot a growth rate of 13.4%, created
by 32.5% rise in the international segment and a drop of 6.2% in the domestic segment. Aeroflot
has mostly benefited from a loss of passengers by UTAir group that lost of 17.1% in 2015, 16.1%
loss of Russian top 5 and a 19.9% decrease of foreign companies that left the Russia in 2015
(CAPA report, 2016, 2016).
As it was previously stated on the 26 th October 2015 2nd biggest player on Russian airline
market Transaero was suspended due to inability to pay its debts.
The following figure (Figure 11) shows how concentrated Russian airline market is depicting
share of passenger numbers carries by top 5 Russian airlines:
Figure 11. Market shares of Russian aviation 2014 (red) and 2015 (blue)
Source: Rosavia, CAPA report, 2016
2013 and 2014 were particular from the point of foreign LCC that tried to enter the market.
Companies like EasyJet, Flydubai, Niki and Germanwings (Lufthansa) succumbed to temptation
to enter the growing and promising Russian market and increase their capacity (routes to-from
Moscow). Though hard they tried they managed to achieve only 5% of cross-border seats in 2014
(Aeroflot report, 2015). Subsequently in 2015 the majority of foreign LCC shrinked their business
in Russia. For instance, EasyJet cancelled the flights to Manchester and decreased the number of
46
flights to London by 2 times. As a result the volume of seats taken by LCC in Russia fell down to
less than 4% in 2015. Currently, the leader on the market among foreign LCCs in Russia is
FlyDubai that holds the 15th place out of all airlines by international seats in Russia.
Simultaneously, the market niche of low-cost was filled with local company DOBROLET in
2014. Yet it was for a very short-term of 2 months because of EU sanctions and leasers’ refusal to
continue the contract. Further on Aeroflot founded a new LCC Pobeda in December of 2014. Until
now Pobeda is the only Russian representative of low-cost segment in our country. It transferred
3.1 mln people or 8% of all Aeroflot group in 2015 (Aeroflot report, 2015). According to the
statistics given by OAG (Air travel intelligence) as of 1 st of February 2016 Pobeda is the 5 th
biggest airline in Russian market. The following figure (Figure 12) represents the LCC capacity
share of all seats in Russian market divided into domestic and foreign companies (Air travel
intelligence, 2016). In 2007 and 2008 there were 2 low-cost companies called Skyexpress and
Avianova that went out of business due to old planes that required high repair expenses, frequent
flight delays and poor financial performance (Air travel intelligence, 2016).
Figure 12. LCC capacity share of total seats of the Russian market 2007-2016
Source: Air travel intelligence, 2016
Russian airline market seems to be much closed in comparison with European because
Russian carriers perform 85% of all flights and 100% of domestic flights. On the contrary, in
Poland local airlines do only 32%, in Germany 58% and in England 55% of all movements. This
might be explained by the fact that Russian market is dominated by domestic flights. 54% of all
flight are done within its boundaries, however, in Europe number are drastically lower- Poland
47
8%, England 10% and Germany 16% (CAPA report, 2016). One of the possible reasons for that is
that Russia is not a part of European Union aviation market what places obstacles on the way of
entering for foreign carriers from both sides. Currently the situation is worsened due to political
conflicts and recession in Russia.
Another important aspect in aviation, especially with expensive USD is leasing. There are
generally 2 types of leasing- financial and operational. Operational leasing is more favourable for
Russian market as the situation with oil prices and therefore with RUR exchange rate is unclear, so
the short-term (up to 10 years, in Russia usually 5 years) and less risky operational leasing
contracts are more favourable for the market. Operational leasing satisfies both the leaser and the
airline as they minimise their risks in case of payment default on the contract (Air travel
intelligence, 2016).
For example, Aeroflot share of foreign currency liabilities in the total amount of capital lease
liabilities is 98.1%, but 65.8% of payments under finance lease contracts are due from 2018 and
later (Air travel intelligence, 2016).
Aeroflot group has 78% of aircrafts in operational leasing that does not imply the purchase of
an aircraft after the maturity of contact, but 22% of contracts are in financial leasing (average term
15 years) that forces the leasee to purchase the aircraft afterwards (Air travel intelligence, 2016).
That is not profitable for the airline as the price of the airplane almost does not change for the first
12 years, whereas the average operational leasing contract lasts up to 7 years. Operating lease
expenses in 2015 for Aeroflot reached 44.415 mln RUR, whereas the revenue was 415.173 mln
RUR. On average the operating lease expenses equal 12% of operating expenses for the industry
(Aeroflot group 2015 results, 2016).
Another important aspect of Russian market is a number of wide-body planes that amounts to
less than 7% (CAPA fleet database, 2016) whereas world average is 17% and Europe average is
14%. What is more, out of 62 planes owned by Russia, 38 belong to Aeroflot group, what exceeds
60% of the overall volume. In the world only cargo carrier by the name of Air Bridge Cargo can
boast of 15 wide-body aircrafts, but normally companies have no more than 5. As a consequence,
Aeroflot group is obviously very dominant on the Russian market (CAPA fleet database, 2016).
Another type of airplanes- narrow-body ones are statistically correspondent number-wise with
Europe and World- Russia 48%, Europe 52%, World 49% (CAPA fleet database, 2016). However,
Russia is very much ahead with small planes. Jets are represented by 15% in our country featuring
11% in Europe and 13% globally. Turboprop aircrafts constitute 19% in Russia compared with 1112% in Europe and world (Figure 13).
48
Figure 13. Russian fleet breakdown in 02.2016
Source: CAPA fleet database, 2016
The increased number of narrow-body and small aircrafts in Russia is explained by the
importance of the domestic market due to the huge size of the country and its geographic location.
Russia is closer to Asia than Europe, so latter faces the necessity of long-haul travel to reach Asia.
Speaking about the Aeroflot group, it has the biggest fleet in Russia. According to the CAPA
statistics for the 31st of January 2016 Aeroflot groups fleet includes 266 planes (28% of all Russian
aircrafts) currently in use and 116 planes are on order (38% of all planes on order in Russia).
Aeroflot orders are evenly distributed between Airbus and Boeing in narrow and wide categories,
what is more important the order includes 6 Russian regional planes of SSJ - Sukhoi Super Jet
(Aeroflot report, 2015).
The runner-up is UTAir Group with a fleet of 97 planes (less than 50% of Aeroflot). UTAir
has a order of 46 planes out of which 8 Airbus, 28 Boeing and 21 Irkut narrow-body planes. The
third place is taken by S7 airlines with 45 aircrafts in operation and 23 A320s on order. The 4th
place is Ural Airlines with 35 planes and 7 A320 on order (CAPA fleet database, 2016).
Apart from this top 4 there are only 4 companies that have airplanes on order at the volume
above 10 machines. These are usually small aircrafts from local manufacturers: Yamal ordered 17
SSJ, VIM- 10 Tupolev and Bombardier, Red Wings- 10 Tupolev and IrAero- 10 Irkut (CAPA
report, 2016).
