A Comparison Of Business Models Adopted By The Aviation Industry Companies

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A Comparison Of Business Models Adopted By The Aviation Industry Companies: A Case Of Rolls Royce, General Electric And Pratt & Whitney

Contents

Abstract 1

1.0 INTRODUCTION.. 2

1.1. Background/Overview.. 2

1.2. Problem Statement 3

1.3. Significance. 6

1.4. Aims and Objectives (Research Questions) 8

1.5. Scope of Project 9

2.0 LITERATURE REVIEW… 10

2.1. Background of Aviation Industry. 11

2.2. Current Trends in the After-Sales Service for Aero Engines. 15

2.2.1. Innovative Business Models. 15

2.2.2. Collaborative Business Practices. 17

2.2.3. Forecasting and Simulation Models in the Aero Engine Industry. 20

2.2.4. Modern Models of Business among Airlines and Aircraft Framers. 22

2.2.5. Recent Aerospace Industry Models. 25

3.0 METHODOLOGY.. 28

3.1 Introduction. 28

3.3 Research Context 34

3.4 Participants. 34

3.5 Data Collection. 35

3.5.1 Questionnaire Items. 37

3.7 Data Analysis. 38

3.8 Limitations and Potential Problems. 39

4.0. CHAPTER 4: RESULTS. 41

4.1. Introduction. 41

4.2.0. Companies Profiles. 42

4.2.1. Rolls-Royce. 42

4.2.2. General Electric. 44

4.2.3. Pratt & Whitney. 45

4.2. 0. Services after Sales and ISO Standards. 46

5.4. A Comparative Analysis from the Automobile Industry Standpoint 65

5.5. Implications of the Study Findings. 69

6.0. CHAPTER 6: CONCLUSIONS AND RECOMMENDATIONS. 71

6.1. Introduction. 71

6.2. Conclusions. 73

6.3. Recommendations. 77

References. 78

Abstract

This research study set out to investigate and comparatively analyze the services after sales accorded to aero engines customers by three leading aero engines manufacturers: Rolls Royce, General Electric and Pratt & Whitney. In essence, this entailed improving the existing knowledge on how to go about the management of operations and after-market support involving aero engines.This was occasioned by the apparent state of dilemma among high technology aerospace companies on how to regularly supply the demand of their clients in the face of numerous industry-specific and marketplace challenges. Basically, the study revolved around how aero engines manufacturers can improve and consequently expand follow-up services after they have made the sales; how aero engines manufacturers can successfully solve the pertinent problems of sustaining customers not within the company’s branches; and most importantly, how aero engines can satisfy both their customers and employees. To this end, the study utilized a qualitative methodology where three levels of data collection were employed, that is, interviews, questionnaires, and direct retrieval of data from the companies’ official websites as well as other authentic sources. The analysis of the collected data made thereof culminated in the grand findings that the aero engines market is unequally distributed among players, with the three study companies occupying the ultimate top positions in the industry. Moreover, it was found that a significant percentage of the three companies’ total profits is made from the services after sales it accords to their aero engines customers. Conclusively, the study holds that well structured and coordinated services after sales positively impacts on a company’s overall competitive advantage. Even so, due to few inevitable validity snags, it recommended that future studies that will involve both lower-end and upper-end companies sin the aero engines industry might help to give industry-wide findings.

 

1.0 INTRODUCTION

1.1. Background/Overview

Recently, a number of interesting aero-engines after -service business and production models have been developed and it is worth the time and effort to examine them for their effectiveness and efficiency in terms of ease of implementation, cost factors, and availability of technology, among other considerations. Scott, Hedenryd, and Buxton (2005) opine that the scope of aftermarket services business model is multifaceted. It incorporates a whole host of services that includes; aero engine maintenance, development and implementation of aero engines management systems, development and installation of customer care and facing systems, development and installation of system software that supports market-related data transfer and analysis, and creation of health sustenance solutions to potential organizational and market-related operational eventualities. Moreover, a closely structured and monitored after market services initiated by the aero-engines industries and adopted by both the aircraft frame builders and airlines will entail a shared marketplace environment that enhances efficiency in the manufacture of aero engines parts, aircraft frames, as well as timely repair and maintenance of such (Stranjack, et al 2008). It is therefore not a surprise that the new after market services business model for aero engines is the focus of scrutiny of aviation decision makers and original parts manufacturers today (Kerr & Ivey, 2001).

