The determinants and impact of outsourcing on airlines' performance. PhD thesis, University of Notti

284 Pages·2017·44.15 MB·English

by  Christine Middleton

The University of
Nottingham
Business School
Operations Management Division
THE DETERMINANTS AND IMPACT OF
OUTSOURCING ON AIRLINES'
PERFORMANCE
by
Mamdoub Taber Tayeb, BSc Dip MBA
Thesis submitted to the University of Nottingham
for the degree of Doctor of Philosophy
March 2012
TO MY MOTHER AND IN THE LOVING MEMORY OF MY FATHER
TO MY CHILDREN TAHER, MOHAMMED AND TALA
TO MY WIFE HALA ASHI
Abstract
ABSTRACT
This thesis is concerned with the impact of outsourcing within the airline industry. There
are conflicting viewpoints on the impact of outsourcing and a scarcity of empirical
studies examining its influence on the airlines' performance. In order to fill in this gap,
the research process was divided into three stages: (1) Literature review and an
exploratory case study; (2) Analysis of secondary data; and (3) Qualitative analysis of 14
interviews, representing 12 different airlines. Through the study, the determinants of
outsourcing and current outsourcing practices within the airline industry were identified.
Cost reduction and enhancing the focus on core activities were identified as the main
motives for outsourcing. Local authorities' legislation is regarded as the main influential
external factor while demand level for a given function, criticality of the activity being
considered for outsourcing, and current capability status of performing the activity are
identified as the main influential internal factors. Most outsourcing arrangements are
being made outside the airlines' home bases. The implications of outsourcing in the
performance objectives (cost, delivery, quality, and flexibility) as well as in the airlines'
overall operational performance were also evaluated. The evaluation of the airlines'
performance was based on the 'passenger load factor' and 'daily aircraft utilisation'. The
former captures the airlines' operational efficiency. The latter refers to maximising
aircraft utilisation, one of the main tasks for the airline management. Although a positive
impact on the cost objective was found, it is strongly correlated with the demand level for
the outsourced function. The delivery objective is negatively influenced by outsourcing.
The outsourcing influence on quality varies, depending on the nature of the outsourced
function. The flexibility objective is positively influenced by outsourcing. The study
revealed that there is no direct impact of outsourcing on the airlines' overall operational
performance. Two main contributions were provided through the research: theoretical
and practical. On a theoretical level, a more in-depth understanding of the outsourcing
determinants, current practices, and performance implications in the airline industry was
provided. The study also represents practical guidance for new entrants in devising their
supply chains and assisting managers in terms of supply chain restructuring by predicting
the determinants and impact of outsourcing on the airlines' operational performance.
Acknowledgements
ACKNOWLEDGEMENTS
First and foremost, I would like to thank ALLAH for giving me the strength and making
the completion of this thesis possible.
The completion of this research would not have been possible without the help and
support of many people. The research is indebted to all of them. Therefore, a very special
thank you is owed to every one of them and the following individuals in particular:
I am principally grateful to my supervisor Professor Kulwant Pawar for his kind help,
great guidance, and encouragement throughout this process. Also to my second
supervisor, Dr Ramakrishnan Ramanathan for his time and input. I would like to thank
my examiners Dr Helen Rogers (external examiner) and Dr Jane Guinery (internal
examiner) for their invaluable recommendations and guidance.
I would like to express my great appreciation to my mother for her continuous support,
encouragement and prayers for me, throughout my life and during my studies.
Finally, especial mention should be made to my children Taher, Mohammed, and Tala
and my wife Hala Ashi for their love, inspiration and patience during my PhD.
