Aerospace & Defense

The end of Rolls-Royce and Safran Joint Venture doesn't mean the end of their long-lasting partnerships.

Alix Leboulanger — Thu, 25 Apr 2013 10:24:12 GMT

Safran acquiring Rolls-Royce’s 50% share in their joint RTM322 helicopter engine program is not completely unexpected. Indeed, it has been while since both companies were looking at different directions, with Turbomeca concentrating its efforts to expand its engine continuum for medium to heavy helicopters, whereas Rolls-Royce was focusing on smaller helicopter engines.

As a matter of fact, Turbomeca recent partnership with Eurocopter and WZL 1 in Poland to create a full assembly line for the Makila 2 engine (circa 2,100 shp) was already a step in that direction in order to consolidate its expertise and its logistic footprint. But most importantly, by gaining the full ownership of the RTM 322 program, Turbomeca gets a step closer to its main American rivals, who are positioning themselves since 2006 within the American Advanced Affordable Turbine Engine-AATE program. GE and ATEC (50:50 Joint Venture between Honeywell and Pratt & Whitney) are separately developing a new type of military engine exclusively for Apaches and Black Hawks- at least initially. The targeted objective is to create an engine reaching at least 3,000 shp to be in production from 2016 onwards. If Turbomeca wants to keep up and preserve its market dominance across the European helicopter market, it has to offer an alternative solution to the American ones. Turbomeca’s unmatched green developments with the Ardiden 3G might not be enough in that regard.

Conversely, Rolls Royce is focusing more on future engine enhancements for light platforms. Apart from its revolutionary CTS800 engine, notably used for Sikorsky X2 and jointly developed with Honeywell through the Light Helicopter Engine Company, another 50:50 Joint Venture, the British manufacturer is already offering a wide range of engines for light and very light helicopters, but is now willing to position itself as an unrivalled UAV engine OEM, already enjoying its success from the M250 engine family. At the end of it, it is really interesting to observe that the two main European helicopter engine OEMs are seizing the emerging opportunities offered by the rotary wing world: UAVs and medium platform homogenization.

Threats or challenges, Turbomeca and Rolls-Royce have made their choices, their routes have to diverge: the common RTM 322 program stops here. However, if people are trying to find out a hidden crisis behind this termination, they might be wrong. Rolls-Royce and Turbomeca have still many joint programs on the table, including the famous RRTM Adour aircraft engine, and the MTR 390 helicopter engine (joint company, formed by MTU, Turbomeca, Rolls Royce and ITP). A partnership that at the moment remains intact.

European airlines struggling with their restructuring programs

Lida Mantzavinou — Mon, 22 Apr 2013 11:19:40 GMT

Lufthansa’s union strike is impacting 98 per cent of the carrier’s flights, with cancellations hitting almost all short- and long-haul destinations. The half-day strike in March, had affected 40 per cent of the carrier’s flights with cancellations of 700 flights. The union’s reaction does not come as a surprise. Lufthansa had clearly stated its intentions in 2012 with the Score program, targeting 3500 job cuts in order to generate savings of €600 million and revenues of €300 million through other activities. Other European groups such as Air France/KLM and IAG are facing similar issues with the unions reacting to their cost restructuring programs. IAG’s restructuring program is targeting 4500 job cuts to generate €450 million of savings and Air France/KLM’s program is targeting 5000 job cuts to reduce its net debt to €2 billion. Union disputes will be the main challenge that legacy carriers will have to face moving forward with their programs.

The question that is arising is – are these strategies vital for the groups’ survival? Since 2008 the groups have been experiencing losses in millions due to three major challenges: fuel prices that remain at high levels, strong competition from low-cost carriers (LCC) within Europe such as Easyjet and Ryanair that have been generating more than £200 million profits year-on-year after 2009, and strong competition coming from the Middle East from carriers mainly including Emirates, Etihad, Qatar Airways and Turkish Airlines that are expanding strongly due to the availability of cash and the strategic intent to position Abu Dhabi, Dubai, Doha and Istanbul on the global map, feeding traffic from the east to the west and vice versa.

Lufthansa should be implementing multiple strategies to face each of these challenges. The airline can dent its fuel bill by optimising operational performance. In the short term, Lufthansa has implemented a paperless cockpit, going digital and equipping its pilots with the hardware, software and applications to make optimum choices in terms of operational performance. Furthermore, investments on aircraft connectivity will allow optimal operational performance by linking the engines and other aircraft systems to the high bandwidth connectivity for operational data streaming, real-time health monitoring, and maintenance interaction with aircraft systems, thus saving on fuel costs and eliminating maintenance costs. Connectivity in the cabin linked to the in-flight entertainment system will allow the carrier to generate revenues through online advertising and retail spending as well.

Lufthansa can face LCC competition within the region by leveraging on Germanwings operations. Similarly IAG is leveraging on Iberia Express and planning 100 per cent acquisition of Vueling while Air France/KLM is leveraging on Transavia and its other French subsidiaries, Regional and Brit Air.

In the long-haul market Lufthansa can face competition from the Middle East by forming partnerships. A potential partnership with Turkish Airlines can strengthen the carriers’ bottom line. The other groups are also making similar steps, with IAG aiming to cooperate with Qatar Airways and Emirates and Air France/KLM with Etihad. In the West, regulatory environment still restricts cross border mergers as European carriers can acquire only up to 25 per cent shares in a US carrier. This is a hurdle for European airlines that are witnessing acquisitions taking place from Middle Eastern carriers within Europe, e.g. Etihad acquiring 29.2 per cent in Air Berlin, as well as expansion strategies that are aiming to tap into the US market by transferring passengers through Europe to the Middle East and beyond. Air Berlin and Etihad cooperation is an example. Air Berlin is also undertaking a restructuring program aiming at generating €250 million savings through 1000 job cuts. The carrier is restructuring its network introducing new connections to the US complementing Etihad’s network by bringing traffic from the US to Europe that will be transferred to the East through Abu Dhabi.

Connectivity accelerates IFE market growth

Lida Mantzavinou — Thu, 18 Apr 2013 07:03:03 GMT

Smartphone proliferation, georeference and social media platforms have driven the desire of the consumer to be connected 24/7. To meet the demand of its passengers, the airline industry is currently undergoing a dynamic change.

The commercialisation of satellites has allowed prices to fall and connectivity to be considered a viable investment by aircraft operators. ATG (air-to-ground) and Ku band are currently the main offerings on the market, in terms of connectivity.UScarriers are leading the market, with JetBlue Airways, United/Continental, Southwest Airlines and Delta Air Lines already providing connectivity on several of their aircraft. InEurope, Norwegian Air and Icelandair are the early adopters. Suppliers are also strongly investing in the connectivity market with Inmarsat, Viasat, Panasonic, on Air and Gogo standing out from their competitors having spent between $1 and $1.5 billion each.

However, in-flight connectivity is still facing the challenge of high prices, low speed, limited capacity and coverage. The Ka band that Inmarsat is investing in is expected to be the next generation of global service connectivity that will address the four challenges mentioned above.

While the ultimate goal is to provide seamless connectivity for the passenger, the high start-up costs are restraining investments. An investment of approximately $100,000 to $150,000 per aircraft is required for ATG, while $300,000 to $350,000 is required for Ku band. Aircraft operators need to evaluate the revenue and cost sharing models that allow them to break-even faster while generating additional ancillary revenues in the medium-term. The airline industry is looking at new revenue and cost sharing models, for example Google and Blackberry have been sponsoring free connectivity on board. Ancillary revenues from online advertising and retail spending can generate up to $500,000 per year for a single-aisle aircraft with 150 passengers and 85% load factor depending on adoption rates. It is important to note that high revenues are not generated from wifi charges – as 85% of passengers on average are not willing to pay for wifi usage – but are dependent on adoption rates, which will only reach its maximum when wifi is offered for free.

This post was first published on the Air Transport Publications Airlines industry blog. See the post here:

http://www.airtransportpubs.com/airlines/blog/post/connectivity-accelerates-ife-market-growth

Airport operational excellence drives revenues

Lida Mantzavinou — Wed, 10 Apr 2013 14:52:51 GMT

Airport capacity constraints, strong air traffic growth and increasing competition among airports globally will drive investments on airport IT infrastructure. This is expected to reach $300 million compound spending over the forecast period of 2012 to 2020. Implementing technology solutions in airports, such as wifi, bluetooth, near field communication (NFC), and radio frequency identification (RFID), as well as launching applications that enable interaction with the passenger, is vital to maximise operational efficiency, improve the passenger experience and the quality of service offered to airlines. Airports should track, record and measure real-time passenger data, in relation to passenger PEDs (portable electronic devices) within the airport environment in order to understand their behaviour, better interact with them and improve key performance indicators (KPIs).

Airports have set new operational and commercial KPIs with passenger experience at its core, aiming to minimise waiting times at various touch points, improve airline on-time performance, decrease average turnaround time, and overall improve non-aeronautical revenues.

Geolocation and smartphone proliferation is key. It will enable airports to build relationships with passengers and reach their targeted KPIs. Ultimately, the airport should integrate passenger information recorded in the zones and terminals with information captured in other areas and from other airport systems. The airport can then interact with the remaining stakeholders and share information to improve services offered to passengers, and eventually move towards a collaborative decision-making (CDM) terminal environment. However, completely integrated and interactive business intelligence platforms are not yet recognised as viable solutions, due to perceived constraints and cost of implementation. The lack of cooperation among airport stakeholders is another hurdle in realising the full benefits of a new technology in practice.

There is potentially plenty to be gained though. Our return on investment (ROI) methodology is showing that strong revenues are generated from an increase in retail spending, which is a result of operational excellence and interaction with the passenger through wifi, bluetooth-enabled portable devices and location-based services. So while operational excellence in a hub airport environment can cost up to $10 million, it can increase retail spending by up to five percent per year allowing for a break-even point in the third year of operations.

Airports will need to re-position themselves in the supply chain and become the entity that will ensure efficient collaboration of the stakeholders and operational excellence in order to satisfy the traveller. All stakeholders can benefit from more efficient operations, as a result of integrated information, real-time decision-making and situational awareness.

This post was first published on the Air Transport Publications Airports industry blog. See the post here:

http://www.airtransportpubs.com/airports/blog/post/airport-operational-excellence-drives-revenues

The Caracal May Turn Polish for the Utility Helicopter Tender

Alix Leboulanger — Wed, 10 Apr 2013 11:22:12 GMT

Eurocopter plans to set up a EC725 Caracal helicopter production in Poland

With Poland seeking to replace its ageing military helicopter fleet and putting out a tender for 70 new multirole platforms, Eurocopter has made a bid with its EC725 Caracal helicopter. What is interesting in the competition is Poland’s willingness to get a holistic in-country industrial work package, which will not be limited to the acquisition of new platforms, but demands the domestic manufacturing of assets.

At first sight, Eurocopter’s market entry path is not evident, to conduct a fair assessment of the finer details of the proposal need to be further explored. The first question to ask is why would Polish Government finally select a third supplier when two of the leading helicopter suppliers are embedded within the Polish industrial structure, and have successfully proven ability to meet local demand and to also create export opportunities?

To begin with two notable competitors Sikorsky and AgustaWestland are already well established domestically and have strong partnerships with Polish companies – on one hand PZL-Swidnik/AgustaWestland, already serving the Polish Air Force, enjoying its recent delivery for the Philippine Air Force of eight W3 Sokol helicopters, and who will potentially bid for another separate Sokol upgrades program in Poland. On the other hand, PZL Mielec/Sikorsky is benefiting from the licensed production of the S-70i Black Hawk, with model already exported to Colombia and is nourishing strong ties with WSK PZL-Rzeszów. However, EADS, Eurocopter’s parent company, is already settled in Poland since 2001 with EADS PZL Warszawa-Okecie S.A, in which the Polish Government is an 18 per cent owner.

Furthermore, Eurocopter‘s strategy is noteworthy in the context that it is almost proposing a replicating of the successful Brazilian venture (Helibras) in selling the same platform whilst providing a significant local industrialisation base. “The positive experience with Helibras, where the Caracal is indigenously assembled in Brazil, demonstrates that the heavy platform acquisition cost is optimized by an effective return of investment for the domestic industry. If the Brazilian parallel offers further assurances to the Polish Government, Eurocopter has a high chance of figuring in the final shortlist. It will be interesting to see if Eurocopter offers similar financing incentives to Poland as was the case for Brazil, wherein the program risks were significantly nullified for the end-user / buyer. The partnership with Military Aviation Works No. 1 J.S.C, the aviation maintenance company is a must have value add, and not only ensures efficient operations through its life and potentially offer a lower through life cost for the Polish Armed Forces, but also provides opportunity for Eurocopter to capitalise on revenues through the platform lifecycle.

However, regarding EC725s potential to win this tender, things may be complicated for Eurocopter. Despite leading the global civil helicopter market with more than 35 per cent share – reinforced by 69 new orders and expressed intents at Heli Expo this year – Eurocopter will need to aggressively pitch to overcome the strong position of Sikorsky and AgustaWestland in the military market. Having said that, the EC725, with its existing heritage in the Military domain (and the win in Brazil), will potentially be a befitting choice to meet the requirements of the Polish Armed Forces. This becomes even more interesting when compared to the potential option of fielding the NH90, designed with the latest capabilities. The Eurocopter EC725 Caracal offers nearly the same capabilities as the NH90 but is significantly more affordable and program acquisition cost is a critical issue in the tender as the Polish Army is used to flying and maintaining very resilient and affordable Soviet platforms.

Liberalisation of the Indian air transport industry creates opportunities for domestic and international operators

Lida Mantzavinou — Thu, 14 Mar 2013 14:10:17 GMT

India is among the countries along with China, Brazil, UAE, that will experience the strongest air traffic growth globally. Air traffic is forecasted to grow around 12% year on year, driven both by an increase in the regional demand, as middle class and GDP is growing, and an increase in international traffic, as India is becoming a global gateway and main target for foreign direct investments. A strong example is that of the UK where governments’ initiatives are aiming at softening barriers on trade and visa requirements (from UK to India) positioning UK as the ‘main partner of choice’ for India. Furthermore, 14 greenfield airport projects have been granted approval and airport expansion investments are expected in the constraint airports of Mumbai and Delhi in order to cater for the air traffic growth.

Currently aircraft installed base in the country is around 500 expected to double up to 2020. MRO spending is expected to grow along, positioning India n the medium and long term as one of the biggest Asian MRO markets worth over $2B annually by 2020.

In addition to the strong air traffic growth year on year, Indian airlines are eager to fill the gap in capacity that Kingfisher has created due to its severe cash crunch. Kingfisher’s grounding has been a result mainly of mismanagement and wrong decisions making, e.g. acquisition of Air Deccan, of cost inefficiencies in place and high debt exposure.

Indigo, following the European and US low cost model of easyjet and Southwest, with its single Airbus narrowbody fleet is focusing on serving the Indian market; with 64 aircraft installed base and around 200 on order, Indigo is set to cover mainly the domestic Indian market in the short term and expand its reach to countries in close proximity in the medium term, e.g. Singapore, Thailand, Malaysia. We do not see any intention from Indigo to enter the long haul market, as the long haul low cost model has proven to be unsuccessful and as major UAE competitors are price competitive and offer ‘good value for money’ service and comfort on board. Strong cash flow, low operating costs due to low labour cost, economies of scale generated by maintenance and procurement contracts for a single aircraft fleet, are mainly driving the success of Indigo.

Air India seems to be following the Kingfisher path. The airline has been consistently posting net losses since 2008 despite decreasing employee number to half and increasing air traffic year on year. Air India will need to benchmark its European counterparts in cost restructuring strategies in order to be able to survive in the medium term. We believe the company should be serving the Indian market leveraging on its low cost subsidiary Air India Express, while serving the long haul market with the widebody fleet of the main airline. Furthermore, the company should consider deploying cost cutting measures leveraging on the softening of the DGCA’s regulations in the medium term, e.g. approval of EFBs (Electronic flight bags) in the cockpit that can significantly reduce the airline’s operating costs, and strategic partnerships, leveraging on the liberalisation of the Indian market.

International airlines have already expressed their interest in tapping into the Indian market. For example, Etihad is in the process of acquiring 24% stake in Jet Airways, making this the first possible foreign investment in the Indian airline market. Etihad’s choice of Jet Airways as a potential partner leaves Kingfisher available to other players in the market as a potential acquisition target. However, there are few airlines in the market, other than the UAEs that can currently take on board the high level of debt that Kingfisher carries. Moreover, difficulties in doing business within the country and delays in government decision making, capacity constraints and inadequate infrastructure restrain the growth of the market.

Graphene for Solar Energy Devices -An Academic Research and Development Landscape Analysis for the year 2012

Mohit Roshan Srivastava — Mon, 04 Mar 2013 08:36:50 GMT

Graphene which is a flat monolayer of carbon atoms tightly packed into a two-dimensional (2D) honeycomb lattice. It is a basic building block for graphitic materials of all other dimensionalities. In the last few years the novel material has received a lot of attention from the global research and development community.

The material can be used in many applications such as in solar energy devices and printed flexible electronic devices. An assessment of the use of graphene in solar energy devices is presented in this article. The assessment is based on the data obtained from the online search using the key words "Graphene" and "Solar" connected with AND boolean connector for the year 2012 only. Based on the search, a list of 39 research papers were obtained. these research papers were focused only on the use of graphene in solar energy devices.