After market services are meant to build strong and sustainable customer bonds that in the long run play a huge role in reducing the overall costs of operation while still maintaining a strong market foothold. In extension, well coordinated after market services are handy in inducing relevancy on the information and instructions given to customers by the OEMs through the timely and quality delivery of services (Saccani et al 2006). In a nutshell, after market services help to create a sustainable bidirectional communication system that not only quickens the pace which information is relayed but most importantly it helps to impart meaning and purpose to such information (Farris et al 2005).

1.2. Problem Statement

There are many competitive concerns being faced today by the global commercial aviation industry and, consequently, by the aero-engine spare parts industry. These two industry sectors actually are interconnected by complex relationships.  There are some problems plaguing the aviation industry. Buxton, Bart, & Wang (2007) have alluded to the existence of stiff price competition in the aero industry. This is true in any industry as well, but it is more acute in the aero engine industry since parts are highly specialized, costly to manufacture, and entail a lot of development costs in their life cycles (Kerr & Ivey, 2001). While there are big players in this industry, because of the recent global financial crisis, most airline companies have halted orders for parts, and these led to a turbulent aviation industry. These are the downsides. However, there are also opportunities, like a rapidly evolving industry because of advances in aviation technology, and the use of information and communications technology.

Fuel costs of aircraft engines have gone up, thus, the need to reduce operating costs and yet it could not be done because the development cycles of aero-engines are long and costly. The search for new business and operation models has become a necessity for the sector to navigate the future successfully. Hence, according to Buxton, et al (2007), in order to be competitive, airlines have developed new business and production models such as what they call as the “virtual airline” where passengers can just book their flights online, and where airline operations are conducted virtually, enabled by ICT (Information and Communication Technology) and cutting edge aerospace technologies. These kinds of changes going on in the industry necessarily demand that the service companies should likewise need to adjust if they want to say in the market. Buxton, et al (2007), talk about another business model worth looking into which is that of the “business aviation group”. This is an organizational restructuring forged by cooperative partnerships with other aviation companies. Why the need to search for new business models? We realize today that global markets are rapidly changing, and technologies are likewise evolving. If companies do not keep pace, they will be left behind in the competition.

Considering these changes in business models, in organizational set up, changing technology, and in business operations, the aero-engine manufacturing companies are left with no choice but to respond to these changes by creating new business models, no longer that of being in the delivery of products, repairs and overhaul business, but they now call themselves as service companies. This means that they are no longer merely spare parts companies, but they offer after sales service. This is an interesting development in this kind of industry under the bigger market: the aerospace industry. For instance, Scott, Hedenryd, and Buxton (2005) postulate that the desire to venture into closely monitored after market services among aero engine industries, particularly the major ones such as Rolls Royce, General Electric and Pratt and Whitney is occasioned by the changing aero engines technologies. Precisely, the shifting from revolutionary to evolutionary gas turbine technology has occasioned the need fro OEM their customers (airframe builders) to form joint ventures. Such as joint ventures help to eliminate undue competition, maximize gains from emerging technology and hence considerably cuts down operation costs while still staying competitive. In essence these joint ventures are a form of after market services especially when approached from the aero-engines industry point of view (Steffens & Hollmeier, 2009).