11
Table a/Contents
TABLE OF CONTENTS
ABSTRACT ........................................................................................................................ i
ACKNOWLEDGEMENTS ............................................................................................. ii
TABLE OF CONTENTS ................................................................................................ iii
LIST OF T ABLES ......................................................................................................... viii
LIST OF FIGURES ......................................................................................................... xi
LIST OF ABBREVIATIONS ....................................................................................... xiii
CHAPTER 1 ...................................................................................................................... 1
INTRODUCTION. ............................................................................................................ 1
1.1 STUDY BACKGROUND. .......................................................................................... 1
1.2 RESEARCH AIM AND ASSOCIATED OBJECTIVES ........................................ 3
1.3 RESEARCH CONTRIBUTIONS ............................................................................. 5
1.4 STRUCTURE OF THE THESIS .............................................................................. 5
CHAPTER 2 ...................................................................................................................... 7
LITERATURE REVIEW - OUTSOURCING .............................................................. 7
2.1 CHAPTER OVERVIEW ........................................................................................... 7
2.2 SUPPLY CHAIN AND VERTICAL INTEGRATION ........................................... 7
2.3 OUTSOURCING OVERVIEW. .............................................................................. 10
2.4 STRATEGIC OUTSOURCING .............................................................................. 12
2.5 LEVELS OF OUTSOURCING ............................................................................... 13
2.6 SUBSTITUTION VS. ABSTENTION OUTSOURCING •.•••••••••.•.••••••..•••.•.••••••.•. 13
2.7 DRIVERS AND FACILITATORS OF OUTSOURCING .•••••••••••••••••••••••••••••••••.• 14
2.8 MOTIVES FOR OUTSOURCING ......................................................................... 14
2.8.1 Cost Reduction ................................................................................................. 15
2.8.2 Quality Improvement ....................................................................................... 16
2.8.3 Focus on Core Competencies .......................................................................... 17
2.8.4 Flexibility ......................................................................................................... 17
2.9 OUTSOURCING DISADVA NTAGES ................................................................... 18
III
Table a/Contents
2.10 FACTORS RELEVANT TO OUTSOURCING DECISIONS ........................... 19
2.11 THEORETICAL PERSPECTIVES OF OUTSOURCING .•.............................• 20
2.11.1 The Resource-Based View (RBV) ................................................................. 21
2.11.2 The Transaction Cost Theory (TCT) ............................................................. 22
2.11.3 The Contingency Theory (CT) ...................................................................... 23
2.12 OUTSOURCING AND OPERATIONS PERFORMANCE ••••••.••••..•...•••..••••..... 24
2.13 PERFORMANCE OBJECTIVES ......................................................................... 2S
2.13.1 Cost Objective ................................................................................................ 26
2.13.2 Delivery Objective ......................................................................................... 27
2.13.3 Quality Objective ........................................................................................... 27
2.13.4 Flexibility Objective ...................................................................................... 27
2.14 ISSUES RELATED TO OUTSOURCING .......................................................... 27
2.tS CHAPTER SUMMARY ......................................................................................... 28
CHAPTER 3 .................................................................................................................... 30
THE AIRLINE INDUSTRY .......................................................................................... 30
3.1 CHAPTER OVERVIEW ......................................................................................... 30
3.2 AIR TRANSPORTATION INDUSTRY OUTLINE ............................................. 30
3.3 THE AIRLINE INDUSTRY: CHALLENGES •••.•••••••....•••••••...•••••••••••••...•.•••••.••••• 31
3.3.1 Jet Fuel Prices .................................................................................................. 32
3.3.2 Globalisation ..................................................................................................... 32
3.3.3 Liberalisation/Deregulation of the Air Transportation Industry ...................... 33
3.3.4 Privatisation of State-Owned Airlines ............................................................. 34
3.3.5 Entrance of Low-Cost Carriers ........................................................................ 35
3.3.6 Internal Challenges .......................................................................................... 37
3.4 THE NEED FOR CHANGE .................................................................................... 38
3.5 OUTSOURCING IN THE AIRLINE INDUSTRY ............................................... 39
3.6 NEW AIRLINE BUSINESS MODELS .................................................................. 42
3.7 PERFORMANCE MEASURES IN THE AIRLINE INDUSTRy ....................... 46
3.8 RESEARCH FRA.MEWORK .................................................................................. 48
3.9 CHAPTER SUMMARY ........................................................................................... 51
IV
Table o/Contents