49
Russian airline market is inextricable linked and dependent on regulatory system and
governmental intervention. And Aeroflot, being by far the biggest player and 51% owned by the
government is the main participant of the evolution of Russian airline market legislation.
The initiative of Aeroflot to become a market leader belongs to the Russian government.
Government made non-refundable tickets and hiring foreign pilots legal and now the country have
an opportunity to have its own low-cost carrier Pobeda (CAPA report, 2016).
All things considered, the situation on Russian airline market seems to be an interesting topic
for a research from the point of business models used by the companies and their value creation
principles. The following research will start with the companies’ description and further focus on
the elements of BMs of the focal companies that help them create superior customer value and
gain a competitive advantage.
3.3
Airline case studies
3.3.1 Aeroflot group
The largest national airline of Russia performing domestic and international flights from
Moscow Sheremetyevo airport. It is one of the oldest airlines in the world, from its history of 1923
it is a wholly state-owned enterprise. After the collapse of the Soviet Union became semiprivatized company where a majority stake (51%) is under the control of the state (Aeroflot annual
report, 2016).
Since April 2006, Aeroflot is a full member of the airline alliance SkyTeam. Also, Aeroflot
together with its subsidiaries, the airlines Russia, Donavia, Aurora, Orenburg Airlines and Pobeda
forms one of the largest aviation holdings in Russia - Aeroflot group (Aeroflot annual report,
2016). Multi-brand strategy allows the Group to successfully expand its presence in all key
segments of the market in the domestic and international destinations.
At the end of 2015 the Group hold 35% of the Russian market. According to passenger traffic in
2015, 34.7 million people used Aeroflot group, including 23.6 million passengers who flew by
Aeroflot (CAPA Centre for aviation, 2016).
Group successfully implemented its strategy of profitable growth with the main priorities:
• high rates of business growth
• increase of investment attractiveness
• construction of high-performance hub system
• development of a of modern aircraft fleet
• balanced development of the route network
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• improving the quality of passenger service
Aeroflot fleet is the youngest among the world's major airlines. The average age of Aeroflot
aircraft is 4.1 years, and the Group's aircraft is 7.0 years.
Aeroflot performs his own passenger and cargo flights from Moscow (Sheremetyevo airport) to 51
countries around the world. Out of 125 destinations 43 are located in Russia, 8 in the CIS, and the
rest - 1 in Africa, 4 in the Middle East, 5 in the Americas, 13 in Asia and 45 in Europe (CAPA
Centre for aviation, 2016).
Shared flights (code-sharing) with partner airlines are done in 69 destinations, but if we take
into consideration the whole group and the code-sharing flights, we will have the total of 351
points located in 66 countries.
In 2012, Aeroflot continued development of cooperation with a number of airlines via codesharing in order to strengthen the presence in promising markets, get access to new markets,
improve route network and more efficiently use of its own fleet ships.
At the beginning of 2013 JSC Aeroflot had code-sharing agreements with 29 Russian and
foreign airlines, including (Aeroflot web-site):
17 agreements in which Aeroflot is a partner of the operator, and marketing partner
4 of the agreement, which Aeroflot is the only partner-operator
8 agreements where Aeroflot is the only marketing partner.
Total last year Aeroflot flights have transported more than 500.000 passengers by codesharing. Total income from operating activities of Aeroflot in the framework of agreements codesharing has made more than 3.7 billion rubles (Aeroflot annual report, 2016).
Russia airlines
“Russia airlines” is a part of the Aeroflot group that operates passenger and cargo flights from
St Petersburg Pulkovo Airport. At the end of 2014 Russia took the fifth place in the list of the
largest airlines of the country. The company is based in St. Petersburg and carries about 40% of
all air traffic from the airport Pulkovo.
In summer 2016 Russia airlines will unite 3 Aeroflot subsidiaties- Russia itself, Donavia and
Orenburg Airlines. It will be a new major carrier positioned in the middle price segment with a
fleet of 74 aircraft (Aeroflot annual report, 2016).
Russia airlines also promote themselves by doing different agreements. For example, in July
19th 2015 a new partnership agreement between "Russia" was signed by the airline on the
"Petrovsky" stadium and the football club "Zenit". The new agreement partners is for one year
with possibility of further extension.
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Geography of flights includes over 20 Russian cities, 5 cities of the CIS, and 13 points in
the other countries.
In 2012, the Company continued to optimize and coordinate schedules and route network as
part of "Aeroflot" Group. Russia airlines got rid of unprofitable flights by reducing the number of
routes from 120 to about 80. The company has improved the results of operation of aircraft An148 type vessels, reduced the number of aircraft types by the withdrawal of Boeing 737 and
optimized staff structure (Aeroflot financial annual report, 2016).
"Donavia" is a regional carrier that is based in Rostov. In 2012 the Company completed the
transfer of all commercial functions in Aeroflot. The company completed the implementation of
unified financial policy, accounting and adjusted itself to a Group product standard "Region". It
also went through a complex restructuring of the fleet. In addition, the company centralized the
functions of maintenance and repair with providing a centralized pool of spare parts, engineering
and quality control (Company web-site).
"Orenburg airlines" used to be a charter-oriented company, but as a result of economic
crisis, terrorist attacks and political problems such business model has become unprofitable. So
Aeroflot has decreased the number of planes by 9 and decreased destinations by 26. Business
model is now mixed- local regular carrier with charter flights to holiday destinations. Aeroflot has
centralized program of periodic flights carried out by "Donavia" and "Vladivostok Avia" in the
Southern and Far Eastern Federal Districts. In addition, "Orenburg airlines" is now responsible for
periodic flights previously carried out by Russia airlines to/from St. Petersburg. The company, like
other subsidiaries, has unified fiscal policy and tax accounting rules (Company web-site).
Avrora- Russian regional airline based in Yuzhno-Sakhalinsk, Vladivostok and Khabarovsk.
One of the subsidiaries of Aeroflot Group (51%). The airline connects regular flights between The
Far East and Siberia, performs local transportation within the Far Eastern regions and flies China,
Korea and Japan (Company web-site).
The establishment of Russia airlines that will embrace Russia, Donavia, OrenAir and Aurora
is aimed at strengthening Aeroflot presence in international and domestic market and
optimisation of domestic network in order to lower the costs and increase customer value that
will result in higher profits.
Pobeda
Currently Pobeda is the only Russian LCC - the 4th in the Russian aviation history and the 1 st
successful one.
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At the moment, 12 new Boeing 737-800 aircraft operate about 70 flights per day to 34
destinations, 6 of which are foreign. By the end of 2015, passenger traffic reached 3 million
passengers. By 2018, the fleet will consist of 40 aircraft and transportation will reach 10 million
people a year, allowing the company to enter the top five largest Russian air carriers (Aeroflot
financial annual report, 2016).
Pobeda airplanes fly to 65 destinations (data for February 2016) between 24 airports in Russia
and 5 in Europe. The main hub is Vnukovo Moscow airport. In the near future Pobeda plans to
expand its flight direction and add to its network new Russian and European cities.
Pobeda has the park of 12 new Boeing 737 that is used super intensively as airplanes spend 14
hours a day in the air (CAPA fleet database, 2016). It provides low operating cost per flight hour.
