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Airlines Business & Marketing Strategies
There is no single, unique strategy which must befollowed if success is to be achieved
One must be selected from a range of possiblestrategies available
It must then be implemented well, and continuedon a long term basis
We will discuss the possible strategies, and theiradvantages and disadvantages
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Porters five forces & its application in Airlines Industry
Michael Porter states that strategic issues arecoloured by interplay of five forces of rivalry
amongst existing firms, substitution, new entry, thepower of customers and the power of suppliers
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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 theirintra-European point-to-point operations
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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 thesebeing that of substitution
There are number of substitution issues affectingairline at present time:
Electronic method of communication- video-
conferencing, teleconferencing & email all havepotential to mean that business travellers willtravel less
Surface transport, especially by rail, has beenshown to severely affect the business travel
market once city-center to city-center journeycan be brought down to below three hours Email has substantially reduced the lucrative
market for the movement of urgent documentsand newspaper by air
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New Entry
The second of the forces which disturb to thecompetitive equilibrium amongst the existing playersof that of NewEntry
In some industry, aero-engine business, entry isdifficult or impossible. GE, RR & PW dominated theindustry for 30 years
In international market, airlines are constraints byregulatory barrier to entry
In the world largest domestic markets, USA & EU,airlines now operate without any significant entrycontrol apart from Cabotage Right
Unavailable or very costly slot is anotherconstraints to entry
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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 twovariable: 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 todictate prices to carriers
Internet allowed carriers to broadening their customer
base resulting their ability to address the problem ofescalating commission costs & falling yield Aircraft manufacturer offers very large discounts in
purchase price of aircraft, in order to compensate theswitching costs of moving away from other
The question of power of their customer is a verydifficult one for airlines to address
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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 largeone
Airlines having no choice but to pay whatever ATC
(Air Traffic Control) and airport charges are levied onthem If a carriers requirement was a long-range aircraft
with 400 seats, the 747 was the only optionavailable 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 hasprovided the switching technology which allows atravel agent to make reservations with thousands of
different airlines, hotel, car rental companies andtour operators through a single computer keyboard
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Disintermediation
When a player or group of players is not addingsufficient value to justify the price that they arecharging. An attempt may then be made to bypassthem, in a process which Porter describes asdisintermediation
Returning to the example of GDS firm, the recentrapid growth in the use of internet as a distributionchannel reflect a clear attempt by airlines todisintermediate the GDS companies, one which hasalready saved them substantial amount in terms of
booking fees.
Any airline strategy, if it is to be successful, mustdeal with a complex interplay of often conflictingforces as discussed in PortersFiveForce Model
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Strategic Families Porter argues that some firms achieve success from
what he calls Cost Leadership position. Others
employ a strategy based on Differentiation. A thirdoption is to adopt a Focusing position, though here,the focusing expertise may be used either to addvalue or to achieve low production costs. He alsoargues that a fourth position, called Lost-in-the-
middle,from which success is difficult or impossible
Differentiation Overall cost leadership
Focus
Strategic Advantage
Uniqueness perceived by the
customer Low cost position
Industry-wide
Strategic Target
Particular segment
only
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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 & remarkablystayed 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, adomestic & regional carrier in Malaysia
Regulatory liberalization is one obvious explanationbehind the rapid spread The arrival of Internet as channel of distribution has
also been highly significiant
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Low Cost Business ModelAchieving & sustaining simplicity in business processesis an absolutely fundamental requirement for a
successful low-cost strategy. Bearing this point in mind,let us explore features of this strategyLow Fleet costs:FleetCommonalitypolicy, having one type of aircraftin fleet is pursuing by mot successful cost leader airline.