Out of the 39 research papers published in peer reviewed journal papers, 21 were strictly focused on the use of graphene / graphene based materials in Dye-Sensitized Solar Cell. In research focused on the use of graphene based material as a Counter Electrode in Dye-Sensitized Solar Cells. It was also observed that number of research papers published were highest from China. In 2012 first authors from Universities located in China published 16 research papers on the use of Graphene in Solar Energy Devices. The data is presented in Attachment 1.pdf. The list of universities is presented in Attachment 2.pdf.

Attachement 3.bmp

The image Attachement 3 gives a visual mapping of the Graphene based materials and their use in solar energy devices.

In the analysis of the gathered data it was found that in 2012 Nokia Research Centre located in Cambridge, UK collaborated with the Department of Materials Science and Metallurgy of the University of Cambridge, UK to conduct R&D on graphene. The research is focused on using Graphene for energy harvesting/storage devices such as solar cells and printed electronics devices.

The analysis of the research papers published in 2012 indicate that in the solar energy device sector, the adoption of graphene or graphene based material will be focused on their use as Counter Electrodes in Dye-Sensitized Solar Cells. The research intensity is very high in China. South Korea, Taiwan and the United States of America are also conducting research focused on the use of graphene in solar energy devices.

The analysis indicates that R&D focused on the use of Graphene in solar energy devices will accelerate in coming years.

What next for Ryanair and Aer Lingus: Looking for alternative options

Lida Mantzavinou — Fri, 01 Mar 2013 10:27:59 GMT

Ryanair has been consistently reporting substantial net profits year on year (in exception of 2008) and I estimate that the airline is set to report a 5% increase in profit after tax in its full year results in March 2013, in comparison to last year.

Ryanair finds short term solutions to grow. However, the low cost carrier faces difficulties in growing in the long term. Ryanair’s growth is being constrained primarily by the EU’s denial to approve the Aer Lingus take-over (e.g. in 2006/2007, in 2009 and in 2013) that would allow the carrier to expand its fleet, overcoming the lack of new aircraft deliveries that has been already constraining its growth, and benefit from economies of scale, that would further reduce its unit cost and increase revenues.

As more consolidation is expected to take place in the next two years and once airline groups see benefits from their restructuring programs, expected in 2014, competition in the short haul market will intensify, pushing average fares downwards. Ryanair in the short term should seek to grow inorganically through other acquisitions benefiting from the fact that European airlines are currently valued below net asset value (NAV).

Aer Lingus, on the other hand, has successfully marketed itself in the market in order to attract other potential buyers. Aer Lingus has managed to generate net profits in the last 3 years (2010-2012), expanded its code share partnerships, e.g. Jet Blue expected in April, added frequencies to US and expanded network and is still marginally valued below net asset value (NAV). The company is an attractive target for carriers that are eager to have a foothold in the European market and feeding traffic back to Asia through the Middle East, such as Etihad.

Will Restructuring and New Business Models Aid Struggling Airlines?

Lida Mantzavinou — Tue, 19 Feb 2013 16:02:47 GMT

Liberalisation efforts and the launch of the 'low cost carrier' (LCC) business model, enabling affordable air travel, have driven air traffic demand and intensified competition in the air transport industry. Although demand has been rising year on year and airlines have become more sophisticated in delivering value to passengers, profits have been elusive. This is due to the impact of external factors on operating costs over which airlines have very little control. Some of these factors include the global economic crisis and the slowing of economic growth, physical disasters and fluctuating fuel prices, currently at an average of US $120/barrel versus US $ 80/barrel 5 years ago, representing 30% of total operating costs, versus 14% a decade ago. Total fuel expenses in 2012 reached US $200bn from US $44bn a decade ago. Airlines' net profit margins have rarely exceeded 3%, making them the worst performers in the air transport value chain. Exceptions within the last five years have been North American airlines reaching -6.0% net post tax profit margin in 2008, and Asian carriers reaching 8.0% in 2010. As a result, in the last five years the airline industry has witnessed strong consolidation in an attempt to generate profits from synergies, cost efficiencies and economies of scale. 2008 was the worst year for the airline industry with 108 airlines ceasing operations. Since then, in total, 375 airlines ceased operations, twice the number of airline start ups. The implementation of major restructuring programmes has also been key in achieving sustainable profitability. Restructuring has been taking the form of cost-cutting, fleet modernisation, as well as streamlining of route networks and revenue management systems, among other measures. Regional Assessment of Restructuring Efforts Europe – group restructuring, hybrid business models and LCC inorganic growth European airlines have been the worst performing, generating marginal net profits in the last few years while several airlines such as Spanair and Malev went bankrupt in 2012. Big airline groups, such as Lufthansa, Air France/KLM and IAG, implemented major restructuring and cost reduction programmes in the beginning of 2012 in order to survive in the medium term, increase market shares and boost consumer confidence. These airline groups have been strengthening their low cost and regional subsidiaries; Iberia Express and potentially Vueling for IAG, Germanwings for Lufthansa and Transavia for Air France/KLM. They have been rationalising their fleet and optimising their network while increasing connections from regional hubs in an attempt to compete on price and gain back their market shares from the LCCs. The main airlines will be focusing on the long haul and premium traffic segments where profit margins are higher, leveraging on their strong presence in key European hubs, such as Lufthansa in Frankfurt airport and Air France/KLM in CDG and Schiphol. Furthermore, unable to substantially decrease fuel costs through hedging, IAG, Lufthansa and Air France/KLM are aiming to decrease operating costs by reducing staff numbers by 13,000 by 2014, while generating savings of €450 million for IAG and €200 million for Lufthansa and reducing net debt by €4 billion for Air France/KLM by 2015. On the other hand, European LCCs have been generating profits. For example, EasyJet is expecting £255 million while Ryanair estimates £394 million - £418 million as profits after tax in 2012. Their success hinges on low cost operation processes that allow for the lowest unit cost in the market. Low cost carriers are attempting to grow inorganically, such as in the case of Ryanair and Aer Lingus, by leveraging on their strong cash flow and capturing larger market share from the big airline groups that are facing financial difficulties. However, constraints imposed by regulatory authorities due to competition rules and additional charges imposed by the ETS on the short haul routes are restraining the growth of low cost carriers in Europe. Frost & Sullivan expects more consolidation to take place within Europe in the next few years and competition in the short haul market to intensify once airline groups see the benefits from their restructuring programmes by 2014. North America – Strong consolidation and transcontinental joint ventures Since 2008, consolidation in North America has been strong. For example Delta/North West, United/ Continental and Southwest/AirTran Airways merged in order to overcome financial difficulties through cost cutting and economies of scale, while others such as American Airlines could not avoid Chapter 11. Furthermore, major airlines have been strengthening international collaboration through alliances and have been forming transatlantic joint ventures, e.g. Delta Air Lines acquired 49% stake in Virgin Atlantic. Frost & Sullivan expects more consolidation to take place in North America with a potential merger between American Airlines and US Airways, while the big 3 players will be aiming to strengthen their position globally through collaboration with foreign partners within the alliances. Russia and CEE – undeveloped business models and privatisation efforts Along with China and the Middle East, Russia is one of the countries, that is experiencing strong air traffic growth, estimated at above global average 5.7% (CAGR 2012-2031) The capacity of Russian carriers increased by 25% in 2011 as a result of the strong expansion strategies of several legacy Russian airlines. On the other hand, the growth of Russian carriers is being hampered by EC regulatory restrictions, aiming to create a single aviation market establishing the "EU designation clause." In Russia, network carriers are still operating and growing individually, few partnerships are in place, networks are still heavily focused on Moscow and the LCC business model is not as strongly developed. The market shares of LCCs in Russia are lower and growth is restrained mainly due to regulatory restrictions that need amendments in order to allow LCCs to operate as in Europe. Furthermore, the low level of internet sales, underdeveloped secondary airports and the high concentration of population in several urban communities dampen LCC expansion. Frost & Sullivan believes that in the next few years, Russian legacy airlines will consider entering one of the alliances to boost their long haul traffic, while LCCs will expand by taking advantage of regulatory changes, through meeting underserved demand and leveraging infrastructure investments taking place at secondary airports in Russia. LCCs are expected to grow and expand the short haul network, adding capacity and linking domestic destinations, while competition will be strengthened with the entrance of foreign LCCs in the Russian market. Russian LCCs are anticipated to evolve through hybrid business models, where legacy carriers will be launching their own low cost subsidiaries. For instance, Aeroflot recently expressed its willingness to launch its own LCC subsidiary. The regulatory air transport landscape in Russia will need to adapt to the new air transport environment and enable the development of domestic LCCs in order to compete with low cost incumbent carriers such as EasyJet that announced the launch of flights linking London (Gatwick) and Manchester with Moscow (Domodedovo). EasyJet is one of just four carriers that are permitted to fly between the two countries under existing bilateral agreements. Ryanair has also expressed an interest to serve the Russian market and the renegotiation of bilateral agreements between Ireland and Russia is expected to happen soon. CEE airlines will be increasingly looking for private investors, preferably selling directly to a single large investor or a number of investors, aviation or non-aviation related, rather than going for an Initial Public Offering (IPO) as the domestic equity market is not strong and the airlines do not have a good track record. Africa - Major legacy airlines are connecting the African region and growing organically on the domestic front while aiming for greater international presence through foreign partnerships The air transport industry in Africa is still underdeveloped in comparison to other regions but is expected to register strong growth in the next decade. By 2030, Africa's fleet will double to 1,210 aircraft, 60% being additions to existing fleets. The major legacy airlines are growing domestically through regional partnerships and through the launch of low cost subsidiaries, and internationally through foreign partnerships. Some prominent examples of this trend include South African airlines launching Mango as its low cost subsidiary to serve the market within Africa and strengthening its partnership with Emirates and Qantas to grow in the Middle East and Asia. Ethiopian Airlines partnered with the Togolese carrier ASKY to better serve East Africa and joined Star Alliance in order to benefit from strengthened partnerships with the Alliance's Asian members. The LCC business model has been making strides through the launch of low cost subsidiaries by legacy carriers including Mango by South African Airways, and through the launch of independent LCCs such as Fastjet. Frost & Sullivan believes that the main focus of African carriers will be to capture a higher percentage of the domestic market and to expand to China, India and Latin America in order to take advantage of the 'Southern Silk Road' linking Africa, Asia, Latin America and the Middle East. Strong GDP growth of around 10% (CAGR 2012-2017) robust air traffic growth of 10% in 2012, high aircraft utilisation rates and large aircraft orders and deliveries between 2012 and 2016 in the Asia-Pacific (APAC) region are key drivers that will enable large carriers, such as Singapore airlines (SIA), to successfully implement organic growth plans. Furthermore, LCCs are expanding rapidly by leveraging on deregulation, the use of internet as a distr Asia – Legacy carriers expanding through regional and low cost subsidiaries ibution channel, low-cost labour and escalating air traffic demand, driven mainly by higher average disposable incomes and an expanding middle class. The penetration of LCCs in APAC increased from 1.1 % in 2001 to 14.0 % in 2008. Legacy carriers are responding with the launch of their own LCCs. A notable example is that of Singapore Airlines Limited (SIA) which launched Tiger Airways in 2004 and two subsidiaries thereafter in Australia and the Philippines. By entering the low cost market, SIA was able to capture market share, create synergies and implement best practices in low cost operations in both type of businesses. SIA recently launched the long-haul LCC, Scoot, in an attempt to decrease dependence on declining premium and business class revenues. Latin America – Large carriers are entering alliances and forming mergers while domestic carriers are going bankrupt The region has witnessed consolidation through mergers, such as that of LATAM and Avianca-Taca, that is expected to operate under one brand by 2013. Alliances are enabling Latin American carriers to grow and strengthen cooperation with North American carriers. Prominent examples of this development include Aeromexico strengthening its partnership with Delta within Skyteam, Aerolineas Argentinas joining the same alliance in 2012, AviancaTaca strengthening cooperation with US Airways within the Star Alliance, LATAM co-operating with American Airlines within One World. Up to now, LATAM has been benefiting from both its One World membership through LAN and its Star Alliance membership though TAM. By 2013, LATAM will need to decide on joining one of the alliances as a merged entity. Middle East – United Arab Emirates (UAE) carriers and Turkey are driving the market through organic and inorganic growth strategies Airlines in the UAE, such as Emirates, Etihad and Qatar, have a unique business model due to their ownership structure being 100% owned by their respective governments. Emirates has been growing mainly organically by increasing the frequency of flights to European destinations, while Etihad has been growing inorganically through codeshare agreements (33 up to 2012) and share acquisitions (in four airlines up to 2012), with such trends expected to intensify in the short-term. UAE carriers are looking into penetrating the different markets through acquisitions that will allow them to overcome the ownership and control rules that are still troubling the global airline industry. For example, in the European region, Etihad purchased a 29% equity stake in Air Berlin in 2012, investing US $255 million with a 5 year horizon. The acquisition allowed Etihad to tap into the German market, competing with Lufthansa, and leverage on Air Berlin's network and partnerships. Furthermore, Etihad is eager to enter two other strong European markets - France and Netherlands - through a potential partnership with Air France/KLM. Recently, Etihad acquired a 3% stake in Aer Lingus and is aiming to increase it as the Irish government is looking to sell its 25% stake. This acquisition will allow Etihad to enter the Irish and UK markets through Aer Lingus' strong network. Now is the right time for foreign carriers to enter the financially troubled European region as the big European airline groups, including IAG, Lufthansa, Air France/KLM are reporting substantial revenue losses and are being undervalued in the stock market. In the APAC region, Etihad recently increased its stake in Virgin Australia to 10%, while its counterpart Emirates has been in talks with loss making Qantas to strengthen cooperation. Etihad is also eager to co-operate/collaborate with Chinese airlines, such as Hainan and China Eastern airlines, and acquire stakes in Indian airlines, such as Jet Airways. The company has been launching routes to secondary cities in China and recently entered into a codeshare agreement with China Eastern to expand its network. Frost & Sullivan expects that UAE carriers will be seeking partnerships in the fast growing regions of Latin America and Africa with airlines such as LATAM or AviancaTaca and Kenya Airways or Royal Air Maroc. Turkish Airlines (THY) has been growing organically in the period 2006-2010 expanding both its Airbus and Boeing fleets, taking advantage of its strategic location in Istanbul and feeding traffic to and from East and West. THY is aiming at expanding its reach by strengthening cooperation with other carriers within alliances, such as star alliance and AACO (Arab Air Carriers Organisation). Frost & Sullivan expects that THY will partner with Lufthansa within star alliance, competing with the other two alliances that are attracting UAE carriers. Moving Forward Airline operating costs are expected to decrease slightly in the next 2 years as expectations of an increase in oil supply by Saudi Arabia and new oil supply from the US can drive down fuel bills. However, the implementation of new environmental measures, that Frost & Sullivan expects to come into force in 2014, such as the ETS that can add 1% to an average return fare, will pose an additional burden on airlines. In the meantime, biofuel usage in aviation will remain on the fringe, as it still remains an expensive alternative. Airlines that want to overcome the high cost and undersupply of biofuels in the market will need to take individual measures, such as Lufthansa which is collaborating with Algae Tec to build a facility in Europe that will produce algae on a large-scale suitable for conversion into aviation kerosene and conventional diesel fuels and such as Delta Air Lines that acquired in Pennsylvania an oil refinery. Airlines will need to implement cost-cutting programmes that will most likely entail job losses as this, along with the fuel costs, is the highest operating cost for an airline. Airline privatisation is expected to intensify as governments become unable to finance unprofitable businesses, especially in Europe, Africa and the US. Successful privatisations have been taking the form of capital restructuring, selling directly to one large investor or a number of investors, aviation or non-aviation related, initial public offering (IPO) in the case of strong domestic equity markets, optimisation of route network and fleet rationalisation by leasing aircraft and forming a single fleet that will allow lower maintenance costs. As the industry is still very inefficient, consolidation will intensify in the next few years, driven by legacy and LCCs, in the form of mergers and acquisitions, as well as strategic partnerships. The implementation of major restructuring programmes is also key in raising profitability. Unification of revenue management processes across an airline group's global locations, co-ordination of flight schedules and redeployment of aircraft are some of the steps that airline groups will have to adopt for sustainable profit generation. Regulations do not yet allow full ownership or effective control of airlines by foreign investors and this is still a deterrent to foreign direct investment. Nonetheless, restrictive bilateral agreements and congested airports make small shareholding stakes increasingly attractive, particularly in Europe. For example, over the past couple of years, Etihad acquired stakes in both Aer Lingus and Air Berlin. Similarly, Air China has expressed an interest in acquiring a stake in LOT, while TAP Portugal and Scandinavian SAS are still "in play" as acquisition targets. Frost & Sullivan expects financial benefits by airline group restructuring to be realised from the end of 2013 onwards, with union agreements and organisational restructuring being enforced and group synergies being realised. Many weaker airlines will be forced to cease operations, while others will become acquisition targets for foreign investors that are willing to expand inorganically and benefit from valuable route networks. The LCC model will gain greater momentum as more airlines launch operations in Africa (Fastjet), and Asia, and bid for legacy carriers, such as in the case of Ryanair and Aer Lingus. Furthermore, alliances are going to provide the platform for strong cross border partnerships. For instance, within Skyteam, KLM has formed a strong partnership with Delta, Air France with Alitalia and Kenya Airways, while Etihad is entering the game as an external player. Within One World, Iberia, BA and Qantas are strengthening cooperation, while Emirates and Qatar are becoming important players. Within Star Alliance, it is expected that Lufthansa will build a partnership with Turkish airlines.