The Company is very serious with fuel economy: for example, in order to lower the weight of the
aircraft they got rid of unnecessary equipment (food heating furnace, trolleys, etc.), so the planes
became lighter 1.5 tons each, what in its turn reduced the cost of flight hours by approximately
380 rubles. Another achievement developed jointly with Boeing is a new technology of lying on
one engine that gave savings of 100 kg of fuel per flight.
As a result of cutting labor costs Pobeda has 5000 passengers carried per employee, while the
world average is 1,000 passengers per employee (www.rbc.ru).
Pobeda is first in Russian airline where you can buy a single ticket "plane plus bus. A
passenger of the airline can just buy a ticket from Moscow to the centre of Vienna. By selling a
ticket Pobeda guarantees the transportation in spite of a delay of a bus or a plane (CAPA fleet
database, 2016).
According to the data from Aeroflot Pobeda has managed to find its routs and customers
without cannibalizing on the group. For example, at Sochi during the 9 months of 2015 Pobeda
had a loading of 82.5%, whereas Aeroflot had 80.8% and Russia airlines had 83.9%. As far as the
passenger numbers are concerned, they were decent at all three airlines- Pobeda 395000, Russia
491000 and Aeroflot 481000 (Aeroflot annual report, 2016).
Pobeda is perfectly market positioned as it took the new market segment of price-sensitive
passengers and is winning by offering more affordable travelling experience without cannibalizing
of the Aeroflot group. Moreover, the emerging and development of Russian LCC protects the
market from entering by foreign competitors who might occupy the market.
3.3.2
UTair
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This carrier is formed by many subsidiaries such as UTair-Ukraine, UTair Helicopter
Services, UTair Cargo and others. One of the largest air-holdings in the country UTair Group is
engaged in the implementation of passenger and cargo flights within Russia and abroad as well as
the maintenance of aircraft (airplanes and helicopters) and staff training.
Their largest airline hub airport is Moscow Vnukovo airport and Roschino (Tyumen). Also,
UTair has hubs and important technical bases in several northern and western regions of SiberiaSurgut (headquarters), Khanty-Mansiysk and Noyabrsk.
The airline is the world's largest in size and capacity of the existing helicopter fleet operating
in Russia and in other countries and continents. By volume of passenger traffic UTair occupies the
2nd place in Russia after Aeroflot. During 2015 the airline carried more than 8.7 million people.
In April 2016 a fleet of UTair consists of 62 aircraft. Helicopter fleet comprises 338 units (as
of March 1st, 2016) including the world's best-lifting helicopters Mi-26, capable of carrying up to
20 tons (UTair annual report, 2015).
2014 was tough for the airline - according to the document, the net loss reached 61 billion 659
million rubbles.
The reason for bad economic performance is the leasing payment in foreign currency. The
aging fleet and the incidents (8 crashes during 9 years) in the sky forced UTair to buy new planes.
As part of the "Farnborough-2012" Carrier has signed a contract with Airbus for the supply of
twenty A-321 worth $2 billion. The reality is that the aircraft business of UTair is unprofitable,
but these losses are covered by helicopter business. Nowadays with rubble is cheap and
purchasing power of passengers is low, the helicopter business cannot cover airline losses
(www.ura.ru/articles/1036263544).
3.3.3 S7
It is a Russian airline operating both domestically and internationally. It has hubs at
Tolmachevo (Novosibirsk) and Domodedovo airports, as well as additional hubs in Irkutsk,
Krasnoyarsk, Khabarovsk and Vladivostok.
In 2015 S7 Group (includes airlines "Siberia" and "Globus") carried 10.63 million passengers,
which is 5.6% more than the year before; with 7.57 million passengers transported on domestic
routes (S7 Annual report, 2015).
From 15th of November 2010 the airline is a full member of the global airline alliance
OneWorld, which gives them a certain status and the possibility of code-sharing. In 2014 174.000
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passengers were transported on interline flight agreements and another 170.000 on code-share
agreements. Airlines OneWorld based on all continents and operate flights to 150 countries.
In April 2016 S7 Group fleet consists of 64 aircraft. The average age of the fleet is 9.3 years,
the average number of flight hours a day is 11.0 hours (S7 Annual report, 2015).
S7 boasts a loyalty program «S7 Priority» which gives various bonuses for regular
passengers. They have also developed good Internet services and mobile technologies- they had
the first airline website where you could buy tickets directly, service Passbook and the service
«Mobile boarding ticket».
3.4
Comparative analysis of the focal airlines on the basis of business model canvas
3.4.1 Value proposition
Value proposition of Aeroflot is separated into 3 main segments that are attached to the
subsidiaries of Pobeda, Russia airlines and Aeroflot itself. They all, as a group, cover all customer
segments (Table 6).
Table 6. Customer segments of Aeroflot group
Source: Aeroflot report, 2016
purpose
length
price
destination
business
short-haul
low-cost
regional
regional traffic
mid-haul
mid-price
domestic
leisure
long-haul
upper class
international
price-sensitive
Aeroflot value proposition - Russian airline providing perfect safety and a high quality
service at all stages of air travel- premium product. Aeroflot works hard to provide a clear vision
and understanding to the customer that their value is superior to others. All other elements of their
business model work in collaboration to get a clear and distinct value proposition. Their value is
safe air trips to multiple destinations domestically and internationally with superior quality of
service, new and safe aircrafts, cutting-edge entertainment systems on board, superior food and
high preflight experience.
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Russia airlines value proposition- focus on regional operations in the middle price segment
with selective exposure to international routes. Obviously the value proposition of Russia airlines
correlates the price segment and their destinations’ network. They offer safe, comfortable service
mostly for regional domestic flights, particularly covering other region of The Russian Federation
and connecting them with each other and with Moscow and Saint Petersburg.
Pobeda value proposition- Russian only low-cost flight service with good value fares to
convenient airports and leading-edge digital platform Pobeda provides much lower ticket prices
for both domestic and international destinations that are mainly in small airports. Pobeda service is
the main substitution to railways as the price may be even cheap whereas it is much more
comfortable and fast.
3.4.2
The company and its exchange partners (customer segment and relationships,
channels and key partners)
Aeroflot’s main customer segment is business travellers for short-haul, mid-haul and longhaul distances. For short-haul they use direct flights on regional jets, for mid-haul they use hubspoke model with very high frequency flights and narrow-body aircrafts. For long-haul business
flights they also use hub-spoke, high frequency flights some of which are code-shared. Long-haul
aircrafts are wide-body. Aeroflot also takes some part of regional traffic and long-haul leisure
passengers.
Aeroflot based in Sheremetyevo covers the whole Russia connecting Far-East, Siberia and
other regions with Moscow. Out of 125 Aeroflot destinations 43 are located in Russia, 8 in the
CIS, and the rest - 1 in Africa, 4 in the Middle East, 5 in the Americas and 13 in Asia and 45 in
Europe. Shared flights (code-sharing) with partner airlines are done in 69 destinations
Russia airlines is presented in regional traffic and leisure segments. For regional traffic
Russia airlines are presented in short-haul flights on demand-based frequency basis of direct
flights. Mid-haul segment is based on hub-spoke model of demand-based frequency. Leisure
segment is covered by mid-haul and long-haul flights with high seasonality.
