VivaColombia Airlines – Operational Analysis

VivaColombia Airlines – Operational Analysis

VivaColombia Airlines
In 2007 the idea of bringing a low-cost-carrier (LCC) business model to Colombia was born. VivaColombia was the Stanford University’s project of one of its founders, William Shaw (former British Airways CEO), who brought in Juan Emilio Posada (former Avianca CEO), Fred Jacobsen (former Tampa Cargo CEO) and Gabriel Migowski (former Brazilian Air executive) to realize this idea and turn it into a business. Needless to say, the four of them had the combined experience needed to create this company and after much discussion, they all agreed to fulfill that demand in Colombia. Founded initially in 2008 under the name Fast Colombia, the VivaColombia went through various hurdles[1] until May 2012 when they finally began operations in Colombia.

VivaColombia: The Challenge of Growing a Low-Cost Airline in Latin America

The VivaColombia case narrates the airline’s history from 2012 to 2015 at which point the company’s board of directors had to make a decision: whether to expand to a new market in Brazil or go forward with consolidating their local operations to improve standards, consistency of service and customer satisfaction. Both projects involved an upfront cost of $1 Million. A decision had to be reached at the board meeting on December 29, 2015.

The board members of the airline had different opinions of the best course of action was, but they all agreed that whichever decision was made had to comply with the following four points:

  • They would only do one of the two projects
  • They didn’t want to incur in higher debt
  • Whichever plan had to begin in 2016[2]
  • Whichever project had to yield a minimum rate of return of 8%.

Analyzing VivaColombia’s Operations Strategy

(Using Frances Frei’s “4 Things a Service Business Must Get Right”)

The Service

The low-cost airline service models are very straight forward. Their value offering stands from stripping the most out of expenses to then push on those savings to the customer. At the same time, it is imperative for VivaColombia to be transparent about the fact that they are a low-cost airline and what that means to a consumer. Their website makes the charge structure clear with disclaimers that other fees can be included in the final. They are straight forward with their offering: “We’ll take YOU there as cheaply as possible.” That offering comes with the full and sole intention of what YOU mean. Not to be confused with YOU and some luggage, nor YOU in addition to some in-flight catering services.

After the customer purchases the service, an a-la-carte pay per service experience takes over in which the customer chooses to enhance their experience by paying extra fees. For the past decade, the airline industry has been getting smarter about opportunities in ancillary revenue since the hikes of fuel prices in 2007. Ancillary revenue is all the revenue collected by the airlines that are non-ticket related such as early boarding, excess luggage weight, in-flight meals, and entertainment, preferred seat assignment, among many others. In many cases, this revenue has grown tremendously year over year with many airlines doubling their revenue per passenger in the past years. This trend from traditional airlines could be positive for low-cost airlines. In the cheap airline services, customers that genuinely understand the value of the service won’t be alarmed when they are being charged for something extra.

On the other hand, a customer from a traditional airline might be annoyed by the fact that he/she is being charged a fee for something extra since this does not resonate with their perceived value of the service offering. This gives a potential edge in customer satisfaction to the low-cost airlines if and only if the customer understands their offering. Education and transparency will always be an integral part of this service model.

The Funding

To be a low-cost airline, VivaColombia had to differentiate from the traditional airline business model. Some of these differences are[3]:

