Today’s post is a twofer that hits on unrelated items that we have posted on previously. The first of these is airlines and operations strategy. I previously noted that Southwest has modified its longstanding operations model in part because traditional airlines have successfully lowered their operating costs. So that begs the question: Is there an airline left with a truly unique set of operations?
The answer is, of course, yes. (Otherwise, there would not be much to post about.) Fast Company has an interesting article on Allegiant Air (Heard of Allegiant Air? Why It’s the Nation’s Most Profitable Airline). These guys exist because a specific asset is available in the market, the MD-80. I’ve never liked those planes and apparently many airlines agree with me in part because they are not fuel-efficient. Major airlines have shed these beasts so they are relatively cheap as planes go (about $4 million according to the article). This has allowed Allegiant to pick up an inexpensive fleet. At a high level, Allegiant has carved out a unique set of resources. Most airlines have very high fixed costs and thus worry about utilization. Allegiant has relatively low fixed costs but higher variable cost.
How should Allegiant deploy these resources? With lower fixed costs, they can afford to let their planes sit a bit between flights. That is, they don’t need markets in which one plane could make several round trips per day the way United or American may send a jet back and forth between Chicago and New York. They also (because of their financial resources) need routes that can be profitable quickly. Never mind Chicago, we’re going to Peoria! Here’s the two most interesting number from the article: “Allegiant faces competition on only 6 of its 134 routes.” and “It serves 40 destinations from Las Vegas with just 14 planes.”
From an Ops Strategy point of view, Allegiant has built itself a job shop and is out to take the low volume work that the big boys with their flow shops won’t. Of course, the caveat here is that there are likely limits to growth. A city much smaller than Peoria (around 180,000) is probably not worth flying to. Bigger cities likely already have better air service from the major airlines.
The second topic for today is DVDs. There are two interesting stories in DVDs. One is Netflix. The other is Redbox, the automated kiosk at many grocery and other stores that allow customers to rent a DVD for a dollar a day. Here are some basic facts from the company’s website:
• Redbox is currently available at more than 17,000 convenient locations nationwide, including select McDonald’s® restaurants, leading grocery and convenience stores and Walmart and Walgreens stores in select markets. Each fully automated redbox kiosk offers the latest DVDs at an affordable price.
• Each fully automated Redbox kiosk holds approximately 700 DVDs, representing up to 200 new release titles. New titles are available at Redbox every Tuesday.
Now you would think that this would make movie studios happy. Turns out that it doesn’t. (See Hollywood hates Redbox’s $1 DVD rentals, Macworld Aug 10, 2009.) DVDs have been a boon to movie studios because people would buy them. People rented VHS tapes from local shops or large chains like Blockbuster and that limited the studios’ upside (although allow me the gratuitous self-citation – make that citations). But retail sales of DVDs were much more profitable.
Redbox undercuts all of this. Their rentals are cheap and convenient and focused on new releases. Why buy a DVD when you can rent it for a few bucks (assuming you hold it for a few days) on an errand you were going to run anyway. Furthermore, Redbox’s volume is enough to mess with the second-hand market. If Redbox puts four copies of a DVD in each kiosk and a month later only needs half of those, that is a big pile of inventory hitting the market.
This has lead to much bickering – and, of course, litigation. Some studios have tried to keep Redbox from buying at wholesale prices. Others have struck deals that allow Redbox to buy at a discount but control how Redbox disposes of unneeded DVDs. Maybe there is a contractual way that will make everyone better off but that seems unlikely. Contracts allowed the VHS tape supply chain to work much better (see the aforementioned gratuitous self-citations) but they also kept the basic business model of the players in tact. Here the studios are swimming upstream. They want to preserve their sales model but the end customers want the convenience of renting. One suspects that overtime the studios will blink. They may not like Redbox, but they would rather do business with them then force consumers to Pirate Bay for convenient access to new releases.
UPDATE: The New York Times had an article on Redbox (Movie Studios See a Threat in Growth of Redbox, Sep 6). Two interesting facts: Paramount actually deals with them on revenue-sharing contracts and stores such as Walgreens subsidize Redbox because the kiosk drives store traffic.
ANOTHER UPDATE: The Chicago Tribune has an article that discusses the history of the firm as well as their ongoing battles with movie studios. Redbox DVD vending company bargains for success, Oct 16, 2009.