Russia airlines will unite in one big carrier this summer, so I will treat it as 1 company
consisting of 4 (Aeroflot annual report, 2016):
1. Russia airlines themselves- regional airline with a hub in SPb, focus on direct and transit
routes via Pulkovo, Aeroflot SkyTeam representative on the north-west of Russia
2. Donavia- regional airlines with hubs in Rostov, Krasnodar, Sochi and Mineralnie Vodi. It
does short and mid-haul direct domestic routes in the South of Russia
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3. OrenAir- charter business model, well established locally, hubs in Vnukovo, Domodedovo
and Orenburg.
4. Aurora- regional far-east airline with hubs in Vladivostok and Khabarovsk that flies shortand mid-haul international and domestic routes.
Pobeda airline operates in a price sensitive segment on short and middle distances. The
business model is based on maximum frequency direct flights and maximum fleet utilisation. They
use only 1 type of completely new aircrafts and offer ancillary services like luggage, food and
boarding pass printing. At the moment, 12 new Boeing 737-800 aircraft operate about 70 flights
per day to 34 destinations, 6 of which are foreign. It flies to Milan, Bratislava, Vienna, Cologne
and Minsk.
All things considered, the strategy of Aeroflot Group for the year 2025 is to provide the
establishment of 3 standards: “Premium”, “Region” and “Tourist”. Aeroflot will take “Premium”
niche, “Region” niche will be taken by Russia Airlines in the North-West and by Donavia in the
South. A new Far-East airline Aurora will function in “Region” standard, whereas Oren Air will
play the role of a charter carrier in a “Tourist” niche.
In order to best meet the consumer demand and create the biggest value the Group plans to
divide into the following segments:
Aeroflot serves premium passengers, offering high quality service, high-frequency route
network with more destinations, access to the partner network of routes for the SkyTeam alliance,
convenient connections for international transit passengers.
Subsidiaries specialize on carrying passengers located mainly in regions with adjustable
frequency of flights and the capacity for maintenance of transit flows prospects in case growth in
demand.
Model of LCC involves the use of short or medium-range passenger service for the most
price-sensitive segment.
Travel Company provides passenger transport to places of recreation on the world's largest
resorts mainly in cooperation with travel agencies.
All in all, Aeroflot group has divided the country not only into 3 segments and now has a
separate airline targeting for each niche, but also has the full coverage of the territory including
foreign destinations. Ultimately, the company is trying to create value for every passenger who
can now choose from the group’s wide portfolio (Figure 14).
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Figure 14. Aeroflot group market segmentation
Source: Aeroflot report, 2016
Taking everything into consideration, Aeroflot group region-wise has full coverage on Russia.
The synergy of all companies within the group allows capturing customers not only with different
level of income, but also flying to/from almost any region of the country and international
passengers albeit tourists or business people flying to distant or neighbor countries.
Customer relationships of Aeroflot group do not differ within the group and do not
significantly differ from other focal companies. Aeroflot, Russia and Pobeda all have their callcentres where the customer can call and ask the required information. Moreover they all have
convenient web-sites designed in accordance with their brand design and value proposition. All
web-sites offer additional services of hotels, car rentals etc. Pobeda is the only one that does not
have a mobile app, what is logical due to low-cost BM. All group companies offer airport services
of self-registration booths and business lounges (except Pobeda). Moreover Russia and Aeroflot
have the shared “Aeroflot bonus” program for frequent fliers that give the following bonuses:
have premium flights together with your family or friends;
use earned miles for class upgrades;
faster miles earning in business class;
collect miles with program partners;
use the premium service partners to gain miles;
regularly receive information about news and offers of Aeroflot and program partners.
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T h e channels that Aeroflot uses to reach their customers are web-sites, e-mail delivery,
mobile application and advertising. They do not have any distinct details in these channels, as they
are almost obligatory for the industry and shared by all focal companies. Another important way
how Aeroflot reaches its customers are the charitable events that Aeroflot always participates in.
They support different event both by free or discounted services or financially. Another very
important for Aeroflot channel is code-sharing contracts that allow penetration into new hard to
get markets and increase the global recognition of the brand. Lastly, Aeroflot uses the sponsorship
contracts like with Manchester United football club. Aeroflot has become an official carrier for the
club and by doing this they have rocketed the brand recognition on a global scale.
As far as the key partners of Aeroflot are concerned, they are shared among within the group
with only Pobeda being an outsider for The Skyteam alliance. Aeroflot is a member of Skyteam
alliance what helped them transfer 450000 passengers via code-sharing contracts just in 2015.
Skyteam has an extensive network of routes throughout the world through the powerful base
airports alliance members with Aeroflot in Moscow - Sheremetyevo, Air France and KLM in Paris
- Charles de Gaulle, Delta in Atlanta in Amsterdam – Schiphol as well as the leading airport in
Mexico City – Aeromehiko. The alliance has 636 lounges around the world that is available to
Aeroflot bonus passengers (Aeroflot web-site).
Moreover Aeroflot has profitable contracts with Boeing, Airbus and SSJ what allowes former
get 40-60% discount on big airplane orders. Due to the fact that Aeroflot buys planes as a group
i.e. in big number, they can benefit from such economy of scale and get aircrafts much cheaper
than other companies.
There are multiple corporate partners like Manchester United football club or Zenit football
club (Russia airlines). Charitable organisations are also partners of Aeroflot that give them a
chance to increase the brand awareness and improve the public perception of the company.
Another block of partners are airports, gas companies and catering agencies. At this point Aeroflot
does not have differences from other companies and here the economies of scale are not
significant. Lastly, the travel agencies and ticket web-sites are a big group of parents as only 30%
of tickets were sold by Aeroflot itself in 2015.
UTair has 2 distinct customer groups- aircraft customers and helicopter customers. UTair
strategy is aimed at Ural federal district where UTair does, according to various estimates, about
2/3 of the flights (CAPA report, 2016).
Aircraft customers are business and leisure passengers for mainly mid-haul flights both
domestically and internationally. The price segment is middle.
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In order to capture price-sensitive customers who are unable to afford a full price ticket UTair
has a new tariff "Light" for passengers without luggage. It also has limitations for changing your
reservation and refunding the ticket, but passenger can choose the seat for free.
Helicopter customers are a bit vaster and universal. Basically, UTair Helicopters is ready to to
service any kind of operations in any part of the world. Mainly their customer are oil and gas
companies that need to conduct geodesic works or need to transfer their employees or equipment
to the distant areas. Another big source of contracts are different international operations with
United Union. The company operates in Liberia, Côte d'Ivoire, Sudan, South Sudan, Congo,
Afghanistan, Somali and Mali. The company provides exclusive air service for some villages and
small towns. Also the airline does VIP-transportations and custom-made transportation, tourist
charters and conducts video footage from a helicopter.
