The economics of the Internet

TheeconomicsoftheInternet,theneweconomyandopportunities

forairports

DavidGillena,b,*,AshishLallcbUniversityofCalifornia,Berkeley,CA,USA

SchoolofBusinessandEconomics,WilfridLaurierUniversity,75UniversityAvenueWest,Waterloo,Ontario,CanadaN2L3C5

cRoomS3-B1A-28,NanyangBusinessSchool,NanyangTechnologicalUniversity,Singapore639798,Singapore

aAbstract

ThispaperprovidesanoverviewofhowtheneweconomyandtheInternethaveandarelikelytochangetheconductofbusiness.TheInternetcreatesvalueonbothsidesFonthedemandsidebyallowingfirmstocustomizetosuitspecificconsumerneedsandonthesupplysidebyreducingcosts.Ourparticularinterestisinidentifyingopportunitiesforairports,whicharealmostanafterthoughtinthetravelindustry.Oursurveyofonlinetrendsindicatesthatairportsareessentiallylocalbrandsandthevaluepropositionliesincomplementingthelocaleconomy.r2002ElsevierScienceLtd.Allrightsreserved.

Keywords:Airportsande-business;Airportsandtheneweconomy;Onlinetravelindustry

1.Introduction

HastheInternetredefinedeconomicsintheneweconomy?TheInternethasemergedasavitalcompo-nentofthenewmarketplaceinfrastructure.Ithasbeenaptlydubbed,asanairway,roadway,railwayandseawayfor21stcenturybusinessoperations.Assuch,theInternetiscapableofreducingdistancestherebybringingpeopleandbusinessesclosertogether,ideallymakingmarketsmoreefficientinbothanallocativeandproductivesense.

Thetermse-commerceore-businesshavebeenusedtodescribealmostanyactivityassociatedwiththeInternetandtheneweconomy.Inmanycasestheyhavebeenusedcarelessly.TherangesofactivitiesforwhichtheInternethasandcanbeusedareelectronicdatainterchange(EDI),e-information,e-transactions,e-commerceande-business.1Thefirstthreearesimply

*Correspondingauthor.Tel:+1-519-884-0710ext.2469;fax:+1-519-888-1015.

E-mailaddresses:dgillen@wlu.ca(D.Gillen),alall@ntu.edu.sg(A.Lall).1EDIandotherprivatenetworkscontinuetodominatecorporateprocurement.TheAsianWallStreetJournal,May21,2001reportsonpageT3thatintheyear2000,US$458billionworthoftransactionswereconductedbyUScompaniesusingEDI.Inthesameyear,directcorporatepurchasesovertheInternetwereworthUS$503billionandthoseconductedusingelectronicB-to-Bmarketplaceswereworth$43billion.Though,thelattertwochannelsareexpectedtodominatetransactionsinthefuture,EDIisnotexpectedtodieanytimesoon.

waysofproducingmoreefficiently,ofreducingtransactionscostandofmatchingconsumerswiththeirpreferredchoice.2Theysimplyrepresentanewwayofdoingoldthingsbetterbutthereisnothingnew.Theylowercostsandthegainscanberealormerelypecuniary.Ontheotherhandtruee-businessande-commercereflecttheenablingfeatureoftheInternet;doingnewthingsthatintheabsenceoftheInternetwouldnothappen.Anessentialfeatureofthesenewe-businessesisrootedintheirnetworks;onemightarguetheyarerootedinnetworksandtheeconomicsofanybusinesswillobeythelogicofnetworks.

Theneweconomy3hasthreedistinguishingcharac-teristics;itisglobal,itfavorsintangiblethings(ideas,information,andrelationships)and,itisintenselyinter-linked(rootedinnetworks).Thisdoesnotmeanthateverythingisnew.Agoodexampleof‘relationships’occursintheairlineindustrywhereaircraftaresmarterfrombothexternalR&Dandinternalcommunicationofthedifferentparts.Thisresultsinincreasedproductivity,safetyandprovidesopportunityfornewoutcomes

2Ineffectmovingthemclosertothepointincharacteristicsspacethatmatchesallthecharacteristicstheydesireandinthedesiredproportions.3Weareusingtheneweconomytodescribee-businessande-commerce;businessthatwouldnotexistintheabsenceoftheInternetandwhicharerootedinelectronicnetworks.

0969-6997/02/$-seefrontmatterr2002ElsevierScienceLtd.Allrightsreserved.PII:S0969-6997(01)00041-2

50D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–62

(bettermaintenanceprograms).Atthesametimetheplanestalktooneanotherinrealtimesotheycanbetterutilizetheairspace;thisiscalledFreeFlightPhase1intheUS.4Asecondprincipledifferencebetweenoldandneweconomiesisvaluecamefromscarcityandclosedsystemsintheoldeconomyanditcomesfromopennessandplentyintheneweconomy.

Thereisadownsidetoallofthiseuphoriaregardingtheneweconomy,however.Itmaybesimplyexpressedas:‘WhattheInternetgiveth,logisticstakethaway’.Providingconsumersandbusinesseswithmorechoicefrommultiplesourcescanreducetransactingtimeandcostsbutattheendoftheday,tangibleproductsstillhavetobedeliveredtomarket.HavingB-to-BandB-to-Care,inmanyifnotmostcases,e-informationande-transactionswitheliminationofsomemiddlemenandorwarehousingsteps.Thesetypesoftransactionsprovidethefirstopportunityforairports.Increasingtheturn-overratesofgoods(likethevelocityofmoney)andlinkingcustomerswithproducersmeansmanyordersandmorepackagingtomoredestinations.Intheoldeconomywarehousesactedasbuffersforincompletedemandinformationandwesubstitutedthewholesalesystemfornetworkedinformation.Aretheseopportu-nitiesorthreats?

Thesecondsetofopportunitiesforairportsintheneweconomy,comefromtheinformationflowsandnetworkcharacteristicsoftheneweconomy.Steelproducedin1990isbetterthansteelproducedin1950becausetheformercontainsmoreinformation(orembodiedtech-nologicalprogress).Thisrepresentedanevolutionwhereinformationwastransferredinasequentialwayfromthelaboratorytotheproduct.Buttheneweconomyprovidesanopportunityforcontinuousinformationflowsinrealtime.Achipinacreditcardcontainsinformationoncustomers.Achipinanautomobilecomponentstoresinformationonthecomponentitselfanditsperformanceandthisinformationcanbeshared.Newvehiclesare‘smarter’thanolderonesbecausecomponentscommunicatewithacentralcomputerorwitheachother,suchas,anti-lockbrakingsystemsandall-wheeldrive.Asaresultperformanceisbetter.Thereisnoreasonanairportcannotbenetworkedinthesamewaywherethevariouspartscommunicatewithoneanotherbyhavingchipsindifferentlocationsprovidinginformationoneverythingfromwearandtear(schedul-ingmaintenance),tolocationsofequipment,toidenti-fyingpotentialconflictsorproblems.Butthisisasystemsview.Theairlinesunderstandtheconcept,andvalue,ofanetwork.Itisnotclearthatairports

4Theneweconomytoolsoftruckingincludebarcodes,radios,dispatchalgorithms,routinghubsandeventuallyevenroadsthem-selvesthroughintelligenttransportsystems.Thesetoolsfollowthelogicofanetworkeventhoughthetruckstillhastobedriventheold-fashionedway.

appreciatethisidea.Theyhavetraditionallyviewedthemselvesasnodesandmakedecisionsonlyinthiscontext.5Inthispaperweprovidetwostreamsofinformation.First,weexaminetheunderlyingeconomicsoftheInternetandtheso-calledneweconomy,expandingonthethemesintroducedabove.Inparticular,weareinterestedinnetworkeffects,theroleofinformation,decliningmarginalcosts(increasingreturns)andtryingtounderstandthedrivers,masscustomizationandapparentverticaldisintegration.Dothesefeaturesleadtofundamentaldifferencesinbusinessstrategybetweentheso-called‘smokestack’economyandtheneweconomy?Howdothesefeaturesrelatetothe‘airportbusiness’?Second,weexaminetheactivitiesofairportsintheiruseoftheInternettoenhancetheirbusinessproposition.HereweconcentrateonB-to-Capplica-tions.Theinsightsgainedinthisdiscussionarethenusedtoprovidesuggestionsforfuturedirectionandopportunitiesforairportsbothtodonewthingsandtodothingsbetter.

