In normal circumstances the airline industry creates value, a portion of which the airlines capture for themselves. Explain what we mean by value capture and how increased competition in the industry might impact the ability of airlines to capture value.
In normal circumstances the airline industry creates value, a portion of which the airlines capture for themselves. Explain what we mean by value capture and how increased competition in the industry might impact the ability of airlines to capture value.
When some percentage of value provided in each business transaction is retained, it is known as 'value capture.' The purpose of retaining some percentage of each transaction is investing it back into the business for expansion, growth, etc.
Every business must retain or capture some value earned in terms of revenue or profits. Value capture is important:
- to increase competitive advantage
- invest in research & development
- investment for new projects
The airline industry is highly competitive. It is because the prices of airline tickets are continuously reducing. Also, the airline industry is a highly capital intensive sector. A capital intensive sector needs continuous investment. Besides, a capital intensive sector has high fixed costs as well as barriers to exit.
In the airline industry, players have little difference in their products as it is a service industry. Also, the increased competition has made it difficult to differentiate the product from that of the competitors and reduced profitability to a large extent. In such a situation, if an organization in the airline industry will not perform 'value capture,' sustaining in the industry and competition will be impossible.
This 'value capture' allows airline organizations to reinvest and grow in the industry.
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