Sustainability of Low-Cost Airlines within South Africa

170 Pages·2017·3.39 MB·English

by  Dumo Denga

Sustainability of Low-Cost Airlines
within South Africa

A dissertation
presented to the

School of Economic and Business Sciences (SEBS)
University of the Witwatersrand

in fulfilment of the requirements for the
MASTER OF COMMERCE DEGREE (MCom)
by

Dumolwakhe Denga
Student number: 384780

Department: Marketing
Supervisor: Mr Norman Chiliya
Co-supervisor: Professor Richard Chinomona

Date: 5 June 2017
DECLARATION
I, the undersigned, ___________________________________ (full names, please print),
hereby declare that this research is my own, unaided work. It is being submitted in partial
fulfilment of the requirements for the degree of Masters in Business Science at the University
of the Witwatersrand, Johannesburg. It has not been submitted before for any degree or
examination in this or any other university.
I further declare that: I am aware that plagiarism (the use of someone else’s work without
their permission and/or without acknowledging the original source) is wrong. I have
followed the required conventions in referencing the thoughts and ideas of others. I
understand that the University of the Witwatersrand may take disciplinary action against
me if there is a belief that this is not my own unaided work or that I have failed to
acknowledge the source of the ideas or words in my writing.
SIGNED AT _________________________ ON THIS _______ DAY OF ___________ 2017
______________________________________ Signature

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ACKNOWLEDGEMENTS
Firstly, I would like to thank all my supervisors who aided me in this four-year study. These
good people are Dr Solomon Habtay, Dr Richard Chinomona, Dr Pepukayi Chitakunye and
Mr Norman Chiliya.
I would also like to thank all the following participants for sharing their expert knowledge:
Barry Parsons, Javed Malik, Phumla Luhabe, Jerome Simelane and Ian Meaker.
I would like to thank Brian Carlson for editing my work.
Lastly, I would like to thank all my family members and colleagues for showing me their
support in completing this study. Your support and words of encouragement have motivated
me to complete this exercise.

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ABSTRACT
Based on the significant amount of entries and exits of low-cost airlines in the commercial
airline industry within South Africa, this brought on the question of whether such business
models are sustainable in an emerging market. Incidents such as the exits of 1time and Velvet
Sky brought about a high degree of concern. Analysts have suggested that the main reasons for
airlines departing are the global financial crisis in 2009 which led to a decrease in passenger
numbers, decreasing market size, the volatility of the fuel price, route density on major routes,
market size and currency risk. (1time Holdings, 2010; South African Airways, 2014; Comair
Limited, 2014; Hedley, 2012). These factors are all external and indicate possible reasons for
low-cost airline market exit. However, the business model of the airline is not considered as a
possible reason for a low-cost airline’s exit from a market. Johnson, Christensen and
Kagermann (2008) stated that the business model has four key components and, when these
components are combined, they deliver value. These components are customer value
proposition, profit formula, key resources, and key processes. Using the components provided
by Johnson et al (2008) as a basis for the theoretical model, the study aimed to investigate key
factors that enable or inhibit a disruptive innovation, such as a low-cost airline, in an emerging
market like South Africa, and propose a conceptual model (that will be empirically tested in a
subsequent study) for sustainability within the context of disruptive innovations, such as a low-
cost airline, in a developing country setting. Five managers of leading low-cost airlines and
airline consulting firms in South Africa were selected using judgmental sampling method and
were requested to participate in separate individual in-depth interviews. The data from the
interviews was analysed using the Glaserian coding method. Based on the data analysis, three
themes were developed. These themes were: the business model, business model evaluation
and external factors. From the themes, a conceptual model was developed. The model alleged
that specific elements of the airline business model (the organisation, the product, costs and
cash sources) have a possible influence on the competitive advantage of an airline while the
competitive advantage of an airline has a possible contribution to its sustainability.
Keywords: Business models, low-cost airlines, sustainability, innovation, disruptive
innovation, services, emerging economy