2.Featuresoftheneweconomy

Theemergingliteraturedescribingtheneweconomystatesthatitisbasedinnetworksandinstalledbaseandexhibits‘increasingreturns’.Furthermore,thenewerpartoftheeconomyisknowledgebasedwhereasthetraditionaleconomyisprocessingbased.Theseparti-cularfeaturesleadtoquitedifferentcharacterizationsofhowtheeconomyworks.InFig.1theleftpane(a)reflectsthetraditionalmarketwithanupwardslopingsupplycurveandadownwardslopingdemand.Thesecurvesowetheirshapetodiminishingreturns,diminish-ingmarginalutilityanddiminishingmarginalproduc-tivity.Ontherightside(b)isthecharacterizationoftheneweconomy.Asdemandgrowsitisvaluedevenmoreandthusmoredemandleadstoyetmoredemandduetohighervalue.Thevalueofthenetworkincreasesassomeexponentialfunctionofthenumberofusers;generallybythesquare.Thisideaisnotnew.AsLiebenstein’sclassicwork,‘‘Bandwagon,SnobandVeblenEffects’’publishedin1950,pointsoutthatdemandcurvesaremoreinelasticwhenconsumersderivepositivevaluefromincreasesinthesizeofthemarket.Theinelasticityisaresultoftheirshiftoutwardreflectinghighervalue.Thusthedemandcurveisreallyalocusofobserveddemandsthatarepointsontraditionaldemandcurves.Alongwithincreasingreturns,marginalcostsareverylow.Why?Webelieveitisaresultofanumberoffactorsandnotentirelythosethatwetraditionalascribe

5Thismaynotbesurprisingsincetheymaynotbeabletoappropriatetherentsfromthenetworkthewayairlinesareabletodoso.

D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–6251

$

S

$

D

D

0

(a)

S

0

(b)

OutputOutput

Fig.1.(a)Theoldeconomyand(b)theneweconomy.

tocausingincreasingreturns.Thesupplycurveweobserveintheneweconomyisafrontier,alocusofcost/consumptioncombinationsatdifferentlevelsofoutputorsize.Thecoststaketheirpositionduetofourfactors.Firstly,lowmarginalcostsduetohighup-frontcosts.Knowledgebasedproductsaredifficulttodesignandbringtomarket.Theyareheavyonknow-howbutlightonresources,hencethelowmarginalcosts.Secondly,thecostcurveisshiftingdownfromlearningcurveeffects.ButthesearenotsimplyonthesupplysideFwelearntodoitbetteraswemakemore.Moreimportantly,onthedemandside,customersneedtoinvesttimetolearnthecapabilitiesofaproduct(flyinganAirbusormaintainingaBoeing)andonsubsequent(orderivative)versionsofthisproducttheyneedonlyupdatetheseskills.Asaresulttheywilldemandmoreofthem.6Productsthatgainmarketadvantagewillstandtogainfurtheradvantage.Thirdly,therearewhatsomehavetermednetworkeffects,butwewouldcallcomplementors(basedonBrandenburgerandNale-buff’s(1996)theoriesofCo-opetitionandtheValue-Net).Manyknowledge-basedproductsneedtobecompatiblewithanetworkofusers.Ifaproductbecomesthestandardthedemandwillbesubstantiallyincreased(e.g.Java).Againnotethisisanoutputeffect.Thelastsourceofcostsavingsistechnologicalchange.Newtechnologieschangethemixofinputs,theamountofinputsandeventherequiredinputs.Allcanleadtolowercosts.

Amongalltheconditionslistedaboveforlowcostsorincreasingreturns,twoarerelatedtolargeroutputsandtwoarerelatedtoshiftingcostcurves.Thisdistinctionisveryimportantsinceinthepastbiggerhasbeencheaperandthereforetheconclusionwasdrawnthatbiggercausescheaper.Butifthesourceofthecostsavingsarisesfromshiftsinthecostfunction,theimplied

Notethisisaneffectthatmovesusalongthemarginalcostfunction.

6causalityisreversed,cheapercausesbigger.Theimplica-tionofthedifferencebetweenthesetwocanbeenormoussincetheroleofmarketrestrictionsinachievinglowercostsistocreatemonopolyratherthantopromoteopennessandbroadmarketappeal.

Networkeffectsareanotherconceptthathasbeentreatedsomewhatcarelesslyintheneweconomyliterature.First,theyarereferredtoas‘networkexternalities’andthislabelisappropriateonlyiftheaffectsarenotinternalized.Consumersareunlikelytodoso,thoughifthenetworkisowned,theownerwould(orshould)internalizethe‘benefit’ofthebroadbaseofusers.7Onceinternalized,theyarenolongerexternal-ities.Airlinesthatofferbroadgeographiccoveragethemselvesorinanallianceinternalizesomeorallofthevalueofthenetworkintheiryieldmanagementpractices,forexample.

Asecondpointregardingexternalitiesistheyarenothomogeneous(KatzandShapiro,1994).Ifbusinessstrategiesinthenewknowledgebasedeconomyarebasedinpartonthenetworkbenefits,itisimportanttodistinguishbetweendirectandindirecteffects.Thedirectexternalityaffectsrealresourcesandisarealbenefitwhereasindirecteffectsarepecuniary;becauseofthelargeinstalledbaseofPCs,thepriceoffloppydiscshasfallen.Thisisapuretransferandnotanexternality.Theinternalizationofnetworkeffectsisofparticularimportancetoairports.Thevalueofconnectivitytootherairportsisalwayspositive;thenetworkexternalityispositive.Butifairportsfailtointernalizethiseffecttheywillbetoosmalland/ortheywillhavetoofewdestinationstoserve.Ifairportscaninternalizethesebenefitsthesizeofthenetworkwillbeoptimal.Aninterestingsideaspecttothenetworksizeissueisthatitdoesnotdependonthetechnologyortypeofnetworks(whichmaybecompeting).Whatistheoptimalsizeof

Ifneitherinternalizethenetworkexternality,thenetworkwillbesmallerthanissociallyoptimal.

752D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–62

analliance?Clearly,iftherearenetworkexternalities,andwebelievethereare,policyshouldnotdiscouragebroadlybasedalliances.Furthermore,sincecompetingnetworksconferconsumerbenefits,onecouldarguethatlargenetworkcoveragebytwoormorecompetingnetworksissuperiortooneverylargenetwork.

Theissueofcompetingnetworksandourdiscussionearlierregardingincreasingreturnsraisestheissueofchoiceamongnetworktechnologies.Forexample,isitbettertohaveanumberofinternationalhubsinEurope(Schiphol,Frankfurt,Heathrow,andCharlesdeGaulle)orshouldtherebeonehubwithmanyspokes.Thesearetwodifferentnetworktechnologies.Iftherearepositivenetworkeffectsthatraisethevaluetoconsumersasmarketsgetlarger,largercompetitorshaveanever-wideningadvantageoversmallercompetitors.Ifpro-ductioncostsareconstantorfalling,networkeffectsareasufficientconditionfornaturalmonopoly.Butifmarginalcostsdorise,thereisalimittothesizeofthenetwork.Somehaveargued(Arthur,1996)thattradi-tionaleconomyindustrieswillexhibitdiminishingreturnswhileneweconomy(knowledgebased)indus-triesexhibitincreasingreturns.However,onceweacknowledgethatconsumershaveavarietyoftastesandtherearecapacityconstraintsevenintheneweconomy,multiplenetworkscanco-exist.

3.Lessonsforairports

Airportsmightbethoughtofasmixingoldandneweconomies.Thetraditionalprocessingworldistheoneinwhichtheymoveairplanesandpeople.Theknowl-edgeisintheaircraft,runwaysandterminals.Theneweconomyservicesaretheidea,knowledge,relationshipservicestheycananddoproduce.Thetravelportaldiscussedbelowisaneweconomyproduct.Afurtherdistinctionweseeisonefamiliarineconomicsindistinguishingcompetitioninthemarketfromcompeti-tionforthemarket.Traditionalindustriescompeteinmarketsandneedtooptimize;produceatlowestcostforthedeemedqualitydesiredinthemarket.KnowledgebasedfirmscompletefortheproductbecauseofnetworkeffectsFwinnertakesmuchofthemarket.Theobjectiveisnotoneofoptimizationasmuchasidentificationandadaptation.Viewedasalocalproducer,airportsareoldtechnologywhileviewedinthecontextofnetworks;airportsareaneweconomyindustry.Airportmanagementwillthereforebefacedwithatensionbetweentryingtoprovidetheleastcostwayofmovingaircraftandpeople,andtryingtostrategicallypositiontheairportinthecompetingnetworksandofferingnewservicesthatareanaturalgroupingwithairports.Thisinterdependencefitsnicelyintothenotionsofcomplementorsalludedtoearlier

whichrecognizepositivefeedback,andapplyacrossmarketsaswellaswithinmarkets.

