Power by the Hour – how Rolls Royce helped airlines
Published on: 14 April 2024
In 2020, BMW came up with a new idea.
An idea that would ensure they had more stable revenues.
Of course, ideas like these do not excite customers.
But they do excite the executives running the company.
Except – that things did not go according to plan. BMW’s idea was criticized universally.
What was the idea?
If you buy the higher variant of a car, it will have more features – that you paid for.
BMW’s idea was to charge a ‘subscription fee’ for some of the features.
They announced that features like a heated steering wheel and heated seats – loved in cold countries – would require monthly payments.
Think of it like paying for YouTube Premium or Spotify Premium.
BMW customers were not happy. They felt cheated.
Their argument was that they were paying extra for features that were already installed in their cars.
And then they would have to pay a monthly fee to use those features? Not acceptable.
BMW withdrew this subscription option soon after launching it.
But why did they come up with an idea like this?
Subscription – as a business model – is desired and loved by many.
We need to go back a bit to understand this better.
Power by the Hour
The airline business has always been difficult.
There are too many sides to deal with: passengers, routes, prices, safety, maintenance of planes, price of fuel – the list is longer than most of us realize.
To make matters worse, it is an extremely competitive industry.
Every company is fighting the other company to offer the lowest prices.
Around the 1960s, things worked a bit differently.
In one particular way, every airplane operator had a more difficult time: maintenance.
Plane owners had to maintain their planes and the engines. They carried out repairs, replaced worn-out parts, and serviced the planes.
Planes that are flying earn money. Planes that are getting repaired are not earning money.
To save time, plane owners would also stock parts needed for their planes.
If an owner owned a large variety of planes, they would have to store that many different kinds of parts.
In reality, they struggled to store the parts. There were just too many parts.
Often, planes would just sit waiting for parts – a real headache.
If something went wrong unexpectedly, the finance teams would hate it too – a sudden big expense. Their annual planning would get ruined.
Rolls Royce – the plane engine maker – noticed this problem.
Its customers hated the stress and tension of maintaining the engines.
So, Rolls Royce came up with a plan. It was called ‘Power by the Hour’.
The idea was simple. Rolls Royce would take care of the engines.
Airplane owners would pay Rolls Royce only for the hours the plane flew – and the engines were being used.
If the engine was being repaired, they would not get paid.
In short, Rolls Royce had come up with an engine subscription plan.
Airplane owners loved the idea. Their finance teams loved the idea – no more large unexpected payments.
And because Rolls Royce themselves would not earn money if the engine was getting repaired, they were incentivized to make sure the engines were well serviced.
Rolls Royce poured their engineering skills into making durable engines. Airlines got better engines and more predictable running costs.
This was a win-win situation.
‘Power by the Hour’ is believed to be the first subscription plan.
The subscription business model was born.
Subscription Based Companies
Today, when you look around, you will realize our world is filled with companies that rely on the subscription business model.
The software world is filled with examples of this.
There was a time when software was bought – for a one-time cost. Today, the subscription dominates the industry.
In fact, it has given rise to a new word – SaaS – Software as a Service.
You might have heard of Photoshop, a photo editing software.
Adobe, the company behind it, was struggling for many years. Its software was expensive. Photoshop was pirated illegally and used.
Adobe has many other software. They all had the same problem.
So Adobe introduced a subscription plan.
Customers could pay a monthly subscription fee and use the latest Adobe software. This worked out much cheaper than buying the software.
It was a hit.
Adobe’s revenue was up 22% in just a year.
There are many companies who mainly depend on the subscription business model for their revenues.
Amazon, Google, Microsoft – all offer subscription-based cloud computing products.
Spotify – music subscription. Netflix – movies and shows. Amazon Prime – shopping, movies, shows, and more.
In fact, look at the apps on your phone.
Most of them will have some kind of a premium subscription plan.
Why Subscription
The subscription business model is extremely loved.
It offers many benefits for companies.
First, subscription plans are like EMI. They break down the cost into smaller chunks.
More customers find the subscription costs affordable.
Second, there’s a loyalty factor.
Once customers start paying regularly for a subscription, they usually continue with it.
It makes the companies’ revenues more stable and predictable – and also higher.
Third, it also allows companies to sell more things.
Think about it like this: you go to a new shop. You see a new shampoo. You ignore it.
If you never visit this shop again, that new shampoo will probably not come to your mind ever again.
But if the new shampoo is kept in a shop you visit every day, you might eventually get tempted to buy it.
These are the main reasons. There are several more.
There are thousands of companies that use subscriptions in one way or another to get paid.
And many companies are desperately trying to offer more products and services via subscription plans.
Some companies succeed. Some even do better with subscription plans – like Adobe.
And some companies take it too far.
Like BMW’s heated seats?
The illustrations used above are made using an AI tool (DALL-E).
Quick Takes
+India's retail inflation fell to a 9-month low of 4.85% in March.
+Passenger vehicle sales rose by 8.4% and overall vehicle sales rose by 12.5% in the financial year 2024: SIAM report.
+Number of unicorns (startups worth over $1 billion) in India fell to 67 unicorns vs 68 unicorns earlier: Hurun Global Unicorn Index 2024. India is the 3rd-biggest unicorn hub, following China (340 unicorns) and the USA (703 unicorns).
+Average salaries of CEOs in India rose by 40% to Rs 13.8 cr in 2024 (compared to pre-pandemic times): Deloitte.
+Ola Cabs is reportedly planning to exit all of its existing international markets (UK, Australia, and New Zealand).
+Market cap of companies listed on the BSE crossed Rs 400 lakh cr for the first time.
+Jio added 35.98 lakh new telecom customers in Feb 2024. Airtel added 7.78 lakh. Vodafone-Idea (Vi) lost 10.23 lakh customers.
+Blackstone backed Aadhar Housing Finance got SEBI approval to raise Rs 5,000 cr through an IPO.
+Vodafone-Idea (Vi) approved a Rs 18,000 cr Follow-on Public Offer (FPO) - open from 18 to 22 April.
+Bharti Hexacom got listed on the stock market at a 32.5% premium.
6-Day-Course
Theme of the week: other important indices
We’ve reached the end of this week’s course that started on Monday.
Here’s a test you should take. Get pen and paper!
Question 1:
Nifty Next 50 index includes companies with market cap ranking of _____ ?
-1 to 50
-51 to 75
-51 to 100
Question 2:
The banking sector behaviour is tracked by an index that includes top 12 biggest banking stocks. This index is called as _____ ?
-Bank Nifty 12
-Bank Nifty
-Nifty for Banks
Question 3:
Nifty TMI includes which of the following type of companies?
-Large cap only
-Mid and small cap only
-Large, mid and small cap only
-Large, mid, small, and micro cap
Question 4:
Mid and small cap company stocks are generally more volatile than large cap stocks.
-True
-False
Question 5:
Which index is used to measure the volatility of stock markets?
-Sensex 30
-Nifty TMI
-Nifty VIX
-Nifty Small Cap 100
Answers:
Q1: 51 to 100
Q2: Bank Nifty
Q3: Large, mid, small, and micro cap
Q4: True
Q5: Nifty VIX
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest