Service innovation: brought to you by low cost carriers

By Koen Frenken

Innovation is commonly associated with technological development. Historically, the jet engine immediately comes to mind. More recently, one can think of Internet booking, biofuels, or unmanned flight. Yet, perhaps the most radical innovation in the airline industry has been a 'service innovation': the widespread success of the low cost carrier (LCC) business model.

Compared to traditional carriers focusing on high service levels, LCCs introduced an operational logic based exclusively on cutting costs. This logic applies to almost all aspects of flying, ranging from booking, seat assignment, checking-in, transfer service, turnaround times, wages, airport fees and aircraft maintenance. Technology played a role (LCCs pioneered Internet booking), but its role was minor. Nevertheless, there is no doubt that the LCC business model constituted an innovation, as defined as the successful introduction of a new practice in society.

Less trivial is the question whether the LCC business model is a true radical innovation. Definitions of radical innovations vary widely. Some define it at the operational level: an innovation is radical if its introduction drastically alters a firm's operations. Others define radical innovation in terms of a leap in performance, be it in terms of cost reduction or quality improvement. And others, in turn, understand radical innovation as an entrepreneurial event that completely alters the terms of competition and industry leadership ("creative destruction").

I would argue that whatever definition one adopts, in all three respects the LCC business model constituted a true radical innovation. First, at the operational level, LCC companies re-designed virtually all activities compared to the operations of a traditional company. Second, in terms of performance, the LCC model has drastically lowered ticket prices, without compromising safety and punctuality. Lastly, the introduction of the LCC business model completely changed the terms of competition in the airline industry, with the LCC pioneers, Southwest Airlines and Ryanair, having become the new industry leaders.

The main lesson we can learn from the success of LCC holds that we need to approach innovation in the airline industry from a service angle, rather than exclusively from a technology angle. A future revolution in the airline industry will, most likely, be again a service revolution. However, one can only speculate about how such a future revolution may look like. Just as no industry analyst predicted the LCC revolution, no one can reasonably predict what air travel will look like in, say, 30-40 years. Nevertheless, one can point to structural weaknesses in the 'service proposal' that current airlines provide, and think of out-of-box service alternatives.

What comes to mind as a major weakness of present-day flying, is the time that is lost while not flying. This does not only include parking, check-in, waiting and boarding, but also transfers between flights, and pre- and post-flight travel. A possible scenario for future air travel is a new do-it-yourself regime. The service provider allows passengers to plan a trip and rent an ultra-light aircraft from any airport. As flying an aircraft becomes increasingly less difficult with the use of advanced ICTs, passenger can become their own pilot. And, assuming that any city can afford a small airport, pre- and post-flight travel will substantially reduced, while trip planning becomes extremely flexible, both for individuals and for groups. Airports can provide further support by offering “seamless self-services” for check-in, boarding, luggage handling and re-fuelling. Finally, as no flight crew is needed anymore, such trips may, indeed, be cost effective. Who dares to develop the do-it-yourself business model?

Koen Frenken

Full Professor in Economics of Innovation and Technological Change
School of Innovation Sciences
Eindhoven University of Technology

Category: columns, Koen Frenken