Arthur(1996)statesatpage106,‘‘Infact,iftechnologicalecologiesarenowthebasicunitsforstrategyintheknowledgebasedworld,playerscompetenotbylockinginaproductoftheirownbutbybuildingwebsFloosealliancesofcompaniesorganizedaroundamini-ecology.’’Airportsprogressbybuildinganallianceofservices,somewithotherairports,thatallowsthemtoexploitincreasingreturnsandnetworkpresence.Whileitistruethatlocalmarketpassengerswouldseemtoplacealimitondemand,havinganinternationalhubdoesnot.Brandingyourselftohandlelong-haulconnectingpassengerswithservicesandconnectivitywillyieldrents.Howtheserentsaresharedbetweendominantairlinesatthehubandtheairportisanotherissue.

Whataresomeofthekeyfeaturesthatanairportshouldfocusoninembeddingtheneweconomyintoitscurrentproductsandtodevelopnewproducts?Aswehaveemphasizedearliersincenetworkeffectsaresoimportant,itisthevalueofthenetworknotthefirm(airport)thatshouldbemaximized.Secondly,theInternetprovidesmorechoiceandtheopportunitytomovecustomerstotheirdesiredpositioninproductspacebutthisalsoincreasescosts.Moreinformationmustbeprocessedandsiftedthroughpriortomakingthefinalchoice.Therefore,keepthecostsofattentionandthecostsofparticipationlow.8Automateasmuchaspossibletoincreaseinformationandcreatedigitizedservice.Placingachipinadoorallowedhotelstochangekeyselectronically,tomonitormovementsandimprovesecurity.Beingabletodeliverinformationtopassengers,airlines,personnelandotherusersbyhavingmoreinformationontheairportsystemwilladdvalue.Andthepassengersandshipperscanprovidetheairportwithmoreinformationaswell.Untilrecentlywehadawarehousingsystemthatwasusedasabufferagainstincompletedemandinformation.Withnetworkedinformationthisshouldchangeandthenumberofintermediariesreducedifnoteliminated.TheliteratureontheInternetandneweconomyemphasizesthenotionofrelationships.Becausenetworkeffectsaresoimportant,communityissaidtoprecedecommerce.Thisisfoundedonthreebasicideas.First,networkscannotbeinstalledbutmustgrowandemphasizingrelationshipsmeanstheinvestmentinthenetworkwillgrowmuchfaster.Second,itispossibletohavecustomization.Newtechnologycanprovidemasscustomizationsobeingpartofanetworkdoesnotmeanhomogeneity.Third,thenetworkeconomyrestoresthe

8ReadersDigestbecamesopopularbecauseitallowedpeopletohaveacapsulesummeryofbooksthattheywouldotherwisehavetimetoread.Thevaluepropositionwasbasedonthekeyideathatwhatwasscarcewastime.

D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–6253

symmetryofinformationorknowledge.Thereislesschanceofincompleteinformationorasymmetricin-formation,thereforeweshouldhavelessadverseselectionandthecostsofwritingandenforcingcontractsshouldbereduced.

Sincethecustomerwill,inmanycasesbepartoftheproductionprocess(e.g.selfcheck-inmakeseachpassengeracheckinagentmuchthesamewaythatusinganATMmachinemakesoneateller),thisisanewrelationshipbetweencustomersandsuppliers.Itisthenimportantthatcustomersandsuppliersbeequallysmartandallbeconnected(Napsterisagoodexampleofconnectingcustomerstoeachother);lateralconnectivityprovidesmoreinformationthatverticalconnections.Themoreinterconnectedisatechnologythemoreuseitwillreceiveandhencethemorevalueitwillhave.Aclearstrategytoemergefromthisthinkingistomaximizetheopportunitiesforotherstoparticipateinyournetwork.Airportsshouldlinkwithhotelsandtoursandthelocaleconomy.Theconnectivityofanetworkisnotjustaboutdestinationsitisalsoaboutorigins.

4.E-businessissuesofpractice

TheInternetreducestransactionsandsearchcosts.Thisincreasesefficiency.Inaddition,themediumalsoservesanenablingfunctioninthatitallowsforimplementationofnewbusinessmodels.Thissectionprovidesabriefdiscussionofboththesefeatures.Inparticular,itexaminestheimpactofreducedsearchcostsonpricecompetition.Or,hastheInternetbroughtmarketsclosertotheidealofperfectcompetition?Theenablingfeaturesdiscussedhereincludehypermediationandsyndication.Lastly,itprovidesanoverviewofexistinge-businessmodels.4.1.Pricecompetition

TheInternetreducescostsbothforbuyersandsellersandfacilitatespricecomparisons.Italsoallowsforlowcostprovisionofdetailedinformationwhichcanaccessedanytime.Yetafewfirmsdominatemanyonlinemarketsandcyberspacehasnoteliminatedpricedispersion.Theeventualimpactonpricesisproductdependent.Thusweexpecthigherdispersionforproductswherenon-pecuniaryconsiderationssuchasafter-salessupportareimportanttothepurchasedecision.Givenlowstartupcosts,therearelikelytobenumeroussellerswhoarejustaclickortwoawayandconsumersmayhavepreferencesregardingqualityofservice,trustworthinessofsuppliersandsecurityoftransactions.ThoughtheInternetallowsconsumerstofindthebestprice,italsoallowssellerstocustomize,bundleandpricediscriminate.

AccordingtoShapiroandVarian(1998)theInternetturnseverythingintoacommodity.Reverseauctionsitesinparticular,suchasPriceline.com,facilitatethisprocessbyhelpingbuyerstoidentifypricefloorsandmeta-searchenginessuchasCopernicautomatetheprocessofmakingpricecomparisons.Sinha(2000)arguesthattheimpactoftheInternetisanalogoustothatoftheimpactofprivatelabelsor‘‘no-name’’bandsatsupermarketsonsalesofnamebrandgoods.Privatelabelsprovideconsumerstheinformationthataproductofcomparableornearequalqualitycanbepurchasedformuchlessthanmajorbrands.Thus,forcingmajorbrandstocutprices.Inthisexample,pricecompetitionerodesbrandloyalty.Forexample,broker-ageservicehasbeenturnedintoanundifferentiatedproductwiththeemergenceofonlineservicesandmarginshavebeendrivendown.Further,manye-commercecompaniesoverlyemphasizebuildingasubscriberbaseandtodothistheyreduceprices.ThisisalsohappeningintheB-to-Bworldwhereexchangesoffercompetitivebiddingforproductsandallowprocurementatthelowestcost.

Usingpricediscrimination,bundlingproductsandproducingbetterproductsaresomestrategiesfirmscanusetocounterthistrend.Bothonlineandtraditionalshoppingareaffectedbynon-pricevariables.Forthepurchaseofspecializedbooks(inEconomics,forexample)Amazon.comandBarnes&Nobledifferinonesignificantrespect.Thoughbothfirmsmayquoteidenticalprices,itishighlylikelythatAmazonwillrequiretheconsumertoplaceaspecialorderwhichcantakeuptosixweekswhereasBarnes&Noblewillhavethebookinstock.Thisprobablycanbeexplainedbydifferencesinprocurementmethodsandback-endrelationshipswithwholesalersandpublishers.Ifaconsumerwishestopurchasemorethanonebook,theavailabilityofthespecializedbookessentiallydictatesthechoiceofvendor,regardlessofanypricedifferences.Thisisbecausetransportationcostsarenon-linearinthattheyhaveafixedandaper-bookcomponent,whichmakesitunattractivetounbundletheorderandpurchasefrombothvendors.Typicallypricedifferencesarenotsignificantenoughtooutweighthesavingintransportationcosts.Clearly,inthiscaseitisnotloyaltyorpricesthatdrivethepurchasedecisionbuttheprocurementpoliciesofvendors,whichultimatelyaffecttimelyavailabilityandthereforepurchase.AnotherexampleistheDell.commodelorwhatSlywotzky(2000)referstoasthe‘‘choiceboardmodel’’wheretheconsumerputstogethertheproductbasedontheirneeds.Theconsumercanmakeverygeneralpricecomparisonsforcomputersystems,butitisdifficulttomakecomponentbasedpricecomparisons.InthecaseofDell,goodcustomerserviceandproductreliabilityarekeybusinessdriversFnotjustprices.Thuscusto-mizationbenefitsbothconsumersandproducers.

