Understanding how to adapt their strategies to a rapidly changing 'newgame' environment may be one of the most important lessons for airline managers in the 1990s. Dr John Steffens proposes a suitable framework. It should be a basic premise in any industry that new games require new rules. And the faster the changes are taking place the more important it is to understand and react quickly to the rapid evolution in industry and market conditions. As a result of change a 'newgame' environment emerges and the right strategies, organisations and thinking are required to deal with this.

Newgame environments consist of a set of fundamentally changed business conditions in which the rules of the competitive game have been irreversibly altered, usually in a fairly short period of time. They are created by the combined effects of major drivers for change, including step-changes in technology, economic costs, social behaviour patterns and/or political policy. These drivers are of course at work most of the time, but under certain conditions they may combine to offer the opportunity for an entrepreneur or a corporation to rethink their way of doing business. Under these circumstances, the new thinking results in a newgame strategy, which in turn will usually necessitate development of a newgame organisation.

The newgame strategy is the result of a major shift in thinking and embodies a new concept of the business task at hand. Most importantly, where a newgame strategy is successfully implemented, it will radically alter the structure of both the industry and the marketplace.

Clearly technological and economic changes will continue to play a large part in the evolution of the airline industry, while changes in social behaviour affect potential demand and market expansion. However over the next 10 years, the greatest potential for development of a newgame environment hinges upon the extent to which the industry is free to compete through more open skies, most notably between Europe and the US.

The US has the largest deregulated domestic airline market, while Europe will complete its intra-European and domestic deregulation in 1997. Meanwhile Asia-Pacific has an amalgam of bilateral agreements, with very different policies from one country to another. Agreements between countries in the three regions are often a source of tension and can be linked to more complex trade negotiations.

Cynics might argue that deregulation of traffic rights in the global airline industry is a pipedream, but there is a case for at least considering what might happen if, during the next 10 years, the US and Europe were to achieve a consensus on open skies between the two regions. What would this mean for the world's major airlines and how would it affect the structure of the industry in these two regions?

At least two key assumptions have to be made to enable this to occur. First, legal conditions surrounding the ownership of airlines would need to be relaxed between the two regions to allow foreign ownership of capital assets and effective managerial control by foreign carriers in the regions of their overseas assets. Second, traffic freedoms in Europe and the US would need to be relaxed to permit full operational freedom both between and within the regions.

If these conditions were met the shape of the industry and market competition would change dramatically. First, there would be a number of new entrants into the European marketplace, combined with a relatively limited expansion of European operators in the US marketplace. Some of the European entrants would be new start-ups offering commuter air-taxi services, while others would be no-frills operators based on the Southwest Airlines model.

The organisational structures and systems of the established incumbents, both private and state-owned, are unlikely to survive the onslaught in their present form. Furthermore, granting US carriers greater traffic rights in return for reciprocal arrangements for European carriers in the US, would encourage a number of carriers such as United, American, Delta and Northwest to seek a major development of their European networks. Similarly, major European carriers such as British Airways, KLM, Lufthansa and Virgin Atlantic could also seek to build larger US networks. Such shifts in competitive behaviour would of course be likely to encourage the development of price competition, which in turn could stimulate significant levels of demand in Europe and across the Atlantic. However, the prolonged price wars in the US are unlikely to support yet more heavy discounting in this market. Carriers from the Asia-Pacific region and other parts of the world would also need to reappraise their strategies in relation to this newgame environment.

International newgames

Two major options exist to build stronger positions on the other side of the Atlantic. The first - already partly in place - represents entry to the other market by means of a joint marketing and/or technical joint venture agreement. Such a strategy gives quick and ready access to the market but there is a risk, in a marriage between a strong and a weak partner, of a full acquisition later on. This threat is at present relatively academic, given restrictions on foreign ownership and control. However, a lack of such restrictions might well force certain airlines to reassess their current choice of strategic partner.

The alternative - more direct entry - would present a carrier with the lengthier and much more costly exercise of building up market share and customer loyalty and developing the appropriate organisational infrastructure. However this approach has certain advantages: it avoids all the problems associated with overcoming cultural differences of both a corporate and national nature, while growth of foreign operations can take place in line with existing corporate procedures and systems, helping present a consistent image to established and new customers.