Moreover, the complex nature of the aviation industry brings the services of all the key stakeholders together such that it is very difficult for each of the stakeholders to perform independently. As a matter of fact, Scott, Hedenryd, and Buxton (2005) argue that engines are responsible for a significant chunk of savings for both the OEM and their customers every time a new technology is unveiled. Furthermore, given that the efficiency of an engine, its overall costs of maintenance as well as its lifespan directly impacts on both the aero engine manufacturers and airline operators. This is because the aviation industry is unique from other forms of marketplace businesses particularly when looking at it from an aero engine point of view. In essence, aero engine manufacturers are situated at the lower end of the aviation industry – they sell their engines to aircraft frame makers who in turn sell the fully developed aircrafts to the airlines (Buxton, Farr, & McCarthy, 2006). Even so, they participate in the negotiation of final prices as well as the maintenance of products making it possible to maintain a commanding marketplace presence (Doganis, 2001). In a nutshell, the aviation industry is directly dependent on the aero engine manufacturers and therefore a new business model that seeks to join all the stakeholders together will definitely enhance competitiveness at the marketplace.

The aero engine sector of the broad aviation industry is a long term investment industry where investments may take as long as 30 years to break even. Moreover, a lot of funds are also required to sustain the numerous processes in the manufacture, installation, maintenance and servicing of aero engines (Buxton, Farr, & McCarthy, 2006). Therefore the establishment of sustainable after market services serves to bring together the industry players and most importantly the pooling of resources, hence economies of scale (Mabert, Ashok, & Campbell, 2006). Again, basing on the complex nature of the aviation industry it can be argued that the competitiveness of aero engines in the marketplace cannot be fulfilled by one stakeholder (Farris, et al 2005). Precisely, the core competitive features such as cost efficiency, environmental friendliness (cleaner, quieter, and fuel-efficient), relationship building, weight reduction, and overall engine efficiency/performance cannot be fulfilled in by the aero engine makers alone (Scott, et al 2005).

1.3. Significance

Companies that are engaged in highly-specialized production of spare parts that are supposedly marketed globally are, presently, in a dilemma on how to be able to regularly supply the demand of clients. This paper would be very significant primarily to aero-engine companies worldwide, such as the Rolls Royce Company, General Electric, Pratt and Whitney, and the MTU Aero Engines. However, other beneficiaries would include offices and individuals that are into management, marketing, and to those interested in improving the overall sustainability of their company. Essentially, the airline industry is not the only one involved in the system of aero-engine operation but there are a whole lot of actors in the playing field. Original equipment manufacturers (OEMs) are equally crucial and, recently, have played a major role in increasing the total cost. There are the clients and manufacturers. Each actor in the playing field contributes to the overall operation but, presently, the aero-engine operation is beset with numerous problems.

It is envisaged that after market services that incorporates the maintenance, repair, and overhaul (MRO) of aero engines as well as other critical parts of an aircraft goes a long way in instilling efficiency in service delivery. This postulation derives its impetus from the notion that business entities should always endeavor to align their services with prevailing marketplace trends so as to remain competitive. Again, contemporary business environments are crowded with all manner of technological complexities beckoning business entities to switch on new and efficient operations models. Precisely, airlines that have proper MROs are bound to incur minimal expenses particularly when it comes to the overall costs of servicing their aircrafts. From an industry-wide perspective these MROs are initiated by aero-engine manufacturers and other OEMs. Apparently, these MROs are responsible for between 10 percent and 15 percent of the overall airline expenditure explains its criticality in shaping marketplace positioning and leveraging of the OEMs, aircraft frame builders, and airlines (Knotts, 1999).

Precisely, Roll Royce, General Electric, Pratt and Whitney as well as other major aero engines players have close after market services partnerships with major aircraft frame builders and airlines (Scott, et al 2005). However, the extent which each of the companies pursues after market services is yet to gain substantial attention from researchers. In this regard it is envisaged that this study will provide comparative empirical data on the extent which each of these three companies indulges its customers in after market services when juxtaposed against industry and marketplace benchmarks.

