airline business and marketing strategies (1) (1)

7/23/2019 Airline Business and Marketing Strategies (1) (1)

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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

airline business and marketing strategies (1) (1)

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