Clearly the choice of maintaining an oldgame strategy - reflecting the current status quo through joint venture agreements or limited share ownership - versus the newgame of an aggressive attack on the other side of the Atlantic will be a critical strategic decision for any airline. However, if an airline's long-term goals are to gain a strong position on both sides of the Atlantic, then it will have to make either a direct entry or acquire a reasonably substantial existing carrier to develop its market potential outside its own home ground.

In order to make a direct entry through acquisition or expansion, most of today's major airlines would need to make significant changes to their corporate strategy and behaviour. In particular, they would need to shift away from a strategic outlook that historically has always been linked to the location of the company's headquarters and, in international terms, reflects a somewhat parochial view of the world.

Such perceptions were obviously viable in the oldgame environment where the chosen airline hubbed all or most of its operations at its home base on its own side of the Atlantic. However, if the strategic goal was for a strong market presence in two or more major geographical regions of the world, the airline would need to reorganise its resources along multinational lines. At a later stage, it could have to move one step further to a global operation.

At present none of the world's airlines can claim to be multinational let alone global in organisation. For those wishing to develop a multinational presence there exist some significant and exciting challenges ahead. If for example, a European or US airline wished to become a multinational player across Europe and the US, it would need to inject some newgame thinking into its strategic behaviour. It would need firstly to determine how different the US industry and market structure looked to that of Europe, both in terms of strategic groupings and market segments. Further-more, any such assessments would need to take careful note of predicted future patterns and trends.

An airline might decide, for example, that in 1995 the kind of product needed in the US was more like a commodity item, with price being the governing factor for successful competition. In contrast, the European market might present an opportunity to offer a higher value-added product, with less price discounting. However, looking beyond 1997, the offer of such a product may become increasingly hard to sustain, as new no-frills carriers penetrate the market, driving down average prices. Meanwhile on the North Atlantic and flights between Europe and the US west Coast, a different kind of segmentation might emerge.

Experience from other industries with multinational competitors suggests that designing different types of product which reflect different market structures in major regions may be a more sensible strategy than a simplified common approach to all markets. However if in time, two market structures moved towards a more homogenous pattern of behaviour, the airline would need to re-evaluate its organisational and product/service design.

If British Airways organised itself along multinational lines, it would probably continue to have its headquarters at London's Heathrow while delegating elements of service design to its North American headquarters. For its US domestic operations, BA Inc would be responsible for, say, the choice of aircraft procurement, cabin crew and pilot training, maintenance, route structure and network development, fare setting and catering. US carriers could develop a European headquarters in a similar manner.

Any such developments in the market would of course carry a price tag for the competitors and it is unlikely that more than a few US or European airlines would have the resources to develop a multinational operation. Furthermore, it would be unclear how much extra capacity the overall market could sustain without creating a bitter price war. Among the multinational, international and regional carriers there would be casualties and some of today's household names in the US and Europe might well go the same way as Pan Am.

Certain lessons about newgames in other major industries could be of value to today's airline managers as they prepare for the possible development of international open skies during the next 10 years. It appears that for management to succeed in a newgame environment, certain key skills are necessary. These include:

1 The ability to develop a greater understanding of the forces driving change, on a company wide basis, in order to form a view on the most likely developments over the next few years.

2 The need to understand that strategic management must involve people breaking traditional functional barriers if the process of change is to operate in an integrated manner throughout the company.

3 Identifying and implementing the steps that are needed to create an effective marketing strategy and culture.

4 The need to set realistic international strategic goals and to ensure that appropriate structures and systems are developed to achieve these goals.

5 Sensitivity to the problems surrounding cultural differences between different companies and nationalities in an international joint venture.

6 Establishing a balance between marketing, economic and operational factors in the company's business activities.

7 Development of new and fresh ways of thinking about the competitive environment that can be applied to managing change at all levels of the company.

Such skills of course only come into being through investment in appropriate management development and training, together with suitable experience. Increasingly, such knowledge is being brought in from outside the industry, by recruitment from other industries or through consultants. Whatever the source, however, it must be directed towards trying to create better service for the customer.

Yet in their bid to survive in a newgame environment, managers must also accept one unchanging golden rule: the need for a commitment to both the customers and the staff who make up the organisation. High-technology and other facilities can never replace the value of friendly, creative and motivated employees whose ideas provide the basis for tomorrow's solutions.

Source: Airline Business