Innovation requires competitive pressure and a culture of cooperation to make it happen. In Latin America, many indicators, also from other industries, are suggesting that this is not yet happening. But, does this exempt Latin American (and other) airlines from creating value through innovation?
Latin American airlines have been among the star performers of the last decade. Double-digit economic growth rate in key economies, most notably Brazil, have helped to create regional champions like LAN, TAM, Avianca, Taca or Copa. LAN and TAM, Avianca and Taca merged, most major airlines joint an international alliance.
The Latin American airline industry left behind its shabby image and now has an impeccable safety record, a great product and a modernized fleet, which makes the aircraft of some US competitors look like flying museums. There is no doubt, the Latin American airline industry did their homework and created one of the most efficient players in the world.
But now the party is over. Economic and passenger traffic growth curves are flattening, yields are eroding and profits have given way to losses. Can innovation save the situation?
The innovation pioneers of the last decade find themselves suddenly in a critical position: Gol, Brazil’s low-cost, not-so-low-fare pioneer is reporting record losses, Uruguay’s Pluna, which made the “low-cost regional” oxymoron actually work has been renationalized and Mexico’s Volaris continues pivoting its business model in the search of a mythical lost ark, presumably hidden by now bankrupt Mexicana.
But, what’s next? Airlines have been innovative at the cost reduction side of the business, but not at the value generation side. Introducing just a few ancillary purchase options into the booking path creates no value, particularly when they are “taxes” (mandatory charges, which buy no value for the customer, like credit card, booking and baggage fees).
During our Airline Customer Experience and Value Generation Management consultancy work, thought leadership forums and customer focus groups we have identified a number of levers and drivers to impulse value-creating innovation, still vastly underutilized by most airlines. Here are some of them:
1) Serve the Generation F: don’t get this wrong – I mean generation Facebook. Their travel buying behavious has some very special characteristics:
- Before even comparing prices, they read what others have said about a given product.
With this consumer behavior, where do you want to put your money first – customer experience (which will be shared) or advertising (which will be shot down on the Internet if its promises are not matched by the actual experience)? - They will share their experience, in real time, and once all planes have Wifi even during the flight. How can you help customers to short positive and inspiring experiences with the same enthusiasm they are showing for sharing complaints?
2) Reinvent loyalty: the undifferentiated miles for flights model doesn’t work anymore except as a disguised discount program. And any CEM scholar knows that discounts are a clear symptom of a doomed Value Proposition. New technologies and mobile platforms allow to design a Copernican change into frequent flyer programs, away from a huge centralized behemoth to an agile, customer engaging micro-payments/micro-rewards platform.
3) Make yourself relevant in a mobile world: Come on, you are in the mobility business. Why are you then pushing out so static and useless mobile apps? Currently, more than 80% of the users delete travel apps within 90 days of installing them on their mobile devices. Why? They are irrelevant. Not engaging. That’s what users told us.
4) Create products for which customers WANT to pay: Customer Experience Management is not about pleasing customers for free, it’s about making more profits. This requires introducing some “Silicon Valley startup spirit” in your company and experiment with new products and value propositions.
KLM’s “chose your seat neighbor” is a great example (a service concept invented by Sergio Mello’s Satisfly, although I haven’t seen KLM crediting him).
Returning to the situation in Latin America (and most other regions!). I am seeing worrying clouds on the horizon. Airlines have cut costs, created merger synergies, but there seems to be no road map towards developing significant new value potentials through innovation. But before starting to design innovations, there are a number of structural obstacles, which need to be removed to allow change to happen and to stay internationally competitive.
- Innovation only occurs under extreme competitive pressure.
Mergers have created oligopolistic structures with little real competition in many markets. Many Latin American countries like Argentina are still very protectionist.
Both factors eliminate or reduce the vital need to go through the pain of deep change and assuming the risks of trying something new and unproven. Without the occasionally life-threatening power of extreme competition, little innovation ever occurs. - Innovation only occurs in a culture of open cooperation. This requires modern and transparent corporate structures.
But many Latin American companies are still very hierarchical. Employees are often not expected to take their own decisions nor to assume risks. Access to information is departmentalized and stratified because some owners don’t want anybody to see the complete picture.
Such a corporate culture cannot innovate and is unable to attract external and activate internal talent. The organization is busy creating Potemkin villages to please the bosses.
The role of corporate leadership
Fortunately, some Latin corporations do not follow this pattern. For example, LAN is a huge organization, which gives people room to work and innovate.
Corporate leadership has a lot to do with it: at the 2010 Fidae air show I found LAN co-owner and executive president Enrique Cueto standing behind me in the queue of the “ordinary people”, waiting to enter the lunch tent although the CEOs were being escorted directly to their VIP tables. Without the slightest gesture of pose, he said that he preferred to be in this queue. A humble, hard working boss with no neo-aristocratic allures, will always inspire more confidence than distant “hierarchs”, as top executives are still called revealingly in some less developed Latin American countries. And confidence is key to innovation.
Another well-working corporate structure is a start-up in which the founders work hands-on to make things happen. VivaColombia is a great example. Founded by a group of industry veterans, the Colombian startup airline is full of brilliant ideas around a powerful and simple business model, which creates value and competitive advantage beyond the price.
I sincerely hope that VivaColombia will have its place in aviation history for finally creating the much needed competitive “temperature” to force other airlines in the region to start innovating deeply (beyond putting just bigger screens in business class seats).
In summary:
- Innovation creates new and often unexpected value and revenue generators. Without innovation, a company only produces a commodity that competes on price, resulting in reduced margins and profits.
- Innovation only occurs when competition forces change-adverse organizations to embrace it: Protectionist or oligopolistic environment will not let it grow.
- Innovation also only occurs in cooperation-friendly organizations without hierarchical, departmental or lack-of-trust barriers that kill innovation before even reaching embryonic state.
- And innovation needs a method, which may come from an outside consultant or “innovations lab”. Start googling terms like “airline customer experience”, “airline service design innovation” or similar to start collecting some initial ideas.
For example, at avionline we have created not only service concepts and digital products for a number of industries, but also business models for spin-offs, helping larger companies to raise capital while unleashing creativity within their own corporate environment.
This year’s CILA airline conference (MIAMI 5-6 September 2012), which I have the honor to chair, will be all about innovation in the airline business: innovating structures, business models, IT, and much more. Just have a look by clicking here.
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