Competitive advantage and fuel efficiency in aviation

Abstract

This paper builds upon a resource based view of competitive advantage under a dynamic capabilities construct. Fuel efficiency measurement in the aviation industry can be incorporated into dynamic capabilities such as strategic decision making and alliancing. These dynamic capabilities can drive operational cost reductions, which in-turn can enhance profitability and establish a competitive advantage. To further this advantage, fuel efficiency can be embedded inside an organizational culture. A fuel efficiency focused organizational culture can be a valuable, rare, inimitable and nonsubstitutable resource. This paper proposes a model to merge the dynamic capabilities of strategic decision making and alliancing with organizational culture under fuel efficiency. Under this model, a fuel efficiency index is introduced to drive behavior and provide accountability. Effective use of the index has profit potential. INTRODUCTION A firm’s efficient utilization of resources can be a source of competitive advantage. For the aviation industry, the resource that makes up the largest component of total cost is fuel. Aviation industry fuel encompassed 20% of total costs in 2007 and United Airlines saw their cost of fuel, as a percentage of total cost, vary between 10% and 25% from 1973 to 2006 (Mazraati, 2010). A dynamic capability to obtain the efficient use of fuel and reduce those costs could lead to a sustained competitive advantage. Barney (1991) suggests a rationale for a resource based view of sustained competitive advantage. The two main assumptions of this view are that a firm’s resources are heterogeneous and that those resources may be immobile across firms. In addition, resources that provide for a sustained competitive advantage must be valuable, rare, inimitable and non-substitutable. Fuel is not rare or inimitable. Fuel as a resource therefore will not provide for a sustained competitive advantage. Yet, a firm's dynamic capabilities properly applied to fuel efficiency can achieve that advantage. Eisenhardt and Martin (2000) expanded upon Barney’s resource based view model by adding dynamic capabilities as potential sources of sustained competitive advantage. AVIATION FUEL EFFICIENCY AND DYNAMIC CAPABILITIES Dynamic capabilities as defined by Eisenhardt and Martin are those “‘organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve and die.” Some examples given of dynamic capabilities include alliancing, product development and strategic decision making. Eisenhardt and Martin suggest that dynamic capabilities can be a source of competitive advantage by altering a firm’s resource base. The efficient utilization of fuel in the aviation industry is dependent upon alliancing, product development and strategic decision making. A model for implementation of a fuel efficiency strategy can be seen in Figure 1. The model's three elements — strategic decision making, supply chain fuel efficiency and an organizational culture of fuel efficiency directly impact a firm’s operational fuel efficiency. Strategic decision making concerning fuel efficiency involves strategic investment and strategic planning. Strategic investment