Ready for Take-Off? Financing New High-Tech Ventures in the Aviation Industry. The case of the Mainport Innovation Fund.

mainport_innovation_fund“In the rapidly evolving airline industry, emerging technologies could play an increasingly critical role in the delivery of real and perceived customer value” (Taneja, 2010). Taneja, the author of highly interesting books on the aviation business like “Airline survival kit” (2003), “Simpli-Flying” (2004) and “Flying ahead the airplane” (2008) pointed out that innovation is of major relevance for the aviation industry worldwide. Innovation means that new products, services, processes and business models will be introduced successfully to the market. In the field of aviation innovation can be related to the aircraft (e.g. new materials used, avionics and engine technologies) but not necessarily. Innovation is also the introduction of check-in kiosks at airports, new revenue models of the low-cost carriers, the use of social media by airlines and techniques for the decrease of perceived ground noise.  In this short article we discuss why it is not easy to bring an innovative product or service to the market related to the aviation business. But we describe also a venture capital fund initiated in The Netherlands that will support emerging technologies in this domain and speed up innovation: the Mainport Innovation Fund. The introduction of this fund could decrease the hurdles of starting entrepreneurs in the aviation business.

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See also the below presentation held by Ignaas Caryn, director Innovation & Venturing at KLM, about the Mainport Innovation Fund (in Dutch):

Ready for takeoff? Financing new high-tech ventures in the aviation industry. The case of the Mainport Innovation Fund

“In the rapidly evolving airline industry, emerging technologies could play an increasingly critical role in the delivery of real and perceived customer value” (Taneja, 2010). Taneja, the author of highly interesting books on the aviation business like “Airline survival kit” (2003), “Simpli-Flying” (2004) and “Flying ahead the airplane” (2008) pointed out that innovation is of major relevance for the aviation industry worldwide. Innovation means that new products, services, processes and business models will be introduced successfully to the market. In the field of aviation innovation can be related to the aircraft (e.g. new materials used, avionics and engine technologies) but not necessarily. Innovation is also the introduction of check-in kiosks at airports, new revenue models of the low-cost carriers, the use of social media by airlines and techniques for the decrease of perceived ground noise.

In this short article we discuss why it is not easy to bring an innovative product or service to the market related to the aviation business. But we describe also a venture capital fund initiated in The Netherlands that will support emerging technologies in this domain and speed up innovation: the Mainport Innovation Fund.

[article to be published in Issue 50]

Customer Loyalty in the Airline Business: Towards a Blueprint for Valuable, Relevant and Differentiating Loyalty Programs

by Brian Goehring, Anand Janardhan and Maureen Stancik Boyce

customer loyaltyCustomer loyalty programs in the airline business have suffered as airlines have been hit with multiple challenges over the past few years – bankruptcies, increasing fuel prices, an increasing number of competitors and deteriorating customer satisfaction. As a result, the industry risks further commoditization, while other industries continue to innovate. Many travel customers feel trapped, remaining loyal primarily to avoid losing status and accumulated rewards.

Business Process Redesign at Amsterdam Airport Schiphol

pax_processDespite the current economic downturn, Amsterdam Airport Schiphol expects that between 2020 and 2025 approximately 70 million people per year will use the Dutch airport. While the terminal complex has expanded tremendously over the past forty years, further options for expansion in the current geographical context are limited. Any solution must therefore fit within the contours of the existing terminal complex. The authors of this paper discuss the redesign program of the passenger process by answering their research question: to what extent does the program increase the efficiency of passenger service processes and the level of perceived service quality?

Co-written with Betty Samola

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Blue Skies or Storm Clouds? Discussion and Recommendations

By Daan de Jong, Bram Kaashoek and Willem-Jan Zondag

The international air transportation sector is a dynamic one. Think for example of the way this industry is affected by exogenous factors like 9/11, the Iraq war and SARS. Furthermore the dynamics within the industry are obvious: new entrance of low cost carriers, the pressure put on development of sustainable technological aircraft products as well as industry-wide compliance with environmental standards, and inter-organizational dynamics like alliances, takeovers and mergers. The role of policy interventions or the lacking of it, within this story is rather significant. Interventions, like reallocation of sources, regulation, incentives and sanctions of certain behaviour, fiscal measures, public charges and promotion can highly influence performance within the air transportation industry. In a positive as well as a negative manner. Air transport policy making is important for all stakeholders within the industry since it largely determines the competitive landscape and is of vital importance for all companies involved. For that reason, policy making within the field of international air transport is a complex task.

