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Airlines Business & Marketing Strategies

There is no single, unique strategy which must be


followed if success is to be achieved

One must be selected from a range of possible


strategies available

It must then be implemented well, and continued


on a long term basis

We will discuss the possible strategies, and their


advantages and disadvantages

Porters five forces & its application in Airlines Industry

Michael
coloured
amongst
power of

Porter states that strategic issues are


by interplay of five forces of rivalry
existing firms, substitution, new entry, the
customers and the power of suppliers

Rivalry amongst Existing Firms

Porter argues that often little of the true competition


& the drive for change come from long-established
firm
They can only benefit from aggressive competition
at the margin of their activities
Since 1997, airlines of EU have competed in a single
aviation market with the loosest control over entry,
capacity & fare
Competitors are using same aircraft -A320 family-,
identical seat configuration, similar frequencies &
timing & identical pricing policies
Such policies made it easier low-cost carriers to
grow in Europe
Short haul scene is dominated by two very large low
cost carrier Ryanair & easJet, while Lufthansa, Iberia
& British Airways are making large losses in their
intra-European point-to-point operations

Substitution

Porter argues that disturbance to the competitive


equilibrium set up by the long-established firm can
come from two established sources, the first of these
being that of substitution
There are number of substitution issues affecting
airline at present time:
Electronic method of communication- videoconferencing, teleconferencing & email all have
potential to mean that business travellers will
travel less
Surface transport, especially by rail, has been
shown to severely affect the business travel
market once city-center to city-center journey
can be brought down to below three hours
Email has substantially reduced the lucrative
market for the movement of urgent documents
and newspaper by air

New Entry

The second of the forces which disturb to the


competitive equilibrium amongst the existing players
of that of New Entry
In some industry, aero-engine business, entry is
difficult or impossible. GE, RR & PW dominated the
industry for 30 years
In international market, airlines are constraints by
regulatory barrier to entry
In the world largest domestic markets, USA & EU,
airlines now operate without any significant entry
control apart from Cabotage Right
Unavailable or very costly slot is another
constraints to entry

Power of Customers

Porter argues that power of their customers will be a


crucial determinant of profitability for the firms. The
customer power will be related to at least two
variable:
the number of customer a firm has &
the existence of Switching costs

Business traveller use their bargaining power to


conclude corporate deal for substantial price discount
Consolidator in leisure market achieved substantial
dominance in Europe & Far East which allow them to
dictate prices to carriers
Internet allowed carriers to broadening their customer
base resulting their ability to address the problem of
escalating commission costs & falling yield
Aircraft manufacturer offers very large discounts in
purchase price of aircraft, in order to compensate the
switching costs of moving away from other
The question of power of their customer is a very
difficult one for airlines to address

Power of Suppliers

Porter argues that when a firm is totally depend on


monopoly suppliers, which severely limit the profits
of firms that they supply
The list of suppliers who either actually or potentially
have this monopoly power is a depressingly large
one
Airlines having no choice but to pay whatever ATC
(Air Traffic Control) and airport charges are levied on
them
If a carriers requirement was a long-range aircraft
with 400 seats, the 747 was the only option
available with them for next 25 years since it was
introduced in 1970
Perhaps the best example of powerful suppliers in
the aviation industry has concerned the GDS. It has
provided the switching technology which allows a
travel agent to make reservations with thousands of
different airlines, hotel, car rental companies and
tour operators through a single computer keyboard

Disintermediation

When a player or group of players is not adding


sufficient value to justify the price that they are
charging. An attempt may then be made to bypass
them, in a process which Porter describes as
disintermediation
Returning to the example of GDS firm, the recent
rapid growth in the use of internet as a distribution
channel reflect a clear attempt by airlines to
disintermediate the GDS companies, one which has
already saved them substantial amount in terms of
booking fees.
Any airline strategy, if it is to be successful, must
deal with a complex interplay of often conflicting
forces as discussed in Porters Five Force Model

Strategic Families

Porter argues that some firms achieve success from


what he calls Cost Leadership position. Others
employ a strategy based on Differentiation. A third
option is to adopt a Focusing position, though here,
the focusing expertise may be used either to add
value or to achieve low production costs. He also
argues that a fourth position, called Lost-in-themiddle, from which success is difficult or impossible

