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Product innovation and demand dynamics  

M Rokonuzzaman   | Published: May 05, 2019 20:47:45 | Updated: May 05, 2019 21:14:40


Often we think that creative spark triggered by technological and financial capability is sufficient enough to succeed in taking a great idea to market at profit. But unfortunately, demand dynamics plays an important role. Upon succeeding with a technology marvel, A380, Airbus has learned this lesson in a hard way. Due to the changing dynamics of demand, bigger as well as better mouse trap developed out of the progression of technology does not always succeed in creating an innovation success story. Despite succeeding in innovating A380 which is superior to Boeing 747, Airbus had to decide to abandon the journey prematurely without causing disruption to Boeing 747's 50 year long dominance in long haul flights connecting hubs.

In the hub-spoke model of the global air traffic industry, flying between mega cities, known as hubs, has been the dominance of Boeing's 747 for decades. It was anticipated that passengers flying between hubs would keep growing, opening the innovation opportunity of causing destruction to the dominance of Boeing 747. To capitalise on this creative destruction prospect, Airbus pursued the strategic idea of developing bigger, better mousetrap. Airbus succeeded through daunting challenges to deliver technology marvel, double-decker jumbo jet-A380. To make A380 idea a reality, advancement was made in aerodynamics, cabin design, engine integration, flight controls, aircraft systems, manufacturing techniques and the extensive use of advanced lightweight composite materials, making A380 the world's most advanced and efficient airliner-resulting in also more than 380 patent filing. But unfortunately, after flying for more than a decade, this mega jumbo jet has run out of fuel before succeeding to cause destruction to the dominance of Boeing 747. Rather, smaller airliners having twin jet engines are emerging as stronger substitute to this mega marvel.

The journey of A380 started in mid-1998. It was a secret project of Airbus on the development of an ultra-high-capacity airliner to break the monopoly of Boeing 747 in carrying passengers between airports of mega cities. Initially, the development cost was budgeted to be $15 billion. But the actual R&D cost accelerated to $25 billion, before flying in 2008. Not only Airbus stretched the envelope of technologies in making the aircraft, but the transport requirements of different major modules between countries also brought major innovations in logistics. Airports had to also bring changes to accommodate the landing, take off and passenger handling of this double-decker mega airliner. Extensive usages of carbon composite reduced the weight by more than 7 tons, making it more fuel-efficient and also quieter than competing products like Boeing 747. Due to quietness and spaciousness, passengers and crews alike loved this 500-plus-seat aircraft. But chief financial officers of airlines were under fear of failing to fill all those seats to turn the fuel efficiency and economies of scale into profitable revenue.      

As per the estimation in justifying the design of mega jumbo jet, the traffic of air passengers has been steadily growing. According to the International Air Transport Association (IATA), over the next two decades, the forecast anticipates a 3.5 per cent compound annual growth rate, leading to a doubling in passenger numbers from today's level to 8.2 billion in 2037. Such growth should have been the music in the ears of bosses of Airbus and A380 owning airliners. But unfortunately, the growth of traffic between mega cities has been far slower than that between mid-sized cities. As a result, in order to fly between mid-sized cities, instead of taking one of the hub airports of mega cities as a transit, the more preferred option has been flying directly, known as flying 'point-to-point'. The growing 'point-to-point' traffic has been creating the demand for two engine wide-body aircraft like Boeing 787 and 777 or Airbus's own A350 while eating up the occupancy rate of A380 flying between hubs. Such changes in the growth pattern of traffic have been eroding the scale advantage of A380-making it financially less attractive.

Once the plane flies at full occupancy, A380 is unparalleled to competing airliners. To passengers, the aircraft is quieter and more spacious. On the other hand, to the accountants, it is the least costly option-making A380 as the best choice. But as the 'point-to-point' is gaining increasing preference reducing the occupancy rate of super-jumbo jets flying between hubs, A380 started losing the financial viability. To address this issue, airliners attempted to add features using the space. After adding several space hungry features starting from the shower, bed to bar, still, they have more room to spare.   But at the end of the day, economic valuation of product features in creating the utility to flying passengers plays a vital role. It appears that instead of enjoying a shower and enjoying a drink at the flying bar, passengers were finding flying 'point-to-point' far more rewarding than going through the hassle and killing extra time to travel through one of the hub airports as transit. Moreover, flying in A380 neither did carry social prestige value like flying in Concord nor saved time. As a result, airliners simply kept failing to transfer the added space into profitable revenue. 

On the backdrop of eroding economic attractiveness in flying A380s with less than required occupancy rate, European aviation giant Airbus has said it will stop making super-jumbo A380 in 2021 due to dearth of customers.  It appears that although Airbus more or less reached breakeven in delivering more than 234 aircraft (as of January 2019) to major airlines of the world, including Emirates and Singapore Airlines, it could not recover virtually a penny of the initial $25 billion R&D investment.   

Like many innovations, the A380 team in pursuing the creative destruction strategy, had faced significant technology barrier to building highly fuel-efficient super-jumbo. The team succeeded in developing the technology further to turn the idea into a flying innovation, a marvel in aerospace history. But the deviation of air passenger growth between hub cities than estimated level turned the A380 economically less viable than required. Such uncertainty in future demand often creates significant stress on the journey in taking ideas to market at profit. This reality underscores the innovation principle: there is no natural correlation between science, technology and creativity competence and profit-making ability from innovation in a globally connected competitive economy.  In order to succeed, product innovation supported by technology progression must sync with the demand dynamics. 

 

M Rokonuzzaman Ph.D is academic and researcher on technology, innovation and policy. zaman.rokon.bd@gmail.com

 

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