The authors of the essays presented in this book have interestingly addressed inter-market dynamics and the interplay with policy interventions. They discussed how this interplay works and how it will or could develop. Moreover, most of the authors end with policy recommendations. This final chapter highlights these recommendations, using the below-mentioned model. We will elaborate on the four chosen themes and classify recommendations by different levels of analysis: the aviation industry, the governmental level (nation) and the supranational level. Within the following sections we will discuss the findings in dept.

I. Air Transport Policy in an International Context
International air transport policy has a highly national and supranational dimension. In his contribution, Peter Nijkamp expects that the recent U.S. – EU Treaty will open-upmany more opportunities for carriers on both sides of the Atlantic to increase their financial viability and their market shares. However, he says efficiency among European carriers is hindered by the existing patchwork of air traffic control systems, as well as by the fact that most airports are still government-owned while flag carriers still dominate the market. As low cost carriers have rapidly emerged in the European skies the last decade, Nijkamp questions whether– and to which extent – LCCs will be able to befit from the Open Skies agreement on Transatlantic routes. He also points-out that a new major question will be how the industry will respond to tighter environmental policy constraints (e.g., noise, CO2 emission).

In line with Peter Nijkamp’s view, Ken Button believes that transatlantic liberalization will bring unforeseeable structural shifts. As a consequence of the U.S. – EU Treaty, airlines have to be innovative if they are to retain some of the €377 million in economic surplus that the Treaty will generate for the aviation sector. Market forces allow better use of resources, but what the outcome will be is simply unpredictable and according to Button may surprise us.

Despite the unclear future observed by Ken Button, Peter van Fenema in his contribution says that an influx of other Community carriers into the Netherlands – U.S. market is unlikely because of the limited size of third/fourth freedom traffic and the dominance of hub-carrier KLM. Although the Dutch government managed to get the merger between Air France and KLM accepted by third countries without substantial financial or aeropolitical sacrifices, Van Fenema foresees that the U.S. – EU Treaty will make the negotiations on similar topics easier rather than more difficult. According to Van Fenema, aviation is turning into almost a ‘normal industry’ as fiscal, environmental and infrastructural issues are replacing traffic rights and other political issues during negotiations.

A ‘normal industry’ suggests more competition than companies are used to in an unliberalized market. Pablo Mendes de Leon forecasts increasing competition on intra-EU routes as U.S. airlines will enjoy unlimited access to intra-EU routes, thank to the U.S. – EU Treaty. On the supra-national level, Mendes de Leon expects that the Treaty will have a positive spin off for transatlantic cooperation and alliances. However, he warns governments to pay more attention to competition law regimes. Otherwise regulatory innovations (i.c. the U.S. – EU Treaty) might not translate into commercial opportunities.

On behalf of the Association of European Airlines, Athar Husain Khan and David Henderson stress the need for coherent policy and aviation legislation. From their point of view, an integrative policy approach would allow for the best possibilities for the European airline industry to be sustainable. They question whether the respective national, international, pan-European and Community European authorities responsible for aviation deliver the product in the most efficient way.

