Strategy study by Roland Berger and HHL – Leipzig Graduate School of Management on the European aviation industry

• Aviation industry remains as exposed to complexity, volatility and uncertainty as ever – increasingly difficult to plan ahead
• European Network Carriers risk being caught between European low-cost carriers and Asian and Middle Eastern competitors
• Study identifies major risks and derives four possible scenarios for the years to come
• Newly developed scenario-based strategic planning approach allows decision-makers to consider different development paths and help them choose the right strategy for their airline

The global aviation industry is set to recover rapidly after the historic crisis of 2008 and 2009. Passenger numbers are on track to reach pre-crisis levels, revenues are improving strongly and net profits are expected to top USD 15 billion in 2010. However, the crisis has brutally revealed the weaknesses of European Network Carriers.

"The traditional European Network Carriers (NWC) are still in a rather shaky condition," says Björn Maul, Partner at Roland Berger Strategy Consultants. During the crisis, low-cost carriers have further increased their market share in Europe, while Asian and Middle Eastern competitors likewise kept their targets set on growth. European NWC are still looking for a strategic response to their competitors. They have to strike the right balance between maintaining their service and quality advantage on one hand and adapting to cost pressure on the other. With passenger volumes set to grow strongly, opportunities do lie ahead. But European NWC must identify the right strategy to make use of them.

Scenario-based strategic planning for dynamic environments

"We believe that our scenario-based strategic planning approach improves the ability of managers to plan for dynamic and uncertain framework conditions," says Prof. Dr. Torsten Wulf of HHL – Leipzig Graduate School of Management. Decision-makers still rely strongly on traditional, one-dimensional strategic planning tools and forecasts. Such approaches are systematic and easy to implement, but due to their rigidity they are also ill-suited to dynamic industries like aviation. Traditional scenario planning, on the other hand, allows airline management to take a more creative approach to their ever-changing business, but is less practical in its application.

Prof. Dr. Wulf: "The approach chosen by HHL and Roland Berger combines the open-mindedness of scenario planning with the systematic framework and ease of application typical for strategic planning. It thus reflects the dynamics of the aviation industry, but remains easy to implement."

Four different scenarios for European airlines

The four scenarios developed jointly by HHL and Roland Berger center around two key risks which were identified in an industry survey and subsequent scenario workshop: the degree of regulation of the aviation industry and the price-sensitivity of customers. Based on these key uncertainties as well as further trends and influence factors, four plausible scenarios emerge for how the European airline industry might evolve.

1. 'Network Fortress' sees the European NWC recovering quickly, boosted by healthy demand in premium segments, successful restructuring and the introduction of product innovations. The growth of foreign competition is slowed down by limited market access.
2. In 'Europe under Siege', European NWC are forced back into their home market by aggressively growing Asian and Middle Eastern competitors.
3. 'Decline of Champions' paints an even gloomier picture of both European low-cost carriers and Asian and Middle Eastern competitors tearing into the established market of NWC.
4. In 'New Horizons', European NWC suffer under a price-sensitive European market, but manage to defend their position against foreign competitors on the rapidly growing Asian routes.

Björn Maul: "Our scenario study shows that European NWC will face far-reaching changes over the next years. Considering potential scenarios allows airline managements to proactively prepare and remain in control of their company's future."