CHAPTER 4 .................................................................................................................... 52
RESEARCH METHODS ............................................................................................... 52
4.1 CHAPTER OVERVIEW ......................................................................................... 52
4.2 MAIN RESEARCH PARA.DIGMS ......................................................................... 52
4.3 RESEARCH APPROACHES .................................................................................. 54
4.4 TYPES OF RESEARCH DESIGN ......................................................................... 58
4.5 RESEARCH METHODS USED IN SIMILAR STUDIES ................................... 59
4.6 RESEARCH DESIGN AND PROCESS ................................................................. 62
4.6.1 Stage One ......................................................................................................... 64
4.6.2 Stage Two ........................................................................................................ 65
4.6.3 Stage Three ...................................................................................................... 70
4.7 RELIABILITY AND VALIDITY ........................................................................... 81
4.8 CHAPTER SUMMARY ........................................................................................... 84
CHAPTER 5 .................................................................................................................... 85
THE EXPLORATORY CASE STUDY ........................................................................ 85
5.1 CHAPTER OVERVIEW ......................................................................................... 85
5.2 THE EXPLORATORY STUDY - SAUDI ARABIAN AIRLINES ••••••••••••••••••••• 85
5.2.1 Airline Background .......................................................................................... 87
5.2.2 Current Structure of SAUDIA ......................................................................... 88
5.3 THE CHALLENGES FACED BY SAUDIA ••••••••••••••••••••••••••••••••••••••••••.•••.••••••••••. 89
5.4 THE RESTRUCTURING OF SAVDIA ................................................................. 90
5.4.1 Motives Behind Outsourcing ........................................................................... 94
5.4.2 Factors Influencing Outsourcing Decisions ..................................................... 95
5.4.3 The Impact of Outsourcing .............................................................................. 96
5.4.4 Saudi Airlines Ground Services (SBU) ........................................................... 97
5.5 THE EXPLORATORY STUDY KEY FINDINGS ............................................... 98
5.6 CHAPTER SUMMARY. .......................................................................................... 99
CHAPTER 6 .................................................................................................................. 100
THE SECONDARY DATA ANALYSIS .................................................................... 100
6.1 CHAPTER OVERVIEW ....................................................................................... 100
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Table o/Contents
6.2 CHARACTERISTICS OF THE SAMPLE .......................................................... 100
6.3 RESULTS AND ANALYSIS ................................................................................. 103
6.4 SECONDARY DATA ANALYSIS FINDINGS •.•.••••••••••.•••.•••••.•.•..••••••••.•••.••••..•. 107
6.5 CHAPTER SUMMARY. ........................................................................................ 107
CHAPTER 7 .................................................................................................................. 108
OUTSOURCING DETERMINANTS AND CURRENT PRACTICES .................. 108
7.1 CHAPTER OVERVIEW ....................................................................................... 108
7.2 MOTIVES ................................................................................................................ 109
7.2.1 Cost Reduction ............................................................................................... 109
7.2.2 Focus on Core Activities ................................................................................ 112
7.3 EXTERNAL FACTORS ........................................................................................ 113
7.4 INTERNAL FACTORS ......................................................................................... 117
7.4.1 Demand Level ................................................................................................ 117
7.4.2 Criticality of the Activity ............................................................................... 120
7.4.3 Current Capability Status ............................................................................... 122
7.5 CURRENT PRACTICES ....................................................................................... 124
7.5.1 Home Base vs. Outstations ............................................................................ 124
7.5.2 Functional Level Outsourcing ....................................................................... 126
7.5.3 Supervision .................................................................................................... 131
7.5.4 The Outsourcing Trend .................................................................................. 132
7.6 CHAPTER SUMMARy. ........................................................................................ 137
CHAPTER 8 .................................................................................................................. 138
THE IMPACT OF OUTSOURCING ......................................................................... 138
8.1 CHAPTER OVERVIEW ....................................................................................... 138
8.2 PERFORMANCE OBJECTIVES - COST .......................................................... 139
8.3 PERFORMANCE OBJECTIVES - DELIVERy• ..•••...•.....•.•.•.••••••••..•.•.•••.•••••.•.• 144
8.4 PERFORMANCE OBJECTIVES - QUALITY .................................................. 148
