What’s the Supply Chain for an Airline?

I teach a module on Supply Chain Strategy that requires students to choose a business, evaluate its performance and make recommendations for the future.  Quite a few of my students choose an airline as the business that they consider, and that’s reasonable enough; airlines are interesting! Unfortunately, there’s one feature of such work where it falls apart, more often than not.

When asked to consider the power relationship with suppliers (an aspect of Porter’s Five Forces) I often find a statement something like this:

“There are two potential suppliers; Airbus or Boeing. This duopoly has considerable power, and there is no possibility of any new suppliers entering the market in the foreseeable future.”

This is more-or-less correct… if we confine ourselves to the most simplistic level. It’s true that there are very few companies you can go to if you’re looking to buy a new airliner. Alliances, mergers, acquisitions and simply not attracting enough customers have played a part in whittling down the field. No longer can you order one from the British Aircraft Corporation, from Vickers, or Hawker Siddeley (although Hawker Siddeley ended up making wings for Airbus…)

The Russians stumbled at the end of the Cold War, with their offerings showing poor fuel burn performance and a bad safety record. For a time, the Sukhoi Superjet 100 looked as if it might mark the resurgence of the Russian industry, but the number sold is miniscule. That leaves Airbus and Boeing; the duopoly – except that airlines don’t always buy new aeroplanes. An aircraft can operate for a quarter of a century, and may change ownership several times. Some airlines will demand the newest systems for reasons of prestige, comfort or high serviceability; others will tolerate a cheaper airframe, and serve different markets. One airline’s strategy might be to obtain a brand new fleet, operate it for a while and then offload them at about the seven-year mark (before the first major engine rebuilds become due) while a different airline might choose to have in-house maintenance, repair and overhaul (MRO) capability, thereby tolerating the increased frequency of servicing operations that older aircraft require.

Another common comment from students is that because airliners are so expensive, there is a substantial barrier to market entry. It’s true that a new Boeing 737-800 has a theoretical list price of just over US$90m (put me down for a couple…) but again, this is a simplistic view of the industry. There is no need to buy new; neither is there a need to own the aircraft outright. Many airlines lease aircraft, for a variety of reasons, such as when they need additional capacity, or when trying out a new route. The leasing market also gives us some brilliant additions to the English language, such as “wet leasing” (where the lessor provides the aircraft, complete with crew, maintenance and insurance) and even “damp leasing” (much the same, except the airline provides its own cabin crew).

Seriously.

Aircraft in water

Some aircraft are wetter than others, it seems.

The biggest problem facing the student who chooses to consider an airline’s supply chain strategy and then assumes that aircraft manufacturers should be considered as suppliers is that they’re ignoring a much more challenging supply chain issue that has to be addressed every day; that of provisioning each flight.

When Logistics Consulting Partners investigated British Airways’ supply chain back in 1996, they reported that each time a Boeing 747 took off, it pulled some 40,000 items through the supply chain. Blankets. Headphones. Paper napkins. Cutlery. Wine. Roast chicken. Water… all with the possibility of affecting a passenger’s perception of the airline, if planners don’t get it right. What a shame to ignore all these interesting, real-world issues, and focus instead on an aircraft-buying transaction that (a) involves incredibly complicated bargaining, (b) happens behind closed doors and (c) might only happen once a decade, or so.

Boeing 747 taking off

Boeing, Boeing… gone. Along with some 40,000 items from the supply chain.

Supply chain managers don’t negotiate with aircraft manufacturers – senior company executives do that – but there is a very important and complex supply chain task being performed right now, in ensuring that each of the tens of thousands of commercial flights that lift off today will have the right quantities of consumables on board.

It’s not just a case of organising a catering division to load meals into trolleys, and stocking a warehouse with bits and pieces… the supply chain manager has to ensure that the goods are available not just at the airline’s own hub, but at every place that scheduled flights depart from, all over the world. In the right quantity, at the right time, every time… and without it costing a fortune.

For that, you need a supply chain strategy.

Advertisements

Talk to me! Leave a reply...

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s