Apple, iPhone, and the Shifting of Coolness

Katherine Burns — Wed, 06 Feb 2013 17:16:16 GMT

There’s a wonderful scene in “Almost Famous” in which Philip Seymour Hoffman tells the teenage aspiring writer/protagonist, “I met you. You are not cool.” I’ve always loved that line, because I feel like what he was really saying was, “You are your own kind of cool.”

On my best days, this is how I would describe myself – my own kind of cool. I’m not cool by normal standards: no crazy college stories, nothing like that (unless you count that I used to channel Monty Python and click coconuts together on many long, horseless walk to the library… by the way, if you think that’s cool… you’re not either).

If the coconuts story doesn’t have you convinced, here are some other reasons why I’m not cool:

1) Old movies. This makes you cool at the Turner Classic Movies film festival, but that’s about it. Couldn’t care less that this makes me not cool. To me, this just represents a deficiency in taste on the part of my peers.

2) Pop culture basics. For better or worse, I tuned out the music and TV of my youth. No Cosby Show, no In Living Color, no… I’m not sure what music I didn’t listen to, because I’m not sure who was big then, because, well, I didn’t listen to it then and I don’t listen to it now. Tiffany. Was that a thing?

3) Technology. I always seem to be one (or a dozen) steps behind in adoption of gadgets. As an example, I got my first iPhone this past December. This phone is the coolest, you guys! I can take videos! The photo quality is great! The background noise is almost nonexistent! I realize that these remarks were far more relevant in, say, 2007. This is what I mean by being not cool.

Which brings me to my next point. As I said, I’ve just come around to how great my iPhone is, and I’m enjoying the heck out of it. And then I open up the Wall Street Journal today, and I see this article comparing the iPhone to the Model T. The Model T! The must-have car of 1924! Whether you were an early adopter or a late one like me, you’d have to be living under a rock not to know that the iPhone (its many iterations, launches, sleek design, nifty-looking headphones) has been one of the most exciting, have-to-have-it product introductions of our lifetime. It’s still flying off the shelves as I write this. What on earth could the iPhone possibly have in common with the car that pioneered the power of mass production in early 20^th Century America? Here’s the author’s argument:

The Model T couldn’t have been the Model T unless the automobile were on its way to becoming too interesting a product for consumers ever to be satisfied with a single model, a single manufacturer, a single design statement.

The same is true of the iPhone. Different customers not only want different things from their smartphones, they want difference for its own sake, which explains the otherwise inscrutable shifting of coolness cache from the iPhone to Samsung’s Galaxy S line.

In sum, the smartphone market that Apple essentially pioneered now wants to “explode into diversity,” and Apple may not be ready for it. You can have any phone you want, so long as it’s white?*

I think the remark about the inscrutable shifting of coolness cache is interesting. For a very long time (an eternity in technology time, really), the iPhone has been a status symbol phone. This author seems to be arguing that it’s someone else’s turn now. Uncool people like me are starting to embrace the iPhone, and that must mean it’s not cool anymore. If it’s not cool anymore, something else is, and at least in this author’s opinion, that something may be the Galaxy (which, by the way, I considered purchasing instead of the iPhone, but it was frankly too cool for me…I’m not making that up).

Anyway, if I worked for Apple, I would cringe at any comparison of our trendiest, most breakthrough product to a car whose time passed almost a century ago. The stakes, and the challenges, for Apple are now extremely high. Reinvent the category yet again, or be surpassed by those with a new idea.

I’ll leave the adoption of those new ideas to the trendier set. For me, the iPhone is perfect. It’s just the right amount of cool – its own, very distinct, kind of cool. Just like its owner.

*I know that the iPhone also comes in black. But it’s more poetic to stick to just one color. Go with it.

Katherine is the Director of Strategic Communications for Growth Team Membership, a premier best practices research group within Frost & Sullivan. You can follow her on Twitter: @KatherineSBurns.

The Designer's Playlist

Jannette Whippy — Wed, 19 Dec 2012 14:51:31 GMT

Silence has always been a distraction for me. I need music or a medley of conversations to help me focus and concentrate. I always have music in the background, and when I work on something important, I have a few favorite playlists that help inspire and focus me. Recently I took a closer look at one of my favorites: Leonard Cohen, a musician/poet from Canada. I found some fun and interesting connections between his songs and how to best work with designers. Here are five Leonard Cohen songs to keep in mind when working with a designer:

1. First We Take Manhattan

Clarify your needs. Be a good partner in the design process, let your designer know what you want from the project, and of any designs that appeal to you. Communicating your needs is never a bad thing. Just like in the song, spell it out: "First we take Manhattan, then we take Berlin." Specifying your needs and making sure that everyone involved knows what is expected of them will leave more room to engender creativity: your designer won’t take Berlin before first taking Manhattan.

2. The Future

Include pertinent deadline information, always. Most designers work on multiple projects at the same time. They need to adjust their priorities based on concrete information, like deadlines. As Leonard Cohen would say, "Get ready for the future: it is murder." Hopefully the deadlines associated with the project don’t end in murder, but keeping your designer in the loop for when the future is nigh will ensure your project will remain on track, with no loss of life.

3. Who By Fire

Explain your issue; don’t just try to solve it. Instead of asking to make a font bold or bigger, tell the designer what you need the title or sentence to do in relation to the rest of the design or page. As the lyrics go, "…who shall I say is calling?" Knowing the concept behind the changes allows your designer to come up with innovative ways to solve the issue. However, if you do have an idea about how you might solve the problem, include it (but don’t forget to explain what the problem is so that your designer has a chance to offer a solution).

4. Anthem

Trust your designer’s skills. You hire designers for a reason; don’t micromanage their creative process. Be willing to give them space, space to innovate and create; you might be pleasantly surprised at what comes of it. My favorite line in Anthem is, "There is a crack, a crack in everything, that’s how the light gets in." Trust that your designer can break through and shine a light on your work.

5. Waiting for the Miracle

Give your designer time to work well. Time—time to marinate, mull, and sketch—is a necessary part of creating good design. One must wait for the miracle to come. Patience is best, as the lyrics suggest: "Nothing left to do when you've got to go on waiting, waiting for the miracle to come." Give a designer time to work and you will see what miracles of design emerge.

Once you collaborate with, and trust in, your designer, a world of opportunities will open up. In a similar vein, HCL Technologies realized the importance of its people and reassessed their strategies to capitalize on their strengths. GTM members can click here and learn how HCL Technologies uses a three-step transformation process to invest in a collaborative, employee-focused, customer-centric business model. If you are not a member, check out the sample on slideshare.

Jannette is the Senior Graphic Design Artist for Growth Team Membership, a premier best practices research group within Frost & Sullivan. You can follow her on Twitter: @jwhippy.

Rules of the game have changed for the aerospace industry

Lida Mantzavinou — Thu, 22 Nov 2012 13:22:57 GMT

Low-cost carriers are reporting profits and bidding for legacy carriers while airline groups struggle with losses, consolidation and restructuring

Globally, 2012 has been a hard year for airlines. Profits decreased to half in comparison to last year; IATA estimates revenues to close at just $4.1Billion by year-end. High average oil prices at above $100/barrel and unexpected events – such as Sandy that caused airlines losses of around $100Million – caused profit margins to fall to 1.6% and strongly buffeted the airlines industry.

Struggling with the economic and financial crisis, European carriers are expected to be the worst performers generating total losses of around $1Billion. A number of airlines went bankrupt in 2012, such as Spanair and Malev, while big airline groups implemented major restructuring and cost reduction programmes in the beginning of the year to survive in the long term. IAG, Lufthansa and Air France/KLM are aiming to reduce staff by 13,000 within 2014, generate savings - €450Million for IAG and €200Million for Lufthansa – and reduce net debt – €4Billion for Air France/KLM – by 2015. At the same time, they are leveraging on their low cost subsidiaries, Iberia Express and potentially Vueling for IAG, Germanwings for Lufthansa and Transavia for Air France/KLM, in order to face strong competition coming from the low cost carriers.

The current air transport environment in Europe has been benefiting low cost airlines. A combination of factors – increasingly price sensitive business and leisure passengers, national carriers going bankrupt, legacy carriers significantly cutting down capacity to decrease losses and charter carriers reducing their fleet size – have allowed low cost carriers to grow and be the only segment able to offset oil prices and generate profits. Easyjet is expecting to generate £255Million as profit after tax by year end while Ryanair estimates £394Million-£418Million. Their success hinges on low cost operation processes that are in place and allow for the lowest unit cost in the market.

Looking at low cost carriers piling up cash and bidding for legacy carriers, as in the case of Ryanair and Aer Lingus, it is clear that the rules of the game have changed. However, constraints imposed by regulatory authorities due to competition rules and additional charges imposed by the ETS on the short haul routes versus the postponement of the scheme on the long haul routes, are restraining the fast growth of low cost carriers. We expect more consolidation to take place in the next years and competition in the short haul market to intensify once airline groups see benefits by 2014 from their restructuring programs.

Postponing ETS implementation offers relief to European airline groups

Lida Mantzavinou — Tue, 13 Nov 2012 15:30:38 GMT

Air transport associations, authorities, organisations and airlines have been strongly positioned against the Emissions Trading Scheme (ETS) as it would be a cost burden to airlines, calculated to add 1% to an average return fare, and would decrease up to 1% air traffic volumes. “Intensifying price competition, that does not allow carriers to pass on the cost to passenger, high oil prices at above $100/barrel, marginal yearly industry net profits (forecasted by IATA to reach 4bn$), that can easily turn into losses by the end of the year with unexpected events, such as Sandy that caused to airlines around 100Million$ losses, and profit margins that have rarely exceeded 3%, make airlines extremely sensitive to any decision that can hurt their bottom line.

The European Commission postpones implementation of the ETS until 2013, when the International Civil Aviation Organization (ICAO) will take control of the issue during its assembly.

That is a relief to European airline groups, such as IAG, Lufthansa and Air France/KLM, which are currently under strict restructuring and cost reduction programs, expected to reduce staff in total of 13.000 by 2014, generate €450Million (IAG) and €200Million (Lufthansa) savings by 2015 and reduce net debt by €4bn (Air France/KLM) by 2015, while leveraging on their low cost subsidiaries: Iberia Express and potentially Vueling for IAG, Germanwings for Lufthansa and Transavia for Air France/KLM. US airlines are also benefiting as almost 23% of Revenue Passenger Kilometres (RPKs) are currently generated between the two regions: Europe and North America. Chinese airlines will too take advantage from this decision as they are increasingly penetrating the European market by launching new routes and increasing frequencies, as well as planning acquisitions in the near future, e.g. Air China expressed an interest to acquire stakes in Polish Airlines LOT.

The consensus regarding the impact of the air transport industry on the environment should be reached at the ICAO assembly next year and Frost & Sullivan expects implementation of new measures to take place in the beginning of 2014. In the meantime, biofuel usage in aviation will remain on the fringe, as biofuels are still under limited and unsustainable production, remaining an expensive alternative competing with oil prices per barrel, and government funding decreasing. Additionally, the postponement will enable negotiations between the EU and third countries, such as China and Russia, and allow more liberalisation and consolidation to take place.

Big Airline Groups on Track with Their Restructuring Plans but Challenges Ahead

Lida Mantzavinou — Thu, 01 Nov 2012 10:49:40 GMT

Both AF/KLM and Lufthansa reported operating profits in Q3 2012, being consistent with last year’s financial results. Q3 has traditionally been a well performing quarter for the airline industry; therefore profits should not be overestimated. On the other hand, taking into account that the profit forecast by year end for the European airline industry has been revised downwards, large European airline groups have showed resilience mainly due to the implementation of their restructuring plans which boosts consumer confidence and drives their market shares up.

There are four major challenges that the European airline groups are still going to face: persistent high oil prices, which are being hedged in order to minimise or at least maintain fuel cost at a certain level; strong low cost carrier growth that is gaining market shares in the short and medium haul segments; strong Middle East competition entering Europe through organic and inorganic growth strategies; and finally deteriorating cargo traffic.

Airline groups are responding by strengthening their low cost and regional subsidiaries through fleet rationalisation and network optimisation, increasing connections from regional hubs, in an attempt to compete in price in the market and gain back their market shares, e.g. Lufthansa with Germanwings and AF/KLM with Transavia, Regional and Brit Air. The main airlines will be focusing on the long haul traffic and premium traffic where profit margins are higher leveraging on their strong presence in key European hubs, e.g. Lufthansa in Frankfurt airport and AF/KLM in CDG and Schiphol. Regarding the cargo traffic, the new southern ‘silk road’ connecting the growing regions of Asia, Africa and Latin America, will impact severely cargo revenues in European airlines demanding fast freight fleet restructuring.

I expect that AF/KLM will be strictly implementing Transform 2015 focusing on decreasing its net debt by 4bn EUR. The successful negotiation of agreements with the unions and reduction of overstuffing indicate the company’s commitment. However, 2014 seems too of a short time to achieve its ambitious plan. AF/KLM is set to implement its cost cutting program while attracting partners and investors from the Middle East, e.g. Etihad, and strengthening cooperation with existing members in Skyteam. Lufthansa being in a better financial situation, expecting profits by end of year, allows the company to focus on its multi hub strategy generating group synergies rather than looking for external partners. Having invested in modernising its fleet to reduce fuel costs in the longer term and having sold bmi loss making business, Lufthansa is set to achieve savings by reducing staff costs.

For the full year 2012, I expect AF/KLM to report similar losses as last year while marginally decreasing its net debt and Lufthansa to report similar profits as last year. In 2012 restructuring plans are focusing on stabilising financial results of the groups in an attempt to avoid further deterioration of the airlines’ bottom line. We expect financial benefits to be reported by end of 2013 onwards with union agreements and organisational restructuring being enforced and group synergies being realised. Furthermore, alliances are going to provide the platform for strong cross border partnerships, e.g. within Skyteam, KLM has formed a strong partnership with Delta, Air France with Alitalia and Kenya airways, while Etihad is entering the game as an external player. Within one world, Iberia, BA and Qantas are strengthening cooperation while Emirates and Qatar are becoming important players.

For further insight:

http://www.bloomberg.com/video/air-france-klm-etihad-joint-venture-makes-sense-KYA4dNXDQp2ZcrYGvT5roQ.html

Good Design is Innovative

Jannette Whippy — Tue, 11 Sep 2012 17:20:36 GMT

Dieter Rams, a German industrial designer, introduced ten principles of good design. I am going to focus on one principle in this blog post: good design is innovative.

I am not a product designer, but innovation is something I work toward in my page and infographic designs as Senior Graphic Design Artist for Frost & Sullivan’s Growth Team Membership program. Creating clever and different ways to explain processes and data takes time; I call it marinating time.

Speaking of marinating, I love to grill. And I love a good marinade. I think marinated food is just fabulous. However, sometimes (most times) I don’t build in enough time to marinate and I get (what I feel are) sub-par grill results. Talking about grilling right now makes me a little sad what with fall just around the corner. I love the change in seasons (probably because I grew up with only two in the Pacific: rainy and dry); fall is one of my favorites, despite the shorter daylight hours and the temperature drops that deter me from venturing outside to grill. So while grilling (for me) is a late-spring, summer activity, marinating can be done year round (when I remember to plan ahead). Just like marinating food, marinating on design takes time: time to think and time to allow myself to follow meandering thoughts, jot down many sketches (I go through a lot of paper), and come at ideas sideways.

These marinating sessions require me to think loosely about a problem or page. When I let my mind wander, flashes of inspiration hit and I come up with some unique and clever ideas. It is a rush when an idea flashes and I grab it and run with it, sometimes the idea fizzles once I start fleshing out the details, but more often than not, the idea solidifies into a great page or a lovely section of an infographic.

I often tell my team that I need time to marinate on a page or an infographic. This time to muse and reflect is crucial to my design process. If you find yourself stuck on something, the flow of a presentation or even just one page; I highly recommend setting aside time to marinate, the brain often comes up with interesting solutions when you allow yourself to think sideways.

Jannette is the Senior Graphic Design Artist for Growth Team Membership, a premier best practices research group within Frost & Sullivan. You can follow her on Twitter: @jwhippy.

Paradigms, Parents, and Podcasting

Katherine Burns — Fri, 03 Aug 2012 13:12:15 GMT

Every once in a while, you read something that really blows your hair back. Few things are better than having a moment of enlightenment – having a new idea presented to you that helps you make sense of your world in a better, simpler, way.

That’s what happened to me when I came across a book from the 1960s entitled The Structure of Scientific Revolutions. This book’s author, Thomas Kuhn, argued that periodically practitioners of a shared discipline find that the framework (or paradigm) in which they operate has been undermined by a series of events that cannot be explained by the prevailing paradigm. If they continue to accumulate, these incidents combine to create a state of crisis. Out of the crisis and the chaos come a revolution and out of that an altogether new paradigm – a new way of looking at the world, a new framework for working, existing, and thinking.

What an incredibly simple, but sophisticated, concept: a period of stability, followed by a period of chaos, followed by a new order of things. I know the phrase “paradigm shift” is no longer new, but that didn’t make it any less earth-shattering to me when I first came across it.

This idea has deeply, fundamentally affected the way I look at things, and it certainly affected my approach to writing the growth process toolkit for technology strategy, which I have discussed in my two previous blogs. We are living through a paradigm shift right now – each of us trying to make sense of the chaos and searching for clues of what the new paradigm will be.

