Diversification as an alternative growth strategy for the airline industry

Under the traditional model of regulation, airline firms basically diversified because of low rates of return, their desire to achieve operating or financial synergies, or the need to utilize investments tax credits and tax loss carry forwards. The experience of airline firms with diversification under this model was mixed. While some diversification efforts were extremely successful, many of these original diversification activities involved the achievement of "operating synergies" with other travel-oriented firms; there is little evidence to suggest that this objective was ever achieved.

Many of the subsequent diversification activities of the carriers involved service-oriented firms outside the travel industry. The objective of such activities was financial synergies and utilization of investment tax credits. The diversification record of the industry with firms not related to travel has generally proven less successful for a variety of reasons. From an overall perspective, diversification has proven less than rewarding to the airline industry because of corporate planning failures linked to a lack of commitment on the part of senior management and the failure of management to develop expertise in the acquisition area.

While the history of diversification in the industry is important to provide perspective, four key questions must be answered for the 1980s. What factors will influence diversification in the 1980s? How will these factors influence the nature of carrier diversification objectives? How will diversification help financially strong, weak, and noncompetitive carriers in this period? What improvements can airlines make in future diversification efforts? This research effort offers some insights into these provocative questions.