In the early 90s, Airbus and Boeing, the two major players in commercial aircrafts decided to come together to manufacture Very Large Commercial Transport ( VLCT). Later on both the competitors parted ways as their business strategy could not synergize. Ultimately in 1994 Airbus decided to go solo on this venture and the project was codenamed A3XX. And thus the first flight of A380, the largest commercial aircraft happened in 2007 which is a double-deck, wide body 4-engine aircraft with 6000 square feet of usable space, 40% more space than its nearest rival product Boeing B747-8. A380 could accommodate 500 seats in 3-class capacity (Economy, Business and First Class) or 850 in an all-economy class.
With several delays the project cost escalated from the initial 9 billion to 13 billion Euros.
Product Pricing and Positioning: The A380 had a seating capacity which was 5 times the Airbus A320 Neo but the price point was 4X . The List price of A 380 was $430 Million whereas A320 was $107 Million. The product was received well after its launch. However in the last few years the customers, the airline companies are either cancelling the orders or postponing the delivery dates. The peak production which was at 30 aircrafts per year has dwindled to 12 per annum.
In spite of excellent product features, good quality (50% quieter than competition product) and the right price, why did Airbus started losing on the business for A380? The anticipated exponential growth in passenger traffic from hub-to–hub was the cornerstone on which Airbus decided to make A380. Hub-to-hub traffic for Air India is like New Delhi–London, for Singapore Airlines it can be from Singapore to Dubai or Frankfurt etc. One aspect that was overlooked was that of the point-to-point traffic. When the traffic between two points crosses a minimum threshold, airlines can afford to have small or midsized aircrafts which is more economical than transferring through the hub.
Even though the air traffic grew considerably; instead of it growing from hub-to-hub it started increasing from point-to-point. For example 10 years back, Air India used to have seven flights from Delhi to London and passengers were picked up from Hyderabad, Bangalore etc. Now all this airport being choc-a –block, it makes better business sense for airline companies to transport passengers directly from Bangalore to Cardiff/Manchester rather than routing through them hubs like Delhi and London. What is the learning for Sr. management from these?
- A technically superior product with better specifications even though necessary is not sufficient for long-term success.
- Appropriate price positioning even though crucial need not be a game changer.
- Factor X: Identify the factor x which is insignificant today but can become significant in future (that is generally overlooked) which can seriously affect your business strategy. ( In this case it was the point-to-point traffic) In case of Nano car, legend says that Shri Ratan Tata while doodling decided to launch a cheap car while seeing a family of four on a scooter. One factor which was overlooked was for majority of the Indians having a car was more of an aspiration and a status symbol ( emotional decision) than a cheap car as a mode of safe and convenient transport.(logical decision) Doodling can sometimes be an expensive proposition!
And last but not the least, there is nothing called as a right or wrong decision. All decisions are evaluated in posterity. Time is the best judge!
Nassim Nicholas Taleb author of books like Black Swan, Fooled by Randomness or Anti _Fragile says for most of us absence of evidence is interpreted as evidence of absence (Please read the book review: Anti –Fragile: How to Live in a world we don’t Understand) http://www.paradigm-info.com/recommended-books) Be Humble!
(Source: Bigger is not Always Better, Business Line November 30, 2016 by K. Giriprakash)
An eye opener indeed. And I guess the same logic applies to The Leela downfall.
Thanks & Regards,
Adrian Dsouza – Associate Vice President-HR & L&D.
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You are right Adrian, that’s quite an apt comparison.