Geography of UTair flights in Russia covers European Russia, Siberia and the Far East since
2012, but does not cover distant foreign countries. Daily aircrafts do more than 300 flights in 100
directions (UTair web-site). Flights are in Moscow, St. Petersburg, Tyumen, Rostov, Krasnoyarsk,
Irkutsk, Surgut, Omsk, Perm, Novosibirsk, Ufa and Kiev, Minsk, Baku, Tashkent, Yerevan and
Vilnius.
UTair main distinguishing feature is helicopter operations and the contract with United
Nations. For this UTair has a set of subsidiaries- UTair Europe, UTair South Africa and UTair
India (CAPA report, 2016).
The mission of the business direction of helicopter operations in Russia and abroad is to
perform work on customer request and at the optimal quality at any time of year and day anywhere
in the world by modern and reliable helicopters.
Customer relationships of UTair do not significantly differ from other focal companies.
UTair has a call-centre where customers can ask the required information. Moreover it has a
convenient web-site where they offer additional services of hotels, car rentals etc. UTair also has a
mobile app, that allows convenient purchase of tickets and easy search. UTair also offers airport
services of self-registration booths and business lounges. Moreover, UTair like all focal companies
except Pobeda has a frequent flyer program called “Status” that gives the different bonuses from
the program partners. Customers can gain extra miles staying in hotels, using the services of car
rental and paying by credit card for purchases. A unique feature of UTair Status program is that
one can spend 6000 miles on 30 min of pilot experience in a flight simulation machine (UTair
annual report, 2015).
The channels that UTair uses to reach their customers are a web-site, e-mail delivery, mobile
application and advertising. It does not have any distinct details in these channels, as it was
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previously mentioned they are almost obligatory for the industry and shared by all focal
companies.
Key partner of UTair are the oil&gas companies that require their helicopter services for
different operations and employees delivery in particular. Another important partner is The United
Nations and other foreign organisations and associations that need helicopter services in different
part of the world (UTair annual report, 2015). Moreover, UTair is in partnership with Airbus
helicopters that allow them to conduct more effective and cheaper staff education and keep close
relations with the helicopter provider. As well as other companies UTair has code-sharing partners,
but there are only 7 of them that is substantially less than other focal companies have.
Another block of partners are airports, gas companies and catering agencies. At this point
UTair like Aeroflot does not have differences from other companies. Eventually, the travel
agencies and ticket web-sites are a big group of partners as who managed to sell 68% of tickets in
2015 (UTair annual report, 2015).
The main customer segment for S7 is business passengers, leisure passengers and regional
traffic. For regional traffic S7 business model is based on hub-spoke model of demand-based
frequency. For business passengers they use hub-spoke model with high frequency flights and
narrow-body aircrafts. Leisure segment is covered by mid-haul flights with high seasonality (S7
Annual report, 2015).
In 2014 the routing network of airline Siberia included 122 routes- 29 countries, 91 cities. S7
Airlines together with its subsidiaries forms extensive route network, which includes 88
destinations (44 - Russian) in 26 countries in Europe, Asia and the Middle East (S7 Annual report,
2015).
S 7 represents the same niche as Aeroflot of high price segment with well-perceived market
brand and high quality of service. S7 is known for being innovative and contemporary with mobile
applications (Passbook) and has won numerous rewards as the best carrier, best advertisement,
best Russian airline company and many others. Also, S7 charter flights account for 19% of
passenger traffic, so tourists are a very important part of their business (CAPA report, 2016).
S7 like Aeroflot covers the whole Russia, but does not have distant foreign countries and flies
to Europe, Asia and Near East. It will also try to gain a competitive advantage by launching
Charlie Airlines in Cyprus to fly in Europe.
In 2016 S7 has introduced new types of tariffs for flying (S7 web-site):
Economy basic- no luggage, 10 kg of carryon, no free date change or seat choice
Economy flex- 23 kg luggage, 10 kg of carryon, free date change or seat choice
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Business basic- 32 kg luggage, 10 kg of carryon, no free date change or seat choice, no
access to airport business lounge
Business flex- 2*32 kg luggage, 2*10 kg of carryon, free date change, seat choice and
ticket return
Customer relationships of S7 are a bit different from other focal companies to the point that
they are most innovative in terms of digital ways of establishing the relations with customers. For
example, they were the 1st who launched a web-site, who started selling tickets from it, who
offered a mobile app, they are still the only ones who offer a Passbook- an app that allows users to
store electronic tickets, boarding passes, event tickets, loyalty program cards, coupons, discount
cards and gift certificates on their phones. S7 has a call-centre where customers can ask the
required information. Like other companies S7 has a convenient web-site where they offer
additional services of hotels, car rentals etc. Another common feature is airport services of selfregistration booths and business lounges. S7 has its own frequent flyer program called “S7
Priority” that gives the different bonuses from the program partners. Customers can gain extra
miles staying in hotels, using the services of car rental and paying by credit card for purchases
(CAPA report, 2016).
The channels that UTair uses to reach their customers are a web-site, e-mail delivery, mobile
application and advertising. It does not have any distinct details in these channels, as it was
previously mentioned. Nevertheless, the S7 advertisements were acknowledged to be the best in
the industry and have gain the world recognition on Cannes Lions awards.
The Key partners of S7 airlines include The Oneworld alliance that implies 21 core-sharing
agreements with airlines globally. Another partner is S7 Engineering facility that conducts the
aircraft maintenance for the airlines. Other partners include Russian jet fuel suppliers- Rosneft,
Gazprom and Lukoil (CAPA report, 2016). Other partners include hotels, car rentals, Internet
shop etc- all companies that are involved in S7 Priority frequent flyer program. As well as other
airlines S7 has partnerships with airports, catering, travels agencies and charitable organisations.
3.4.3
Key activities and key resources
The key activities for all focal companies include: flight operations, on-line and office ticket
sales, airplane maintenance, customer service, timetable planning and marketing research and
campaigns. For The Aeroflot the exception is the current rebranding of Russia airlines and
merging Russia itself, Donavia, Orenburg Airlines and Aurora in the whole Aeroflot group system
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with subsequent optimisation of these subsidiaries. For UTair an exceptional activity includes
extensive helicopter operations of any kind, any difficulty, anywhere. S7 stays within the regular
list of activities mentioned above.
The researcher wants to start with the analysis of such activity as fleet. The graph (Figure 15)
shows that Aeroflot, S7 and Russia are expecting growth in the near future in mid-haul flights,
where Aeroflot has the brightest expectations of buying 61 more aircrafts. Moreover, we can see
that Aeroflot is planning to drastically increase the number of long-range aircrafts by buying 47
more, whereas other companies either don’t have any plans to fly long distances in the future or
just keep the airplane rotation with a slight increase like Russia airlines with 3 more aircrafts. As
far as the mid-range aircrafts are concerned- no interesting pattern is revealed with only UTair not
buying anything. Yet that is obvious due to hard financial condition of the company and a trend
towards selling assets. Moreover UTair is a company that makes money on their helicopter
business, whereas their airplane segment has been long unprofitable.