By sticking to one type of aircraft, it gains substantialeconomies in such areas as pilot training &maintenance. Ryanair illustrates the policy with 737sLow landing fees:Landing fees & airport charges consists around 20% of
cost. Airlines are using secondary & little used airportfor gaining very low charges. The airlines will also beable to expand rapidly, free of slot availabilityconstraints that bedevil congested hub
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Low Cost Business ModelShort turnarounds/ high aircraft utilizationOnce uncongested airports has been selected, airlines is
well on the way to achieving short turnarounds & highaircraft utilization. Ryanair has always scheduledturnarounds of 25-30 minutes, in contrast to 50-60minutes which the industry has traditionally used. Thispermits a wider spread of capital cost or of lease rental
Limited on-board servicesAirlines chose to be completely no-frill. This resultedin cheaper aircraft acquisition costs due to the absenceof galley space, speedier aircraft cleaning & allowingextra seating. They do offer a meal & drinks services,
but charge relatively high price as AncillaryrevenuePoint-to-point service onlyAirlines have removed all costs and revenue dilutionassociated with a transfer product by concentratingexclusively on point-to-point traffic. It also gives
comfort passengers on-time delivery of their baggage
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Low Cost Business ModelSimple faresWeb based fare system makes the whole reservations
procedure a simple one. The fare on offer will certainlyvary through time, being generally low well in advanceof flight & rising as the departure day nears. It ensuresbetter revenue management systemLow distribution costs
By the end of 199s it was common to find that 12%-14% of a traditional airlines cost were made up ofcommission. GDS cost is another challenge for airlines.Cost leader airlines has been to use internet-baseddirect sales to address the challenges of distribution
problemNon-refundable tickets:Airlines have a policy of allowing no refund. Bookingcan be changed, in return for a substantial fee but nomoney is ever refund. This allows a certain cash flow,
which in turn brings useful savings in interest costs
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Low Cost Business Model
Ancillary revenue:
Airlines adopt a policy where the fare that passengerpay is a basic price to carry the passenger on the flight.Additional service features- free baggage allowance &fills- are available on payment basis. This revenueconsists 20% of total revenue of Ryanair
Generation of new traffic flows:This strategy of charging lower prices has exposed anew markets in air travel such as weekend breaks, forvisiting second homes & for travelling to take up a job
in countries with labour shortage
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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 togrow & to boost their yield
easyJet & Southwest Airlines have begun to fly intomajor airports rather than cheap airfield away fromcity center
FFP is introduced by many LLC, thereby adding costsbut hopefully gaining a market advantage
Virgin Blue introduced business class thatencompasses free meals & drinks & access to thelounges at airport
Southwests flights are now displayed & can bebooked in the database of Sabre GDS
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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 & otherrelationships 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 theirpreviously competitive relationship with a cooperativeone
Air Berlin announced in 2010 that it was taking stepstowards membership of the OneWorld alliance
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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 producinga range of different products under the sameumbrella. Such policies conform very well to theDifferentiationposition
In order to be successful in the differentiation sectorit has always been necessary for airlines to beinnovative. Emirate & Singapore Airlines has a strongreputation of innovation. Both are early customer forA380
Standard of personal service which are offeredassume even more significant for a differentiationairline. Frequent business traveller prefer to travelwith carrier which treat them well
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Differentiation in Airline Industry Brand building forms another vital part for successful
differentiation in airlines industry. Branded airlines
offer product where customers do perceive significantdifference from the product of competing airlines.Virgin Atlantic is example in addition to Emirate andSingapore airlines
During 1990s a fashion grew up in airlines industrythat Big is Beautifulthat only airlines with wide-preferably a global- network had any real hope ofsurvival in a rapidly changing world
Passenger preference show that on-line connectionare preferred to transfer ones
Frequent Flyer Program (FFP) of large airline is moreattractive than small carrier
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Focus Strategies
Porter proposes that successful focusing can comeabout in two way. Some focusing firms achieve adefendable position by adding a great deal of value,which allow them to cover high production cost & stillsustain profitability. Others use their expertise to
achieve very low costs
Airline industry illustrates both of these position
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Focus StrategiesValue addedfocusing: Integrated Carriers
A very good example of Value Added focusing inthe airline industry is that of Integrated Carrierssuch as FedEx and UPS.
They provide guarantee next day delivery services forsmall urgent packages. Such services cannot be
provided cheaply
Integrators need to invest in very large fleet offreighter aircraft, in constructing & running costlysortation center, in surface transport vehicles forcollecting & delivery services and spending oninformation technology in order to provide tracking &tracing option
These large capital requirements provide aformidable barrier to entry
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Focus StrategiesValue addedfocusing: AllBusiness-ClassAirlines
This proposition is based on the idea of focusing exclusively
on meeting the needs of business air traveller & wealthyleisure traveller prepared to trade higher fares for greaterstandard of luxury
MGMGrand Air & Fairlines stayed in this focused marketcouple of years in 1990s
In 2005 Maxjet & Eos Air commenced operation between JFK
airport & Stansted Airport with AllBusiness Classstrategy 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 during2008. Reasons behind their failure: Business market fall away during holiday & weekend They targeted profitable route of well-established airlines-
British Airways, Virgin Atlantic & American Airlines. Itprovoked these airlines into a competitive battle that they
could not afford to lose
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Focus StrategiesLowCostfocusing: Charter Airlines European charter airlines developed a way focus on
single activity the wholesaling of blocks of seats totour operators at a lower price. They achieved such costin 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 4,300hours/ year), spreading ownership & lease rentalcosts
dead-of-night departure for en-cashing off-peakairport facilities
No complementary frills The charter airlines became vulnerable, though, once
demand began to move away from the product thatthey had become so expert in providing
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Focus StrategiesLost-in-the-middle
Porter argues that there are firms that do not fit into anyof the boxes. Their costs are too high for them to pursueCost Leadership & there is too little about them which isdistinctive for true differentiation to be achieved
Sadly, the airlines industry has an almost endless list offirms to which this description can be applied