- Email: [email protected]
The Evolution of the Airline Industry
Book reviews
thus the ‘standard’ career path of the British middle classes-into either the professions, management, or public services). In 1968 he founded a magazine, Student and subsequently (in the same year) a (minor) nurses’ employment agency. These are not very remarkable origins: yet, some 25 years later, he had become one of the UK’s wealthiest individuals-without emanating from, or becoming part of, the Establishment. Moreover, en route he had become an international celebrity; yet, according to Jackson’s biography, this most public of persons is somewhat inarticulate, and also keeps the inner workings of his business operations under strict security wraps. The business history of the Virgin Group contains similar-and not unrelatedenigmas to those of the man himself. Specifically, there is no easily-apparent business logic to the pattern of diversification adopted by the Virgin Group in its search for expansion over the past 2 (plus) decades. In 1969, Branson moved into the record mail-order business (as Student closed), and then into record shops (1971). A far more major jump was involved in going into music recording/record distribution (the Virgin label) and music publishing (by 1973), and then some nightclubs (1978 onwards). Early origins apart, however, the 1970s story of Virgin could be retailed as one of somewhat related diversification revolving around a core in the music business involving major artists of the time. In the 1980s however, the Virgin Group started to engage in what might be viewed as a questionable and haphazard pattern of industry entry and exit. It set up new businesses in both residential/commercial property and computer games software (1983) and then-staggeringly-made a move into the airline industry with the foundation of Virgin Atlantic (in 1984). This was followed by further ventures in condoms (Mates; a non profit operation), and airships/balloons in 1987; then a radio station (Virgin 1215) in 1993; and currently soft drinks (Virgin Cola) in 1995. On the way (in 1992) the Virgin Music Group-the supposed core activity of the Groupwas sold off to Thorn-EM1 (for a handy f560 million). 208
The conventional wisdom of both strategic management analysis and City thinking in the 1990s is that such unfocused conglomerates are to be viewed with some suspicion, as regards their inherent business logic sustainability. and thus ultimate Certainly not all of Virgin’s diversifications have been a success-witness the fiasco resulting from its entry into property (via Vanson Developments) in the late 1980s. Nevertheless, there is no denying the overall business success of the expanding Virgin empire over the last 25 years. How has this ‘trick’ been worked? Alternatively put, what core competences have enabled Branson to overcome the innate difficulties involved in corporate growth via diversification (and often of a seemingly unrelated nature)? It is important to realize in this connection that Virgin’s growth/diversification record was not achieved via acquisition. In most cases, new Virgin ventures have been established de nova (although also, more recently, via joint ventures-as in Virgin retailing). One of the strengths of Jackson’s book-apart from being a very readable account of the personal history of a major entrepreneur-is that it provides some of the answers to the foregoing questions. A key feature of the Branson persona is that he appears to conform to the classic visualization of ‘the’ entrepreneur (according to the ‘Austrian’ economic analysis of the late Frederick Hayek and his followers), involving an elemental alertness to market opportunities-backed, in his particular case, by an (instinctual) negotiator’s skill to get the best deal, at a very good price, for his company. In addition, however, to these classic entrepreneurial features Richard Branson has other important skills which are not necessarily given to all entrepreneurs. First amongst these is an ability to motivate his staff, at all levels. The result is that Branson operations tend to get more enthusiastic staff who are willing to work for lower remuneration than those obtaining elsewhere. Second, he has ensured that Virgin operates as a ‘flat hierarchy’, with a small HQ (and
divisional) staffing. Thus the success of Virgin Atlantic, which has generally (by common assent) achieved high quality, but with a relatively low cost-base. Third-and of vital importance to understanding the success of Virgin’s pattern of seemingly unrelated diversification from the early 1980s onward -has been Richard Branson’s ability to utilize his public image to acquire massive ‘free’ advertising (via media reportage) for his new ventures, and thus to lower, quite remarkably, the entry barriers typically facing a ‘standard’ corporation thinking of entering a new business arena (e.g. those that would be faced by Unilever or AT&T in evaluating objectively entry into the airline industry). Branson has, uniquely, been able to develop a ‘personal’ brand across a diverse array of products/services that others (e.g. Yves St Laurant) have been unable to match. Jackson’s biography ends with a speculative chapter suggesting that Branson might enter politics-as a sort of British Berlusconi (or Ross Perot?). I personally think this extremely doubtful. A more pertinent question, for those in the airline industry especially, concerns the strategy for international expansion that is embedded in Branson’s psychology and the Virgin modus operandi. This book provides some clues to the stratthis most interesting egy of entrepreneur and his evolving corporate activities. John Burton School of Business University of Birmingham
The Evolution
of the Airline Industry
SA Morrison and C Winston The Brookings Institution, Washington, DC (1995) 169 pages US $32.9S/Z25.75 (hardback) and US $12.95/E9.95 (paperback) ISBN O-8157-5844-8 (hardback) and O-8157-5843-X (paperback)
Despite its broad title this is a book almost _ entirely with concerned airlines in the United States. It considers the international context only to the extent of recommending the US government to push for global