Strategic Advantage
Uniqueness perceived by the
customer
Industry-wide

Strategic Target
Particular segment
only

Differentiation

Low cost position


Overall cost leadership

Focus

Cost Leadership in Airline Industry

In 1971, a new carrier, Southwest Airlines, was set


up to serve the intra-state Texan market in USA.
The airline became profitable in 1975 & remarkably
stayed profitable for over 30 years
Cost leadership strategy has been seen the rapid
spread around the world since late 1990s
Ryanair & esayJet in Europe, JetBlue Airways
appeared in US in 1999
Other examples of relatively new Cost Leadership
players around the world include WestJet in Canada,
Virgin Blue in Australia, GoL in Brazil & Air Asia, a
domestic & regional carrier in Malaysia
Regulatory liberalization is one obvious explanation
behind the rapid spread
The arrival of Internet as channel of distribution has
also been highly significiant

Low Cost Business Model


Achieving & sustaining simplicity in business processes
is an absolutely fundamental requirement for a
successful low-cost strategy. Bearing this point in mind,
let us explore features of this strategy
Low Fleet costs:
Fleet Commonality policy, having one type of aircraft
in fleet is pursuing by mot successful cost leader airline.
By sticking to one type of aircraft, it gains substantial
economies in such areas as pilot training &
maintenance. Ryanair illustrates the policy with 737s
Low landing fees:
Landing fees & airport charges consists around 20% of
cost. Airlines are using secondary & little used airport
for gaining very low charges. The airlines will also be
able to expand rapidly, free of slot availability
constraints that bedevil congested hub

Low Cost Business Model


Short turnarounds/ high aircraft utilization
Once uncongested airports has been selected, airlines is
well on the way to achieving short turnarounds & high
aircraft utilization. Ryanair has always scheduled
turnarounds of 25-30 minutes, in contrast to 50-60
minutes which the industry has traditionally used. This
permits a wider spread of capital cost or of lease rental
Limited on-board services
Airlines chose to be completely no-frill. This resulted
in cheaper aircraft acquisition costs due to the absence
of galley space, speedier aircraft cleaning & allowing
extra seating. They do offer a meal & drinks services,
but charge relatively high price as Ancillary revenue
Point-to-point service only
Airlines have removed all costs and revenue dilution
associated with a transfer product by concentrating
exclusively on point-to-point traffic. It also gives
comfort passengers on-time delivery of their baggage

Low Cost Business Model


Simple fares
Web based fare system makes the whole reservations
procedure a simple one. The fare on offer will certainly
vary through time, being generally low well in advance
of flight & rising as the departure day nears. It ensures
better revenue management system
Low distribution costs
By the end of 199s it was common to find that 12%14% of a traditional airlines cost were made up of
commission. GDS cost is another challenge for airlines.
Cost leader airlines has been to use internet-based
direct sales to address the challenges of distribution
problem
Non-refundable tickets:
Airlines have a policy of allowing no refund. Booking
can be changed, in return for a substantial fee but no
money is ever refund. This allows a certain cash flow,
which in turn brings useful savings in interest costs

Low Cost Business Model


Ancillary revenue:
Airlines adopt a policy where the fare that passenger
pay is a basic price to carry the passenger on the flight.
Additional service features- free baggage allowance &
fills- are available on payment basis. This revenue
consists 20% of total revenue of Ryanair
Generation of new traffic flows:
This strategy of charging lower prices has exposed a
new markets in air travel such as weekend breaks, for
visiting second homes & for travelling to take up a job
in countries with labour shortage

Hybrid Low Cost Carrier Model

Most LLCs today are using a strategy that can best be


describe as a Hybrid, where at least some of the
features normally associated with full-service airlines,
are present
Many carriers have wished to target corporate
business traveller market in order to continue to
grow & to boost their yield
easyJet & Southwest Airlines have begun to fly into
major airports rather than cheap airfield away from
city center
FFP is introduced by many LLC, thereby adding costs
but hopefully gaining a market advantage
Virgin
Blue
introduced
business
class
that
encompasses free meals & drinks & access to the
lounges at airport
Southwests flights are now displayed & can be
booked in the database of Sabre GDS