II. Sustainability and Environmental Issues in Air Transport
Some authors came up with interesting recommendations on the sectoral level. Narisra Limtanakool and her colleagues for example speak highly of the Easyjet case: this airline offers a carbon offsetting scheme. Consequently, passengers are able to see how much C02 they are generating per flight as well as the cost to offset the related emissions. However, Bart Boon strongly states that, although passengers and organizations more and more voluntary offset the climate impact of their flight, voluntary action should not be seen as an alternative to public policy. In other words: in order to really pay attention to sustainability issues within the aviation industry, policy interventions are necessary to stimulate sustainable behaviour of passengers and industry parties. Paul Upham and his colleagues also address that industry incentives are needed. They especially put emphasis on innovation: the sector is obliged to pursue technological and systems options for fuel efficiency and a sector wide innovation program is key. A well-strategic thought and industry wide research & development and deployment (R&D&D) program could be funded with emissions charge revenues. However, Paul Upham et al. note that in the short term reduced passenger growth is necessary. This conclusion implies that implementation of a rise in ticket prices (for example by taxes) on a national level is a valuable proposal in terms of sustainability. Carlijn Jonkman, and Narisra Limtanakool and her colleagues elaborate on this topic. Although taxing might be the solution, Narisra Limtanakool et al. urge that supranational consistency is of elementary importance. In other words, an extra tax on tickets should be implemented by neighbouring countries of the Netherlands (or at least by airports within the overlapping catchments areas), in order to prevent reallocation of economic activity.

Furthermore, airports, local and national governments must understand that a relational planning approach is a needed future perspective; as described in the essay of Bart de Jong. The current situation of glocal complexity asks for an answer: “places become articulated moments in networks of social or economic relations and understanding and simultaneously traditional areas with specific boundaries” (Graham and Healy, 1999; 11). A relational planning approach implies that not just plans or projects should be at the centre of discussion when it comes to spatial developments, but actors, their stakes, needs and ideas as well. Related to the viewpoint of putting actors and stakeholders central, airports do not sufficiently manage noise disturbance at this moment. A more structural perspective on noise disturbance management is of importance. Only in that case, as Callum Thomas and his colleagues of CATE mention, is it possible for an airport to safeguard the quality of life of local residents in the future.

Although above-mentioned recommendations are meant for the industry or national governments, some authors are of the opinion that ‘supranational power’ is needed to increase sustainability in aviation. After all, supranational governmental bodies (European Union, ICAO) in their nature are focused on optimizing social welfare beyond national boundaries. Bart Boon, for that reason, suggests an European Commission scheme in order to tackle noise hindrance. He compared intervention of the Commission in the field of noise hindrance to the successful case of emission trading (EU Emissions Trading Scheme – EU ETS). Paul Upham et al. however, warn the European Commission: a tightly contracting EU ETS cap is recommended, because otherwise the scheme is way too weak and the commitment not exceeding the +2°C threshold is not doable. Finally, Carlijn Jonkman stresses the reconsidering of exemptions of excise duty and VAT for international aviation in the international arena.

III. Challenges of Airport Policy
Scarcity is a driver for innovation (Sass, 2006). In his New York Times contribution, Stephan Sass put emphasis on the usefulness of scarcity-driven innovation: Scarcity, mother of invention. Although the article is focussed on fossil fuel scarcity and the ongoing search for sustainable energy, this issue of scarcity-driven innovation definitely goes for the air transportation industry as well.. Airports like Schiphol have to deal with this. Service innovation is for that reason of importance, think for example of the self service check-ins. These operational innovations are able to increase service quality and efficiency in the near future.

In line with this, Geert Boosten as well as Edwin Koster and Paul Bleumink have recommended to focus more on added value and the importance of our service economy: in order to stay competitive, Schiphol is recommend to add value in economic and logistics networks by upgrading and optimising products/services and processes for the land users close to the airport. Think for example of integration of first and second line logistic activities. The bottom line presented by Edwin Koster and Paul Bleumink is growth in added value instead of growth in volumes. This new paradigm asks for rethinking investments in business climates, increased accessibility and service quality, new and revolutionary logistic concepts, focus on knowledge development, sharpened promotion and marketing activities. Additionally, Geert Boosten explains that air transportation networks are key for our economy, because connectedness is of elementary importance these days, but the same goes for being a hub in virtual networks (Amsterdam Internet Exchange). Thinking of possibilities in order to let both hub positions positively interact should be on the list of strategists. And, last but definitely not least, Geert Boosten recommends Schiphol to take into consideration the effects of new destinations and frequencies on our service economy. In essence, using the service economy criterion while considering network opportunities is a manner of selectivity. Bouke Veldman further gives his point of view on selectivity in air transportation. First of all he speaks of policies on demand management, which include slot allocation and trading, pricing, restrictions, multi airports systems (MAS) and selectivity. Bouke Veldman comes up with a recommendation on a national level, but beforehand he concludes that demand management might be a risky and complex policy issue. Future perspectives are based on a mix of our current situation combined with a MAS policy, or slot reallocation. In the last case night flights will be strongly limited, which supports Schiphols’ mainport function and contributes to sustainability demands.