Book reviews
‘open skies’. The conclusion from a detailed and careful analysis of deregulation on US domestic routes is that travellers have gained some substantial benefits from it, in terms of lower fares and higher service frequencies. In a welfare analysis these benefits are estimated to be accruing at an annual rate at US$18.4 billion (at 1993 price levels). Accordingly, the authors reject calls for the industry to be reregulated, notwithstanding the instability, lack of profitability and impediments to competition observed in recent years. One of the arguments presented is that the primary source of the industry’s financial troubles is not anything it from structural that prevents earning a normal rate of return, but a failure to adapt efficiently to the business cycle. On the controversial question of how far the industry’s financial losses can be attributed to the pricing behaviour of carriers under Chapter Eleven operating bankruptcy protection, the authors’ econometric work suggests that the small. been quite effect has
Interestingly, it was found that the net revenues of some airlines were actually the enhanced through tarnished image of its bankrupt competitors (e.g. Delta in competition with Eastern and Continental), whilst those of some others were damaged by the lower marginal costs and fares of competitors in Chapter Eleven bankruptcj (e.g. American and United competing against TWA). Another major finding is that the marketing and operating strategies adopted by airlines to limit competition-hubbing, bias in computer reservations systems, yield management programs, loyalty marketing schemes-do not allow carriers to capture much of the gains accruing to travellers from deregulation. The anticompetitive effects of such innovations are assessed as being minor or at least easily remedied. Perhaps the most surprising aspect of this book is the virtual silence it maintains on the potential for predatory behaviour. This topic does not even receive a mention in the index. And yet predatory pricing, predatory
scheduling and predatory use of marketing weapons like computer reservations systems, travel agency commissions etc. are all things that have concerned antitrust authorities in the US. The authors’ overall conclusion that there is nothing to justify a more activist antitrust policy may not be one supported everywhere. The econometric empirical work described in this book is excellent. It does much to clarify and explain the effects of deregulation, updating and extending the authors’ earlier book on the subject.1 Particularly interesting are the various simulations of airline decision-making on fares, route entry and route exit. The analysis is highly original, painstakingly executed and beautifully presented. All in all, this is a most important contribution to the literature on airline deregulation and should be read by all those interested in this topic. Pat Ha&on School of Business University of Birmingham
1Morrison S.A and Winston C., (1986) The Economic Effects of Airline Deregulation, The Brookings Institution, Washington, DC.
thus the ‘standard’ career path of the British middle classes-into either the professions, management, or public services). In 1968 he founded a magazine, Student and subsequently (in the same year) a (minor) nurses’ employment agency. These are not very remarkable origins: yet, some 25 years later, he had become one of the UK’s wealthiest individuals-without emanating from, or becoming part of, the Establishment. Moreover, en route he had become an international celebrity; yet, according to Jackson’s biography, this most public of persons is somewhat inarticulate, and also keeps the inner workings of his business operations under strict security wraps. The business history of the Virgin Group contains similar-and not unrelatedenigmas to those of the man himself. Specifically, there is no easily-apparent business logic to the pattern of diversification adopted by the Virgin Group in its search for expansion over the past 2 (plus) decades. In 1969, Branson moved into the record mail-order business (as Student closed), and then into record shops (1971). A far more major jump was involved in going into music recording/record distribution (the Virgin label) and music publishing (by 1973), and then some nightclubs (1978 onwards). Early origins apart, however, the 1970s story of Virgin could be retailed as one of somewhat related diversification revolving around a core in the music business involving major artists of the time. In the 1980s however, the Virgin Group started to engage in what might be viewed as a questionable and haphazard pattern of industry entry and exit. It set up new businesses in both residential/commercial property and computer games software (1983) and then-staggeringly-made a move into the airline industry with the foundation of Virgin Atlantic (in 1984). This was followed by further ventures in condoms (Mates; a non profit operation), and airships/balloons in 1987; then a radio station (Virgin 1215) in 1993; and currently soft drinks (Virgin Cola) in 1995. On the way (in 1992) the Virgin Music Group-the supposed core activity of the Groupwas sold off to Thorn-EM1 (for a handy f560 million). 208