Funnily enough, my own life is in the midst of something of a paradigm shift itself. I’m already a mother to a wonderful two-year-old boy, and I am about to have a daughter. My stable world will soon, to quote myself, find itself in a state of chaos. What will the new paradigm look like?

And what is my daughter’s paradigm going to be? How will she look at the world? What truths will govern it? I’ve been thinking about this a lot lately – what do I want to teach her? What do I want her to like (hint: old movies, Esther Williams, sparkles)? What do I want her to not like (hint: scary movies, New York Giants, sugar)? What things do I really want her to believe? At the risk of falling into platitudes, I thought I’d share a few of my lessons with you all (no guffaws or eye-rolling allowed, I don’t care if it’s cyberspace).

Fred Astaire made it look easy. The lesson: the harder you work, the more effortless it will seem. There is no substitute for hours upon hours of practice, frustration, setbacks, and breakthroughs. Talent alone is one step above laziness.

Find your brilliance. My dad used to tell me, you’re probably not going to be a genius at everything. But you might be lucky enough to be a genius at one thing. Have the courage to run at that strength with everything you’ve got.

Use your words. The English language is a wondrous thing. Treat it with respect. Learn your grammar. Diagram sentences. Speak properly. Write beautifully. Read E.B. White and P.G. Wodehouse. Listen to Cole Porter.

Daddy’s wrong about Mommy’s movies. Just because it’s old doesn’t mean it’s outdated. I know there’s something to be said for special effects, but could any technology of today improve upon Gone With the Wind? I rest my case. The past is a treasure trove of awesomeness.

Every day is a happy day. Start every day believing that it will be better than the one preceding it. Never think you’ve peaked. What was the line from Anne of Green Gables? Each new day is a new beginning, with “no mistakes in it.” Isn’t that comforting?

Anyway, this is sort of my blogging swan song, at least until November. So with that, I leave you all with a few thoughts:

1) I just recorded a podcast revisiting the concept of technology strategy (its opportunities and risks, success stories and cautionary tales), and I’d love for you all to take a listen. Please forgive my voice – I’ve been battling laryngitis. My husband says I just talk too much.

2) If the toolkits seem interesting to you, take note: There are 10 of them! You can see them all here.

3) If you’re not a member of Growth Team Membership, and therefore can’t access these materials but would like to, let us know.

4) Enjoy the Olympics! Enjoy Halloween! I’ll see you at Thanksgiving!

As always, happy computing.

Katherine Burns

Katherine is the Director of Strategic Communications for Growth Team Membership, a premier best practices research group within Frost & Sullivan. You can follow her on Twitter: @KatherineSBurns.

How Wine Tasting and the Gestalt Principles of Perception Improve My Designs

Jannette Whippy — Tue, 24 Jul 2012 21:22:39 GMT

It’s rare for me to meet a Cabernet Sauvignon that I don’t like. My favorites are Cabs with backbone: big and full-bodied. I like my wines earthy (even a little herbaceous [taste and aroma of herbs]) with some tobacco flavor. And I love when the wine finishes dry. My wine preferences have matured and changed over the years (I have attended many, many tastings) I started off liking the more fruity, light reds and creamy, buttery chardonnay’s and now I really cannot abide either.

My design skills have also matured and improved through the years. I have designed many pages, some good, some great, some forgettable, and some truly insightful. I find that my best designs are conceived when I have a few key principles in mind. When keeping proximity, similarity, and order (a few of the Gestalt principles of perception) top of mind I produce clean, easily navigable pages.

Proximity occurs when elements are placed close together. While they are still separate objects they are perceived as unified because they are close to each other.
Similarity occurs when objects look similar to one another; they are then perceived as a group or pattern. Repetition of colors or objects is pleasing and aids in fast comprehension.
Order (or symmetry) occurs when the whole of a figure is perceived rather than the individual items that make it up. When designing to instruct, order and symmetry help the information to be consumed and comprehended quickly.

There are more principles, but these three are the ones that help me the most when designing guidebooks.

Chelsea Cappetta created this slideshow that showcases all the Gestalt Principles:

Gestalt Laws and Design from chelsc

Simplicity is beautiful, especially if your end goal is comprehension. Attending all those tastings allowed me to learn what I liked and didn’t like and have been the building blocks for me to be a more informed and happy wine drinker. The Gestalt Principles give me a great starting point when designing a page, as long as I know how things interrelate on the page, I can then design the page for maximum, full-bodied, consumption.

Jannette is the Senior Graphic Design Artist for Growth Team Membership, a premier best practices research group within Frost & Sullivan. You can follow her on Twitter: @jwhippy.

Improving Efficiency by Focusing on the Customer: Asia Pacific 2012 Marketing Priorities Survey Results

Holly Lyke Ho Gland — Mon, 09 Jul 2012 13:11:10 GMT

Marketers continue to be faced with the imperative tofind ways to appeal to specific customer needs, keep costs down, and drive higher ROI. This focus on the customer has marketers reassessing their value propositions and customer segments—to target the “right” audience with an engaging message. However, marketers are expected to take on this task with limited resources—budgets and staffing levels are expected to remain stagnant. To accomplish more with less, marketers are striving to improve the effectiveness of lead generation efforts and adoption rate collateral by Sales. More pointedly, marketers are striving to improve their channel strategies and collaborate closely with Sales on segmentation efforts.

To examine these challenges in more depth, the survey asked respondents to “root cause” their top internal challenges; indicating if they stem from issues with staffing, process, technology/systems, or strategic alignment. Respondents attribute their challenges to two primary causes: limitations in staff and a lack of common objectives.

When comparing Marketing’s 2012 resource allocations to forecasts made in 2011, the belief that budgets and staffing would remain static is inaccurate. In fact budgets have decreased since 2011. In regards to staffing, budgets have dropped by over a third. In contrast, marketers’ growing love affair with social media is readily apparent as social media activities are receiving twice the budget allocation they did last year. Additionally, marketers have allocated more budget to “content development”, which is critical for demand and lead generation activities.

This year’s survey included examined Marketing’s demand generation capabilities. Overall marketers are satisfied with their demand generation effectiveness—most respondents ranked their effectiveness as “Above Average”. Marketers are also satisfied with their effectiveness at specific demand generation tactics—with the exception of social media and mobile marketing.

Differentiating the Value Proposition: 2012 Asia Pacific Marketing Priorities Survey Report

View more presentations from Frost & Sullivan

Holly is the Research Lead for the Growth Team Membership, a best practices research group within Frost & Sullivan. Follow her on twitter at @hlykehogland.

Second Time Around

Katherine Burns — Tue, 03 Jul 2012 13:23:30 GMT

I once read an article in the Wall Street Journal about how writing the pilot episode of a new series is usually easier than writing the second episode, which can be an excruciating process. Maybe it’s because writers use all their good material in the first attempt, and feel a bit empty for the second go-round.

I hope this isn’t the case with me and this blog. I so enjoyed writing the first one – I hope you enjoy reading the second one as much.

At least I teed up a few things to discuss in this one, so I’m not starting at ground zero. Wasn’t that savvy of me?

For instance, I promised you all a list of my favorite detective stories. The “Professional Communicator” in me thinks that it would be a good idea to close with this, rather than lead with it…so scroll to the end if that’s why you’re here. I also promised to tell you more about something that I just wrote – a new growth process toolkit on technology strategy.

There can’t be a more satisfying feeling in the world that finishing a large project, especially one that took a great deal of personal blood, sweat, and tears (and no, for a writer, that’s no exaggeration: writing is a blood sport, played sitting down). I love to finish writing something, and then not look at it for a few weeks. That way, when I read it again, I see it with fresh eyes. Sometimes this means I’m disappointed in something that I previously had thought was terrific—and other times, I feel nothing but pride in what has been produced.

I’m happy to say that in this case, my re-reading of this toolkit produced the latter sentiment. Maybe it’s obnoxious of me to say that, but trust me – my standards are high, and this isn’t praise I would give myself, or anyone else, lightly. Furthermore, I think it’s probably a good thing for a writer to believe in her work. If you don’t, who will?

And if I didn’t believe in it, I wouldn’t be blogging about it right now. I wouldn’t be telling you how I think there’s something in it that will strike a chord with many of you. As I mentioned in my previous posting, technology is such a complex, moving target that it’s nearly impossible for anyone to make sense of the chaos. Patterns are fleeting, and moments of normalcy or consistency even more so. What this toolkit is designed to do is to help you stay calm in the storm. To take a systematic approach to understanding your business, identifying market opportunities, and evaluating them. To nurture creativity within your organization, because without it, you’re a sitting duck. These are really important ideas—and perhaps not entirely new, but still meaningful, and difficult to execute. The toolkit’s purpose is to aid that execution to the greatest extent possible. If you’re interested in reading the entire thing, and you are a member of Growth Team Membership, you can click here.

If you’re interested in reading the entire thing, but you’re not a member of Growth Team Membership, you can still read an excerpt by clicking here.

Enough about that. I mentioned at the start of this blog that I would close with a list of my favorite detective stories. In the interest of brevity, because brevity is the soul of wit, I shall keep the list to five (starting with my favorite).

1) Some Buried Caesar, by Rex Stout

2) Black Orchids, by Rex Stout (I realize it would be more interesting not to repeat an author, but…my blog, my rules)

3) Murder on the Orient Express, by Agatha Christie

4) The Big Sleep, by Raymond Chandler (read this, and then watch the movie: Bogie and Bacall at their most snazzy)

5) The Maltese Falcon, by Dashielle Hammett (read this, and then watch the movie: Bogie at his most Bogie, sans Bacall)

For a more in-depth book discussion, or to share your thoughts on technology strategy and its myriad challenges (none of which really existed in the lovely 1930s, “stuff dreams are made of” world I’ve just recommended for you), please take to the comments.

As always, happy computing.

Katherine Burns

Katherine is the Director of Strategic Communications for Growth Team Membership, a premier best practices research group within Frost & Sullivan. You can follow her on Twitter: @KatherineSBurns.

Pursuit of Productivity and Social Selling: 2012 APAC Sales Leadership Priorities Survey Results

Holly Lyke Ho Gland — Mon, 02 Jul 2012 16:27:38 GMT

This year’s survey results indicate sales executives’ 2012 challenges are shaped by their need to increase productivity. Specifically, sales executives need to pinpoint the highest-value sales activities, streamline their sales processes to match, and invest in new tools and practices for team collaboration. The other prominent challenges are enhancing the ability to monitor the business environment for shifts in pricing pressures and customers’ purchasing behaviors and needs.

To further explore this year’s challenges, respondents were asked to “root cause” their top challenges—whether they derive from issues with staffing, process, technology/systems, or strategic alignment. Sales executives attribute their challenges to the gamut of process, tools, and people. While respondents foresee little to no increase in staff, budgets are on the rise.

Given social media’s increasing role in companies’ strategies and activities, the survey asked respondents about the sales force’s use of social media. An overwhelming majority (98%) of the respondents are using social media in their daily sales activities. Specifically, respondents employ social media to identify needs, build awareness, and nurture ongoing client relationships. Unsurprisingly, LinkedIn is the primary social media platform sales executives use—primarily joining special interest groups to enhance their understanding of customer needs. Fewer respondents are actively participating in or creating special interest groups, which forgoes opportunities to demonstrate topical expertise.

Regarding the use of virtual and social media tools in sales activities, respondents employ tele-presence and/or live streaming video and predictive analytics—the analysis of customer behavioral data to identify patterns and insights for customer interactions. However, few respondents are using social media monitoring tools (e.g., Radian 6), dashboards (e.g., Hootsuite or MediaFunnel), or CRM systems (e.g., Nimble). Consequently, sales executives are not realizing the full benefits these tools offer for improving customer focus, collaboration, and productivity.

2012 Asia Pacific Sales Leadership Priorities Survey Report

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Holly is the Research Lead for the Growth Team Membership, a best practices research group within Frost & Sullivan. Follow her on twitter at @hlykehogland.

Visualize This!

Jannette Whippy — Thu, 28 Jun 2012 16:42:36 GMT

Inspiration hits at the strangest times: morning walks with my greyhound, a quiet moment sipping wine, or a busy and hectic day of running errands. It turns out solutions come more easily when I stop thinking about the problem. However, a key component of my ability to visualize solutions is having an understanding of the broader view.

Telling someone else’s story can be challenging. As a designer of Best Practice Guidebooks, I am not involved in the primary research and robust storyboard discussions required to create our guidebooks. When a guidebook is passed to me the researcher must explain everything, in extreme detail and I am responsible for visualizing the story. However, I often find the details distracting and, while it is good to have them, I need the big picture. Working with researchers who have a superior understanding of the subject manner and are able to step back and explain the overall view helps me to create meaningful structures and visuals. When I step back from the details, clarity often ensues.

Understanding the big picture helps me to better visualize graphical solutions to complex ideas. Once I design the concept, the details tend to slip into place within the larger, coheseive structure.

Visualizing text can make presentations more interesting and help your audience grasp the core concept quickly. If you are looking to make your work more visual, more exciting, details are nice to have but if you don’t understand how they all work together, visualizing your text will not be easy. Take a step back from your page and think about what you are trying to communicate.

Managing Resources and Idea Generation: 2012 Asia Pacific R&D Priorities Survey Results

Holly Lyke Ho Gland — Thu, 21 Jun 2012 17:42:44 GMT

The survey reveals that R&D executives in Asia Pacific are focused on challenges surrounding two topics: (1) managing the product portfolio and (2) integrating inputs from an array of sources outside of R&D. In regards to the first topic, R&D executives are struggling to generate an accurate technology map—that outlines customer needs, the current technology landscape, and gaps. Developing an accurate technology map is the first step to addressing R&D’s other portfolio management challenges—prioritizing and funding projects within the portfolio. A technology roadmap allows R&D executives to develop a portfolio strategy—that pinpoints which needs match company capabilities for development. Furthermore a formal portfolio strategy is necessary for an effective portfolio management process and measuring project ROI.

Customer-facing functions such as Sales and Marketing are a rich source of innovation information on everything from customer needs to feedback on current products. However, R&D executives struggle with establishing a method to consistently capture and integrate this information with their product development process. Some solutions to this dilemma include establishing regular cross-functional exchanges of ideas, or interacting with customers directly—via crowdsourcing or a formal open innovation process.

In view of open innovation’s (OI) growing prominence and potential to systematically capture ideas from a broad network, the survey asked respondents about their use of OI. The majority of respondents include OI in their product development processes. Open innovation is largely employed for idea generation and concept testing and customers are the primary source of ideas. Most of the respondents have a dedicated OI team within R&D.

Even though companies are committed to using OI—a concept that is founded on tapping into multiple sources for ideas—respondents still cite struggles with gathering and integrating insights from Sales and Marketing and customers. This may be attributed to respondents’ challenges with the fundamentals of establishing an OI program: overcoming the fear of lost IP, establishing a framework for collaboration, and garnering the resources needed to test incoming ideas and technologies.

2012 APAC Portfolio Management and Open Collaboration

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Better Communication, Better Business

Holly Lyke Ho Gland — Tue, 12 Jun 2012 12:09:56 GMT

One of my roles in my household is mediator between my son and husband. Like many a father and son, they are so much alike that sparks fly on a fairly regular basis. Not surprisingly, nine times out ten, their frustrations stem from a lack of communication. Needless to say, pointing this out results in an emphatic eye roll from my son and gruff sigh from my husband. However, once they do talk, there is peace in the house for at least 24 hours.

So what does this have to do with business?

Part of my job is to conduct annual priorities surveys, to pinpoint role-related challenges for executives in Marketing, R&D, Corporate Strategy and Development, Market Research, Competitive Intelligence, and Sales. Some challenges that come up year after year include:

How do we get buy-in at all levels of the company for strategy adoption?
What’s the best way to get support for that promising innovation?
How can we get the strategy team to integrate our insights into the annual planning process?
Why won’t Sales use the collateral we developed?

Any of these sound familiar?

In addition to picking their top challenges, the surveys also ask respondents to pinpoint the root cause of each challenge. In addition to limited resources, there are three recurring culprits—ineffective processes, a lack of common objectives, and inadequate communications.

Another key part of my job involves creating best-in-class case studies (Best Practice Guidebooks) that address the challenges identified in the surveys. In almost every case study our team produces, the best practices require developing communication mechanisms—to generate buy-in, break down silos, tap into out of the box ideas, and create transparency and trust between stakeholders. Here are two common methods we have found for creating sustainable communications:

Formal cross-functional committees—these committees tend to meet monthly and include representatives from all the relevant stakeholder groups/functions. These committees are useful to discuss resources, create transparency on project milestones, and supply information on project status prior to hand-off.
Informal monthly meetings—these meetings tend to include staff from related functions (such as Marketing and R&D) and are particularly useful for sharing best practices, breaking down silos, and brainstorming long-range or disruptive ideas.

Much like with my son and husband, when left to their own devices, business communications tend to break down or be shifted aside for more pressing priorities. Communications are vital to ensuring the health of any project or process and require commitment and nurturing equal to the multitude of benefits it offers.

Holly is the Research Lead for the Growth Team Membership, a best practices research group within Frost & Sullivan. Follow her on twitter at @hlykehogland.

Airline Industry Profits Driven by Asian Carriers, Europe still in Crisis

Lida Mantzavinou — Tue, 12 Jun 2012 09:58:14 GMT

2012 will be a tough year for airlines globally. With fuel prices at unsustainable levels and the threat of a major breakdown in the Eurozone area looming, airlines need to take action. Yet the most pressing issue is the lack of sustainable profitability in an industry used to negative results.