Figure 15. Fleet comparison of long-haul and mid-haul airplanes of the focal companies
Source: Researcher analysis
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Another key resource for Aeroflot is the Russian government. The researcher considers
government in this case a resource rather than a partner, due to the fact that government can have
another government as a partner, whereas here it is more one-sided benefit relations in favor of
Aeroflot. The idea is make a country champion out of The Aeroflot Company (research interview
reference) that obviously has access to the political elite and therefore has by definition a very
crucial competitive advantage. Also Aeroflot has a studying facility and a maintenance facility that
help then decrease the labour and maintenance costs and retain the quality management at a very
high level due to the fact that they can control all the processes and provide themselves with
resources like professional and sufficient in numbers personnel and well-prepared planes. Another
resource that Aeroflot can boast of is its size and vast present via multiple airlines in the group.
This economy of scale allows them economize a lot of money as a buyer and decrease the fixed
costs. Lastly, the researcher considers high brand recognition and professional staff as valuable
resources as well, yet all focal companies obtain them as well.
The Key Resources for UTair is obviously the biggest in Russia helicopter fleet and
maintenance facilities that allow them to repair their fleet. Another resource is Surgutneftegas,
who is also the biggest shareholder, that can assist financially and support in case of payment
defaults (UTair annual report, 2015). Of course, other resource includes international channels
with organizations that need helicopter services and professional staff.
The key resources for S7 include their airplanes that are very distinct and recognizable due to
their color. Another resource is S7 Engineering, what is a maintenance facility that allows them to
repair their fleet and planes of other companies. Another resource that the researcher feels most
relevant is the management of S7. As the company is basically owned and controlled by Filevi
family, they take a very close look at all KPIs and performance indexes. Moreover, they are
primarily interested in both long-term and short-term goals. Another resource that constitutes the
bright coloring of the fleet is very bright and distinctive brand. It is well perceived by the
customers and is associated with good emotions and high quality.
3.4.4 Revenue streams and cost structure
Aeroflot revenue streams stem from their multi-segment strategy that is aimed at capturing
maximum value from all possible market segments. As Aeroflot is the biggest company in Russian
aviation market with distinct airlines that aim different price segments and geographic regions,
they manage to get the maximum value from the customers. Moreover, they offer superior service
64
on board in comparison with competitors. Lastly, they make a lot of money on core-sharing
agreements with their partners.
Cost structure of Aeroflot group is managed in a way that they constantly try to decrease the
operational costs and optimise the companies in the group. They have optimized the lease payment
of the subsidiaries what helped latter save 42 mln $ just in 2015 (Aeroflot annual report, 2016).
Another important aspect is constant flight optimization. Since 2014 they have changes about 26%
of the routes what allowed them to get rid of excessive operational costs and keep high loading.
Fleet standartisation that they use allows decreasing the maintenance costs and labour costs by
servicing only 1 or 2 types of aircraft. Moreover technical personnel will do a better and faster job
if they train only on 1 type of the plane. The fuel optimization equals to 1.4-1.8% each year what
is a very good result that saves Aeroflot millions of dollars annually (Aeroflot annual report,
2016). That is achieved by decreasing the weight of an airplane by flying with less fuel, less
equipment and by using new generation airplanes that are more efficient as they are. Another
important indicator that Aeroflot uses is the labor productivity that is kept very high in all Aeroflot
subsidiaries. The labor optimization allowed them to decrease labor costs by 8% in 2015 (Aeroflot
annual report, 2016).
UTair revenue streams come from helicopter business that equal to 70% of their operational
profit. As it was already mentioned they have contracts with The United Nations and oil & gas
companies what constitutes 87% of helicopter revenues. Also 10% of their revenue comes from
code-sharing contracts with partners (CAPA annual report, 2016).
UTair cost structure was completely remastered in 2015 as a result of huge net losses since
2012 with 6 bln RUR loss in 2014. They have sold 4 subsidiaries, 46 aircrafts and cancelled 37
routes to cover the operational expenses and shrink according to the current demand. They have
also cut the headcount by 35% accordingly to the overall company reduction. Moreover they have
restructured their debt what decreased their operation costs by 25% or 65 bln RUR (UTair annual
report, 2015).
S7 revenue streams are aimed at high effectiveness and low efficiency. They are considered to
be most effective on the Russian aviation market. One of the main additional KPIs used by Filevi
is a number of hours flown by plane, as the more hours it flies a month the less lease payment part
it has per flight. By controlling this KPI they keep very high utilization of each plain and achieve
maximum loading. Another important contributor to their revenue is highly effective collaboration
with Domodedovo airport that manages to prepare the plain for the flight within 40 minutes,
whereas the average time for other carriers is 2-3 hours (Researcher interview information).
Moreover, S7 provides customers with superior quality service that attracts new customers and
65
retains old ones. Obviously, the participation in Oneworld alliance gives additional passengers via
code-sharing and interline contracts. The part of passengers reached through Oneworld alliance
equals 9-17% of all traffic (S7 annual report, 2015). Another source of revenue are travel agencies,
web-sites and other selling intermediaries that S7 unlike other companies offers additional
payments to their partners and therefore stimulating them to sell better.
S7 cost structure consists of first of all low lease payments, % to which were negotiated with
the lease company privately. Moreover, S7 does not use the financial lease at all,p referring
operational lease that is less risky and by definition less expensive. They have very professional
cash management that allowed them to have 12 bln RUR on bank accounts against 7.8 bln RUR of
accounts payable in 2016, what means that they retain high liquidity and have survived the crisis
successfully (Researcher interview information). Another point is the fuel cost optimization by
remaking the contracts with theoil producers instead of intermediaries. Like other focal companies
S7 constantly optimizes the routes and manager to increase the loading by 1.7% in 2015. They
also do the fleet standartisation and manage its size very carefully. For example, they had sold 37
Russian airplanes just before 2014 and laid-off 3000 employers. By doing that they have managed
to get rid of unprofitable assets and would have causes huge losses. Moreover, they have
negotiated the debt % at Alfa Bank, who gave them a discount and postpones the maturity date. As
far as the labor costs are concerned, they are optimized by the unique in Russia fully automated
system of work planning of flight and cabin crews that allows minimizing the number of
employees and optimizing their schedule to ensure no intersection takes place. Lastly, S7
engineering allows decreasing the fleet maintenance costs by 25% by not outsourcing it and doing
it themselves (S7 annual report, 2015).
3.5
Business model canvas results and interpretation
In order to present the findings in a visually representative way and cover all important
aspects of the focal companies’ BMs, business model canvas approach was chosen. The following
tables (Tables 7, 8, 9) represent full analysis of Aeroflot group with sub-division into Aeroflot
itself, Russia airlines and Pobeda, then UTair and S7.
66
Table 7. Aeroflot BMC
Source: Researcher analysis
67
Table 8. Aeroflot BMC
Source: Researcher analysis
68
Table 9. Aeroflot BMC
Source: Researcher analysis
69
Taking everything into consideration the following conclusions are drawn from the analysis of
the business models of the focal airlines (Table 10):
Table 10. Main differentiating components from the BMC analysis. Source: Researcher analysis
Aeroflot
UTair
Key
partners
1. Skyteam- code-sharing
2. Airplane suppliersdiscounts
3. Government- support
1.