Three authors, namely Hans Heerkens, Hugo Gordijn and Peter Forsyth, have written about policy making with regard to regional airports. Hans Heerkens, first, concludes that in the Netherlands too many regional airports are present and no policy instruments or measures exist to control this overpopulation. Although he expects that market dynamics and mechanisms will do the job, giving strategic responsibility (spatial development) to regional governments several years ago was not a good thing. After all, currently there is no view of the national government on the field of regional airports. Hugo Gordijn underlines this; an airport will lead to overall regional value and accessibility. However, as in the future negative side effects like noise disturbance will go down, every region probably wants an airport from a regional economic point of view. Peter Forsyth even states that regional airport subsidies are highly questionable. His economic research points out that overall subsidies lower welfare for the nation and even the subsidising region. Supranational agreements on the banning of regional airport subsidies will bring a healthier European mix of regional airports. Market mechanisms will do the rest.

IV. Intermodality: Rail, High Speed Rail and Seaport Opportunities
Although ground transportation modalities have to a large extend a complementary role to air transport, policymakers sometimes suggest to replace air transport, particularly with high speed train. Nicole Adler makes some important notes on the upgrading of Europe’s rail network, based on her research of the Trans European Network links. She concludes that thesociety would be better off without the upgraded links if the rail operator is expected to cover the entire infrastructure cost. According to Adler it is possible to set an environmental charge of €100 per flight and €50 per train service without dramatically changing the transport equilibrium, thus collecting approximately half the estimated environmental damage.But an environmental charge of €200 per flight and €100 per train service would cover the estimated environmental costs generated, while slightly reducing frequencies and the total number of travelling public by approximately 2,000 people per day within Europe. In line with these findings, Grimme concludes that public financial support for mode substitution is justified when external costs, such as from emissions or congestion can be reduced.

But mode substitution (e.g. the train replacing the aircraft) is not recommendable under all circumstances. Moshe Givoni concludes thatreal congestion and environmental benefits arise only when it takes place on a large scale and when the modes complement each other. Substitution efforts make clear that cooperation between airlines and rail operators is not always free of conflict, as the two modes are on the one hand competing for passengers, while being complementary on the other hand, as Wolfgang Grimme elaborates. Grimme also argues that infrastructural prerequisites to achieve attractive journey times and a seamless integration of air and rail infrastructure have to be created, if the goal is to make rails a favourable mode.

In cases where mode substitution is not feasible or not desirable, effective cooperation seems to be the best option. To exploit cooperation opportunities to the fullest, some barriers have to be overcome. Givoni argues that common institutional separation between air and rail transport, even the organizational division between the modes within ministries of transport, is probably the first and main barrier for greater air-rail intermodality. In any way, the potential benefits from air-rail cooperation are greater than the benefits from air-rail competition according to Givoni. Although air-rail integration can contribute to EU transport policy goals of sustainability, the scale of investments and the likely impact of such infrastructure developments make it a matter to deal with at a European level.

Schiphol Airport and the Seaport of Rotterdam are striking examples of the industry level in The Netherlands. These major transportation and logistics nodes are located within a short distance. Hugo Roos discusses the widespread misunderstanding of the possible cargo transfer movements between the seaport and the airport. He points out that the direct transfer between sea and air transport within Europe is very small. The mode choice has a logistical background. Roos concludes that direct transfer between seaports and airports is only a very small percentage of total flows.

Blue skies or storm clouds? The authors of the essays presented in this book have shown that policy making within the field of international air transport is a complex task. Sometimes this complexity is hard to handle because of the number of stakeholders, their opinions and stakes, but also uncertainty: the air transportation industry, and therefore also related industrial policy, is highly influenced by external factors. Considered all, the authors do not forecast “storm clouds”. However, policy recommendations are exposed; on the national as well as the supranational level. Are policy makers ready to take off and fly to the blue skies?

