Outsourcing for Low Cost Airlines
Executive Summary
Over the years, low cost airlines have increased across the globe. The success of these airlines underlies the good management of the cost structure and the diversity and reliability of the services they can offer. As the industry remains volatile, it is crucial that low cost airlines are able to improve their responsiveness to its infrastructures whilst greater variable cost component is achieved. The key factor enabling the low cost airline to compete in the market is their low cost structures. Hence, it is vital that outsourcing services be availed by these airlines to reduce their costs and continue to operate.
In lieu of this success factors, the low cost airlines can move towards outsourcing their Information Technology needs and their non core activities such as maintenance, repair and overhaul. Since this area is complex, they can collaborate with business partners to meet their changing needs in a cost effective way. This way, costs are reduced and the airline can focus on strengthening its competitive advantage to remain in the industry.
Introduction
Outsourcing helps companies significantly in the reduction of their costs. In this set up, the company that outsources the services is the buyer while the party providing outsourced services is the supplier or the vendor. By outsourcing, the company can devote more of its time and attention to activities that will give them a competitive advantage. It can focus on developing and motivating people who create value for the organization. Today, service companies employing advanced technologies are offering their services at lower costs that are often superior to those that are generated inside the firm. This must be taken advantage by low cost airlines to improve efficiency and provide a wider range of services to potential customers. They can also designate their maintenance and ground services through outsourcing.
Trends in Outsourcing
As it was previously seen as a means to reduce costs, outsourcing is now increasingly regarded as a means of achieving a step change in performance. According to current research, the relationships of outsourcing are likely to broaden in the coming years. Significant investments are expected of the service providers in key areas (2003).Moreover, outsourcing is favored by the expansion of technological changes. All aspects of businesses utilize information technology which is why the demand for outsourcing is enhanced.
Outsourcing is also rapidly increasing in traditional areas of the business such as the customer care, financial services manufacturing, IT and ITES. In fact, large corporations are using Business Process Outsourcing units in their supplier countries to reduce risks and be able to control quality. Because of this, outsourcing is becoming more sophisticated worldwide. Customers are looking for business processes that will foster excellence, improve their quality to world class standards. In addition to this, global competition and the pressure on margins from low cost outsourcing companies are emerging. The outsourcing revolution is led by China over the past few decades with a growth of 9.5 percent per year and India with a 6 % growth (2006)
Future of Outsourcing
Outsourcing has become one of the ways by which business is done. It is becoming more popular and expanding internationally among countless organizations that are participating in the trend of globalization. Because of this, more countries are expected to find outsourcing as attractive following the lead of US and UK. The current trends show that an emerging management style of a new culture of network rather than that of two organizations working as separate entities. As such networks continue to grow the future will entail the cooperation between the clients and the competitors to keep the customers satisfied and loyal to them (2003).
In the future, more businesses will rely on outsourcing arrangements to meet their changing needs. It is worth noting that many organizations simply outsource to pass off problematic areas of their organization. However, with the concept of partnering and collaboration, outsourcing can add value to the business activities of the organization. It has to be viewed as an integral part of the business strategy. Additionally, consultants must be able to prove the value they add to the company to remain in the increasingly competitive industry.
Types of Outsourcing
Typically, there are two broad categories of outsourcing. In Business Process Outsourcing (BPO), the vendor will provide business processes or administrative functions that are once performed by the company itself. Call centers, human resources, accounting and payroll outsourcing are among the common forms of BPO.
On the other hand, Information Technology Outsourcing (ITO) provides services that are related to information technology functions. Outsourcing IT provides major cost and time saving advantages not only to large corporations but even to medium enterprise businesses. With the rapid changes in the area of IT, it becomes challenging for the industries to remain technologically updated. This process can be made easier by outsourcing IT as shown by the proliferation of application service providers (ASPs) over the recent years ( 2003).
Potential Areas of Outsourcing for Low Cost Airlines
For Low cost airlines, it is necessary to reduce costs to remain competitive in the volatile industry. Low fares can be possible through outsourcing support services from strategic partners. In this regard, outsourcing its IT needs to stay adept with the current technology is a strategic move. Aside from enhancing its internal IT capabilities, such can be used to accommodate a wide range of services. One of which is a more efficient online booking system.
Other potential areas for outsourcing may include maintenance and ground services. Indeed, outsourcing is vital to mitigate the effects of increasing costs for low cost airlines. This set up fits their business because of the overcapacity in the segment of low cost airlines. It is a good option since it helps to cut the capital costs and increase the efficiency. The airlines can also outsource its non core activities so it can focus on its core competencies. For example, GoAir has ventured with Singapore Engineering Company to provide the maintenance, repair and overhaul (MRO) needs (2006).
In Europe, more MRO needs are being outsourced as compared to the United States with the emergence of numerous low cost airlines. Typically, low cost airlines outsourced most of their non core activities as they choose to focus on their competencies ( 2007).
Conclusion
Outsourcing provides a venue for companies to improve efficiency. The services they offer vary from traditional business areas to information technology. The key element that enables low cost airlines to compete with traditional carriers is their low cost structures. The process of outsourcing will certainly add value to the company with its cost effectiveness. As such, the airlines can offer lower airfares and are more likely to attract customers. By availing of outsourced services such as IT and MRO activities, low cost airlines can focus on reinforcing their competitive advantage.
Moreover, outsourcing must be viewed as a corporate strategy by the airlines and not as a simple means of handing over the problematic areas of their operation. In the next few years, outsourcing relationships are predicted to increase. In this sense, low cost airlines must consider building strategic partnerships by collaborating with their vendors who share the same goals as theirs. Ultimately, the conveniences offered by outsourcing can help improve the overall efficiency of the airline while increasing profitability.
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