The 68^th International Air Transport Association (IATA) Annual General Meeting (AGM) took place in Beijing this year, with discussions focusing on the key factors that impact airline profitability and operating costs. This is nothing new. In the 68 years of the AGM net profit margins have rarely exceeded 3%, making airlines the worst performers in the air transport value chain.

For a third year in a row IATA members witnessed modest profit margins, albeit driven by the Asian carriers. Overall airline profits, in all regions apart from the Middle East, are expected to fall in comparison to 2011, falling from $8bn to $3bn in total. However Global GDP, a key driver of air traffic growth, and passenger numbers are expected to grow, while average jet fuel prices for the year are expected to be lower.

The industry is witnessing a paradox: even though demand is on a constant rise and airlines become more sophisticated in delivering value to passengers, profits are elusive. This is due to the impact of external factors, over which airlines have very little control, such as the global economic crisis and physical disasters. Operating costs are heavily dependent on jet fuel price fluctuations, with fuel currently representing 35% of total operating costs which is up from 15% a decade ago.

Even though its impact is still limited, the European Emissions Trading Scheme (ETS) has also been a major topic of discussion at this year’s AGM, as it is expected to add 1% to an average return ticket price. Fears of a full blown trade war between foreign and EU aviation authorities are exaggerated, with the EC expected to back down and postpone implementation to 2013, when ICAO will take control of the issue during its assembly.

As the industry is still very inefficient, consolidation will intensify in the next few years. Consolidation in the form of mergers and acquisitions, as well as strategic partnerships, allow the creation of synergies, cost efficiencies and economies of scale. The implementation of major restructuring programmes is also key in raising profitability. Unification of revenue management processes across an airline group’s global locations, co-ordination of flight schedules and redeployment of aircraft are some of the steps airline groups have to take for sustainable profit generation.

A First Time for Everything

Katherine Burns — Wed, 30 May 2012 15:08:29 GMT

Well, it’s my first blog. Not just my first one for Frost & Sullivan – my first blog ever. As a professional writer, and professional communicator, I guess this means I’m somewhat old-fashioned. I’d rather write something longhand than type it, and I wish we’d all put the Postal Service back in business by sending each other some letters. (Remember letters? No “you’ve got mail” ding, dong, ping, or gong could ever be better than the silent anticipation of opening an envelope.)

Anyway, I’m old-fashioned in most aspects of my life. I love old movies. I love old music. A few weeks ago my husband asked me to name a famous Grunge band, and the best I could do was Aerosmith (apparently they are NOT “Grunge”). Somehow this makes me eccentric, whereas the fact that he couldn’t tell me the difference between Ella Fitzgerald and Julie London just means he’s cool. Whatever.

And so I’ve skipped through life, mostly paying homage to things that happened before I was born, and all to a Cole Porter soundtrack. I’ve watched Singing in the Rain more times than I could count; I’ve memorized all of Fred Astaire’s movies. I’ve devoured books on the Golden Age of Hollywood. Mid-20^th Century detective stories are my vice (I’ve read them all, but Nero Wolfe’s brownstone is my absolute ideal…and if that doesn’t mean anything to you, do yourself a favor and pick up Some Buried Caesar, or maybe Champagne for One).

Speaking of mid-20^th Century detective stories: One of the lovely things about them is the way the detecting is done. There’s no scanning of Twitter pages, no research of Facebook posts. The hero might read back issues of the New York Times, or he might pay a trip to the library. He might even go really high-tech and type something, on a really snazzy machine like an Underwood. In all, a decidedly low-tech (but always successful) way of arriving at whodunit.

Imagine my anxiety, then, when I was asked to write about technology. Not the technology of yesteryear—but the technology of tomorrow! Technology that hasn’t even happened yet, and how we can predict it and prepare for it! Did I mention I’ve barely started to blog? As I like to remind my boss, I have only to look at a computer to fry its insides past the point of hope or redemption.

Perhaps I should explain why I was so chosen. I’m responsible for writing a series of Growth Team Membership deliverables called the Growth Process Toolkits. These toolkits are essentially primers – how-to-manuals—on key topics that drive a company’s top-line growth. For example, we’ve published toolkits on M&A, new product launch, distribution channel optimization, and more. We needed to write a toolkit on technology strategy, and as the author of the series, the responsibility fell to me. I was, as I said, somewhat hesitant to begin. What could I possibly teach on this subject, when I was so ill-informed myself?

And then I realized two lovely things all at once:

I’m not the only one who’s overwhelmed by the rapid, nearly disorienting pace of technology evolution today. It’s OK to acknowledge this feeling, and to empathize with others who may also be struggling to make sense of the chaos. That’s why I decided to open the toolkit with a quotation from historian Henry Adams (for you history buffs out there, Mr. Adams was a direct descent of John, who was his great-grandfather). I came across this passage while reading David McCullough’s wonderful new book The Greater Journey: “Every day opens new horizons and the rate we are going gets faster and faster till my head spins and I hang on to the straps and shut my eyes.” He wrote those words in 1900 – but how apt they seem today! Maybe not everyone reading this would self-describe as “old-fashioned,” the way I have, but I think everyone can relate to that sentiment and sometimes feels powerless to keep up with…well, anything today. We live in a crazy time. That’s probably why we need a toolkit on technology strategy in the first place. And that leads me to my second realization:

The ideas don’t have to be mine; I just have to present them clearly. One of the great things about my job, and about writing these toolkits, is that it’s made easier by working with extremely smart people. I may not know a lot about technology, but I know who in our company does, and I know how to seek them out, ask them questions, and see how they’ve helped others think through technology-related challenges. All I have to do is collect the goods and translate them into a single, cohesive story. I might not be good at blogging (am I?), but I can certainly do that.

And so there was no need for trepidation—and in fact, this was a good chance for me to learn about something that I’ve avoided, perhaps to my detriment, for a very long time. I’m happy to say that the production of this new toolkit has been a learning experience for me; I hope reading it will be one for you as well.

That last sentence probably makes it sound like the toolkit is finished. It’s not. But it will be soon, and we’ll share it with you as soon as it is. Check back in with us next month, and we’ll provide some more detail on it (that, and my favorite detective stories).

Until then, happy computing.

Katherine Burns

Katherine is the Director of Strategic Communications for Growth Team Membership, a premier best practices research group within Frost & Sullivan.

2012 European R&D/Innovation and Product Development Priorities Survey: Open Innovation for Idea Generation

Holly Lyke Ho Gland — Tue, 29 May 2012 17:20:25 GMT

Frost & Sullivan’s Growth Team Membership™ (GTM) recently completed its 2012 survey of R&D/innovation and product development executives throughout Europe. The executives were asked to identify their most pressing challenges for 2012.

The survey reveals that R&D executives continue to struggle with doing effective portfolio planning and leveraging a wide network for idea generation. Moreover, respondents are challenged by how to generate an accurate technology map—outlining customer needs, available solutions, and technology gaps—to guide portfolio planning and project prioritization. The other prominent challenge is a perennial one, identifying the next breakthrough idea.

To examine these challenges in more depth, the survey asked respondents to “root cause” their top challenges by indicating if they stem from issues with staffing, process, technology/systems, or strategic alignment. R&D executives attribute their challenges to two primary causes: limitations in staffing and processes. R&D executives are unlikely to see additional staff in 2012; most respondents expect staffing level to remain static. On a positive note, budgets are expected to increase in 2012. Despite the emphasis on breakthrough innovation, most of the budget increases will be allocated to short-, medium-term, and incremental innovation projects.

In view of open innovation’s (OI) growing prominence and potential to help R&D develop emerging or disruptive technologies, the survey asked respondents about their use of OI. Surprisingly, given its prominence in the last two years’ survey results, the majority of respondents do not leverage OI in their product development processes. This may be attributed to respondents’ challenges with establishing partnerships and measuring the ROI of OI efforts. In regards to creating OI partnerships, respondents struggle with identifying partners with the right IP, establishing clear communication channels, and building sustainable trust. The R&D departments that are embracing OI tend to use it for idea generation and screening during product development life cycle and customers are their primary source of ideas. In terms of staffing for open innovation activities, most respondents employ part-time technology scouts.

Open Innovation for Idea Generation - 2012 R&D Innovation Priorities Survey Results

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Feedback: The Good, The Bad, and The Irrelevant

Jannette Whippy — Thu, 24 May 2012 17:32:45 GMT

As an in-house designer who works alone, I require constant feedback. It’s the only way to know if I am on the right track. Recently, I had an epiphany: I have ignored my best design resource available, my fellow designer. I could have kicked myself for the oversight. I was working on a poster that was just not fitting together well. I ignored my first instinct to send it to a friend, and instead sent it to a fellow designer in a different department. Her insightful comments and suggestions helped me to see the holes in my design and the fixes we discussed made the poster better.

Feedback is only as good as the reviewer. If your reviewer doesn’t know your intended audience or have much experience in your subject, their feedback (while interesting) is not as meaningful as another, more appropriate, reviewer. Take care in gathering feedback. Your work will get better if the feedback gathered is from someone who understands/is part of the audience you wish to engage. As Seth Godin says: “Shun the non-believers.”

2012 Global R&D/Innovation and Product Development Priorities Survey: Pursuing Emerging Innovation

Holly Lyke Ho Gland — Wed, 23 May 2012 14:17:56 GMT

Frost & Sullivan’s Growth Team Membership™ (GTM) recently completed its 2012 survey of R&D/innovation and product development executives globally. The executives were asked to identify their most pressing challenges for 2012. GTM will focus its best practices research to address the prominent issues identified in the survey.

This year’s survey indicates R&D executive struggle with two chronic challenges: (1) managing the product portfolio and (2) finding the next disruptive idea. In regards to portfolio management challenges, respondents struggle to develop accurate technology maps for planning, to prioritize innovation projects, and measure their portfolios’ success rate. Overcoming these challenges requires R&D executives to map out their portfolio strategy and develop key performance indicators to guide project prioritization and monitoring.

Identifying the next breakthrough idea rarely involves a “Eureka” moment, but does require time and resources. While companies understand the need to develop emerging technologies, they are reluctant to commit substantial resources to high-risk projects. This risk aversion appears to be impacting R&D budget allocations—budgets for incremental innovations are increasing, while disruptive technology budgets remain stagnant.

The survey asked respondents to “root cause” their top challenges by indicating if they stem from issues with staffing, process, technology/systems, or strategic alignment. R&D executives attribute their challenges to two primary causes: understaffing and processes (ineffective or nonexistent process). On a more positive note, R&D executives foresee additional resources—both staffing levels and budgets are expected to increase in 2012.

Given the pressure on R&D executives to tap into new ideas and emerging technology, survey respondents were asked about their use of open innovation. The majority of respondents employ some form of open innovation team (OI)—typically a small, dedicated sub-group within R&D. It comes as no surprise that OI’s primary role in the product development life cycle is idea generation and that customers are the primary source of ideas.

Even though companies are committed to using OI to increase their ability to develop emerging or disruptive technologies, respondents struggle with the fundamentals of establishing an OI process: securing internal buy-in, getting resources for idea testing, and creating a collaborative framework with external partners.

Idea Generation and Portfolio Management - 2012 R&D Innovation and Production Development Priorities Survey Results

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2012 Americas R&D/Innovation and Product Development Priorities Survey: From Portfolio Management to Open Innovation

Holly Lyke Ho Gland — Tue, 22 May 2012 17:35:17 GMT

Frost & Sullivan’s Growth Team Membership™ (GTM) recently completed its 2012 survey of R&D/Innovation and product development executives in North and South America. The executives were asked to identify their most pressing challenges for 2012. GTM will focus its best practices research to address the prominent issues identified in the survey.

According to the 2012 survey results, R&D executives continue to wrestle with portfolio management. Specifically, R&D executives need to prioritize innovation projects, balance the value and risk of the portfolio, and allocate budgets across a wide range of project categories. Respondents also struggle with two other persistent issues: (1) identifying breakthrough ideas and (2) integrating inputs from internal stakeholders (e.g., Sales and Marketing) with portfolio planning.

The survey reveals differences in challenges between different business models. For example, the key challenges for R&D executives in B-to-B companies are generating technology roadmaps for portfolio planning and managing an open innovation process. In contrast, their peers in B-to-C companies are challenged by securing buy-in for promising innovations with senior management and streamlining the product development process to reduce costs.

The survey asked respondents to “root cause” their top challenges by indicating if they stem from issues with staffing, process, technology/systems, or strategic alignment. By and large, R&D executives attribute their challenges to understaffing. Fortuitously, staffing and budgets are expected to increase in 2012. Ironically, though respondents stress the importance of driving breakthrough innovations, short-term or incremental projects account for the majority of the 2012 budget increase.

Given the potential of open innovation (OI) to tap emerging technologies, survey respondents were asked about their use of OI. The majority of respondents (58%) apply OI approaches to their product development process. When asked about the role OI plays in product development, respondents report using OI for ideation generation and screening. However, respondents in B-to-C companies are more likely to use OI throughout the product development process than their B-to-B peers. The composition of respondents’ OI teams varies by business model. Respondents within B-to-B companies employ small, dedicated open innovation teams, while R&D executives in B-to-C companies use part-time technology scouts.

While most R&D organizations engage in OI activities, R&D executives still struggle with implementation: establishing an effective OI process, garnering resources, and collaborating with partners. Respondents in B-to-B companies are focusing on developing a method to measure the ROI of OI activities, while their peers in B-to-C companies are endeavoring to establish a structured process to test the feasibility of idea submissions.

From Portfolio Management to Open Innovation - 2012 R&D Innovation and Product Development Priorities Survey Results

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Sales and Marketing Collaboration

Holly Lyke Ho Gland — Wed, 16 May 2012 15:11:02 GMT

The Growth Team Membership™ (GTM) program recently surveyed marketing executives to identify their principal challenges for 2012. The survey found that marketers struggle to (1) cultivate a differentiated value proposition that resonates with clients, and (2) ensure Sales adopts the appropriate messaging and materials.

Survey respondents indicate that understaffing and a lack of strategic alignment across Sales and Marketing’s leadership are the primary causes of Marketing’s struggles. By joining forces with Sales, Marketing can address the strategic alignment issue and tap into additional staff. However, successful collaboration requires taking a closer look at the following three areas:

1. Goal Alignment—Since revitalizing the value proposition requires a substantial commitment in time and resources, it is essential that Marketing and Sales agree on the reason for the revitalization at the outset. To achieve this goal, marketing and sales executives need to build consensus on answers to the following questions:

Are our assumptions about how we are perceived by our customers accurate?
Can we quantitatively prove any of our assumptions?
How does our value proposition differentiate us from the competition?
Does our current messaging tell the story we want?
How consistently is our messaging being used?

2. Sales Involvement—No matter how necessary, or how compelling, the redesigned value proposition may be, the sales force may still resist it. Successful marketers understand that sales reps want some measure of control over the way they communicate with their customers and are prone to resenting outside influence. Marketers therefore involve the sales force throughout each stage of the new value proposition’s development (including messaging creation). This inclusion builds cross-functional ownership of the new messaging and limits the likelihood that Sales will reject it later on. Furthermore, it speeds new messaging roll-out, since the sales force will already be familiar with the value proposition and how to tailor its message for various segments.

3. Continuous Engagement—Trust and transparency are crucial to any long-term successful collaboration between Sales and Marketing. One way to maintain this openness is through regularly scheduled meetings between senior management in Sales and Marketing. Growth Team Membership researchers have found that a monthly cadence works best for keeping the conversation flowing, collecting feedback, and addressing collaboration challenges. Monthly meetings also allow marketers to track value proposition adoption and identify opportunities for improvement.

While sales and marketing collaboration is a perennial challenge, some companies have found ways to unite these often-at-odds functions. Take the experience of Kronos, a workforce management software solutions company. For many years, Kronos considered itself a market leader, in spite of its flat product revenue growth. This disconnect stimulated Marketing and Sales to collaboratively revise and differentiate Kronos’ value proposition and messaging. Kronos’ sales and marketing teams followed the practices outlined above—alignment, inclusion, and engagement—to overcome key barriers to collaboration. Successful collaboration has resulted in 92% of the sales force consistently using the messaging. Kronos’ new value proposition has also led to a 36% increase in its earnings before interest, taxes, and amortization (EBITA).

In conclusion, Growth Team Membership survey data suggest that marketers are committed to differentiating their companies through redesigned value propositions. However, Marketing’s efforts are constricted by a lack of coordination and buy-in from Sales. By including Sales in the development process, Marketing can ensure its efforts are adopted and strengthen its relationship with Sales for long-term success.

Want to learn more about best practices for sales and marketing integration?

Sales & Marketing: Revitalizing the Value Proposition

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Scenario Planning: Making Better Decisions about Tomorrow, Today

Jessica Jeffcoat — Mon, 14 May 2012 20:57:23 GMT

The future is inherently unpredictable, forcing companies to conduct strategic planning in the face of great uncertainty. As a result, many companies struggle to develop strategies that take into account long-term threats and opportunities, while balancing short-term priorities. Scenario planning is a structured methodology you can use to test existing strategies against varied future states or scenarios. Scenario planning is not meant to predict the future. Instead, it allows you to explore a series of high-impact, uncertain—yet plausible—future states. This knowledge, in turn, enables you to recognize the “signposts” of scenarios as they unfold and react accordingly.

Frost & Sullivan’s Growth Team Membership (GTM) profiled Merck & Co., Inc. (the global pharmaceutical company) and how it applied scenario planning. Merck’s objective was to better anticipate how different strategies would hold up against the state of the global healthcare environment looking out 10 years. What follows are some of the key insights the team gleaned in understanding Merck’s approach.