54D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–62

Consumerscanbuyamade-to-ordersystem,butthisallowsDelltopricediscriminate.4.2.Disintermediationandhypermediation

TheInternetcreatesdisintermediationinthebricksandmortarworldbyconnectingconsumersdirectlywithsellers,butitiscreatinghypermediationonline(Carr,2000).Hypermeditationreferstotheprocessofcon-ductingonlinetransactions.Thetypicalbuyergoesthroughmanyintermediariessuchasthephonecom-pany,theISP,thesearchengine,thecompanythatexecutesthesearch,thevendor,thecreditcardcompanyandthepostofficeorcouriercompanythatdeliverstheproduct.Volumeandefficiencymakesmicrotransac-tionspossibleandmanyoftheintermediariesareliterallygettingpaidinpennies.AnintermediarysuchasInktomi.comthatexecutessearches,isprobablymakingmillionsFonepennyatatime.Thiswouldbeimpossibleinthebricksandmortarworld.4.3.Syndication

Syndicationworkswithinformationgoodsbecausethesameinformationcanbeusedbyalargenumberofconsumers.Thusinformationgoodsareaboutabun-danceandnotscarcity.Theycannotbedestroyedandcanbere-packaged.SyndicationalsorequireswhatWerbach(2000)referstoasmodularity.Asyndicatedgooddoesnotusuallyconstituteanentireproduct,butisjustpartofwhole.Thetraditionalorganizingmodelislinear,withoriginatorscreatingcontent,syndicatorssourcingfromvariousoriginatorsandpackagingit,anddistributorsdeliveringcontenttoconsumers.TheInternetallowsthislinearchaintobereplacedbyanetwork.OriginatorsontheInternetexpandthescopeofcontentthatcanbesyndicatedandfacilitateglobaldistribution.OftenthesamecompanyplaysallthreerolesasinthecaseoftheMotleyFool.Itoriginatescontentthatitusesonitsownwebsite(Fool.com).ItofferscontentthroughsyndicatorssuchasiSyndicate.com.ItactsasasyndicatoritselfandprovidescommentaryonfinancialmarketstositessuchasYahoo!,tonewspapersandtoradiostations.ItalsodistributessyndicatednewsstoriesfromwireservicessuchasReuters.4.4.E-businessmodels

TherearevariousmodelsofdoingbusinessontheInternet.Theyinclude:

*Business-to-consumerFAmazon.com*Consumer-to-consumerFEbay.com*Consumer-to-businessFPriceline.com*

Business-to-BusinessFChemdex.com

*HorizontalPortalFYahoo.com*VerticalPortal(Vortal)FWebMD*

AffinityPortalFWomen.com

KaplanandSawhney(2000)provideagoodclassifi-cationofB-to-Bmodels.Theyprovideamatrixthatmatchesthetypeofproductwiththenatureofthetransaction.Businessesbuytwotypesofinputs:thosethatarespecializedinnatureorindustryspecific(or‘‘manufacturing’’inputs)andthosethataregeneralinnatureandcanbeusedacrossindustries(or‘‘main-tenancerepairandoperating’’inputsF‘‘MRO’’).Spe-cializedinputssuchasaircraftpartsaresourcedverticallyorfromindustryspecificsupplierssuchasBoeing.Generalinputssuchasstationaryandcompu-tersaresourcedfromhorizontalsuppliersorsuppliersthatsellacrossindustriessuchasDellComputers.

Firmsuseeither‘‘systemic’’sourcingorspotsourcingtoobtaininputs.Theformerinvolveslong-termrelationshipsbetweenbuyersandsellersandmayrequirevendorqualification.Spotsourcingismorecommonforcommoditiesandtheidentityofbuyersandsellersisnotimportantinsuchtransactions.Differenttypesof‘‘B-to-BHubs’’haveevolvedtoeitherreducetransactionscostsortoeliminatepriceand/ordemandvolatility.

MROHubssuchasAriba.comarehorizontalmarketsthatallowsystemicsourcing.Theydealinlowvaluegoodswithhightransactionscostsandprovidecataloguesfrommanysuppliersandusethirdpartylogisticsforfulfillment.YieldmanagersarehorizontalmarketsthatallowspotsourcingofMROinputs.Theydealwithbusinessesthathaveahighdegreeofpriceanddemandvolatilityandwhereexpansionandcontractionofcapacityisexpensive.ExamplesincludeOnemedia.comwhichsellsslotsforalltypesofmedia;Capacity-web.comallowsOEMandcontractmanufacturerstotrademanufacturingcapacity;inadditionthereareyieldmanagersforcapitalequipment,labour(Employease.com)andelectricity.

Exchangesontheotherhand,areverticalmarketsthatallowforspotsourcingofmanufacturingorspecializedinputs.Theyaresimilartotraditionalexchangesandhelptosmoothoutdemandandsupplyvolatility.ExamplesincludePaperexchange.com,whichhasmembersin80countriesandcontentin7languages.Ithasalogisticspartnerfore-fulfillment.CatalogHubsallowsystemicsourcingofmanufacturinginputsandlikeMROhubstheyreducetransactionscostsandcreatevaluebyaggregationandmatching.ExamplesincludeCommerxplasticsnet.comforplastics,resins,compoundsandpolymers;andSciquest.comforscien-tificandlifesciencesproductssuchasantibodies.E-hubscanbeeitherneutralorbiased.NeutralE-hubsactasindependentthirdpartiesandfavourneitherbuyersnorsells.Forwardaggregatorsareseller-biasedE-hubs

D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–6255

thataggregatesupplyandoperatedownstreaminthesupplychain.Reverseaggregatorsarebuyer-biasedE-hubsthataggregatedemandandoperateupthesupplychaintobargainwithsellers.Ingeneraltermsthebiasdependsuponthesideofthemarketthatisfragmentedandneutralmarketsarefragmentedonbothsides.Anincreaseinthenumberofparticipantsinabiasedmarketcreatesvalueononlyonesideofthemarket.Forexample,inaseller-biasedmarket,anadditionalbuyerbenefitssellersbutnotbuyers.NeutralmarketsarebetterbecausetheybenefitbothsidesFthelinksaremanytomanysinceasellercanbecomeabuyerorvice-versa.

5.Onlinetrends

Theonlinepopulationisexpectedtocontinuetoincrease,asistransactingonline.Howevertheoppor-tunitiesarelikelytodifferacrosscountriesgivendifferencesinstandardsofliving,accesstotechnology,andtheabilityandwillingnesstoadoptnewwaysofdoingthings.InthissectionweprovideinformationongeneraltrendsrelatingtoInternetpenetrationandusage.Laterinthesectionwefocusonthetravelindustryandcurrentpositioningofairlines,travelagents,hotelsetc.Inadditiontoprovidinganoverviewthiswillassistindeterminingwhatroleifanyairportsmightplayintheonlinetravelindustry.5.1.Internetpenetrationanddemographics

JupiterResearchreportsthattherewere255.8millionInternetusersworldwidein1999(Table1).NorthAmericahadthelargestshare(45%)followedbyWesternEurope(25%)andAsia(20%).Internetpenetration,measuredasthepercentageofaparticularregion’spopulationonlinewasalsothehighestinNorthAmerica(Table2).38%ofNorthAmerica’spopulationwasonlinein1999followedbyAustraliaandNewZealand(32%)andWesternEurope(17%).Thoughthisrankingofregionsisexpectedtoholdin2005,InternetpenetrationinWesternEurope

Table1

NumberofInternetusersF1999aRegionNumberofusersPercentageshareinmillionsinworldNorthAmerica115.845WesternEurope64.525Asia

49.920LatinAmerica10.64EasternEurope7.93Australia/NZ7.13Total

255.8

100

aJupiterResearch,2000

Table2

InternetpenetrationFpercentageofpopulationonlineaRegion1999(%)2005(%)NorthAmerica3868WesternEurope1743Asia

16LatinAmerica212EasternEurope215Australia/NZ

32

59

aJupiterResearch,2000

Table3

InternetpenetrationforecastsFhouseholdsaCountry/NumberofonlinePercentageofregionhouseholdsinmillionshouseholdsonline2000

200520002005Germany9.718.72547Austria0.61.41941Switzerland0.81.72145UK6.712.62851Ireland0.20.51235Sweden1.92.54861Denmark1.11.54763Norway0.91.34863Finland0.81.33452Netherlands2.54.33759Belgium0.81.71939Luxembourg0.00.12548France3.59.91438Italy2.58.01235Spain1.64.31333Portugal0.20.9726Greece0.31.1727W.Europe34.271.62243USA

53.0

80.0

51

74

aJupiterResearch,2000.

isexpectedtoincreasebyabouttwoandahalftimesovertheperiod1999–2005.

Intheyear2000therewere53.5milliononlinehouseholdsintheUnitedStatesand34.2millioninWesternEurope.Householdpenetrationratesstoodat51%and22%,respectively.Inabsoluteterms,thespreadbetweenUSAandWesternEuropeisexpectedtonarrowconsiderablyby2005(Table3).GermanyandtheUnitedKingdomtogetheraccountedforalittlelessthanhalfofonlinehouseholdsinWesternEuropeandthesenumbersareexpectedtodoubleby2005.Penetra-tionrateshoweverarethehighestinScandinaviancountriesandstoodatabout50%in2000.By2005almostthree-quartersofallAmericanhouseholdsandabouttwo-thirdsofallScandinavianhouseholdswillbeonline.Dataattheindividuallevelshowsimilarpatterns(Table4).InabsolutetermsGermanyhasbeenleadinginWesternEurope,followedbytheUnitedKingdomandthisisalsoexpectedtobethecasein2005.