The conventional wisdom of both strategic management analysis and City thinking in the 1990s is that such unfocused conglomerates are to be viewed with some suspicion, as regards their inherent business logic sustainability. and thus ultimate Certainly not all of Virgin’s diversifications have been a success-witness the fiasco resulting from its entry into property (via Vanson Developments) in the late 1980s. Nevertheless, there is no denying the overall business success of the expanding Virgin empire over the last 25 years. How has this ‘trick’ been worked? Alternatively put, what core competences have enabled Branson to overcome the innate difficulties involved in corporate growth via diversification (and often of a seemingly unrelated nature)? It is important to realize in this connection that Virgin’s growth/diversification record was not achieved via acquisition. In most cases, new Virgin ventures have been established de nova (although also, more recently, via joint ventures-as in Virgin retailing). One of the strengths of Jackson’s book-apart from being a very readable account of the personal history of a major entrepreneur-is that it provides some of the answers to the foregoing questions. A key feature of the Branson persona is that he appears to conform to the classic visualization of ‘the’ entrepreneur (according to the ‘Austrian’ economic analysis of the late Frederick Hayek and his followers), involving an elemental alertness to market opportunities-backed, in his particular case, by an (instinctual) negotiator’s skill to get the best deal, at a very good price, for his company. In addition, however, to these classic entrepreneurial features Richard Branson has other important skills which are not necessarily given to all entrepreneurs. First amongst these is an ability to motivate his staff, at all levels. The result is that Branson operations tend to get more enthusiastic staff who are willing to work for lower remuneration than those obtaining elsewhere. Second, he has ensured that Virgin operates as a ‘flat hierarchy’, with a small HQ (and
divisional) staffing. Thus the success of Virgin Atlantic, which has generally (by common assent) achieved high quality, but with a relatively low cost-base. Third-and of vital importance to understanding the success of Virgin’s pattern of seemingly unrelated diversification from the early 1980s onward -has been Richard Branson’s ability to utilize his public image to acquire massive ‘free’ advertising (via media reportage) for his new ventures, and thus to lower, quite remarkably, the entry barriers typically facing a ‘standard’ corporation thinking of entering a new business arena (e.g. those that would be faced by Unilever or AT&T in evaluating objectively entry into the airline industry). Branson has, uniquely, been able to develop a ‘personal’ brand across a diverse array of products/services that others (e.g. Yves St Laurant) have been unable to match. Jackson’s biography ends with a speculative chapter suggesting that Branson might enter politics-as a sort of British Berlusconi (or Ross Perot?). I personally think this extremely doubtful. A more pertinent question, for those in the airline industry especially, concerns the strategy for international expansion that is embedded in Branson’s psychology and the Virgin modus operandi. This book provides some clues to the stratthis most interesting egy of entrepreneur and his evolving corporate activities. John Burton School of Business University of Birmingham
The Evolution
of the Airline Industry
SA Morrison and C Winston The Brookings Institution, Washington, DC (1995) 169 pages US $32.9S/Z25.75 (hardback) and US $12.95/E9.95 (paperback) ISBN O-8157-5844-8 (hardback) and O-8157-5843-X (paperback)
Despite its broad title this is a book almost _ entirely with concerned airlines in the United States. It considers the international context only to the extent of recommending the US government to push for global
Book reviews
‘open skies’. The conclusion from a detailed and careful analysis of deregulation on US domestic routes is that travellers have gained some substantial benefits from it, in terms of lower fares and higher service frequencies. In a welfare analysis these benefits are estimated to be accruing at an annual rate at US$18.4 billion (at 1993 price levels). Accordingly, the authors reject calls for the industry to be reregulated, notwithstanding the instability, lack of profitability and impediments to competition observed in recent years. One of the arguments presented is that the primary source of the industry’s financial troubles is not anything it from structural that prevents earning a normal rate of return, but a failure to adapt efficiently to the business cycle. On the controversial question of how far the industry’s financial losses can be attributed to the pricing behaviour of carriers under Chapter Eleven operating bankruptcy protection, the authors’ econometric work suggests that the small. been quite effect has
Interestingly, it was found that the net revenues of some airlines were actually the enhanced through tarnished image of its bankrupt competitors (e.g. Delta in competition with Eastern and Continental), whilst those of some others were damaged by the lower marginal costs and fares of competitors in Chapter Eleven bankruptcj (e.g. American and United competing against TWA). Another major finding is that the marketing and operating strategies adopted by airlines to limit competition-hubbing, bias in computer reservations systems, yield management programs, loyalty marketing schemes-do not allow carriers to capture much of the gains accruing to travellers from deregulation. The anticompetitive effects of such innovations are assessed as being minor or at least easily remedied. Perhaps the most surprising aspect of this book is the virtual silence it maintains on the potential for predatory behaviour. This topic does not even receive a mention in the index. And yet predatory pricing, predatory
scheduling and predatory use of marketing weapons like computer reservations systems, travel agency commissions etc. are all things that have concerned antitrust authorities in the US. The authors’ overall conclusion that there is nothing to justify a more activist antitrust policy may not be one supported everywhere. The econometric empirical work described in this book is excellent. It does much to clarify and explain the effects of deregulation, updating and extending the authors’ earlier book on the subject.1 Particularly interesting are the various simulations of airline decision-making on fares, route entry and route exit. The analysis is highly original, painstakingly executed and beautifully presented. All in all, this is a most important contribution to the literature on airline deregulation and should be read by all those interested in this topic. Pat Ha&on School of Business University of Birmingham
1Morrison S.A and Winston C., (1986) The Economic Effects of Airline Deregulation, The Brookings Institution, Washington, DC.