  • Single aircraft type (Airbus A320) – By having a fleet of the same kind of airplane, VivaColombia had savings in the maintenance and technicians needed to support the operations. It also only required regular training for the same aircraft type. VivaColombia on average had half the average amount of employees per airplane in comparison to Avianca and LAN (since they both used Boeing and Airbus Planes).
  • Tighter seating and single passenger class – VivaColombia would carry 20% more passengers than the traditional airline in the Airbus A320. The focus on closer seating made no need to create passenger classes since the goal was to maximize the number of people they can fit inside the airplane. Traditional airlines focused on comfort for their customers at a higher price; VivaColombia was not.
  • Online Ticket Sales – The majority of their tickets are sold online. They push the customer to finalize their purchase without the help of an employee with the incentive of not being charged with an extra fee. This kind of sales enables VivaColombia to lower the number of needed employees in their front line (i.e., Check-in / Reservation Counter Representative).
  • No numbered seats – This strategy makes boarding faster by cutting the boarding time in half. These time cuts result in lower parking and air conditioner cost while the planes are operating.
  • No free in-flight services / No frequent flyer program – Traditional airlines provide meals, free entertainment, and rewards for customer loyalty, but this is an expense that VivaColombia forgoes. The airline charges for snacks and drinks in their flights as part of its ancillary revenue strategy. They also don’t have loyalty programs refraining from incurring on those operational expenses.

The funding mechanism for VivaColombia differentiated them from airlines established in Colombia at the time, but they had to focus on getting the funding right because low-cost airline competitors, such as Wingo and Norwegian, had plans enter the Colombian market soon.

Managing the Workforce

The low-cost airline business model leverages some of its funding strategies to manage their workforce. VivaColombia only buys one type of airplane which helps them achieve their workforce by standardizing training for staff and crew. These standards simplify the employee’s experience since they only had to focus on what to do in one aircraft. In contrast, significant airlines send their crew and staff to training where they must learn about various types of aircraft and how to operate in them. Like many other aspects of the low-cost carrier model, managing something becomes a question of simplification and standardizing procedures.

Airlines, in general, share similar tactics for workforce management by offering fringe benefits. The industry has determined that it can fill empty seats with their employees (or their family members) and in this way, they enhance the employee’s experience when there is no way of monetizing that passenger seat. Employees in most airlines have the benefit to fly standby on an airplane with available seats as long as they are flying through internal company routes. Some companies even extend this benefit across airline alliances and partnerships which maximize the profit of the employee, given them the ability to expand the route selection across the partnerships their employer has established. These types of fringe benefits are beneficial to retain personnel that deals directly with the customer. The chances are that if a customer is dealing with issues of their travel, they will most like take out their frustration on the airline employees. Airlines provide this great benefit to the employee with the thought that it will supersede the will to behave inadequately towards a customer.

Managing the Customer

VivaColombia managers its customers through their online platform. Part of the business model has been built in a way that the online platform of the company is the one that faces the customer on most occasions. Their website is very similar to those of low-cost airlines (i.e., Spirit Air, Ryan Air) which have a very distinct feel from the major airlines (i.e., United Airlines, Delta Airlines, American Airlines). The website layout has been designed to be transparent about their pricing and charges that customers can expect. In this aspect, VivaColombia does a good job, but it seems that they completely forget about the customers that don’t read and the ones that are unable to understand the company’s value offering. This is evident when customer satisfaction surveys state that 20% of its customers will not fly again with VivaColombia[4].

Contrary to VivaColombia, a traditional way that significant airlines manage their customers is by providing enhancements to the customer’s experience with offerings such as loyalty/frequent flyer programs. These types of programs help the airlines retain customers by offering them upgrades and perks to their expertise. These experience enhancements further increase customer satisfaction and increase the possibility of repeated business with these customers. On the other side of this experience, if the airline is not able to provide the expected service (i.e., lost flight/seat to overbooking) for a customer, it finds a way to compensate for their shortcomings. It is customary for airlines to provide flight vouchers (for free flights), cash compensation and hotel accommodations if this is what it takes to increase the likelihood that the customer will fly again with that airline after they have failed at providing the expected service.

Positive customer experience is the driver of repeated business in the airline industry. This is the reason why airlines must always strive to increase customer satisfaction by managing their customer’s experience as much as they can control. The intangibility of the airline services makes quantifying the value more complicated when compared to manufacturing operations. Up next, we explore how service firms differ from manufacturing firms and how those differences affect the company’s strategy.