Introduction on Aerlines Book “Public Policy & Air Transport”

By Daan de Jong, Bram Kaashoek and Willem-Jan Zondag

In a small European country like the Netherlands, air transport policy making by excluding the international context is simply impossible. For most (European) countries, air transport is an international industry by definition. The more boundaries airplanes cross, the more international the associated air transport policy becomes.

Air transport policy making in the present global industry is very complex. Not only the national and foreign governments have a say, non-governmental agencies and supra-national bodies (the EC and ICAO) also hugely influence air transport policies.

Air transport policy making is important for all stakeholders in the aviation industry. It largely determines the competitive landscape and is of vital importance for all companies involved. Public policy usually attempts to strike a balance between public and private interests. These interests are changing continuously. Hence, the field of air transport policy making is extremely dynamic.

In this publication, we have put together expert opinions on a wide range of air transport policy aspects. These essays have been compiled into four different themes. These different themes – the legal dimension, sustainability, airport policy and policy with regard to the interchange of air transport and other modalities reflect the contemporary dynamics of the air transport industry.

In the first part of this book, we kick-off with contributions on the international dimension of air transport policy making by six highly respected scholars on air transport. The first author, Peter Nijkamp, provides us with an overview of air transport policy developments in general. He is followed by Ken Button who reviews policy developments on the transatlantic market with a special focus on Europe. In his essay, dominantly an economic perspective is chosen: which industrial consequences can be noticed?

Furthermore, policymaking is to a large extent a legal and political process. Therefore, we have included three contributions written by air law experts in this part of the book. Peter van Fenema discusses the recently signed aviation agreement between the European Union and the United States. Pablo Mendes de Leon discusses new measures designed to arrive at liberalisation in the airline sector, especially the establishment of an Open Aviation Area in the transatlantic market. Athar Hussain Kahn and David Henderson (Association of European Airlines), writing from an airlines perspective, stress the need for an integrated approach in order to define coherent policy and legislations for the European airline industry to be sustainable.

Sustainability seems to be one of the most important contemporary policy issues in aviation today. Governments, consumers and other stakeholders worry about the impact of aviation on the world’s climate change. Aircraft and engine manufacturers are pressured to build planes that produce a minimum of CO2 emissions while airlines and consumers are more and more requested to compensate for these emissions, voluntarily or by policy interventions. Bart Boon kicks-off this chapter with an introduction into sustainability in aviation.

In line with the complexity of sustainable management and policy making addressed by Bart Boon, Bart de Jong from Utrecht University uncovers the complexity related to the spatial dimension of environmental policy. He suggests a relational planning approach for airports and governments in order to manage the so-called ‘glocal’ complexity; the constant tension between local and global interests.

Paul Upham, Alice Bows, Kevin Anderson and John Broderickdiscuss the disjuncture between EU aviation emissions growth and the EU climate change commitment to not exceeding a 2 °Crise in global mean surface temperature above the pre-industrial level. They come-up with short term and long term suggestions for not exceeding the threshold.Apart from emissions, noise nuisance is another important aspect that dominates the environmental debate around air transportation worldwide. Noise disturbance is the single most important local impact arising from airport operations.Callum Thomas, Janet Maughan, Paul Hooper and Ken Hulme analyze the perception of aircraft noise disturbance and discuss policy initiatives deployed by the ICAO and the EU to control the nuisance.

The sustainability chapter ends with two contributions about the monetary instrument that governments might use to influence consumer behaviour:taxation on tickets. First,Narisra Limtanakool, Ruud Ummels and Sebastiaan de Stigter doubt whether the implementation of tax on tickets, as the Dutch government is proposing, really culminates in environmental benefits. Secondly, on behalf of the Dutch Ministry of Finance, Carlijn Jonkman clarifies the rationale behind the proposed ticket tax on an environmental basis. She explains the difference between taxes and public charges and, furthermore, makes clear that such an intervention is also meant as a stimulus of desired behavior.

Airports are important transport nodes for regions. They not only unlock the region with markets abroad but are often also attractive business locations thus generating jobs and impacting a region’s economy positively. However, airports also play a key role in the environmental debate as outlined in the previous part.

