Is There a Limit to Innovation? The Airline Industry and its Implications

So far, we’ve discussed the theories which influence disruptive innovation, and their implications. In chapter 6 of Seeing What’s Next, the authors pose an interesting question – is there a point at which innovation is no longer possible? By examining the airline industry, we can begin to tackle this question.

 

Until the 1960s, the airline industry was primarily dominated by major airlines that operated within a “hub-and-spoke” system of international and regional airports, focusing most of their efforts on business travel. This created an opportunity for disruptors to infiltrate the under-served market of regional airport travel, and inspired the development of many lower-tier competitors, such as South West Airlines. Suddenly, major airlines found themselves in competition with these companies, as they could not simply “flee” from this segment of the market, composed of lower-tier and leisure travelers.

 

The subsequent decades saw a back-and-forth war of innovation between major airlines and discount/regional airlines.  Discount airlines offered lower rates than major airlines, and compensated for their smaller profit margins by modifying their operations – for example, South West did not provide food on their flights, seating was not pre-assigned, and check-in was largely completed at a kiosk. These airlines slowly captured a large portion of the lower-tier customers from the major airlines.

 

Major airlines responded by offering customers better deals on airfare, and more last-minute options. They had lower operating costs due to the scale of their business, so when they could not compete by creating a new product, they offered up these deals.  Discount airlines remained competitive by expanding their operations, and in some cases, becoming subsidiaries of major airlines. Slowly, discount airlines captured a large segment of the lower-tier market, eventually expanding to international airports, which caused several major airlines to file for Chapter 11 bankruptcy, and others to respond with their own, similar products. Major airlines still held a large share of the higher-tier market of business travel.

 

With the recession, travel cost became a greater concern for a larger portion of the population, while service offerings among regional airlines continued to expand. This seems like it would be a self-sustaining recipe for the success of discount and regional airlines. Interestingly enough, once the discount airlines had expanded operations to as many airports as they could, they faced a wall in their innovation. The authors argue that the ping-pong battle between major airlines and discount airlines would likely continue, with no end in sight.

 

But what could happen instead? The authors suggest that discount and regional airlines could pursue untapped customers by offering transportation between airfields. 98% of Americans live within 20 minutes of a public-access airfield, and this segment of the market still remains largely untapped. Discount airlines could restructure their existing business model to capitalize on this innovation, offering even more regional travel options to business and leisure travelers alike. After all, innovations geared toward untapped customers tend to be the most successful!

 

This poses an interesting dilemma that all entrepreneurs will likely face – how to continue generating revenue and developing ideas when it seems like their business has “hit a wall.” The key is to identify untapped customers and sectors, and become a pioneer in that sector. Sometimes innovators are so ingrained in their existing practices, they miss these opportunities. It then becomes important that innovators continuously search for ways to compete with incumbents, especially through innovations the incumbents cannot realistically sustain, driving down their motivation to compete. Often, creatively examining the market disruptors already serve is a good place to start in developing new ideas. By analyzing customer feedback, researching fringe markets, and sustaining their innovative process, innovators can develop entirely new products with relatively little (initial) competition, placing them at the forefront of these markets.

 

Source: Christensen, C.M., Anthony, S.D., & Roth, E.A. (2004). Seeing What’s Next: Using the Theories of Innovation to Predict Industry Change. Boston, MA: Harvard Business School Publishing Company

5 thoughts on “Is There a Limit to Innovation? The Airline Industry and its Implications

  1. Jeanette
    I agree that is is a hard choice of what to do next when you hit a wall in marketing.
    I think allowing business travel to benefit in fun travel for free with points or to bring back the last minute get a ways would make people feel good and drive loyalty back to that one airline. Business is what people are worried about and I think if you put the FUN back into traveling then business will follow.
    Mary

  2. Hi Jeanette,

    Great post, I enjoyed reading it! Finding ways to grow once a wall is hit is a tough situation for a company to be in. And it seems like many airline companies simply chose to acquire other companies so they could grow. Since expanding vertically was no longer an easy option, expanding horizontally was their answer. I do think that there is still a lot of innovation left in the air travel industry, yet much of it is hampered by government regulation. I share Elon Musk’s opinion that it is a shame that supersonic flight was discontinued several years ago – this is a step backwards in innovation. However, I think that in the future, we will see electric powered supersonic jets. It’ll take a bit of time, but it’s possible for the concept to work and disrupt the entire industry.

  3. Jeanette – nice post! This book sounds great as I love reflection on cases like this (hypothetical questions addressed in light of real world case examples or circumstances). Thank you. The original question, is there a point at which innovation is no longer possible, is an exciting one to consider. Generally, I think this question might not consider the possible emerging markets and demands, etc. I often wonder, well has everything been innovated that can? Then, next thing you know a new technology, regulation, or policy transforms what can be done. I often tell my students that policy and regulation will dictate more of what you can do on this earth than the laws of physics. I sort of mean this as a joke, but there is some truth to this comment. Anyway – you have really gotten me thinking about the role of “creative destruction” within a market – thank you again!

  4. This makes me think about Southwest Airlines. They always advertised low-fares, and stuck with it! They had to fight to stay in business…but look at where they are today.

  5. Jennette,
    I share a lot of the same sentiments as our classmates. You definitely have me thinking. I recently learned that there is indeed a difference between creation and innovation. Along the lines of your posting, it is essential that companies remain competitive and innovative in the product offerings. Prime examples, Do Good mechanic shop opens its doors at 8 a.m. and has several convenient locations around town, but the Always Better mechanic shop opens its doors at 7 a.m. and only has two locations. Do Good mechanics begins to see their customer base diminish and looks to find ways to retain and recruit more customers. They begin a campaign for B.O.G.O discount services and see a small influx during the duration of the campaign, but sales do not remain. So in a efforts to pick up sales, they change their opening hours to 7 a.m. Business begins to have a steady pick up so Always Better extends their hours from 6 p.m. to 7 p.m. this puts both companies neck and neck despite Do Good having more locations. In efforts to knock out the competition Do Good scouts out Always Better and realizes that their customer service and timeliness is what’s really taking their business away. They try to get better in both areas but still don’t see their profit margin move. Thus, although business is steady they are not able to eliminate their competitor because Always Better tapped into their weaknesses.

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