56D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–62

Table4

InternetpenetrationforecastsFindividualsaCountry/NumberofonlinePercentageofregion

individualsinmillionspopulationonline2000

200520002005Germany18.939.22347Austria1.73.42041Switzerland2.03.32846UK18.831.03252Ireland0.71.41836Sweden4.65.65162Denmark2.63.54863Norway2.32.95163Finland1.92.83753Netherlands5.19.63258Belgium2.24.12140Luxembourg0.10.23049France10.724.21839Italy6.620.41135Spain5.413.41434Portugal0.82.7827Greece0.72.9627W.Europe85.0170.62243USA

122.0

194.0

44

68

aJupiterResearch,2000.

Table5

GenderandagedistributionofInternetusersin1999aCountry

UsersGenderAge

(millions)

MaleFemaleUnder3535–5455andover(%)(%)(%)(%)(%)

Netherlands3.9

65

3550428Italy4.0643663325Germany14.0613953398France7.8594167276Norway2.05842484012UK14.25743474211Denmark2.35545463915Spain3.9554564315Finland1.7544647467Sweden4.35248464113USA104.0

5050553510

aJupiterResearch,2000.

Table5showsthegenderandagedistributionofInternetusersfortheUnitedStatesandselectedWesternEuropeancountries.In1999thegendersplitwasevenintheUnitedStateswhereas52–65%ofInternetusersinWesternEuropeweremales.InItaly,FranceandSpain,abouttwothirdsofInternetusersareunder35yearsofage.InScandinaviancountries,thereismoreequityacrossagegroups;46–48%ofInternetusersin1999wereundertheageof35and39–46%werebetweentheagesof35and54.Scandinaviancountriesalsohaveahigherproportionofusersaged55andabove.

5.2.Onlineactivities

WhatdopeopleusetheNetfor?9IntheUnitedStates,e-mailisthemostpopularactivity,followedbyusingsearchengines.Researchingproductsandservicesisaveryclosethird.10Thisrankingofactivitiesholdsforallagegroups.Thefourthmostpopularactivityforthoseunder50yearsofageisbrowsinglocalcontentandforthose50andaboveFelectronicgreetingsandpostcards.Travelresearchisthe12thmostpopularactivityanditspopularityincreaseswithage.48%ofusers50yearsandaboveusetheInternetfortravelresearch;theyreportthisastheirsixthmostpopularactivity.Incontrast,only37%ofthosebetweentheagesof19and35usetheNetfortravelresearch;thisistheir14thmostpopularonlineactivity.

Internetuserscanbesegmentedintobuyersorthosewhotransactonline;browserswhoresearchonlinebutshopoff-line;andnon-shoppersorthosewhoconductnoshoppingrelatedactivities.Approximately40%ofInternetusersintheUnitedStatesarebuyers,another40%arebrowsersandtheremaining20%arenon-shoppers.VeteransoftheNet,orthosewhohavebeenonlinefortwoormoreyearscomprise78%ofonlinebuyers.Thusonlinetenureisthekeypredictorforonlinecommerce.Otherindicatorsincludeageandincomegroup.Browserstendtobeyoungerandhavelowerincome.Non-shoppersalsohavelowerincomeandtendtobeolder.

Thetopproductcategoriesresearchedbyonlinebuyersandbrowsersarebooks,CDs,tapes,albumsandtravelpurchases.Aboutaquarterofthosewhointendtomakeapurchaseonlinevisittwositesbeforemakingapurchaseandabouthalfvisitbetweenthreetofivesites.Onlineresearchalsoinfluencesoff-linepurchases.Inthisregardmostoftheonlineactivityisfocusedonidentifyingpricesandselectionofproductbrandandmanufacturer.

Table6showsthenumberofonlinebuyersinWesternEuropeancountriesandintheUnitedStatesandtheirexpenditures.IntheUnitedKingdomtherewere5.8milliononlinebuyersintheyear2000andtheirnumbersareexpectedtotripleby2005.GermanywassecondinWesternEuropewith4.9millionbuyersandtheirnumbersareexpectedtoquadruplebytheyear2005.Togetherthesetwocountriesaccountedformorethanhalftheonlinebuyersand60%oftheonlinespendinginWesternEuropeintheyear2000.Intheyear2000onlinebuyersinbothGermanyandtheUKspentanequalamountFapproximatelyEuro2billion.Online

9ThedatainthissectionpertainonlytotheUnitedStatesandarebasedonasurveybyJupiterResearch(2001b).Thesamplesizeis2312.10Popularityisdefinedasmonthlyormorefrequentuse.Therespectivepercentagesare93%,79%and78%.

D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–62

57

Table6

OnlinebuyersandspendingaCountry/OnlinebuyersOnlinespendingregion

inmillionsinbillionseuro

2000

200520002005Germany4.921.22.218.2Austria0.31.60.11.1Switzerland0.41.60.21.3UK5.817.92.417.3Ireland0.10.60.00.4Sweden1.43.10.62.8Denmark0.61.70.21.4Norway0.61.50.21.3Finland0.41.40.21.1Netherlands1.14.50.33.2Belgium0.41.70.11.1Luxembourg0.00.10.00.1France2.012.10.67.6Italy1.18.20.24.2Spain1.05.70.22.7Portugal0.11.00.00.4Greece0.11.00.00.4W.Europe20.485.07.664.4USA

39.3

85.0

26.9

82.9

aJupiterResearch,2000.

Note:USforecastsarefortheyear2003.USSpendingisconvertedusing1euro=1.041$

spendinginbothcountriesisexpectedtobeabout7–8timeshigherin2005.Table7showsthetop5productcategoriesbasedononlinespendingintheUnitedStatesandWesternEurope.Intheyear2000,travelandtourswasthetopcategorywithairlineticketsbeingthelargestsub-categoryintheUnitedStates.Thisdominanceisexpectedtocontinueinto2003.Itisimportanttonotehoweverthatthisisnotthemostpopularproductcategorywithonlineshoppers,atleastintheUnitedStatesJupiter,2001b).Thetop5intermsofpopularityarebooks,music,apparel&accessories,softwareandtoys.Travelisthe7thmostpopularproductcategory.5.3.Onlinetraveltrends

Comparedto1998,consumersintheUnitedStatestripledtheironlineexpenditureontravelto$6.5billionin1999.Thisdollarfigurerepresentedabout5%oftheleisureandunmanagedbusinessmarket.Airlineticketsaccountedforabout77%ofallonlinetravelexpendi-ture.Theshareofonlinetravelexpenditureisexpectedtogrowto14%($28billion)by2005.11Leisuredominatesonlinetravelacrossallproductcategories.In1999,80%ofallonlinetravelsbookingswereforleisureandtheremainderforunmanagedbusiness(Jupiter,2000d).In199951%ofonlinebookingswere

11ThedatainthissectionarefortheUnitedStates.

Table7

Top5categoriesforonlinespendinginbillionsofeuroaProductcategories

W.EuropeUSA2000

200320002003TravelandTours2.310.010.620.8Ofwhichairtickets

FF7.513.1Computerhardwareandsoftware2.18.77.115.2Books,musicandvideos1.13.62.68.3Groceries0.85.20.87.2Apparel0.62.41.36.4Others0.75.14.525.0Total

7.6

35.0

26.9

82.9

aJupiterResearch,2000.

Note:USSpendingconvertedusing1euro=1.041$

doneviaagenciesandtherestviasuppliers.Theshareofsuppliersisexpectedtoexpandto55%in2005.12Jupiter(2000a,d)expectsgrowthtoslowdown,butforecaststhattheonlinetravelmarketintheUSwillbeworth$28.2billionin2005andthatinEuropewillbeworth$16.9billion,comparedwith$2.2billionin2000.13Onlinebuyersusethreesourcestobooktravel.TheseincludeonlineagenciesandortravelportalssuchasTraveloicty.comandExpedia.com;supplierssitesuchasthoseofairlines,hotelsorcarrentalcompanies;andthroughreferralsfromonesupplier’ssitetoanother’s.14BasedonreferralpatternsintheUnitedStates,Jupiter(1998)expectsairlinestobecome‘‘onlinebrokers’’orthemainbeneficiariesofthedisintermediationunder-wayinthetravelsector.15Airlinesprovidealargenumberofreferralstoothersupplierswhereastheyreceiveveryfew.AsurveyofExecutivesconductedbyJupiterResearchrevealedthat:

*

Ahighnumberofbookingsarepassedalongfrom:*Airlinestohotels16*Airlinestocarrentalcompanies1712Siteregistrationactsasadeterrentforabout40%ofonlineusers,somanytravelsiteshaverelaxedthisrequirement.About70%ofthetravelsitesintheUSdonotrequireregistration(Jupiter,2000e)13SupplierssuchasBuytravel.com(United’salliancewithBuy.com)and‘‘T2’’Fafourairlineconsumer-directallianceareexpectedtocaptureabout55%oftheonlinetravelbusinessin2005(Jupiter,2000b).14Touroperatorsandcruiseoperatorsdonothavealargeonlinepresencepartlybecausetheirproductsaremorecomplexcomparedtoairlinetickets.Thelatterhavebecomelikecommodities.Suppliersitestypicallylackproductbreadthanddonotprovideforcomparison-shopping.Onlinetravelagenciesratherthansuppliersdominateportalrealestate.15Jupiter(1998)estimatesacumulativesavingincommissioncostsforairlinesofabout$689millionovertheperiod1998–2002.1675%ofhotelexecutivessurveyedindicatedthattheyreceivedsomereferralsfromothersuppliersitesbuttheserepresentedonly4%oftheirtotalonlinebookings(Jupiter,1998).1715%ofonlinebookingsofcarrentalcompanieswerereferralsfromothersuppliersites(Jupiter,1998).