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TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION AND BACKGROUND TO THE STUDY .................... 1
1.1 Background ...................................................................................................................... 1
1.2 Problem Statement ........................................................................................................... 1
1.3 Research Gaps .................................................................................................................. 2
1.4 Research Questions .......................................................................................................... 3
1.5 Research Objectives ......................................................................................................... 3
1.6 Theoretical Framework .................................................................................................... 3
1.5 Theoretical Significance ................................................................................................... 4
1.6 Methodology .................................................................................................................... 4
1.7 Dissertation Structure ....................................................................................................... 4
1.8 Conclusion ........................................................................................................................ 5
CHAPTER 2: RESEARCH CONTEXT ................................................................................ 6
2.1 Introduction ...................................................................................................................... 6
2.2 Airline Business Models .................................................................................................. 6
2.3 Airline Key Performance Indicators .............................................................................. 10
2.4 Brief History of Airlines in South Africa ....................................................................... 11
2.4.1 Short Case Studies ................................................................................................... 12
2.5 Low-cost Business Models in the Global Airlines Industry .......................................... 15
2.6 Drivers and Inhibitors of Low-cost Models in the South African Commercial Airlines
Industry................................................................................................................................. 15
2.7 The Challenges Facing South African Airlines.............................................................. 16
2.8 Emerging Countries........................................................................................................ 17
2.8.1 What is an Emerging Country? ............................................................................... 17
2.8.2 Opportunities and Challenges for Innovation Emerging Countries ........................ 17
2.8.3 Key Drivers for Innovation in Emerging Markets ................................................... 18
2.9 Conclusion ...................................................................................................................... 19
CHAPTER 3: LITERATURE REVIEW ............................................................................ 20
3.1 Introduction .................................................................................................................... 20
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3.2 Sustainability .................................................................................................................. 20
3.2.1 Defining Sustainability and its relation to Airlines ................................................. 20
3.3 Defining Innovation and Typology of Innovation ......................................................... 21
3.3.1 Categories of Innovation Based on the Degrees of Impact ..................................... 22
3.4 Disruptive Innovation Theory ........................................................................................ 25
3.5 Transition from Disruptive Technology to Business Model Innovation Theory ........... 28
3.5.1 The Business Model Concept .................................................................................. 28
3.5.2 Business Model Innovation ..................................................................................... 31
3.5.3 The business model in the social scene and emerging economies .......................... 32
3.5.4 Implementation of the business model .................................................................... 34
3.5.5 Disruptive Business Model Innovation ................................................................... 35
3.6 Business Model Innovation in the Services Industry ..................................................... 36
3.6.1 Service theory .......................................................................................................... 36
3.6.1.1 Understanding Service Products, Consumers, and Markets ................................. 37
3.6.1.2 Applying the Marketing Mix to Services ............................................................. 40
3.6.1.3 Management of the Customer Interface ............................................................... 43
3.6.1.4 Profitable Service Strategy Implementation ......................................................... 46
3.7 Service business model innovation ................................................................................ 48
3.8 Summary ........................................................................................................................ 50
CHAPTER 4: THEORETICAL FRAMEWORK .............................................................. 51
4.1 Introduction .................................................................................................................... 51
4.2 Theoretical Model .......................................................................................................... 51
Structure ........................................................................................................................... 52
Purpose of the theoretical framework .............................................................................. 52
Disruptive Innovation, Business Model Elements, Airline Key Performance indicators
and Airline Sustainability ................................................................................................. 52
4.3 Summary ........................................................................................................................ 53
CHAPTER 5: RESEARCH FRAMEWORK AND METHODOLOGY .......................... 54
5.1 Introduction .................................................................................................................... 54
5.2 Research Philosophy ...................................................................................................... 54
5.3 Research Design ............................................................................................................. 55
5.3.1 Overall Research Design ......................................................................................... 55
5.3.2 Sampling technique ................................................................................................. 56
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5.3.3 Data Collection ........................................................................................................ 57
5.3.4 Data Analysis ........................................................................................................... 57
5.3.5 Data verification ...................................................................................................... 58
5.4 Conclusion ...................................................................................................................... 59
CHAPTER 6: RESULTS ...................................................................................................... 60
6.1 Introduction .................................................................................................................... 60
6.2 Profiles of the Respondents ............................................................................................ 60
6.3 The Business Model ....................................................................................................... 61
The Organisation .............................................................................................................. 61
Business Objectives .......................................................................................................... 64
The Product and Target market ........................................................................................ 66
Cost Reduction, Revenue Generation and Cash Flow Strategies ..................................... 68
6.4 Business Model Evaluation ............................................................................................ 71
6.5 External Factors.............................................................................................................. 74
6.6 Conclusion ...................................................................................................................... 76
CHAPTER 7: DISCUSSION ON FINDINGS ..................................................................... 78
7.1 Introduction .................................................................................................................... 78
7.2 Main Findings ................................................................................................................ 78
7.3 The Business Model ....................................................................................................... 78
7.4 Business Model Evaluation ............................................................................................ 80
7.5 External Factors.............................................................................................................. 80
7.6 Development of the Conceptual Model ......................................................................... 81
7.6.1 Hypothesis Development ......................................................................................... 82
7.7 Conclusion ...................................................................................................................... 88
CHAPTER 8: CONCLUSION, RECOMMENDATIONS AND CONTRIBUTION ...... 89
8.1 Introduction .................................................................................................................... 89
8.2 Review of Main Findings ............................................................................................... 89
8.3 Managerial Implications ................................................................................................. 90
8.4 Limitations ..................................................................................................................... 91
8.5 Future Research .............................................................................................................. 91
REFERENCE LIST ............................................................................................................... 92
APPENDICES ...................................................................................................................... 102
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APPENDIX A: Ethics Clearance Certificate ..................................................................... 102
APPENDIX B: Participation Information Letter, Consent Form and Interview Guide..... 104
APPENDIX C: Interview Transcripts and Notes ............................................................... 109
APPENDIX D: Letter Confirming Editing ....................................................................... 158
APPENDIX E: Approval of Title Letter ............................................................................ 160