United
nations- unique
contracts
2.
Oil&gas
companies- unique
contracts
Key
activities
1. Constant optimization of
Aeroflot group airlines
2. Airplane maintenance
Key
resources
1. Young airplanes- low
maintenance costs, high
customer value
2. Studying facility- cheap to
teach, sufficient staff supply
3. Maintenance facilitycheap to repair aircrafts
4. Governmental support
1. Global helicopter
operations
2. Airplane &
helicopter
maintenance
1. Biggest helicopter
fleet
2. Airplane &
helicopter
maintenance
facilities- cheap to
repair machines
3. “Surguneftegas”
support
Any helicopter
operations anywhere
Value
Multi-brand for anybody
propositio anywhere
n
Customer
relationshi
ps
Channels Extensive code-sharing
contracts
Customer Everybody
segments
Cost
structure
1. Constant cost optimization
2. Leasing management
3. Airplane discounts- up to
60%
1.
Airplanemid-price, mainly
regular mid-haul
flights, leisure and
business
2.
Helicoptereverything
Impulse optimization
program- 25% cut of
operational costs in
2015 just by debt
restructuring
S7
1. Oneworld alliancecode-sharing
2. Sales agentsadditional compensation
motivation
3. Domodedovo airportincreased speed of plane
maintenance
1.
Airplane
maintenance
1.
Professional
management- family
owned and controlled
2.
S7 engineering
facility- cheaper to repair
aircrafts
3.
Bright company
image
Bright, comfortable,
affordable, practical and
reliable airline
Electronic boarding pass
Award-winning
advertising
Mid and upper price
segment, mainly regular
mid-haul flights, leisure
and business
1. Exceptional
management
2. Careful expansion
strategy
3. Low bank %
4. Fully automated
system of work planning
for flight and cabin crews
70
Revenue
streams
1. multi-segment strategy
2. superior quality service
3. code-sharing and interline
partnerships
1. helicopter
business
2. multiple tariffs for
passengers
1. maximum fleet
utilization
2. superior quality service
3. code-sharing and
interline partnerships
All case companies manage to create high customer value for the particular segment of the
market. They are all very approachable and available both on the Internet, on mobiles, at the
airports and have their own offices and call centers. They all use different types of advertising and
well-known by both people and businesses. They all have good quality of service, self-service
booths and other types of preflight and on-board services. They all fly domestically and
internationally. Nevertheless there are differences in other elements.
S7 has the most proactive and yet careful approach to doing business. Being family owned
and mostly controlled by Filevi family the company is extremely economical and has very
meticulous KPI management, particularly the index of flight hours by the plane as it directly
increases the revenue from the plane. They managed to sell 37 Russian planes, lay-off 30% of the
staff just before the crisis what helped them get rid of irrelevant assets, decrease fuel costs
(Russian planes need 2 time more fuel that Boeing and Airbus) and decrease labour costs. Their
expansion plan is very accurate and reasoned- they have bought only 2 planes in 2015 (Aeroflot
ordered 50). S7 tries to use their planes as much as possible including night hours. They work in
collaboration with Domodedovo airport, where the average time of plane flight preparation is 40
min, whereas the average time in the industry is 2-3 hours.
UTair in 2014 was saved by 3 main factors that constitute the core advantages of their BMSurgutneftegas, helicopter business and Impulse optimization program. UTair had massive losses
due to big dollar financial lease payments, low loading (69%) and increased fuel expenses. As a
result they decided to sell 4 subsidiaries (Katekavia, Engineering facility, UTiar-Murmansk and
Tyumen R&D centre), 49 aircrafts out of 115, cut 37 routes, laid-off 37% of staff and restructure
their debt. Only debt restructuring has decreased the operational costs in 215 by 25% (65 bln
RUR) (UTair annual report, 20015). Another reason why UTair is still alive and profitable is UTair
Helicopters that is now a separate legal entity that has always been the main revenue driver in the
company. They have the biggest helicopter fleet and do multiple contracts all over the world.
Aeroflot group main advantage is the size and multi-segment positioning. Another important
factor is close relation with Russian government that accidentally is their main stockholder with
51% of stocks. Aeroflot comprises 7 different airlines that cover the whole Russian and many
countries all over the world. They utilise their participation in Skyteam alliance at best- they are
the only ones who have a big long-haul fleet (35 now and 47 ordered) that can be utilized abroad.
71
Moreover, the participation in the Skyteam alliance helps them to raise their brand reputation
globally and penetrate new markets vie code-sharing.
As it is seen in the BMC, airlines in Aeroflot group altogether cover all customer segmentsbusiness, leisure, regional (where airplane is the only transport) both domestically and
internationally. Aeroflot is aimed at upper price segment, Russia airline is for mid-price segment
and Pobeda the only Russian LCC is for price sensitive customers like students.
Aeroflot gets political and financial support from the government in an attempt to create the
“country champion”, it now takes about 40% of the whole civil airline market in Russia.
In order to triangulate my conclusion and reveal how effective each BM of the focal airlines is
the researcher has the made the financial calculation on the basis of 3 most important and globally
acknowledged indexes for the evaluation of the civil airline carriers (US Department of
Transportation, Form41):
PRASK (revenue per seat km) = Revenue / ASK
CASK (cost per seat km) = Revenue / ASK
RASK (operating income per seat km) = Operation profit/ ASK,
Where ASK (available seat km) = number of seats in the fleet * number of km flown by fleet.
The following table (Table 11) clearly depicts the difference in the actual performance of the
focal airlines. These indexes help to avoid the bias of the size and the pricing, as they show how
much revenue, operational profit and operational loss the company gets per 1 seat per 1 km,
without taking into consideration the loading factor, i.e. if the loading factor is low, then the
revenue is low and the indexes are worse as well because of lower numerator.
72
Table 11. PRASK, CASK, RASK indexes of the case airline in 2015
Source: Researcher analysis, Focal companies’ income statements
ASK
available seat km
Financial indexes 2015
Aeroflot Russia
mln
124741
13400
Pobeda
3846
Utair
14298
S7
20397
pas.km
mln
97672
10100
3000
9995
15584
PRASK
passenger km
load factor
revenue
operational profit
operational costs
revenue per seat
pas.km
%
mln RUR
mln RUR
mln RUR
RUR
78.3%
415173
44101
371066
3,3283
75,60%
35843
4420
34652
2,6749
78%
11000
37
8784,6
2,8601
69,90%
68875
7974
65311
4,8171
76,40%
70756
7218
63488
3,4689
CASK
RASK
km
cost per seat km
operating income
RUR
RUR
2,9747
0,3535
2,5860
0,3299
2,2841
0,0096
4,5678
0,5577
3,1126
0,3539
RPK
revenue
RPK/ASK
per seat km
The table clearly shows that even though Aeroflot size, partnership network, cost management
and multi-segment strategy help gain a sustainable competitive advantage and create superior
customer value, its indexes are not the best in the industry. If fact the PRASK results of the group
are the worst in comparison with UTair and S7, logically Pobeda is weakest company in this
index, but that is a result of the price strategy of LCC- they need higher volumes to improve the
performance. Obviously, Aeroflot size, governmental presence in decision making and costs
connected with its massive and rapid expansion plan decrease these indexes. Yet for such a giant
these are good results.