58

D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–62

*

Somenumberofbookingsarepassedalongfrom:*Hotelstocarrentals*Carrentalstohotels*Hotelstoairlines

*Cruiseoperatorstoairlines*Touroperatorstoairlines*Cruiseoperatorstohotels

*

Averylownumberofbookingsarepassedalongfrom:

*Cruiseoperatorstocarrentalcompanies*Carrentalcompaniestoairlines*Airlinestocruiseoperators*Airlinestotouroperators

TheindustryasawholeseemstohavemovedawayfromworryingaboutchannelconflicttochannelconfluenceandagenciesareusingCo-opetition,orworkingtogetherwithsupplierstohelpselldistressinventory,todevelopnewproductsandprovidefrequenttravelerrewardsforbookingviatheirsites.Hotelrooms,cruisesandtoursarerelativelymoredifficulttosellonlinecomparedtoairlineticketsandrentalcarsbecausetheyhavemoreattributesoraremorecomplexproducts.Thisisnotsurprisingasairticketsandrentalcarsaresearchgoodswhereasaccommodationandtourpackagesareexperiencegoods.Searchgoods,areeasiertosellusingtheInternetthanexperiencegoods.18Thequalityofsearchgoodscanbeassessedpriortopurchasebyvisualinspectionorbyevaluatingtheobjectivecharacteristicsoftheproduct.19Thequalityofexperiencegoodscanonlybeassessedaftertheconsumerusesorconsumestheproduct.20Eachofthesegoodshasanassociatedformofadvertising.Informationaladvertisingisusuallyassociatedwithsearchgoodsandsellersareinformingbuyersabouttheobjectivecharacteristicsoftheproduct.Suchadvertisementsareusuallyfoundinprintmedia.Persuasiveadvertisingisassociatedwithexperiencegoodsandsellersattempttoinfluencepreferencesandtastesofbuyers.Televisionistheusualmediumforpersuasiveadvertising.Ashampooadvertisementonthetelevisionrarelyprovidestheexactchemicalcomposi-tionoftheproduct;insteaditprovidesvisuallypleasingimagesofhowgoodone’shairmightlookafterusingtheproduct.

18Therearesomeexceptions,forexamplecomputersoftwareisanexperiencegoodandalsoveryeasytosellonline.Manysoftwarevendorsprovidefreetrialspriortopurchasetoallowconsumerstoassesstheproducts.19Objectivecharacteristicsarealsosometimesreferredtoasthird-partyverifiableandserveanimportantroleindisputeresolution,shouldtheyarise.20Athirdcategoryiscredencegoodswheretheconsumerreliesonassurancesoftheproviderthatthejobwaswelldone.MedicalcarefallsinthiscategoryandoneoftherolesofaMedicalAssociationorsimilarcertificationbodyistoassureconsumersthattheycanexpectfromtheirphysician,acertain‘acceptable’levelofcompetence.

Clearlysellingmoretravelproductsrequiresmorecontenttosupportonlinesales.Thecurrentapproachtocontentprovisionisbrochure-like.Contextspecificcontentiswherethevaluelies.Contentisimportantas61%ofonlineconsumerssearchforinformationabouttravelproductsonline(Jupiter,2000b).AccordingtoarecentJupiterConsumerSurvey,49percentofprospec-tivetravelersusetheInternettodecidewheretogoonvacation.21Localcontentistheuntappedopportunityinthetravelsector(Jupiter,2000c).IntheUnitedStatesmostInternetusersrelyontheirlocalnewspaperoritswebsitetoobtainlocalcontentandwouldconsideraccessingmorelocalinformationonlineifitwasmorerelevantandbettertargeted.

Thoughcontentisdesirable,itisnotnecessarilyaveryeffectivetoolforcustomeracquisition.FromabusinessviewpointacontentrichsitehasanadditionalcosttorecoverFthecostofcreationandhostingofcontent.Inadditionthereishorizontalfreeridingoncontent.Forexample,Amazon.comprovidestablesofcontentsforbookswhereasBarnes&Nobledoesnot.Consumerscanobtaininformationfromonesourceandbuyfromanother.Contentthatisnotproductrelatedislargelyignoredandsurveyresearchindicatesthatmostonlineshoppersarelookingfortwothings:Flowpriceandchoice.22Onlinevendorsshouldusecontentcreativelytobuildrelationshipswithconsumersratherthantodrivetransactions.ReichheldandSchefter(2000,p.106)suggestthattheInternetisnotaboutpricebutaboutbuildingtrust:‘‘ContrarytothecommonviewthatWebcustomersareficklebynatureandwillflocktothenextnewidea,theWebisactuallyaverystickyspaceinbothbusiness-to-consumerandbusiness-to-businessspheres.’’

Onlinecustomeracquisitionisexpensiveandittakesanumberofyearstorecouptheinvestment.Insomesectorsmorethanhalfofthecustomersdefectbeforethebreak-evendate.23Fortheonlineapparelmarket,ReichheldandSchefter(2000)findthatrepeatcusto-mersspendtwiceasmuchafterthesecondyearoftheirrelationshipthanintheydointhefirstsixmonths.Theyestimatethetypicalcustomeracquisitioncostinthisproductcategorytobeabout$53with1.1yearsrequiredtobreakeven.15%ofthecustomersdefectbeforethebreak-evenpoint.Theattritionratepriortoreaching

21Mapquest.comhasbeenmentionedfrequentlyinJupiterresearchreportsas‘‘standingalone’’inprovidingobjectivedestinationcontent.ThissiteprovidesstreetmapsforairportsintheUnitedStatesandalsoprovidesinformationonthegeneralneighbourhoodintermsoflocationofbusinesses,entertainmentandsportingfacilities.2274%ofconsumersintheUSbuyonlinebecauseofprice(Jupiter,2001a)andanoverwhelmingnumberhaveaspecificproductinmindwhentheyshoponline.23ReichheldandSchefter(2000)estimatethatlessthan20%ofonlinecompaniestrackcustomerretentioneventhoughthemediumisidealforthispurpose.

D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–6259

breakevenisestimatedtobeabout40%forconsumerelectronicsandmorethan60%foronlinegrocerysales.TheycitetheVanguardGroupamutualfundcompanyasanexemplaryexampleofputtingrelationshipsbeforesales.Vanguardspentover$100milliontodeveloptheirawardwinningwebsitewiththeintentofassistingcustomersinmakinginformedandbetterdecisions.IndeedcontrarytopopularWebstrategy,theymadeitdifficultforcustomerstousetheWebsitefortransac-tionsbyrequiringthemtoupgradeto128-bitencryptionbrowsersandmailingtheirpasswordstothemratherthansendingthembye-mail.ThestrategypaidoffasVanguard’ssiteaccountsfor40%ofthecompany’sinteractionswithcustomers.Vanguard’sadvertisingexpendituresareone-tenththoseofitscompetitorsbutitacquiresnewcustomersfasterthanmost.

5.4.Travelrelatedaccessvenues

ThoughanoverwhelmingnumberofInternetusersusePCslocatedathomeoratwork,otherlocationsarebecomingmorepopular.Aswithonlineshopping,veteranusersratherthannovices,aremorelikelytoseekoutalternativeaccessvenues.Therearevariationsacrossincomegroupsaswell.LessaffluentconsumersintheUnitedStatesaremoreinterestedincommunityrelatedvenuessuchaspubliclibraries,governmentofficesorpostofficesandshoppingmallsorsuper-markets.MoreaffluentconsumersintheUnitedStatesarerelativelymoreinclinedtousingtravel-relatedlocations(Jupiter,2000e).Thoughthelikelihoodofuseataparticularvenuemayvaryacrossincomegroups,therelativeattractivenessofvenuesdoesnot.Hotelsaremostpopular,followedbyairports;cruiseships;andlastlyairplanes.24ThesameistruefortenureontheInternet.Thoughtheimportanceplacedonavenuevariesbasedontenure;regardlessoftenure,thoseonlinepreferhotelstoairports.25AirportsrankedpoorlywithhouseholdswithoutanInternetconnection.49%ofrespondentsindicatedthattheywouldaccesstheInternetfromapubliclibraryoraschool;whereasonly3%woulddosofromahoteloranairport.26JupiterResearchpredictsthattherewillbeabout2000InternetKiosksinUSairportsbytheyear2002andthesewillbeaccessedby4%offlyers.