This part particularly, but not solely, puts emphasis on developments surrounding Schiphol Airport and to regional airports in general. Being a major European airport situated in one of the most densely populated areas in the world, Schiphol is an excellent case study for airport policy purposes. Popular airports like Schiphol are often facing more demand for their capacity than they can offer. To overcome this problem, airports might use a wide array of demand management options. A relatively new method in this respect is called selectivity. Bouke Veldman discusses several aspect of this policy instrument.

Selectivity suggests a certain luxury; it becomes superfluous if demand declines.Edwin Koster and Paul Bleumink explore opportunities to sustain Schiphol as a hub given competitive forces. They focus their contribution to competition in the air cargo industry. Next, Geert Boosten introduces the ‘Schiphol Paradox’:on the one hand, the airport is major enabler for economic development in its immediate surroundings. On the other hand, the ‘by product’ of the actual aviation operations might become an important blocking factor for the region’s future development. Just like Edwin Koster and Paul Bleumink, Geert Boosten particularly addresses the focus on added value, for examply by providing services or activities related to the dominant service economy.

This chapter is concluded with three contributions on regional airports. Hans Heerkens discusses the lacking vision of the Dutch government on the development of regional airports. This is a consequence of a policy decision made some years ago to assign public responsibility for these airports to local authorities (provinces and municipalities) and shareholders. Hence, when it comes to regional airports, local interests often prevail over national interests. Additionally, Hugo Gordijn argues that sensible policy making on regional airports is necessary as technological advancements might fade away traditional objections on regional airport development. Peter Forsyth, finally, contributes about subsidies often awarded by regional governments in Europe to regional airports, in the hope of attracting low cost carriers and more tourism. He concludes that this is a questionable public perspective as costs are often underestimated while benefits are greatly overestimated.

The air transport system can not exists without other transport modalities offering ground transportation from the point of origin to the airport of departure and from the airport of arrival to the final destination. This goes for passengers as well as cargo.In this way, different modalities can be perceived as complementary. However, some policymakers believe that one transport modality, for example rail, can be a substitution for the other (air transportation) making these modalities competitive. This final chapter outlines several aspects related to modal complementarities versus modal competition.

In the first contribution of this chapter, Nicole Adler provides research outcomes concerning the competitive outcome of additional or expanded high-speed rail infrastructure on the transport equilibrium in the medium to long haul passenger market.Think for example of trips beyond 300 kilometres. Among others, she concludes that it is only worthwhile improving the high-speed European rail network if the regulators are willing to subsidize the cost of the infrastructure upgrading. She also proposes to set an environmental charge of €100 per flight and €50 per train service without dramatically changing the transport equilibrium, thus collecting approximately half the estimated environmental damage.

Furthermore, Wolfgang Grimme discusses the relevance and importance of air-rail intermodality and integration in Europe. Policymakers often demand better intermodal cooperation. Increasing intermodality and integration may require considerable public funding. However, as successful air-rail integration has proofed to reduce pollution and congestion on and around major airports, such an investment might be justified.

Policymakers support substitution of air by rail services, which are usually promoted through competition between the modes. In line with the Grimme essay, Moshe Givoni argues that the potential benefits from air-rail cooperation are greater than the benefits from air-rail competition. Hence, policymakers should promote integration instead of competition.

Finally, Hugo Roos concludes the last part of this book with a discussion about common misunderstandings on interconnectivity between airports and seaports, particularly with regard to cargo traffic. These misunderstandings often arise when the logistical aspects of modal choice are neglected. He clarifies these misunderstandings.

Competition versus Predation in Aviation Markets edited by Peter Forsyth, David W. Gillen, Otto G. Mayer and Hans-Martin Niemeier

Competition_versus_predation_aviation_markets_smallThe increased interest in Low Cost Carriers and their success in gaining market shares have put emphasis on the strategic behaviour of airline incumbents. The dynamics that come along with new entrants will lead to organizational behaviour to focus on under pricing and to prefer monopoly profits afterwards. At what point does a strategic  reaction from the incumbent become predatory behaviour?

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