Airline Franchising: Boon or Bane?
The franchise business model has proven to be very effective in certain industries. Some key industries that immediately come to mind are the fast food and beverages industry. Indeed, it cannot be gainsaid that brands such as McDonald’s and Starbucks have struck it big in the global business scene. This is in part due to franchising arrangements entered into by partners in regions such as Asia and Latin America. In general, service-related industries is found to be particularly promising fronts for the franchise model. The airline industry, however, has somewhat proven to be a case of mixed signals in this regard. Following the deregulation of the sector in Europe in the 90’s, many airlines have embarked on strategies geared towards maximizing market share. In the light of globalization, this has meant foraying into foreign markets. In spite of franchising offering some advantages in the airline industry, the disadvantages it occasions outweigh the gains.
The first key downside of franchising in the aviation sector is jeopardizing brand integrity. Just like many service industries, the airline business is reputation-sensitive. Any event that adversely impacts an airline’s brand image could translate into massive revenue loss and subsequent market share loss in the long term if damage control is not effectively executed. If a franchisee airline fails to keep time or breaches other standards of customer service, the reputation of the franchisor could be negatively affected since the former uses the latter’s brand image in its operations. If the extent of brand damage is extensive, the franchise agreement could be terminated, or other costly measures could be instituted. For instance, in the United States, Delta Airlines acquired its franchisee, Atlantic Southeast Airlines due to customer service shortcomings (Denton & Dennis, 2000).Airline Franchising: Boon or Bane?
Secondly, a dependency problem could develop between the franchisor and franchisee airlines. Most franchisee airlines are smaller compared to their franchisors. Consequently, they mostly operate shorter routes, especially either between a major airport and a smaller airport or between two smaller airports. In essence, most franchisees operate on domestic routes. Larger airlines, therefore, utilize these franchisees to access the shorter, domestic routes while they focus on more prominent pathways. If, for some reason, a franchisee pulls out of an agreement, or is unable to continue operating due to financial challenges, the major airline could incur substantial costs in trying to ease the inconvenience of passengers traveling on these domestic routes. Therefore, in addition to the extra financial cost, the franchisor could further suffer reputational damage as a result of dependence on the franchisee.
The final disadvantage of franchising in the airline industry regards rapidly shifting marketing dynamics in favor of low-cost carriers (LCCs). As previously stated, most major franchisors use smaller franchisee airlines to cover shorter, domestic routes. However, the emergence of LCCs has increased competition for this particular market segment. Those LCCs that offer a level of service that is equal or greater to that provided by the franchisee airlines will definitely attract more customers. Consequently, the franchisee airlines will experience a decline in their profit margins. Such an outcome is guaranteed to impact the franchisors’ bottom-line. If this trend continues, the franchise model is going to be less viable for the domestic market in the long term.
Proponents of airline franchising have advanced several arguments in its defense. Two of these arguments stand out. First, it has been argued that franchising increases market presence and thereby builds brand image. While this could be true for some cases, it is not a universally accurate assessment. As previously highlighted, enforcing the franchisors’ service standards is not always an easy task. In the event that a franchisee breaches these rules, the reputational ramifications for the franchisor could be significantly adverse. Moreover, it has been asserted that the lower costs incurred by franchisees are yet to trickle down in the form of lower fares for consumers (Pagliari, 2003). Given the emergence of LCCs in the domestic scene, this factor could alter market dynamics, thereby rendering the brand power argument invalid.
Secondly, it has been argued that franchising provides airlines with a cost-effective way of expanding into foreign domestic markets. This argument is rather simplistic in that it fails to take into account a key business reality. For any airline to successfully expand internationally, it requires proper brand build-up, supportive corporate culture, and an aggressive growth strategy that is underwritten by a large capital base. Not many airlines in the world can boast of these characteristics. Therefore, touting franchising as the ‘holy grail” of international expansion in the airline industry is a grossly misleading.
In light of these arguments, it is clear that franchising in the airline industry is a bane since the costs outweigh the gains. Brand integrity risk, dependence and shifting marketing dynamics aggregate to expose franchisors to potential financial losses. The brand power and cheaper international growth arguments provided by proponents of franchising are simply insufficient to alter this reality. Therefore, any franchise arrangement in the airline industry should only be initiated after careful study of the factors at play in the target market.Airline Franchising: Boon or Bane?
Denton, N., & Dennis, N. (2000). Airline franchising in Europe: Benefits and disbenefits to airlines and consumers. Journal of Air Transport Management , 6, 179-190.
Pagliari, R. (2003). The impact of airline franchising on air service provision in the Highlands and Islands of Scotland. Journal of Transport Geography , 11 (2), 117-129.