Touch Points by Steve Finikiotis

While considering the much anticipated Delta-Northwest merger, with many more mergers on the horizon, I recalled Clayton Christensen’s book The Innovator’s Dilemma.

He pointed out how the Southwest Airlines model is “disruptive” because their low-cost strategy targeted customers who had been using trains and buses and or those who used out of the way airports.

But, Christensen believes that low cost carriers have a limited shelf life, because the incumbents can ultimately match them on the cost side, whereas the incumbents can’t climb the value chain.

I wonder what comes next in the evolution of airline service models – few of which are working well in mature markets, particularly in the U.S. and Europe.  Carriers suffer from overcapacity during down cycles like this while customers receive less than stellar service.

Just when we figured there’s nothing new and interesting in the industry comes Virgin America’s innovative business model. Their planes feature custom-designed leather seats, mood-lighting, and the best in-flight entertainment (IFE) system in the industry with on-demand TV and movies, high end games, music and even online chats with other customers.

The IFE is a great example of how the airline got it right.  As a practical matter, customers can plug their devices into USB ports.  The real genius is that the system runs on twin Linux servers–meaning an “open source” platform that is equipped to handle a range of new software and harware add-ons down the road.  This innovation occurred because the company had the wisdom to recruit forward-thinking, Silicon valley engineers – not airline entertainment vendors – to design it.

And, the airline managed all of this using a surprisingly lean, yet scalable operations model.  By allocating costs on non-perishable components that customers value, Virgin has come up with an effective airline model that will alter the way we think about flying.

While the legacy carriers fight it out using conventional warfare, Virgin America is rolling out new, novel features that today’s high value customer desires.  That’s what’s next – along with more mergers among the majors.

P.S. [April 18, 2008], Notice Time magazine’s 4-17 article, “Richard Branson’s Flight Plan”.