Garner Internal/External Insights and Buy-In

To establish plausible scenarios for the future, it is important to involve a cross-divisional team to garner the full range of views within the company. It is equally important to tap into external perspectives on the industry, and outside scenario-planning consultants, to lend credibility and objectivity to the effort. Finally, C-level buy-in and participation in the initiative must be secured.

Challenge Assumptions about the Future

Before you can start exploring future scenarios, you must first understand your existing assumptions about the future. What is the conventional wisdom about where the industry and economic, political, and regulatory factors are headed over the next 10 years? What assumptions about the future underpin this outlook? Once this information has been brought to light, you need to challenge your underlying assumptions to explore alternative future scenarios. It can be helpful to pose this question: What if, and how could, your assumptions about the future turn out differently? The answers to this question uncover they key uncertainties you have about the future and allows you to start envisioning different future scenarios that could emerge.

Explore Future Scenarios’ Implications

After considering a range of alternative future scenarios, it is important to focus on a digestible number of scenarios—generally no more than four—to explore in depth. It is essential to filter the scenarios by plausibility and impact to select the most significant, relevant scenarios for your company and industry.

Identify signposts of the future: A critical step in evaluating the final group of scenarios is to identify early indicators that would signal each scenario is coming to pass. A company should continually monitor this list of indicators to look for early warning signs so it can determine what, if any, strategic shifts are necessary. This enables you to hedge your bets against future risks and gain a first-mover advantage.
Test current strategies against divergent futures: It is important to think about how your company’s current strategies would perform in the context of each scenario. What challenges and opportunities would you face? What actions should you consider taking now to prepare for each scenario?

Revisit Investment Decisions

Once you have identified and explored the most plausible scenarios, the next step is to present your findings to executive management and help them internalize the scenarios’ implications. It can be beneficial to run an investment exercise with executive management that compares their current long-range resource allocations with the allocations they would make in the context of each future scenario. If a particular scenario were coming to fruition, how might your company change its resource allocations toward existing and new business areas? This type of exercise can translate scenario planning into strategic discussions and decision-making about the future.

Learn from Merck’s Approach to Scenario Planning

Scenario planning enabled Merck to embed longer time horizons in its strategy planning, gain a deeper understanding of its internal capabilities and the competitive landscape, and prompt scenario-based resource allocation decisions.

Register for a complimentary webinar on May 22^nd featuring the Merck case and learn how Merck used scenario planning to explore long-term threats and opportunities.
Download a three-page sample of the Merck Best Practice Guidebook, Scenario Planning: Fostering Long-Term Strategic Thinking.
If you have questions regarding the Growth Team Membership™, contact us at GTMResearch@frost.com, follow us on Twitter @Frost_GTM, or visit us at www.gtm.frost.com.

Delta Air Lines to buy a US East Coast oil refinery from ConocoPhillips. A good investment but definitely not a hedge against jet fuel crack spreads.

Diogenis Papiomytis — Wed, 02 May 2012 15:33:27 GMT

In order to discuss the implications of this move by Delta, we first need to acknowledge the main drivers to the deal. If we exclude short-term shifts and look only at mid-term macro developments, we can observe the following:

a) Heating oil crack spreads, a proxy for jet fuel cracks, have tripled compared to 2009 and now stand at about $30 per barrel. Volatility from Q1 2007 to Q1 2012 has been very high, with spreads fluctuating 40-50% on average, from one quarter to the next. This has subsided over the last year and it seems that spreads will remain at current levels for the rest of 2012. The main driver for high spreads is the much greater overseas demand for distilled fuel, compared to domestic US.

b) Refinery capacity in the US has been shrinking, with some refineries becoming inactive and many being on sale since early 2011. Whereas in 2009-10, a similar mid-sized refinery with 185,000bpd capacity would be priced at $500-600M, refinery prices are now depressed. From Conoco’s perspective, which has been looking to sell its Pennsylvania facility since 2011 and was about to close it down, a $150M price tag is better than nothing. Delta acknowledged the opportunity and acted quickly.

c) Similarly, with greater overseas demand and shrinking domestic US supply, crack spreads should remain at historic highs for the foreseeable future.

Delta’s fuel managing team is experienced in similar situations, as this is not the first time the airline has been proactive in managing costs: Going into 2011 the crude oil WTI-Brent spread increased substantially. With WTI been the benchmark for US airlines in setting fuel hedging contracts, it was no longer considered reliable. Delta was among the first to shift its fuel hedging contracts to Brent, in March 2011.

We could be quick to judge Delta’s move as both proactive and positive, if this were an investment. But it is not an investment, as the airline mentioned it was driven to buy the refinery by the inability to hedge against jet fuel cracks.

Nonetheless, buying the Conoco refinery does not remove risk, unlike hedging. By acquiring this facility, Delta essentially goes long the jet fuel crack spread. They are betting that spreads will either remain at current levels or keep on rising. So, effectively, Delta is adding risk. Should spreads decline, while there is still refinery overcapacity in the US, Delta will incur much lower returns and possibly a write-down on its refinery assets. If the end objective is to manage risk, then Delta would have been better off going to the derivatives market (by selling an underlying heating oil / jet fuel futures contract and buying an underlying crude oil contract, so as to hedge against jet fuel cracks).

As with everything else in the airline industry, we should not expect this deal to be a first of many. Even if refinery valuations are at an all time low and jet fuel crack spreads at an all time high, airlines will not rush to buy similar assets. Delta’s competitors will adopt a “wait-and-see” approach. When Air France merged with KLM in 2003, industry experts were quick to predict a surge in airline mergers. But it was not until 2007 when the industry witnessed a second mega- merger; that between Delta and Northwest.

Customer-Centric Shortfall: 2012 Global Sales Leadership Priorities Survey

Jessica Jeffcoat — Thu, 05 Apr 2012 17:20:22 GMT

By Jessica Jeffcoat, Research Analyst, and Holly Lyke-Ho-Gland, Research Lead, Growth Team Membership™ (GTM)

Frost & Sullivan’s Growth Team Membership™ (GTM) recently completed its 2012 survey of sales executives globally. The executives were asked to identify their most pressing challenges for 2012. GTM will focus its best practices research to address the prominent issues identified in the survey.

Sales Leadership in 2012—A Snapshot

Implementing lead generation strategies is the primary challenge of sales executives.
A lack of personnel is the root cause of the primary challenge.
In comparison to 2011, staffing levels will remain static while budget levels are expected to increase moderately in 2012.
Companies attribute 20 percent of their sales to distribution channels and partnerships.
In the main, Sales uses social media to identify and qualify leads.
LinkedIn is the primary social media platform used by Sales, and is typically used to improve sales reps’ knowledge of customer needs and to boost brand recognition.

2012 Sales Leadership Survey Executive Summary

The 2012 survey reveals that sales executives continue to wrestle with a perennial issue: improving customer focus. Specifically, sales leaders must employ more effective tactics to generate high-quality leads, map their sales cycle to customers’ purchasing behavior, and incorporate customer feedback into their sales strategies.

To examine these challenges in more depth, the survey asked respondents to “root cause” their top internal challenges by indicating if they stem from issues with staffing, process, technology/systems, or strategic alignment. Sales executives attribute their challenges to two primary causes: limitations in staffing (limited resources and lack of knowledge) and processes (ineffective processes and inadequate communication). Sales executives are unlikely to see staffing improvements in the next year, as most respondents anticipate staffing levels will remain static in 2012. Budgets, however, are expected to increase moderately in 2012. Despite concerns over inadequate staffing and processes, nearly half (49 percent) of the survey respondents rate their function’s effectiveness as “above average.”

Given social media’s prominence and its ability to give sales executives an additional window into customer needs and behaviors, the survey asked respondents about their use of social media. The majority of respondents (54 percent) indicate they participate in social media as part of their sales approach. More specifically sales reps are employing social media to identify and qualify prospects, collect information on customer needs, and maintain customer relationships. Sales executives predictably are using LinkedIn as their primary social media platform and are conducting individual searches and joining special interest groups to enhance their understanding of customer needs. While the majority of respondents actively participate in LinkedIn’s special interest groups, few sales executives moderate their own groups and thus do not take full advantage of LinkedIn’s ability to help boost brand recognition.

In response to questions about their use of virtual and social media tools in sales activities, respondents indicate universal use of tele-presence and/or live streaming video to increase sales productivity. However, the majority of sales executives indicate they are not employing social media CRM systems (e.g., Nimble), monitoring platforms (e.g., Radian 6), or dashboards (e.g., Hootsuite or MediaFunnel). This is unfortunate given that these tools magnify the benefits of social media activities by collating customer information, which helps facilitate the creation of customer insights. In addition, more than half of the respondents do not use predictive analytics—the analysis of customer behavioral data to identify patterns and provide insights for customer interactions—which is a key customer analysis tool. It is noteworthy that most sales executives are not using these tools despite citing the need to improve their understanding of customer needs and behavior.

Respondent Demographics

There were 564 respondents.

The respondents work predominantly for privately held (56%) rather than public (34%) companies.
The majority of the respondents (69%) work in a business-to-business environment.
Most of the respondents (39%) come from firms with revenues below $100 Million (USD).

For a more detailed analysis of the survey results, including analyses by business model, please see the attached report.

If you have questions regarding the survey, or are interested in learning more about GTM’s marketing best practices, please contact us at: GTMResearch@frost.com, follow us on @Frost_GTM, or visit us at www.gtm.frost.com

The Implementation Deficit: 2012 Corporate Strategy Priorities Survey Results

Holly Lyke Ho Gland — Mon, 19 Mar 2012 13:49:42 GMT

Strategists continue to struggle with many of the perennial issues they identified in the 2011 survey—developing effective implementation plans and aligning corporate and financial objectives. In regards to implementation, the focus is on developing an effective procedure for execution that includes standardized metrics and milestones. Companies newfound focus on long-term planning—looking ten or more years out for game changing opportunities and threats has strategists endeavoring to integrate future or Mega Trends within their planning process. In addition, this emphasis on long-term strategies requires strategists to demonstrate the value of Mega Trend initiatives, even though they may not show financial results for a few years.

When strategist’s challenges were analyzed by business model, strategist in B-to-B companies cite challenges with strategy implementation and integrating future or Mega Trends.. However, strategists in B-to-C companies stress additional problems such as: aligning divisional and corporate strategies and integrating sustainability into the corporate plan, in addition to strategy implementation.

To better understand the top challenges, respondents were asked to “root cause” them in terms of staffing, process, technology/systems, or strategic alignment. The root causes ran the full gamut of options from insufficient staff to a lack of strategic alignment on common objectives.

Companies continue to be cautious about resource allocation and corporate strategy functions are not exempt from this. Respondents foresee both budget and staffing levels remaining constant in 2012.

Given the perennial struggle with getting strategies implemented, respondents were asked a series of questions about their implementation practices. Strategists indicate they use a variety of best-in-class implementation practices:

Employing a dedicated implementation team
Ensuring that divisions—both business (profit centers) and service units (support functions like Human Resources)—create annual strategies that are aligned with the corporate strategy
Conducting quarterly strategy execution reviews within the strategy team and with senior management

Despite using these best-in-class practices, most respondents graded their companies as “Average” regarding strategy execution. The divergence between best practices and effectiveness can be explained by additional findings from the survey:

Implementation teams are understaffed and/or members of the team lack the “right” skill sets
The clarity of roles between participants in strategic planning is only rated as “Average”
Technology systems for strategy monitoring are outdated and insufficient for strategists’ needs

In conclusion, the interest in Mega Trends for planning coupled with meeting the financial expectations of stakeholders, requires strategists to develop and apply implementation and monitoring processes. To strengthen strategy implementation, strategists need to first set their own house in order: ensure the department has the appropriate people, that roles and responsibilities are clearly defined, and the supporting technologies are up to the task. Secondly, corporate strategy functions need to create greater transparency around roles, metrics and expectations.

Access the full report for a more detailed analysis of the survey results—by business model, corporate development challenges, and trends in post-M&A integration.

Strategy Implementation and Acquisition Integration - 2012 Corporate Strategy and Corporate Development Priorities Survey Results from Frost & Sullivan

IAG profit growth a positive but unsustainable performance in a tough 2012 for European airlines.

Diogenis Papiomytis — Wed, 29 Feb 2012 09:27:39 GMT

Today IAG announced its 2011 annual results, characterised by a doubling of operating profits from €225 Million to €485 Million. However, we expect the tough economic climate to negatively impact all European airlines in 2012.

This year European airline consolidation will intensify, with airline groups actively looking for opportunities to enhance their operations and bring economies of scale. The driver for consolidation is the worsening European economy, rising fuel prices, low cost carrier growth and the lack of financing for organic growth. In these situations, large network carriers tend to benefit. Among these, IAG is in a position, both financially and strategically, to take advantage of economic conditions and acquire niche players at bargain prices. If we look at the two companies in play, Aer Lingus and TAP, and exclude BMI which is an opportunistic acquisition, TAP seems to offer more network synergies with BA and Iberia. Aer Lingus is an airline in transition and apart from being part of the oneworld alliance, it is not an attractive target.

In late 2011 IAG released some early performance indicators on the success of the BA-Iberia merger and seems to be on target, even though it has chosen to set itself very low targets to begin with. Shareholder value cannot be realised at such a short period following a merger. In the case of the 2003 AF-KLM merger, it took the combined entity a number of years to produce any meaningful synergies. In cross-border M&A and more specifically in the airline industry, it is normal to have unexpected delays in synergy realisation, due to labour disputes, Government intervention and change resistance. Nonetheless, we have to put everything into perspective. It is far easier for IAG to realise benefits from an acquisition of a much smaller player, like TAP, than achieve full synergies from a merger of equals.

When discussing airlines, we have to mention the effect of rising jet fuel prices, which are indeed a systemic risk in the airline market. Since the year 2000, jet fuel prices have tripled, while fuel costs have grown from 15% to 30% of total operating costs. A steep increase in any given year will, with near certainty, have a major impact on airline profitability, whatever the hedge coverage. Particularly for IAG, fuel hedging is expected to be around 50% this year, compared to 70% last year.

Few airlines get it right when it comes to fuel hedging and IAG is not an exception. Fuel hedging is a practice that adds some level of certainty in an unknown and highly volatile variable, but overall it has proven an unreliable risk hedging tool in itself. This is why airlines rely more on fuel surcharges, as opposed to hedging policies, in an attempt to pass on the costs to their customers.

To conclude, larger airlines like IAG have more firepower to withstand sharp periodic fuel price increases, like the one in the first half of 2008. Prolonged increases however, such as the one witnessed throughout the last decade, require more fundamental changes in airline business models.

IAG profit growth a positive but unsustainable performance in a tough 2012 for European airlines.

Diogenis Papiomytis — Wed, 29 Feb 2012 09:27:23 GMT

Kodak - After 130 years in development, will it go in a flash?

Noel Anderson — Mon, 23 Jan 2012 12:48:37 GMT

This coming summer will play witness to my 5^th wedding anniversary. In that time my wife and I have honeymooned, bought a family home and filled it up with two (sometimes) lovely children. In short, in the last half decade, we’ve had more Kodak moments than there have been EU regulations defining the shape that a banana needs to be in order to be a banana. Now, as I think about our friend the curved yellow fruit, what I do find bananas is the cruel fate of Kodak this month.

So what’s happened to one of the world’s most-loved brands?

At around about the time that I was exchanging my wedding vows in the Alps, an avalanche of misfortune was already being dislodged and wreaking havoc on the once rock-solid foundations of this popular business.

Its once picture perfect share price went downhill faster than Franz Klammer’s skis and it posted losses in 6 out of the past 7 years.

Robert Burley, professor of photography at Ryerson University in Toronto, puts it nicely:

“There’s a kind of emotional connection to Kodak for many people. You could find that name inside every American household and in the last 5 years, it’s disappeared”

The demise of Kodak is clearly down to a lack of vision by the management of the company in the 1980’s.

Unwilling to give up the golden goose that was photographic film through the fear of the cannibalisation of its products, Kodak’s senior executives missed the future trend in digital photography like a drunken slalom skier might miss the gates of his run. This mistake enabled their competitors to skate right over their share of the photography market. The irony is that Kodak developed the first digital camera back in 1975.

Errors of this magnitude are explained in psychology by loss aversion. This is the phenomenon where people are more worried about what they stand to lose, in Kodak’s case film, than what they stand to gain from the new opportunities that are available to them, e.g. digital – sound familiar Sony? The key word is also fear. Fear kills economies. Fear kills growth. Fear prevents individuals from reaching their full potential.

This is happening in boardrooms all over the world today. And it’s not surprising. It is estimated that up to 70% of all new product launches fail, as consumers need to feel that a new product will offer them SEVEN times the value of their current product. This makes executives very fearful of change.

So, if we anticipate an avalanche heading for our markets how do we ensure safe passage down the mountain?

We can do this by understanding which short-term hot topics are forecasting growth in the next 5 years whilst redesigning our longer term piste maps to allow for the longer term mega trends ten years out.

If Kodak had seriously taken heed of the mega trends for the 90s back in the late 80’s, it may well have been able to eat its baby and still be number 1 in the photography market. So how do we demist our goggles to get a clearer view of the future horizon for our businesses?

In December I helped design and launch a research survey with many members of the Growth, Innovation and Leadership Community in Europe. The aim of this project was to see which of the 600 hot topics selected by Frost & Sullivan’s leading industry analysts were poised for the greatest future success.