1.4. Aims and Objectives (Research Questions)

The aim of this dissertation is to make a comparison between three aviation industry companies: Rolls Royce, General Electric and Pratt & Whitney in terms of services after sales for aero-engines that they offer to their customers. To achieve this, information will be sourced the companies’ official web sites as well as a range of other authentic sources which include journal articles and textbooks. In addition, the comparison will also involve ISO standards that each of the company use in the overall delivery of their services after sales. To this end, a SWOT analysis will be carried out for each of the three companies so as to facilitate a sound an ‘industry and company-specific’ comparative study.

Lastly, efforts will be made to obtain the optimum services after sales for the three aero-engine companies with view of juxtaposing them against similar services offered by companies in a closely related industry. In this regard the automobile industry will be the most appropriate. At least one automobile company with a commanding global marketplace presence and evidential services after sales will be used.

In doing this the thesis will be aiming at improving the existing knowledge and system on how to go about the management of operations and after-market support involving aero-engines. Tellingly, the discussion is made much more reflective by my experience in engineering which I have gained from previous degree and experience in the work-field. Specifically, this essential aim is further refined by the following practical objectives: (1) to assist aero-engine companies in improving and expanding services after they have made the sales; (2) to help aero-engine companies find solutions to the problem of sustaining customers not within the company’s branches; and (3) to find appropriate ways to satisfy both the customers and employees of aero-engine companies.

1.5. Scope of Project

The after market services competitive business model discussed in this dissertation will assume Olsterwalder, Pigneur, and Tucci (2005, pp. 17-18) point of view. Precisely, it will seek to give a detailed account of the value aero engines industry “offers to one or several segments of customer and the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital in order to generate profitable and sustainable revenue streams.” Ideally, the dissertation will embrace the four-pillar framework of product, customer interface, infrastructure management, and financial aspects as envisioned by Olsterwalder et al (2005) “Nine Business Model Building Blocks” in Table 3 (p.18). In this regard the four pillars will be discussed in the context of aero-engines industry. In a nutshell, the pillars will be delineated in view of eliciting value creation and sound customers relations methods among the aero-engines, aircraft frame builders, airlines operators, as well as other industry specific stakeholders. [Table 3 is in the Appendices]

1.6. Definition of Terms

OEM – original equipments manufacturers

ISO – International Organization for Standards

GE – General Electric Company

ICT – Information and Communication Technology

MRO – Maintenance, Repair, and Overhaul

2.0 LITERATURE REVIEW

In trying to review the existing literature, this dissertation will adopt the four-pillar approach as outlined by Osterwalder, et al (2005) in their “nine business model building blocks” structure (p.18). This will be necessary as it will induce a sense of focus and direction to the review and hence limit it to the study topic. In this regard the review will be limited to literature on the products offered by airlines industry; how the industry stakeholders go about creating interactive customer interfaces; the key strategies employed by the industry players the management of interactions infrastructure, and; the core financial management tools employed by the industry players to maximize profits while keeping costs at manageable levels.

The aero-engines industry for instance is a unique industry in that, it entails large sums of capital to manufacture aero-engines, to build aircraft frames, to carter for fuels and labor expenses, as well as taxes paid to domestic and foreign governments for using their airspaces (Almeida, 1997). The high amount of capital may be prohibitive to industry players particularly during hard economic times. For instance, to fully assemble and equip an aero engine with the necessary parts and components requires more than $35 million while assembling a 7 x7 aircraft frame may costs a whopping $250 million. By fair terms these are relatively high costs which need to be distributed among a number of industry players so as to cushion the eventualities of shocks and risks.

These costs may even be much higher particularly if the aircraft fail to reach its minimum operation lifecycle due to marketplace as well as natural calamities (Buxton et al 2006). In fact, it is known that aircrafts are prone to all manner of risks that range from human to natural catastrophes. For instance the industry is highly affected by extreme heat, extreme cold, fog, volcanic emissions, and hailstorms among other severe environmental conditions. Moreover, it is true that unlike automobiles, aircrafts undergo rigorous and regular maintenance and inspection. This is necessary as a small hitch on an aircraft can cause immense losses as opposed to the case of automobiles that can be fixed in the middle of a journey in the event of a breakdown (Farr, 2006).