Explaining differences between manufacturing management and service management / VivaColombia and its effect on its service strategy

Airline Transportation Services are partially intangible

The intangibility of airline service makes quantifying its value more complicated since it’s based on the customer’s experience. Airlines rely on sources of information relating to their service to understand how their service is performing such as repurchasing decisions, customer satisfaction scores from company surveys, and also user review platforms (i.e., Yelp!, TripAdvisor). By gathering information about how their customer’s satisfaction can improve their operations to cater to the maximization of that perceived value.

Low-cost airlines have to pay very close attention to the intangibility of the airline transportation service, especially when entering new markets that have never experience the cheap airline model. Paying attention to the customer’s perception of value has to be fundamental to changes that VivaColombia has made since it began operations. As the voice of the customer has come through, they have assimilated that feedback by establishing different fare classes[5] and changes to their reservation system[6] to control and increase customer satisfaction of their services.

Airline Transportation Services Involve Customizations

Airlines, as a transportation service provider, take a high level of customizations to its core offering. One of these service customizations involves setting and providing scheduled flight routes, which in turn potential flyers select after determining their travel plans. For this to be of value, VivaColombia has to be sufficiently flexible to meet the demands of the flyers went to the routes and schedules it offers.

Another aspect of the service that involves high customization is the airline’s a-la-carte enhancements to the flyer’s experience. VivaColombia has an array of improvements that can be added to the reservation for further customization. Some examples of these customizations include priority boarding, seat assignment, meals, drinks, among other perks.

Airline Transportation Services can’t be inventoried entirely

The airline transportation service cannot be made into an inventory entirely. Once the flight takes-off, there is no way to gain revenue from an empty seat inside a flight. Since the services can’t be stored (while preserving value), they have set their eyes in ancillary revenues to maximize their gains. For this reason, airlines have launched revenue management teams intending to maximize the revenue per passenger seat/flights.

Another issue with this aspect of the airline services inventory is relating to flight delays and cancellations. In the case of VivaColombia, they had a relatively small fleet of A320’s, which meant that an airplane that is out of service was detrimental to the company’s operation. On various occasions, flight cancellations and last-minute changes in schedule had broken out into customer protests at the airport. On two of these occasions, Fred Jacobsen (CEO at the time of these incidents) went directly to the airport to speak to the customers hoping that they would understand the issue they were facing. He tried to explain the reality of having one of their airplanes out for repairs, but needless to say the customers did not have it.

Backup airplane fleets are seen in significant airline carriers as the means to hedge against lost revenue. Substituting an aircraft that can’t fly with operational one is one of how major airlines can control for this loss in revenue. It might take the customer longer to get to their destination, but they will get there nevertheless. In the case of VivaColombia, this was not a simple task because they had no backup planes. All their airplanes were being fully utilized with nine A320’s covering 27 routes daily. Lack of backup airplanes have been the cause of VivaColombia’s loss in revenue and in part lead to the recent decision in June 2017 of purchasing 50 new A320’s to improve their fleet size, capacity and operational efficiency[7]. This decision will help the company improve its ability to keep sustaining the low-cost airline model as they keep growing in Latin America.

Airline Transportation Services have customer involvement and co-production

For this service to be delivered, the customer has to be involved in aiding the transaction. This is the reason why service design must always consider customer interaction. In this case, the customer exchanges information with the airline’s online platform (website) to purchase the service. The overall experience the customer has with the airline’s system will determine whether the customer buys or decides not to do so. This is the reason why service firms must take into consideration their customer’s experience when designing and setting up their platforms.

Another way that we can see co-production in airline operations is when the customer purchases a flight from the Airline’s service/reservation desk. In this case, the physical setting increases the complexity of the operation since there is back-room (non-customer facing) variability, front-room (customer-facing) variability in addition to the customer’s involvement in this process. The airlines must have standard methods to deal with these situations keeping in mind the internal and external variabilities of the service.

(Visited 3,698 times, 1 visits today)