The full findings will be posted soon, and thanks again to those of you that participated in the survey, but for now here’s a few of the highest ranked hot topics and mega trends that will start to get their crampon spikes into 2012 and beyond:

Automotive - Mega trends that will impact the cars of the future / Telematics and Connectivity Markets

Security - Safe cities 2012 - Including urban mobility, energy security, building security

Chemicals - Cradle to cradle white biotech and bioplastics / demand for specialty chemicals for construction and waste water

Energy - Opportunities in renewable value chains / growth in solar power technologies

Healthcare - Medical imaging in cardiology applications / Computed and Digital Radiography

Environment - Smart water and the digitisation of the market

Aerospace – Training simulation

Information and communication technologies - Momentum in cloud technologies / disruptive technologies and new business models

Interestingly, 54% of the respondents also stated that they are now seriously looking at mega trends as they shape their strategy for long-term success. Back in the 90’s the key mega trends that were doing the rounds were:

China as an Emerging Super Power
Internet Retail and E-Commerce
From Industrial to Information Society

Today, the top mega trends with the greatest future potential were identified by our respondents as:

Smart is the new green
Infrastructure - Mega cities, corridors and regions
And beyond BRIC – the next game changers

So if you want to grab the button-lift to the top of these peaks of prosperity, then you should look at your business today and imagine how it will fit into the economy of tomorrow. You might even want to consider getting a helicopter to a new mountain; market diversification never did Richard Branson much harm.

So can Kodak survive? I hope so. Their approach to social media has been nothing short of remarkable and the brand and its patents could be a veritable gold mine for the right partner or investor. But the caution in this tale is that the best marketing and branding in the world is useless unless you have the right innovations, products and services to back it up.

To round off this post and make it particularly poignant please allow me to go full circle and return to the ‘big day’ 5 years ago. Then it was customary to have disposable cameras on every table for people to capture those Kodak moments. However, such was the quality of the digital snaps taken by our guests that, to this day, my Wife and I never bothered to develop the disposable film cameras from the tables. That is a perfect example of how the death knell can ring for an outdated technology.

But you never know, the trend towards retro products could mean that film photography might one day have a cult fan base that is similar to the one that exists for vinyl records today. In fact, I now have a strange urge to reclaim that unbeatable feeling of excitement from holidays past, when you picked up your photos from the Kodak shop and viewed them for the first time with your friends and family, thumbs over the lens and all.

With that in mind, does anyone know where I can get 30 disposable cameras full of wedding pictures developed this week? Let's hope that those Kodak moments never die.

Thanks for reading and till soon,

Noel

Overcoming the Great Divide: Embedding Corporate Strategies Effectively

Holly Lyke Ho Gland — Mon, 21 Nov 2011 18:03:47 GMT

When the Growth Team Membership (GTM) program surveyed corporate strategy executives to identify their top challenges for 2011, the primary challenge was, for the second year in a row, developing effective strategy implementation plans. When asked to identify the root cause of this challenge, respondents indicated it was a lack of common objectives. Because of this lack of alignment on the desired outcome of corporate strategy, strategists find it difficult to develop and establish implementation plans throughout their companies. Therefore, to address the root cause, strategists need to ensure that the corporate strategy planning process encompasses the appropriate corporate and divisional stakeholders, and mechanisms to secure agreement on the goals and tactics to achieve them.

The strategic planning process must deal with the following issues head on:

Lack of Strategic Alignment—this problem is most pronounced when corporate objectives have to be adopted and adapted by the business units or divisions. Division leadership needs to understand clearly how corporate imperatives need to shape their own strategies and operations. Moreover, the corporate strategy function must support the divisions in using corporate goals as a framework for their own annual planning.
Division Silos—even when divisions integrate the corporate strategy with their annual planning, there is still a tendency for each division to do so without any reference to the plans of the other divisions. Without any cross-divisional collaboration in planning, companies risk potential redundancy, internal struggles for resources, overlooking cross-functional dependencies, and ultimately reducing their strategies’ effectiveness.
Employee Engagement—strategists identify a collaborative environment and widespread employee engagement as necessary for effective strategic planning. Involving a larger set of employees in the planning process builds a holistic picture of the company’s capabilities and needs and secures buy-in amongst the people who eventually have to execute the tasks that implement the corporate strategy. However, when GTM asked about employee engagement with strategic planning, respondents admitted it was still the preserve of senior management.

Globalization and the size of many companies have strategists struggling to find communication and monitoring methods to ensure corporate initiatives are consistently adopted companywide. All of these strategy development and implementation challenges necessitate strategists developing a supportive corporate culture and open communication strategies.

While there is no single solution to the implementation challenges inherent in strategic planning, there are lessons from the experiences of companies using best practices. A number of these firms have developed an integrated strategic planning process that drives alignment on the objectives and coordinated execution of the plans at all levels of the firm.

Want to learn more about best practices for integrated strategic planning?

Access a complimentary webinar featuring how Sundt created an integrated strategic planning process to break down silos, establish a shared corporate vision, and coordinate strategic and tactical planning for effective implementation. This webcast includes a Q&A session with Richard Condit, Chief Administrative Officer at Sundt and Steve Haines, Founder and CEO of Haines Centre for Strategic Management.

Airline industry in recession: European airlines facing a harsh winter

Lida Mantzavinou — Mon, 31 Oct 2011 18:56:55 GMT

Last month IATA published its 2011 revised estimates, showing an expected 60 per cent decrease in airline industry profits, over 2010. No doubt airlines are in a far worse position in 2011, following a large rebound in 2010. The European and North American sovereign debt crisis, rising fuel prices, turmoil in the Arab world and Japan’s earthquake, all had a negative impact on air traffic growth and on the financial results of European carriers with international route networks. In the first half of 2011 IAG and Lufthansa, two of the largest European airline groups, reported marginal operating profits. Low cost carriers have also experienced the negative impact of an adverse operating environment, with Easyjet reporting a loss for the first half of 2011.

More bad news to follow for the sector, as January 2012 will mark the start of aviation becoming part of the EU Emissions Trading Scheme, resulting in higher costs for European airlines. According to EC DG Clima, direct costs for airlines are calculated to be between €1.50 or $2.10 per passenger each way for a long haul flight from Europe to the US. We believe that this represents an additional cost that airlines are not able to handle during a recession period and passing it on to the passengers could impact demand adversely.

At the same time European airlines are in the process of modernising their fleet, ordering new generation aircraft in order to increase fuel efficiency and reduce their overall costs. As fuel costs represent more than 30% of the airline’s total costs and fuel prices are expected to stay at high levels, fleet modernisation becomes a priority. However, raising cash to finance large capital expenditure projects, as with fleet modernisation, at a time when the European finance industry is in the process of restructuring, is challenging to say the least. This is partly the reason French banks, who for the most part of the last 20 years were the primary lenders to airlines, have retreated from the aviation sector. We firmly believe airlines are set to face a harsh winter that will have a negative impact on their profitability. This is why consolidation will intensify and we will see smaller players exiting this market.

Lufthansa Group outperforms rival European airline groups but still holds on to bad seeds

Lida Mantzavinou — Mon, 31 Oct 2011 18:55:27 GMT

In its 9 month financial results, Lufthansa Group reported a EUR288 million net profit, showing more resilience in a tough operating environment than its European peers. This amount represents a 45 per cent decrease in comparison to 2010 figures, yet it is still better than industry expectations of global industry performance. Last month IATA published its 2011 revised estimates, showing a 60 per cent decrease in airline industry profits. No doubt airlines are in far worse position in 2011, following a large rebound in 2010. The European and North American sovereign debt crisis, rising fuel prices, turmoil in the Arab world and Japan’s earthquake, all had a negative impact on the financial results of European carriers with international route networks.

In addition, the Group does not have positive contributions from some of its other airline subsidiaries, with the exception of Lufthansa airline and Swiss. Germanwings, Austrian Airlines and British Midland have been consistently underperforming, with the latter being up for sale for over a year. More bad news to follow for this sector, as January 2012 will mark the start of aviation becoming part of the EU Emissions Trading Scheme, resulting in higher costs for European airlines. Specifically for Lufthansa’s cargo operations, a decrease in freight traffic is certain, following Frankfurt Airport’s announcement of a night flight ban. The airline estimates the impact to be in the range of EUR 10 million, but we believe this is still optimistic. On the positive side, over the last few months the Group proactively readjusted network capacity which is now set to grow only 3 per cent this year, from 9 per cent previously planned.

Even in these adversary times, Lufthansa is still in a good position to grow. Having invested over EUR 2 billion in expanding and modernising its fleet as part of an effort to decrease unit costs and increase fuel efficiency, the airline is set to take advantage of any upside in demand. Another of the Group’s businesses, Lufthansa Technik, is expected to generate stable revenues and profit year-on-year, maintaining its Original Equipment Manufacturers (OEM) partnerships in the Maintenance, Repair and Operations (MRO) business and taking advantage of opportunities to expand in Asia.

A series of announcements from Airlines, Associations and Manufacturers..excellent reading, but what is the core message?

Diogenis Papiomytis — Wed, 21 Sep 2011 14:39:14 GMT

Last week Air France-KLM announced one of the bigger aircraft orders this year, with options for up to 110 long-haul aircraft split evenly between the Airbus A350XWB and the Boeing 787. Apart from the apparent Boeing success in securing orders for the 787 from a French carrier, this deal is clearly not an indication of European traffic growth. Combined with American Airlines’ July order for 460 single aisle aircraft, also evenly split between Airbus and Boeing, it is rather an indication of fleet modernisation efforts in both, Western Europe and North America. Simply put, most Western airlines are in need of modernisation, even though their respective markets will see little growth over the next few years. Comparing that to Air Asia’s Paris Air Show order for 200 A320s; an airline clearly geared for growth.

This fact leads to the next big announcement from Airbus, on Monday this week, of their new 20 year forecast for 2011-2030. The forecast is slightly less optimistic than Boeing, in terms of global aircraft deliveries, which according to Airbus will be 28,000 instead of 31,500 expected by its rival. Another, unsurprising, point of difference between the two: Airbus expects double the number of deliveries in the “Very Large” aircraft segment, backing its A380 programme. Nonetheless, the most important take from this forecast is the constrained optimism over economic growth figures. Airbus expects a 3-4 per cent world GDP growth in 2012, with a corresponding air traffic growth of 7 per cent. Once again, so called “mature economies” are the ones which keep the global airline industry from double digit growth. Emerging economies will see a GDP growth of 6 per cent and air traffic growth of 10 per cent in 2012, according to the manufacturer.

In turn, the above announcement made way to yesterday’s forecast from the International Air Transport Association (IATA), which once again revised its full year global airline net profit estimates, from $4.0 to $6.9 billion, on the back of better results from European carriers.

This is not the first time IATA makes such generous revisions to its forecasts. In fact, these forecasts are good indicators of market sentiment, but rather irrelevant from a macro-perspective. In reality the $4 - $7 billion profit range can be translated into a 50-100 basis point difference in net margins for the industry. The industry will, most certainly, enjoy margins of between 0.5-1.5 per cent this year.

Let’s ignore the actual numbers and rather concentrate on the trends. In 2010 airlines saw a rebound from a depressed 2009 air traffic level, while 2011 was a year of positive yet modest results, as European and US airlines witnessed the positive effects of restructuring and negative effects of stagnant GDP, rising fuel prices and political turmoil in the Middle East. Next year airlines will struggle to break-even, on the back of ever increasing jet fuel prices and fears of a contagious European economic crisis.

That is true for European airlines but not for their Asian counterparts. In fact European airlines may see a sovereign default giving way to a new recession of European economies, where the only positive outcome will be a devalued Euro currency driving inbound tourism.

Perhaps it is not surprising then that Lufthansa issued pessimistic earnings guidance yesterday, even though IATA sees better results from Europe. Lufthansa is one of the few European carriers with aggressive expansion plans; indeed plans that were initiated a bit too early. They are in the position where they need to rid of subsidiaries that provide little benefit (see BMI) and further integrate others (see Austrian, Swiss).

To summarise, announcements over the past week seem contradictory, in terms of the state of the industry today. Particularly IATA’s upward revised forecast creates a positive market sentiment. But their forecast is irrelevant from a macro-perspective. Everything is pointing towards a difficult 2012 for airlines.

Mini-MegaTrend: The Demise of the Downtown Airpark

Wayne Plucker — Mon, 19 Sep 2011 15:28:06 GMT

Frost & Sullivan has been examining future major trends that we expect to occur in the ten to twenty year timeframe. Among these is the creation and growth of MegaCities or Megalopolises. These will have major effects on the way people live and work. One of the more pronounced effects will be on the way that people travel. A subset of that travel issue is the access to business and general aviation aircraft.

Many of the larger cities in the US have general aviation airfields near their downtown area. Some of these are former city airfields which have been replaced by larger, more modern airports on the periphery of the city. They now continue to exist as operating locations for business aircraft or as small general aviation airfields. Some are owned by the cities or airport authorities and others are in private hands. Over the last twenty years, these airfields have been challenged to stay in operation.

There are a number of reasons for their operations to be challenged. In some cases, the area around the airfield has become a distinctly less desirable part of town. A Learjet operator moved his operation to an airport on the fringe of the city because his wife felt uncomfortable visiting an airport with tagging on every surface and homeless people sleeping against the fences. Other airports have issues with contamination from years of fuel spills and unauthorized dumping. Many private airfields have experienced significant raises in property values and therefore property taxes. Noise complaints have restricted operating hours and traffic patterns to the point that many downtown airports have become inconvenient despite proximity. Probably the biggest threat comes from the cities themselves.

Cities see the revenue possibilities as being far greater at their main airports than at the downtown airpark. They care very little about the true GA operations. Those probably are not economically viable on their own. It is the business aircraft traffic that attracts their attention. They see landing fees, parking fees, taxi and rental car revenue, and many other opportunities from business travel. This is especially true when the downtown airpark is privately held. Visiting the NBAA and AOPA websites will almost immediately highlight the top three or four airports at risk of closure. Most of those are targeted for closure by the city. Few have gone as far as Richard Daley in bulldozing Meigs Field, but cities have been using his security and safety refrain as their reasons. The reality is probably much more tied to revenue than either security or safety.

The reality is that airports effectively restrict building around them. Noise complaints are expensive to fix, as are other environmental issues. As cities become megacities, the ability to operate fixed wing aircraft near the downtown area becomes impractical due to airspace, safety, environmental and business considerations. So, what happens then?

Moving the business aircraft to the suburbs only really works if the businesses have moved there as well. In some cities that has become the norm. However, the existing megacities suggest that the move to the suburbs is a temporary phenomenon. Corporate headquarters in the megacities tend to be returning to city central. If the downtown airpark is no longer viable, what is the corporate travel model?

Some would suggest that helicopters would provide the transportation to the next business mode. That next mode could be the main metropolitan airport or a business airport that would likely be even farther from the city’s center. In some very large cities, that travel model is used by a number of large corporations. Several of the larger corporations in Chicago have helicopters that deliver the executives to Chicago Executive Airport, north of Chicago, to meet up with their FalconJets and G5s. However, owning a business jet, a helicopter and the crews to fly and maintain them is clearly beyond the business model for all except the biggest corporations. That brings up the possibilities of helicopter air taxis. That is already a reality in many big cities. Heliports in the downtown area are more sustainable than fixed wing airfields. The question comes down to demand. Why not just take the helicopter to the main city airport? In my judgment, most metro airports are not helicopter friendly environments. Most would need some level of redesign to accommodate routine helicopter operations.

The loss of the downtown airpark is likely to seriously affect the future of business aviation. The airlines are doing their utmost to convince us all that business aviation is a better option, but making it more expensive and less convenient to travel via business aircraft may seriously damage business aviation. That may be one of the lasting legacies of the megacity.

Turkish Airlines Growth Strategy: Success or Failure?

Lida Mantzavinou — Sun, 04 Sep 2011 21:36:05 GMT

Growth years

Turkish Airlines (THY) grew rapidly in the period 2006-2010, with passenger numbers up by 16 per cent year on year, while maintaining a 76 per cent load factor throughout. The airline expanded both its Airbus and Boeing fleets, reaching 174 aircraft in 2011 with an average age of only 6.2 years. THY takes advantage of its strategic location in Istanbul, in order to feed traffic to and from Asia, Middle East, Europe and the US, with three quarters of its traffic being transit.

A different picture in 2011

Nonetheless, this year’s financial results cast a shadow over the company’s growth strategy. THY reported a USD 342 million net loss in the first half of 2011, compared to USD 152 million in the corresponding period last year. With fuel costs up by more than 30 per cent and higher USD denominated lease payments from a fleet that is 87 per cent leased, operating expenses and short term liabilities have increased substantially. This is primarily the result of a weakening Turkish Lira that now stands at a 2 year low against the US Dollar. Furthermore a 30 per cent increase in capacity, as part of the airlines strategy to expand its network and frequencies across Southeast Asia, Russia and the Americas, was not followed by a corresponding increase in demand and load factors. Revenue per passenger kilometer (RPK) grew only by 19 per cent and passenger load factors were negative throughout the year.

What the future holds

THY’s current losses may not reflect the last of the airline's worries just yet. With further tension across the Middle East and an upward trend in fuel prices, the senior management team faces even more challenges.