UTair managed to recover after 6 bln net loss in 2014 and has the best result in revenue and
operation profit per seat km. That is a result of all sold assets that now cover the costs and
constitute a respective part of the revenue, but as the table shows the cost per seat per km is still
the highest what means that the efficiency still needs to be optimised and the company has to
utilise its fleet more effectively. Yet their plan to shrink the aircraft business and concentrate more
on helicopter business proves its viability.
S7 remain the leader in efficiency taking the second place after UTair in terms of PRASK and
RASK, what proves the quality of management in the company and consistency with the mission.
The company tries to offer reasonable variety of services and tariffs in an unusual, bright and
comfortable way, keeping a close eye on the key financial indicators like lease payments, fuel and
labour costs.
73
4
Conclusions
4.1 Theoretical implications
This thesis contributes to the literature in the field of business models analysis and
application. This thesis showed in detail how the analysis of business models and then their
application in regards to the Russian airline market in the context of economic crisis works. This
thesis showed the interrelation between different business models frameworks and their
approaches to the service companies like airlines. The thesis also managed to define that one of
the key parameters in the business model is value that is subdivided into value creation, value
proposition and value capture.
The researcher is inclined to believe that the study would mostly contribute to the managers
of the service companies and airline managers in particular rather than for the theories. As the
study implies the application of widely used business model canvas framework for the analysis of
5 biggest airlines and then draws the conclusions in regards to the Russian economic and political
situation.
4.2 Managerial implications
After analysing business models of 5 case companies and highlighting their key partners,
activities, competencies, resources, customer relationships, channels and segments, cost structure,
revenue streams and value proposition the researcher arrived at a conclusion that the most
important elements in the airline BMs are cost structure, key partners and key resources as
they help Russian airline carriers withstand the consequences of economic crisis, stay competitive
even with increased costs and create and deliver value that is well-perceived by the customers.
Ultimately, literature review and the subsequent empirical research helped to derive the
following recommendations to Russian airline companies that will help them create competitive
business model and increase performance by creating superior customer value:
1. Increase financial management quality to restructure the debt and manage the lease
contracts and payments
2. Constantly optimize the routes and subsidiaries, get rid of them in case of their
financial irrelevance
3. Optimize business on the current scale, no significant growth moves
4. Concentrate on a certain service and segment (e.g. helicopter or airline, regional
flights or long-haul)
5. Use proactive strategy and flexible business model
6. Keep high company liquidity.
74
The research has also shown that in order to create superior customer value the following
recommendations should be taken into account (Table 12):
Table 12. Recommendations on improvement of customer value creation of focal airlines
Customer value creation improvement
measures
use bright plane colouring to increase the
perception of brand and value
pay additional bonuses to sales agents to
improve sales experience
engage in alliances to provide better
destination choice
engage in alliances to provide multiple
business lounges globally
use contemporary software of work planning
of flight and cabin crew to improve the flights
timing and employees schedule
use no-luggage tickets to satisfy price
sensitive travellers
take new plane in operational lease to have
safer and newer fleet at reasonable price
Aeroflot
Recommended to
Russia Pobeda
Utair
S7
actively engage in charitable events
use electronic boarding pass
develop additional services within frequent
flyer program
use memorable and creative advertising
offer free choice of special menu (diet, child,
kosher, diabetic etc)
provide plaids on short-haul and mid-haul
flights
provide on-board Internet access
provide multimedia entertainment on board
do express postal delivery (not cargo)
The table emphasises the actions that need to be taken in order to create superior customer
value in the focal airlines. Taking everything into consideration, the airlines should pay attention
to the red squares in the table which means that the airline does have a capability to provide
certain services to the customers what leads to a loss of the value created and therefore may affect
75
the performance. The green square says that either the company already has this service or it is not
applicable to it, for example free food is not applicable to the low-cost carrier (Pobeda).
Judging by the number of services, S7 seems to be most advanced, yet they do not provide
multimedia entertainment and Internet access on board what affects the value that they create on
mid-haul and long-haul flights. Aeroflot has a number of competitive advantages like multimedia
systems that become extremely important for customers in long-haul flights. Whereas UTair has to
adopt some of the best practices from the competitors to become more recognizable and create
better customer value.
4.3 Limitations
The research is limited by looking at the business models and analysing the competitive
advantages of 5 airline carriers and not the whole market. As the full market research would
require much deeper analysis and access to the market and financial information that is either
unavailable or hard to reach. The researcher does not perform thorough financial analysis during a
number of consecutive years. Also, the scope of the research is limited to Russian airlines,
therefore all foreign carriers that fly to Russia are not taken into consideration.
Moreover the locale of the study represents a limiting factor of the research. Organising têteà-tête interviews in remote locations like Moscow would be expensive and difficult therefore
would surpass the budget and timeframes of the theses, consequently the study is based on a
limited number of interviews and neglects the primary interviews with top-management.
The thesis is focused on the biggest Russian civil airline carriers that are not bankrupts and
still perform the operations. The size of this companies and the availability of industry insiders
and secondary information have allowed the researcher to gather sufficient primary and secondary
data and conduct a deep analysis to get a respective insight in the industry.
The study is not focused on the analysis of financial performance and comparing Russian
airlines with their foreign competitors or analogues.
Finally, the study relies on qualitative data collected form the industry insiders and company
representatives. Another data collection was done via secondary resources in the form of airlines
reports, market research agencies reports, mass media interviews with top-management and
consulting reports. Different sources of data were used in order to triangulate it and improve the
reliability of the data.
4.4 Recommendations for future research
The concept of business model is comparatively new in the scientific literature and is still
under discussion and development. Especially it becomes interesting in the context of Russian
76
during the time of economic and financial crisis. There are many questions about how value
perception of the customers will change, how to manage your key resources, partnerships and
other capabilities to deliver the maximum value and gain a sustainable competitive advantage.
In order to cover the whole concept of a business model and its main value drivers for
Russian marker further research should be conducted that will include all Russian airlines and
cover benchmarking them against nest examples on a global scale. This kind of study would
benefit both the theory that may arrive at interesting conclusions about the specifics of Russian
and market and the influence of hard economic environment of business models, and managers
who will see a broad picture of Russian civil aviation business models and its comparison with
foreign leaders.
77
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Reports
Aeroflot annual report, 2016
Aeroflot financial annual report, 2016
Air travel intelligence report, 2016
CAPA annual report, 2016
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CAPA fleet database, 2016
International Monetary Fund report 2015
S7 Annual report, 2015
UTair annual report, 2015
Websites
www.aeroflot.ru
www.centreforaviation.com
www.transportation.gov
www.gks.ru
www.rbkplus.ru
www.S7.ru
www.shpls.org
www.UTair.ru
www.vedomosti.ru
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