24AJupiterResearch(2000f)surveyon‘NomadicAccess’indicatesthat50%ofhigherincome(>$75k)respondentsindicatedaninterestinaccessatairports.Thenumbersformiddle($50–75k)incomeandlow(o$50k)incomerespondentsare38%and38%,respectively.ThissurveywasconductedintheUnitedStatesandthesamplesizewas1401.25Jupiter(2000f)reportsthat44%ofveterans,34%ofintermediateusersand29%ofnovicesperceiveairportstobeavaluableaccessvenue.26Jupiter/NFOSurvey,1999.SamplesizeF636.

6.AirportsFsourcesofdemandandrevenue

Thedemandfortheservicesofairportsisdrivenbythedemandforairtravel.ThetwomaindriversofairtraveldemandarewealthorpercapitaGDPandprices.Passengertraffichandledbyairportsprimarilybelongstooneofthreecategories:originating,transfer,andtransit.Originatingpassengersaresourcedfromthelocalcatchmentareaoftheairportandthoughcatchmentareasmayoverlapinsomelocations,airportshaveamonopolyoveroriginatingpassengers.Originat-inginternationalpassengersaremorevaluabletoairportsthanoriginatingdomesticpassengersbecauseairportsgenerallychargeairlinesmorefordepartinginternationalratherthandepartingdomesticpassengers.Inaddition,internationalpassengersspendmoretimeatairportsandthereforemoremoney.27Transferpassengersdisembarkatanairportanddepartonanotherflightwithoutgoingthroughcustomsandimmigrationformalitiesatthetransferpoint.Transfertrafficdependsontherangeofconnectionsavailableatanairport,theticketprice,andlocation,totheextentthatpassengersmaybereluctanttotransferatairportsthatlieinadirectionoppositetothatoftheirfinaldestination.28Comparedtothemarketfororiginatingtraffic,themarketfortransfertrafficismorecompetitive.However,airportscanonlyinfluencethepassengerflow-throughtimes;locationisfixedandticketpricesdependuponairlines.SomeairportssuchasFrankfurt,Paris(CDG)andCopenhagenaremoredependentontheirrespectivehubcarriersLufthansa,AirFranceandSASthanLondon(HeathrowandGatwick)andZurich.Inthecaseoftheformer,thesizeandcompetitivenessofhubcarriersdeterminetransfertrafficgrowth.AmongmajorEuropeanairports,trans-fertrafficasapercentageoftotaltrafficexceeds40%atCopenhagen,FrankfurtZurichandAmsterdam.29Transitpassengersstopatanairportbutdonotdisembark.Sincethesepassengersstayontheplanewhileitpreparesforthenextlegofitsjourney,theyareoflowvaluetoanairport.ThetransitmarketissmallinEuropebutlargeinAsia.Singapore,KualaLumpur,BangkokandHongKonghavealldevelopedtransitbusinessesandcompetitionisprimarilybasedonprice.Mostairportshavetwoprimarysourcesofrevenue.Theyarechargesforuseofinfrastructureoraero-nauticalrevenueandcommercialrevenuefromretailoperationsandproperty.Aeronauticalrevenueisdrivenbytrafficgrowth,asarerevenuesfromretailoperations.Thelatteralsodependonspendperhead.Property

27CreditSuisseFirstBoston(2000)estimatesthatoriginatinginternationalpassengersmaybethreetimesasvaluabletoairportsasoriginatingdomesticpassengers.28Topassengerswithalowvalueoftime,theremaybeatrade-offbetweenlocationofthetransferpointandticketprice.29Fig.17inCSFB(2000).

60D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–62

incomeisdrivenbytrafficgrowthinsofaraslargerairportschargehigherrentsandbytherateofinvestmentinproperty.AtmajorEuropeanairports,aeronauticalrevenueisprobablythelargestcomponentofrevenues,buttherearesomeexceptions.ViennaairporthasasignificantthirdrevenuesourceFgroundhandling.30BAAhasahighproportionofcommercialrevenuebecauseitownsduty-freeshops.WarburgDillonReed(1999)reportsglobaldutyandtax-freesalesfortheyear1997tohavebeenabout$21billion.Airportdutyfreeretailwasthemostimportantsegmentvaluedat$9billionandairporton-boardsales,thesmallestsegment(14%in1996).31Europehasthelargestshare(about45%)inglobaldutyfreesales,followedbyAsia/Oceania(about35%)andtheAmer-icas(about25%).327.Conclusions:whatcanairportsdo?

HowairportsusetheInternetislikelytoreflecthowairportsviewthemselves.Averyminimalistviewwouldbethatanairportisaninfrastructuresupplierorasupplierofanintermediateinputintheprovisionofairtransportationservices.Whatelsedoairportsdo?Theyprovidesomefacilities,eitherthemselvesorthroughtenants,forthepassengerstheyhandle.Thefacilitiesvaryconsiderablyacrossairportshowever,mostifnotallairportshavehealthfacilities,currencyexchangebooths,duty-freeshopsandrestaurants.Othertenantscouldincludeprovidersoftravel-relatedservicessuchasrentalcars,hotelservices,touroperatorsandthelike.Inadditionairportsprovideparkingfacilities,groundtransportationlinksthroughcars,taxicabs,busesandrail.Airportsalsoprovideavarietyofservicestoairlines,includingair-trafficcontrol,baggageandcargohandling,catering,aircraftmaintenanceandlandforcargohandlingterminalsandhangers.Lastly,theyprovidefacilitiestoGovernmentdepartmentsforimmigration,customsandpossiblyhealthservices.

ThedescriptionthusfarisnotexhaustiveandperhapsfromanAirportManager’sviewpointitmayindeedbearatherpoordescriptionofwhatanairportdoes.Nonetheless,theabovelistisbetterthanwhatonemaybeabletocompilefromwebsitesofmany‘International’airports.Airportsareattheveryearly

30CSFB(2000)reportsthatin199934%oftherevenueatViennaairportwasfromgroundhandling.Theairporthastointroduceathird-partysupplierinordertoconformtoanEUdirectivewhichcameineffectonJanuary1,1999.Regardless,theairportexpectstomaintainadominantshare.31Thoughairportpricesarelowerthanthoseonthehighstreet,WDR(1999)estimatesthatairportmark-upsaretwotothreetimesthoseonthehighstreet.32Intra-EUdutyfreeceasedasofJune30th,1999.In1996intra-EUdutyfreesaleswerevaluedataround$2billion.

stagesofleveragingthepoweroftheWeb.Thefirstinitiativeairportscantakeistoimprovetheirwebsites.33Threepiecesofinformationmosttravelersrequirearethelocalweather,thelocaltimeandtheexchangerate.FewAirportwebsitescurrentlyprovidethisinformation.

Theinitialstagesofusinginformationtechnologyinvolveattemptingtoreplicatethephysicalworldincyberspace.Accordingly,AirportsaretryingtomovemerchandisingtotheWebbutitishighlyunlikelythatthecurrentvariantsareprovingtobesuccessful.Singapore’sChangiforexampleprovidesweb-basedpre-orderingofduty-freeitemsandattheBAAwebsiteitisalsopossibletopre-orderforeigncurrency.Thedevilhoweverisinthedetails.TheracebetweenVHSandBetamaxhomevideoformatsshowedusthatsuperiortechnologyaloneisnotenoughtogetahead.ThecontinuinglossesofAmazon.comtellusthatsellingcommoditiesusingthewebcanbequiteachallengeevenforcompaniesthatareglobalbrandsandmodelsofe-commerce.

Pre-orderingforeigncurrencyandduty-freeitemsisusefulinthatitsavesthetimeonemightspendbrowsingatdutyfreeshops.34Howeverinitscurrentformthisserviceisunlikelytogeneratemuchexcitement,letalonedrivebusiness-to-consumere-commerce.Pre-orderingissimilartorestaurantreservationsFpeopleonlymakereservationsatrestaurantsbecauseseatingcapacityislimited.Regardless,thoseembarkingonthisventuremaywishtoconsidersomeofthefollowingissueseventhoughnoneofthemmayprovetobeagoodvalueproposition.