Nonetheless, the company’s growth and long-term profitability can be sustained, as part of a well planned strategy. The airline has an increasingly diversified route network and now focuses both on the high growth regions of APAC and Middle East, as well as the relatively flat, yet still very important European market. In this respect, THY joined the Arab Air Carriers Organisation (AACO) in June 2011, with the aim of developing and strengthening cooperation across the region. In addition, while being already part of Star Alliance, THY expanded its codeshare agreements with Asiana Airlines and US Airways.

We view these partnerships as positive, showing signs of a company that no longer depends simply on organic growth, while operating in an increasingly competitive market dominated by the likes of Emirates and consolidated European carriers. With cash today standing at almost USD 500 million and many potential acquisition targets in Eastern Europe and the Balkans, THY may also choose to fund growth through M&A.

Although there are justified worries following disappointing results during the first half of the year, these highlight the need for better currency and fuel hedging policies rather than redesigning THY's growth strategy.

Why Blame S&P?

Kirti Timmanagoudar — Tue, 09 Aug 2011 10:55:15 GMT

The president of United States, Mr. Warren Buffett and the analyst on the wall street; many are blaming S&P for downgrading the US ratings. I have the highest respect for the world's greatest investor.. Eu to Buffett?

In stead of congratulating S&P for doing a good job and being honest (even at the potential of getting this wrath from various angles) its a pity that we are blaming S&P. They say S&P is evaluating America politically and S&P is not a political judge. How can you evaluate a country without looking at its political stability? Not only has S&P judged it politically, they have got it perfectly right. With the democrats not willing to give up on healthcare expenditure and the republicans not willing to budge on taxes, the fact is US is a debt ridden economy and will remain so for the near foreseeable future!

Some are even asking what was S&P doing four years ago when it gave the highest ratings to asset backed securities (that ended up nasty with the beginning of Lehman going belly up) and hence doubting their analysis. That's the point, S&P has learnt its mistake while a few others including the spendthrift US government has not. I haven't heard a more lame excuse than "we can print more money so we will not default". What about the eventual devaluation of the US dollar and its effect on buying power for Americans? What about the devaluation of billions of dollars of US securities held by other governments?

Obama saying "US will always be a triple A country" is optimism misplaced at the highest. The spiralling US government debt is indeed worrisome. The US government's last week's decision to raise the debt ceiling is only expected to postpone the bad news and not put it off for good. The world did not see a concrete plan to put away the larger danger.

The easiest way out is to say don't give too much importance to rating agencies. If the president of United States himself had not mentioned and made such a big deal of the US ratings downgrade, nobody else would have.

Either believe in the S&P ratings and do something about it or don't believe it and don't talk about it!

American buys European - Boeing's final warning

Diogenis Papiomytis — Thu, 21 Jul 2011 12:49:46 GMT

There were two related announcements made yesterday by American Airlines. The first one was the biggest order for narrowbody aircraft ever made by a single carrier, with 460 orders split equally between the A320 and B737. This announcement cheered up the investor community, with both Airbus and Boeing share prices registering marginal increases. The second was AMR’s results for Q2 2011, which were disappointing to say the least. Clearly the two news stories are the two sides of the same coin; American Airlines is in need of restructuring, as it holds some of the industry’s worst first places:

The only US major that posted losses last year ($470M)
The only US major expected to post a loss this year, after a disappointing Q2 with losses of $286M
The airline with one of the oldest fleets globally, with an average age of 15 years
One of the two US airlines that have not (yet) gone through a consolidation process

In my view this order has been long overdue, as the airline is facing ever increasing fuel and maintenance costs, partly as a result of the upward trend in fuel prices and partly because of its older and more inefficient aircraft. Looking at AA’s fleet profile, it is also evident that the new orders will not be used to expand operations, but rather to replace its older narrowbody fleet. In fact, AA’s fleet size will remain roughly at the same levels over the 10-year modernisation period, as seen in the graph below.

It can be argued that neither the decision to modernise, nor the decision to split the order in four (130 A320, 130 A320neo, 100 B737-8, 100 re-engined B737), were options to AA. These were decisions forced upon them, by the prospect of missing out on vital aircraft delivery slots available at capacity constrained manufacturers.

However, the decision did have a positive externality, as it also forced the hand of Boeing to choose between a new engine and a completely new airframe to replace the B737. Ever since Airbus announced its intent to bring to market the re-engined A320neo (December 2010), Boeing has been sitting in the sidelines procrastinating about the best strategy going forward. In the same period, EADS has registered a 43% growth in its share price, while Boeing’s shares rose only by 9%. Obviously, the investor community is not as patient as Boeing’s board of directors, when it comes to the roll out of game changing strategies; particularly in a (soon to end) duopoly market.

The decision to offer AA a re-engined option, nonetheless, is a short-term measure to avoid disaster, by partially stopping Airbus from winning the ultimate prize in the aircraft manufacturing world; that is stealing someone else’s customer and convincing them to replace their existing fleet with yours. More than anything, Boeing has to act fast and decide in favour of a completely new airframe now. The alternative is to drop prices and follow Airbus in every sales pitch they are doing with old Boeing customers.

Paris Air Show - thoughts about Airbus, Boeing and an attempt to predict order numbers

Diogenis Papiomytis — Fri, 17 Jun 2011 15:16:14 GMT

The following are my thoughts regarding the upcoming Paris Air Show at Le Bourget. Apart from my opinion regarding the success of the Neo programme, I am going against all consulting "rules" in trying to predict orders so close to an event. Indeed consultants and analysts typically create forecasts well in advance and rightly so in some cases (see here http://reut.rs/dSOZ3R).

So here it goes...

B737 replacement

Following yesterday’s announcement (16th June) of the two major orders from Cebu Pacific and GoAir, the heat is on in the Airbus-Boeing order feud at the Paris Air Show. The latest orders for the new A320neo take the number of firm orders for the type to 434 and the number of operators, with plans to introduce it, to 7. This is an important announcement for Airbus, leading up to the Paris Air Show, but definitely not a surprise nor a major breakthrough for the re-engined A320.

Four of the seven operators are low cost airlines with aggressive growth plans and with an existing all-Airbus fleet; their decision is driven by their business models, where economies of scale through fleet commonality would have excluded them from ordering any new B737 variant.

In addition, ILFC that has ordered 100 A320neo, is a major lessor with a clear objective to stock any aircraft required by their customers. Their decision to order the Neo is not the result of a major fleet assessment; they will also order the new B737 variant as soon as it is announced.

The only airlines with Neo orders and a relatively diversified fleet are legacy carriers Lufthansa and Brazilian TAM. Nonetheless, both of them have showed preference for Airbus short-haul aircraft in the past. Lufthansa operates mainly A320s and some B737 Classics, while TAM operates only A320s short-haul.

As a conclusion I do not view these latest orders as either surprising or a major win for Airbus. As the Neo enters operations, older A320 variants will be discontinued, thereby offering no alternatives to airlines that operate Airbus fleets short-haul and have ambitious growth plans. However, if airlines that have yet to make announcements, like Scandinavian Airlines, China Southern or BA-Iberia were to make firm orders for the type, it would be a major blow to Boeing.

Should Boeing continue to delay its announcement for either a re-engined B737 or a completely new aircraft, only then will we see the first airlines shifting to Airbus, to satisfy medium-term growth plans. However the timeline for a Boeing announcement is not as tight as it may seem; I expect a decision by end of the year and one that confirms reports about a complete replacement to the B737, rather than a re-engined model. Getting it right to begin with is far more important than making rushed decisions and changing aircraft specifications later; as witnessed by the U-turn on the A350-1000 (http://bit.ly/llRaUU).

Expected order numbers and airlines that may make headlines

Based on market sentiment, the Paris Air Show is due to follow the early recovery signs of Farnborough 2010 (237 Airbus/Boeing orders), though the number of orders will most likely trail behind Farnborough 2008 (480). I expect Airbus to win this battle, as they’ve done in recent years, with approximately 200 orders, for a total between the two manufacturers of 300-350. Airbus should dominate narrowbody orders, while Boeing aims to further establish itself in the widebody market.

Airlines that could have an impact this year are the Chinese carriers, particularly China Southern, Air France-KLM, BA-Iberia (widebodies), Scandinavian Airlines, Monarch, Qatar Airways and Air Canada. Unlike past events, I expect more active role from the European carriers that have been going through phases of consolidation and network restructuring. Their orders will both serve the purpose of replacing older fleets and allowing further expansion.

I will be here to discuss the accuracy of my predictions next week...

Everything you need to know about Emirates (or almost everything)

Diogenis Papiomytis — Tue, 10 May 2011 12:50:06 GMT

On financial results...

The Emirates press release today (May 10th), with details on their financial results, is in line with my expectations, following outstanding performance during the first half of their financial year and current operational challenges, with higher oil prices and the Middle East political crisis. Their results are also in line with a return to profitability for most major carriers globally, following poor performance in the period 2008-2010. Last year, Emirates was in a position to benefit from low oil prices, higher yields, increase in consumer confidence and record growth in cargo traffic. Additionally it is in a very strong cash position to further grow capacity, by an average of 10-12 long-haul aircraft annually, allowing it to increase frequencies on existing routes and implement ambitious growth plans in the Americas and South Asia.

There is no doubt that the current financial year will be challenging for the airline industry as a whole, including Emirates. But let's put everything into perspective. Last year’s record results were, more than anything, a return to normality after two years of heavy losses during the global economic recession. Airlines are still susceptible to global economic and political events and operate in a heavily regulated market characterised by overcapacity. Airlines with primarily international route networks, like Emirates, are more affected by global events. In addition, further capacity growth and the introduction of new untested routes will impact their profitability.

As such I do not expect them to repeat last year’s performance during the current financial year. Their market share and dominance in routes connecting Asia with North America and Europe go undisputed, but I expect their operating margins to struggle to remain at the same level.

On fuel surcharges...

Just a day before their financial results press release, Emirates also announced its intention to eliminate fuel surcharges. This is, perhaps, nothing more than a PR stunt. The steep drop in oil prices, following developments in Pakistan, is by no means an indication of a long-term trend. In fact, I believe that in the medium- to long-term, oil prices will keep rising, forcing many airlines to reintroduce or increase fuel surcharges. In this case Emirates stepped in first to make an announcement, without concrete data on what the average oil price will be for the foreseeable future. The announcement also comes just 3 weeks after Emirates introduced a fuel surcharge across its network. I do not believe that the global economic outlook changed so dramatically over the last 3 weeks to warrant two contradictory moves by Emirates.

Nonetheless, this move will bring additional traffic over the summer period, boosting their load factors further and can also be interpreted as a response to a prolonged political crisis in the wider region. Even if oil prices return to higher levels though, Emirates has a strong cash position to absorb costs, rather than pass these on to their customers.

On fuel hedging...

The Emirates fuel hedging strategy has served them well over the last decade, with the single exception of 2009 when they bet that oil prices were going to continue growing and signed large contracts. As opposed to other airlines, they do not have a strict hedging policy, instead adopting a “wait-and-see” approach. This is, perhaps, the best approach at this point in time.

On airline industry woes and Emirates positioning...

One of the hindrances to the airline’s growth this year is volatility in oil prices. But that's not the end of it. The airline industry is also characterized by chronic illnesses, such as overcapacity and strict regulations, forbidding foreign investments and uncontrolled growth in international markets. As an example, a restrictive bilateral agreement between the UAE and Canada is an obstacle for Emirates’ growth plans in that country. Additional hindrances are the political unrest in the Middle East, which everyone predicted as a short-term issue just three months ago, uncertainty over the future of Western economies and overall industry consolidation. Emirates is now having to compete against large airline groups, such as the Lufthansa Group, Air France-KLM, BA-Iberia, United-Continental and Delta-Northwest that have completed big mergers adding economies of scale in their operations. The codesharing agreements Emirates signed with JetBlue in New York and Virgin America in San Francisco are a sign of things to come, as Emirates partners with more airlines to counter competitor actions. A future merger or acquisition is not out of the cards for the airline either.

On the possibility of an IPO...

With regards to Emirates launching an IPO, I do not see it as an ideal move in the next couple of years, at least until investors feel more confident over the future outlook of the airline industry. Political instability in the Middle East, doubts over economic growth in Europe/North America and fluctuating oil prices are all causes of concern. Their strong financial results and cash pile to fund medium-term growth are not adding pressure for an IPO soon.

The rise of the Red Dragon: can Chinese suppliers become global contenders in Aerospace?

Diogenis Papiomytis — Fri, 15 Apr 2011 16:34:51 GMT

Just two days ago (April 13), the Aviation Industry Corporation of China (AVIC) announced its plans to invest over $1.5 Billion in R&D for a new engine to power the Chinese C919 narrowbody.

This is surely a threat, but not a surprise, for both CFM and Pratt & Whitney, that were aiming to be the main engine suppliers for the aircraft. A Chinese built engine could, in theory, enter the market by 2020 and be a real contender both domestically and in international markets.

But is that a step taken too far for the, already, overly ambitious Chinese? Clearly China has an abundance of labour and capital to throw on any development project, no matter how big or small. But what it is lacking, is technology; a vital element missing in the otherwise bounderless ambitions of domestic manufacturers. The recent flurry of JVs between Western and Chinese suppliers suggest otherwise: it is only a matter of time until the Chinese gain the technological know-how.

In a recent survey of US businesses with operations in China, most highlighted unclear laws, bureaucracy and IPR infringment as major concerns. Yet an overwhelming 78% of businesses were either "profitable" or "very profitable", in their Chinese ventures in 2010. This essentially means that China has the upper hand, particularly as Western economies are susceptible to negative or very low growth rates. For many Western businesses China is the only source of revenue growth and profitability and they are willing to forego some of their IPR, in return for signing lucrative contracts, tapping into a largely virgin market. It is easy to see why: by 2029, China will account for almost half of all narrowbody aircraft deliveries in Asia and 12% of all deliveries worldwide. By any standards, that is a lot of potential business for Western suppliers.

Now, is the inevitable transfer of technological know-how going to bring immediate international success for Chinese aircraft and engine manufacturers? I doubt it. So long as Western suppliers maintain their own investment in R&D, Chinese success will be limited to China. After all, technology and innovation are the only remaining comparative advantages of Western suppliers in international markets.

Advanced analytics made easy with new business discovery tools

Avinash Bhaskar — Mon, 11 Apr 2011 17:50:55 GMT

My last entry in this space was that of text mining. Since that piece, I have now moved onto learning the market trends in the multi-billion dollar business intelligence tools and so far the study has truly been a satisfying 'business discovery'. I emphasize the term 'business discovery' mainly because this is the catch phrase that is being used by the next-generation business intelligence vendors to differentiate themselves from the traditional BI tool vendors typically supplied by the behemoths SAP, SAS, Oracle, IBM and Microsoft.

Although traditional BI tools have the advantage of hosting massive amounts of data, boast high quality graphics and visualization have been limited by such qualities as difficulty in using, slow in responding to queries and were mostly limited to the IT department of an organization.

Now the next-generation data discovery/business discovery tools such as the ones provided by Qliktech, Tibco, Actuate, Salient etc seek to address those limitations by providing in-memory architecture, 'speed-of-thought' responses to queries, highly intuitive dashboards and many more. Most importantly these tools are so easy to use that any business user can get his daily fix of charts and figures without having to deal with IT!. This truly represents a shift in the way BI tools have been positioned in an enterprise.

This new approach to BI tools has certainly attracted number of small players offering their solutions crowding the market place. Although there is enough room in the global market for new players to enter (our estimation is about $9.5 billion in 2010) the mega vendors (SAP and others) are now waking up. Recently, SAP's Business Objects shifted its architecture to an in-memory platform signaling that it is ready to take on the minnows.

It remains to be seen who wins. My thinking is that whoever is a winner, the ultimate winner has to be the business user of an enterprise!. Imagine the possibilities, if this next generation BI tool and text mining tool are integrated on the same platform!. While this is being accomplished already, I certainly believe there is room for further improvement in this area.

Watch this space... more to come on BI

Commercial Avionics trends & thoughts...

Diogenis Papiomytis — Tue, 05 Apr 2011 10:13:18 GMT

Two weeks ago I was invited to speak at the 2011 Avionics & Defence Electronics Europe conference in Munich. I was particularly impressed with the number of different workshops and presentations running throughout the two event days, but not so much with the weather in Munich.

My presentation focused on forecasts and key trends across commercial avionics markets (air transport, business and general aviation). Here is a summary of the top 5 trends in the industry right now:

1. Stable growth in spending, with market picking up post-2014. At that point we will see the impact of new commercial platforms, with production (hopefully) at full capacity. Nonetheless it is the retrofit market that will grow faster than both forward fit and parts&services.

2. Surveillance and Communications are the two most promising segments for newcomers and incumbents alike. With revenue potential in 2010-2020 of $47.8Bn and $13.9Bn respectively, low-to-medium market concentration and high growth rates, they offer most opportunities to suppliers.

3. Rockwell Collins and Garmin are the two companies to look out for. They have both made their mark in the business (RC) and GA (Garmin) markets and have agressive expansion plans for the future. Surely a situation that keeps Honeywell alert...

4. Smaller avionics related markets, such as Flight data management and Automatic Test Equipment (ATE), are in the radar of avionics OEMs. We expect more consolidation.

5. Outsourcing and Offshoring are now viable alternatives for OEMs. With Asian engineering firms enhancing their capabilities and technological know how, while keeping their labour costs down, outsourcing core functions such as product design and prototyping will be an option for Western OEMs.

A press release from the conference, with some additional details, is available here. For a full presentation just contact me on diogenis.papiomytis@frost.com.