2.1. Background of Aviation Industry

Two major events in the aviation industry in the United States have serious repercussions in the aviation businesses. Firstly, Scott et al (2006) and Buxton et al (2006) agree that the airline industry is faced by a barrage of financial and operational challenges. Apparently, the industry faces these challenges at a time it is being ‘weaned’ from the close support it used to enjoy from the domestic governments. As a matter of fact, the state coffers have over the past been used to cushion the airline industry from marketplace challenges such as financial crunches as well as cut-throat competition. This is a trend that can be attributed to major airlines considered as national flag carriers that have in the past not exposed to the marketplace vulnerabilities. In the US for instance, an estimated $5 billion were distributed to a number of major airlines between 2000 and 2003.  This was mainly done to prevent the airlines from going into bankruptcy as stipulated by the provisions of Chapter 11 of the US Constitution (Scott et al, 2006).

As such, there is no doubt that the state financial and administrative leverage played a huge role in streamlining the airline industry. However, this trend is slowly changing particularly following the realization that the “Over-capacity and low yields lead to instability and the effects of any disturbances within the global economy cannot be absorbed” through bailouts (Buxton, et al 2006, p.2). Needless to say this is a wakeup call to airlines as well as other major players in the industry to adopt more competitive and cost effective business models as a practical solution to the overreliance of support from the public coffers.

The other major event was the famous “September 11terrorist attacks” (Thompson, Strickland, & Gamble, 2003: C-644). Because of low airline traffic, airline companies were financially affected so much so that many airline firms went into downsizing, cancelling orders of additional aircrafts, cutting down number of flights, went into borrowing money to cover cash trapped coffers, and as a last resort, filed for bankruptcy. It was a dark period in the history of U.S. aviation which also affected the aviation global business landscape. On top of this, the 2008 global financial crisis caused great financial crisis to the commercial aviation industry, still reeling from the after effects of the terrorist attacks. Such was the scenario in the last decade in this highly technical industry (Thompson et al 2003).

A combination of these two major events as well as a gamut of other marketplace impediments threatens the smooth operations of the airline industry and in particular the MRO aspect of the industry that apparently is directly responsible for between 10 percent and 15 percent of the overall airline expenditure (Knotts, 1999). Bearing in mind that the aero engines are the aerospace industry drivers that creates revenue for all the stakeholders through the normal “engine flight hours (EFHs) and engine flight cycles (EFCs)” as well as maintenance and consumables whilst in service” there is a great need for aero engines to collaborate with aircraft frame builders, airline operators as well as other ancillary services providers (Buxton, et al 2006, p.4).

These collaborations may take the form of a complete or partial reinvention of their various ways aero engines industry conduct their business activities. Admittedly, the changing business scenario calls for drastic changes in the aero engine business models. No longer competitive by merely just trying to deliver products, conduct repairs, and go into overhaul, the industry has to explore new business approaches if it desires to be globally competitive. The industry has to adopt the changing market place and realities and adopt fast (Steffens & Hollmeier, 2009). This kind of reflection on past business models, to determine which worked well or did not work, or even which should be re-invented or re-engineered must preoccupy aero- engine management nowadays if it desires to exploit market opportunities and take new directions on how to compete in the future.

In light of the above discussion, new and interesting directions suitable for the industry strategic positioning can be advanced. These are: “drastic reduction of new engines development and production costs; revision of the value- added chain; consolidation of the industry and entry into cooperative programs; and product differentiation through innovative technologies” (Steffens and Hollmeier, 2009). In addition, Steffens and Hollmeier suggest outsourcing MRO and engaging in strategic alliances with other corporate partners in the industry.

Let us take this one by one. In terms of drastic reduction of new engine development and production costs, there is a need to be cost-effective in coming up with new aero engine parts but at the same time not sacrifice quality. Where are the areas where costs can be drastically reduced? These can be done in the variable costs as well as in the production costs.