8.5 PERFORMANCE OBJECTIVES - FLEXIBILITy .......................................... 152
8.6 OPERATIONAL PERFORMANCE .................................................................... 155
8.7 CAUSES OF THE NEGATIVE IMPACT ........................................................... 158
VI
Table of Contents
8.7.1 Staff Loyalty .................................................................................................. 159
8.7.2 Staff Training and Knowledge ....................................................................... 161
8.7.3 Control ........................................................................................................... 163
8.8 CHAPTER SUMMARY. ........................................................................................ 166
CHAPTER 9 .................................................................................................................. 167
DISCUSSION AND CONCLUSION .......................................................................... 167
9.1 CHAPTER OVERVIEW ....................................................................................... 167
9.2 CONTEXT AND PURPOSE OF THE STUDY ................................................... 167
9.3 STUDY FINDINGS ................................................................................................ 170
9.3.1 Motives .......................................................................................................... 170
9.3.2 External and Internal Factors ......................................................................... 173
9.3.3 Current Practices ............................................................................................ 178
9.3.4 The Outsourcing Impact on Perfonnance ...................................................... 183
9.4 MAIN CONTRIBUTIONS .................................................................................... 194
9.4.1 Theoretical Contribution ................................................................................ 195
9.4.2 Practical Contribution .................................................................................... 201
9.5 LIMITATIONS OF THE RESEARCH ................................................................ 207
9.6 FURTHER RESEARCH ........................................................................................ 209
9.7 CONCLUSION ....................................................................................................... 210
REFERENCES .............................................................................................................. 213
APPENDICES ............................................................................................................... 235
APPENDIX A ................................................................................................................ 235
APPENDIX B ................................................................................................................ 242
APPENDIX C ................................................................................................................ 250
APPEND IX D ................................................................................................................ 253
APPENDIX E ................................................................................................................ 268
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List of Tables
LIST OF TABLES
Table 3.1: Government Shareholding in International Airlines (July 2004) .................... 36
Table 3.2: A Comparison of the Traditional, Virtual and Aviation Business Models ...... 46
Table 3.3: Operational Performance Measures ................................................................. 47
Table 3.4: Quality of Service Performance Measures ...................................................... 48
Table 3.5: Research Gaps Found in the Literature on Airline Industry Outsourcing ........ 50
Table 4.1: Qualitative, Quantitative, and Mixed Methods Approaches ........................... 55
Table 4.2: Research Methods Used in Previous Studies of Outsourcing Effects ............. 60
Table 4.3: Research Methods Used in the Study .............................................................. 63
Table 4.4: The Experience of the Managers who Participated in the Study ..................... 72
Table 4.5: Profile of the Airlines that Participated in the Study ....................................... 73
Table 4.6: Comparison Between Quantitative and Quantitative Content Analyses ......... 77
Table 4.7: Three Approaches to Content Analysis ........................................................... 77
Table 4.8: Tactics Used in the Study to Address Reliability and Validity Issues ............ 84
Table 5.1: List ofInterviewees of the Exploratory Study ................................................. 86
Table 5.2: Key Statistics of Saudi Airlines ....................................................................... 87
Table 6.1: Data Sources .................................................................................................. 101
Table 6.2: The Characteristics of the Sample (2006) ..................................................... 101
Table 6.3: The Characteristics of the Sample (2007) ..................................................... 102
Table 6.4: Impact of Airlines' Outsourcing Intensity ..................................................... 103
Table 6.5: Impact of Outsourcing on Passenger Load Factor ......................................... 104
Table 6.6: Impact of Outsourcing on Average Aircraft Utilisation ................................ 105
Table 6.7: Impact of Outsourcing on Operating Profit ................................................... 105
Table 6.8: Impact of Outsourcing on Percentage of On-Time Departures ..................... 106
Table 6.9: Impact of Outsourcing on Number of Bags Delayed .................................... 106
Table 7.1: Motives Behind Outsourcing - Cost Reduction ............................................ 110
Table 7.2: External Factors Influencing Outsourcing - Local Authority Legislation .... 114
Table 7.3: Internal Factors Influencing Outsourcing - Demand Level .......................... 119
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