Firstly,registrationrequirementssuchasthoseattheChangiwebsitearelikelytoactasadeterrent.Underthepre-orderonlysystemsuchasthatatBAA,itispossibletopre-orderitemsevenifoneentersfalseorfakeinformationineveryrequiredfieldsuchasname,address,e-mailaddress,phonenumber,flightnumberandflightarrival/departuretime.35Back-endprocessescouldbedevelopedtoensureforexample,thatflightnumbersenteredbyusersareauthentic.36IfBAAgoesonestepfurtherandrequiresthecustomertopayforthegoodsatthetimeoforderingthereisnoincentivetoprovideincorrectinformation.Clearlythevalueofthe

33Mostairportwebsitesarelikedigitalbrochures(seeforexampleYVR).Theimportanceofwebsitedesigncannotbeoverstated.ForexamplewebsitesshoulduseframesandleftjustifiedmenusFtheseareuserfriendly.ThefirstpageshouldbeaslightaspossibletoensurefastloadingFthisiswhyAmazon.comhardlyhasanygraphicsonitsfrontpage.34Somepassengersliketobrowseandothersmaydosobecausetheyhavenothingbettertodoatanairport.35ShapiroandVarian(1998)p.35,citeasurveywhichfindsthat94%ofwebusershaverefusedtoprovideinformationtoawebsiteand40%havegivenfalseorfakeinformation.36TheTravelocitywebsitedoesnotprocessarequestifthecreditcardnumberisnotvalid.

D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–6261

currentservicecanbeenhancedifthetransactionscanbecompletedatthewebsiteandtheserviceincludesdistributionordelivery.

Theairportcantakethismodelastepfurtherandhelpintegrateback-endoperationsofitstenants.Itemsorderedonthewebfordeliverytocustomersneednotbestoredanddisplayedinashowroom;theycanbestoredinanondescriptwarehousethatcanaccommo-datenotjustliquorandtobacco,butalsobooksandelectronicitems.Thefront-endinterfacecanbelinkedtoaback-endinventorymanagementsystem.Theairportnowbecomesmorethanalandlord;itprovidesanothermarketingchannelforitstenantsandforsmallertenantsitprovideswarehousingandinventorymanagementsolutionsthattheymaynothaveimplementedthem-selves.AirportsthatowndutyfreeshopssuchasBAAcouldreduceprocurementcostswithbusiness-to-busi-nessventureswithsuppliers.

Airportsshouldseriouslyaskthemselvesiftheyexpecttoincreasemarginsbysellingdutyfreeitemssuchastobaccoandliquoronline.Theanswerprobablydependsontheexecution.Pricecompetitionisunlikelytoboostprofitsparticularlyathighcostlocationsandafewlowcostairportsarelikelytocapturemostofthebusiness.37Withoutonlinepriceinformationitisdifficulttocomparepricesacrosslocationsandcon-sumersarelikelytoberiskaverseandpurchasedutyfreeitemsatpointofdepartureratherthanatthepointofarrival.38Howeveronlinepriceinformationatjustthedestinationorboththeoriginanddestinationairportsallowsconsumerstocomparepricesandthismayshiftdemandfromoneairporttoanotherregard-lessofthepre-orderservice.Ifcompetitionisonthebasisofpricealone(asitislikelytobeforitemssuchastobaccoandliquor)thecostleaderwillattractallthebusinessandpricecompetitionbetweenairportswilldrivedownmargins.39Lastly,pre-orderingcurrencyisavaluableserviceonlyifthecurrencyonerequiresisexpectedtobeinshortsupply.40Thisisunlikelytobeanattractiveserviceforthoseembarkingfromcountrieswithinternationalcurrencies.Moreoveritisunlikelythatconsumerswillpayforcurrencyusingcreditorchargecardsduetothehighinterestratesassociatedwithcashadvances.An

37Apricecomparisonfora1LbottleofChivasRegalusingthewebsitesofBAAandSingaporeChangiAirportshowsthatonecansaveaboutSG$10bybuyingatChangiAirport.38Theyarealsolikelytodothisanywaybecauseoflongerdwelltimesattheairportfromwhichtheyembarkontheirjourney.Dwelltimesaredeterminedbyairlinesratherthanbyairports.39IndividualpassengersneedonlycomparepricesatO-Dpairsortripletsifthereisatransfer,orstopover,butdemandwillshiftinfavourofthecostleaderfromalllocationsthatitreceivespassengersfrom.40TheBAAserviceofferslowercommissionratesonpre-orderedtravelerscheques,butitispossibleforotheragencies(suchastheAAAintheUnitedStates)dothesame.

onlineofferinginitselfdoesnotgeneratenewbusinessFmostbookpublishershavewebsites,yetitismorelikelythatconsumerspurchasefromAmazon.-combecauseitservestheroleofanaggregator.

Howdoothersperceiveairports?Mostoftheonlinetravelsurveyresearchwehavedrawnfromabovedoesnotevenmentionairportseventhoughairtravelisimpossiblewithoutairports.Transportdemandmodelsclassifythedwelltimesatairportsasaccessandegresscoststhatarethenaddedtothedollarcostsoftransportation.Passengersuseairportsnotbecausetheymaynecessarilywanttobutbecausetheyhaveto,andfromtheirviewpointagoodairportisonewheretheyhavetospendtheleastamountoftime.Airportsaredependentuponairlinesforpassengersandairlinesalsodeterminedwelltimes.Theseperceptionshoweverdonotreflecttheimportanceofairportsandinordertoassesstheirvaluetodifferentstakeholdersairportsmustaskthemselveswhowouldbehurtmostiftheyceasedtoexist.Theanswerwouldlikelybethelocalcommunity.Allairportsareessentially‘‘localbrands’’despitethefactthatsomemaybebetterknowninternationallythanothers;andtheyprovidethemostvaluetothelocalcommunity.Thereviewofonlinetraveltrendsindicatesthatobjectivelocalcontentismissingfromthetravelmarket.Airportsareideallysuitedtofillingthisgap.Thiswillalsoallowthemtominimizetheuncertaintythattravelersfacewhentheyvisitanewlocation.

Localcontentiscurrentlyavailablefromavarietyofsources,howeveritisnotprovidedintherightcontext.Airportscanserveasinfomediaries,syndicatorsanddistributorsoflocalcontent.Throughcloselymonitor-ingandcollectinginformationontheirstakeholders,theycanprovidedataonthelocalcommunitytovisitorsandvice-versa.Forexample,itispossibleforafirsttimevisitortoaparticularcitytoobtainalistofgoodrestaurantsfromwebsitessuchasFodors.com,butinordertobevaluablethatinformationhastobecross-referencedfromothersourcestodetermineifthebestrestaurantsarealsolocatedwithinaconvenientdistancefromthehotelthattheyarestayingat.AnairportwebsiteincollaborationwithacompanylikeMap-quest.comisperfectlysuitedtoaggregatinginformationfromvarioussites.Commerceopportunitiescanalsobetiedtothelocalornationaleconomy.IfFrankfurtInternationalAirportfeelscompelledtoentere-tailingtheycouldcollaboratewithacompanysuchasActiveresearch.comandsellGermanwineproducedintheRhineandMosellevalleys.41Activeresearch.comhasmanyusefultoolsincludingaproductselector,whichasksuserstostatewhichproductcharacteristicsareimportanttothem.Itthenexaminestrade-offsbetweencharacteristicsandfinallyrecommendsproductsthatare

41ThewinegrowingregionsattheconfluenceoftheRhineandMoselleareanhour’strainrideawayfromtheFrankfurtAirport.

62D.Gillen,A.Lall/JournalofAirTransportManagement8(2002)49–62

bestsuitedtotheparticularuser.Frankfurtairportandindeed,allGermanairportscouldpartnerwithRo-senthaltosell(andhavedeliveredattheairport)finechina(or‘‘tableculture’’products)tovisitorstoGermany.Soundscrazy?Maybe,butneithergoodGermanwinenorfinechinaarecommoditiesFliquorandtobaccoare.Consumerswillbehardpressedtocomparisonshoptofindthebestdealsandcompetitionfromotherairportscannotdrivepricesdown.ThoughwedonothavedataonGermanwineproducers,theRosenthalwebsiteshowsthatin1999approximately52.9%oftheirincomecamefromGermany,31.1%fromtherestofEurope,11.3%fromNorthAmericaand4.7%fromtherestoftheworld.The‘‘restoftheworld’’isquitelargeandsomeofitsresidentsquiterichthatRosenthalmaynotscoffatsuchaproposal!

Acknowledgements

Theauthorsthankparticipantsatthe4thHamburgHWWAWorkshoponAirports,TheInternetandE-Commerce,fortheircommentsonanearlierversionofthispaper.AshishLallthanksChadwickTeoandDannyChamforassistanceandMr.KaramjitSingh,ChiefExecutiveofSATSAirportServicesPte.Ltd.,foraninterestingdiscussion.

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