List of Tables
Table 1: Airline business models and associated characteristics ............................................... 8
Table 2: Summary of airline key performance indicators ....................................................... 11
Table 3: The characteristics, challenges, and opportunities in an emerging country .............. 17
Table 4: Categories of innovation ............................................................................................ 22
Table 5: Steps for the creation of a business model in an emerging market ........................... 32
Table 6: Summary profiles of each participant ........................................................................ 60
Table 7: The participants and the Organisation ....................................................................... 61
Table 8: The participants and the business objectives of airlines ............................................ 64
Table 9: Participants and their views on the product and target markets of low-cost airlines 66
Table 10: Participants and their views on cost reduction and revenue generation .................. 68
Table 11: The participants and Business Model Evaluation .................................................... 72
Table 12: The participants and External Factors ..................................................................... 74

List of Figures
Figure 1: Dissertation structure .................................................................................................. 4
Figure 2: A graphical representation of the 'point to point' and 'hub and spoke' models .......... 7
Figure 3: Disruptive innovation model .................................................................................... 25
Figure 4: Disruptive innovation model displaying the third dimension .................................. 27
Figure 6: Framework for Services Marketing .......................................................................... 36
Figure 7: Theoretical Model .................................................................................................... 51
Figure 8: Proposed conceptual model ...................................................................................... 81
Figure 9: Hypothesis 1 ............................................................................................................. 84
Figure 10: Hypothesis 2 ........................................................................................................... 85
Figure 11: Hypothesis 3 ........................................................................................................... 86
Figure 12: Hypothesis 4 ........................................................................................................... 87
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Figure 13: Hypothesis 5 ........................................................................................................... 88
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CHAPTER 1: INTRODUCTION AND
BACKGROUND TO THE STUDY
1.1 Background
The commercial airline industry has primarily provided air travel as another means of transport
for travellers. The evolution of the airline industry has brought about a typology of innovative
airline business models such as full-service airlines, low-cost airlines, cargo freighters, air
shuttle services, aircraft leasing, aircraft maintenance and charter services (Boeing, 2015). The
business model is defined as the firm’s overall philosophy on how it intends to capture, deliver
and create value. The value mentioned in the definition is not only limited to economic value
but could also be social or anything that the firm defines as value (Magretta, 2002; Amit &
Zott, 2001). In South Africa, since 1990, a significant number of airlines have entered an exited
the market such as Nationwide, 1time, Velvet Sky and African International Airways. This
study will focus on the low-cost airline business model. Low-cost airlines (no frills airlines)
are defined as airlines that offer significantly lower fares and fewer features than full-service
airlines (Boeing, 2015). A low-cost airline is also considered as a disruptive innovation because
this type of innovation enabled the creation of a new market, and offered convenience and
lower prices to customers in an established market (Christensen, et al., 2004).
1.2 Problem Statement
In the South African commercial airlines industry, there are four low-cost airlines (FlySafair,
Mango, Kulula, and Skywise) servicing all three of South Africa’s major destinations (Cape
Town, Johannesburg and Durban) among others. In 2012, 1time ceased operations due to its
insolvency. Prior to its demise, 1time was competing with Mango and Kulula. Analysts have
suggested that the main contributors to its demise were the global financial crisis in 2009 which
led to decrease in passenger numbers, the volatility of the fuel price, route density on major
routes, market size, and currency risk. These factors ultimately led to the airline being depleted
of cash, thus being unable to operate (1time Holdings, 2010; South African Airways, 2014;
Comair Limited, 2014; Hedley, 2012). When viewing the contributing factors responsible for
1time’s failure, what is common is that they are all external. It seems that internal factors, such
as the business model, were overlooked. Furthermore, Mango and Kulula also experienced the
same external challenges faced by 1time but they managed to endure those challenges. It could
be the case that both Mango and Kulula innovated their respective business models in such
way that they could deal with the external challenges which ultimately led to the demise of
1