Hybrid Low Cost Carrier Model

Some of them (JetBlue & Virgin Blue) have designed


to allow the exploitation of transfer & international
traffic, by the formation of code-sharing & other
relationships with larger network airlines
Air Berlin gives complementary snacks & drinks &
also offers a free baggage allowance of 20 kg
Air Asia & Jetstar announced that they were forming
a strategic alliance that would replace their
previously competitive relationship with a cooperative
one
Air Berlin announced in 2010 that it was taking steps
towards membership of the OneWorld alliance

Differentiation in Airline Industry

Airlines provide a value-for-money solution to a wide


range of customer requirements, exploiting the
synergies which become available to a firm producing
a range of different products under the same
umbrella. Such policies conform very well to the
Differentiation position

In order to be successful in the differentiation sector


it has always been necessary for airlines to be
innovative. Emirate & Singapore Airlines has a strong
reputation of innovation. Both are early customer for
A380
Standard of personal service which are offered
assume even more significant for a differentiation
airline. Frequent business traveller prefer to travel
with carrier which treat them well

Differentiation in Airline Industry

Brand building forms another vital part for successful


differentiation in airlines industry. Branded airlines
offer product where customers do perceive significant
difference from the product of competing airlines.
Virgin Atlantic is example in addition to Emirate and
Singapore airlines

During 1990s a fashion grew up in airlines industry


that Big is Beautiful that only airlines with widepreferably a global- network had any real hope of
survival in a rapidly changing world

Passenger preference show that on-line connection


are preferred to transfer ones

Frequent Flyer Program (FFP) of large airline is more


attractive than small carrier

Focus Strategies

Porter proposes that successful focusing can come


about in two way. Some focusing firms achieve a
defendable position by adding a great deal of value,
which allow them to cover high production cost & still
sustain profitability. Others use their expertise to
achieve very low costs
Airline industry illustrates both of these position

Focus Strategies
Value added focusing: Integrated Carriers

A very good example of Value Added focusing in


the airline industry is that of Integrated Carriers
such as FedEx and UPS.
They provide guarantee next day delivery services for
small urgent packages. Such services cannot be
provided cheaply
Integrators need to invest in very large fleet of
freighter aircraft, in constructing & running costly
sortation center, in surface transport vehicles for
collecting & delivery services and spending on
information technology in order to provide tracking &
tracing option
These large capital requirements
formidable barrier to entry

provide

Focus Strategies
Value added focusing: All Business-Class Airlines

This proposition is based on the idea of focusing exclusively


on meeting the needs of business air traveller & wealthy
leisure traveller prepared to trade higher fares for greater
standard of luxury
MGMGrand Air & Fairlines stayed in this focused market
couple of years in 1990s
In 2005 Maxjet & Eos Air commenced operation between JFK
airport & Stansted Airport with All Business Class strategy
Maxjet & Eos Air used to operate 767 with 100 seats & 757
with 48 seats respectively
In 2006, Silverjet joined this group by operating flights
between Luton Airport and NYC
Maxjet, Eos Air Silverjet were all lost to bankruptcy during
2008. Reasons behind their failure:
Business market fall away during holiday & weekend
They targeted profitable route of well-established airlinesBritish Airways, Virgin Atlantic & American Airlines. It
provoked these airlines into a competitive battle that they
could not afford to lose

Focus Strategies
Low Cost focusing: Charter Airlines
European charter airlines developed a way focus on
single activity the wholesaling of blocks of seats to
tour operators at a lower price. They achieved such cost
in a number of ways:
Airlines used relatively large aircraft (A330 & 747)
with low seat pitch to accommodate higher no. of
seats
Remarkably high aircraft utilization (4,200 to 4,300
hours/ year), spreading ownership & lease rental
costs
dead-of-night departure for en-cashing off-peak
airport facilities
No complementary frills
The charter airlines became vulnerable, though, once
demand began to move away from the product that
they had become so expert in providing

Focus Strategies
Lost-in-the-middle
Porter argues that there are firms that do not fit into any
of the boxes. Their costs are too high for them to pursue
Cost Leadership & there is too little about them which is
distinctive for true differentiation to be achieved

Sadly, the airlines industry has an almost endless list of


firms to which this description can be applied