Regarding product differentiation mentioned by Steffens and Hollmeier (2009) as one of the strategies to be adopted by the industry, this is affirmed by Porter (1985: 14) who remarks, “A firm seeks to be unique in its industry along some dimensions that are valued by the buyers”. For the aero engine industry, this strategy can be translated as offering unique spare parts after-sales support system. Product differentiation can be a way to be ahead of the competition. When aero engine companies think of innovative and unique products, they are in actuality, trying to differentiate from other similar products manufactured by other competitors. On his part, Johansson (2004) acknowledges that it is true that for OEMs within the aerospace industry as well as other industries to wade through the murky global market economy they must embrace specialization. However, for this specialization to bear the fruits of innovation it needs to be collaboratively shared. In this regard aero engines OEMs, their customers as well as other industry players need to pool together their different specialities in what Johansson  terms as “open and amorphous networks of peers” (p. 257).

On the other hand, the revision of the value-added chain pertains to the life cycle of the product as well as whether the company make some changes either through new technology, or by coming up with some modifications in the whole value chain. Another way is to consolidate the industry and for companies to enter into cooperative programs. Industry consolidation and collaboration will demand that the companies within the industry should find ways to work cooperatively and collaboratively with one another. This is easier said than done. Entering into new cooperative projects involving other companies would mean getting into strategic alliances with them over the long term.

2.2. Current Trends in the After-Sales Service for Aero Engines

2.2.1. Innovative Business Models

Mabert, Ashok, and Campbell, (2006) identify a new source of income for the commercial industry that can be a source of competitive advantage. Farris et al (2005) likewise provide the aftermarket support practices and directions as well as the greater opportunities for supply chain management. Mabert et al (2006) pointed out that it is in “aftermarket support” that the opportunity to reap profits will emanate, not in the initial sales of spare parts for the aircraft. This is a radical way of thinking of how to compete. To think that they are an “after support” company, rather than just a company that delivers spare parts. Precisely, collaborative services between aero engines OEM, aircraft frame builders and airline operators should not only involve the conventional settlement of customer claims and warranty fulfillment, rather it should be holistic. It should encompass regular maintenance and overhaul services, procurement and timely delivery of spare parts, as well as other contract-long customer engagements. Such holistic after sales services are beneficial to both the end product companies as well as the OEMs. For instance, General Motors Corporation recently registered a huge profit from its $9 billion worthy of after sale services when compared to what it got with its $150 billion sales from its wide range of automobiles (Viardot, 2010). Ideally, technology and capital intensive companies have over the years managed to withstand market shocks by staging interactive and contract-long after services sales.

The underlying idea behind success from after sales services is that companies are able to supply their products and make conscious efforts to put in place strong preventive and supportive measures for such products (Bundschuh & Dezyane, 2003). This helps to increase the value of the products sold while also creating strong customer relations for future business. As Viardot (2010) argues it is very easy for firms to find market for its products in segments that it already has strong relations as predicting market needs is easier than it is in new market segments. A case in mind is that of Toshiba where in 2002 the first month sales from warranty fulfillments went up by a margin of 37 percent, with overall sales averaging at 4 percent. The company had embarked on an aggressive drive to initiate an electronic based after sale services for its laptops. The drive entailed prompts to new users requesting them to create a profile that Toshiba used to make critical decision on the effectiveness of a range of warranties it offered (Viardot, 2010).

After-sales service activities in the consumer goods industry depict an orientation to “improve company image, customer satisfaction and retention” (Saccani et al 2006). This is highly important, indeed, and I agree with the authors in pointing out that the focus of companies offering after-sales service tasks should be to enhance the company’s credibility and good image as well as make the customers happy and retain them through customer repeat purchases or their availing of the services. Besides, the after-sales service when done in excellent manner and of high quality would attract new clients. There are only a few big players in the global aviation industry and getting them to avail of the after-sales support servi.............


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