Industry Analysis: Airline Companies Essay

The rail line pass successions industry contains diverse types of players that compete in distinctive niches distri besidesively with different crease models. Airline companies owned by the State characterized the air duct disdains industry into the 1980s. Because of privatization, this model no long-life exists in europium or in the U.S., but it is still present in Asia and Africa. Standard airline companies offer scheduled flights with flight connections, at least two classes on maturate, and other serve much(prenominal) as in-flight entertainment, frequent account schedule airdrome lounge, food, etc. The majority of their taxations atomic estimate 18 earned by dint of slate sales. Low- woo airline companies offer scheduled flights with only one class on board and without additional redevelopment on board akin in-flight entertainment, frequent flyer programs, airdrome lounges, etc. Their job model is different from the tired federation because they go t hrough a different form of income through the tatter woo. Ryanair and EasyJet f any into this category.Regional airline companies offer scheduled flights, usually with small woodworking planes and for diddle distances they previously worked on behalf of other big airline companies (standard, major, government-owned) round of which owned a regional company to earmark presently route flights. Examples argon US Airways Express owned by US Airways and Air Dolomiti owned by Lufthansa. Cargo airline companies offer freight transport. Some cargo airlines are divisions or subsidiaries of larger rider airlines like Air France Cargo or Alitalia Cargo, but there are also independent companies like DHL and FedEx. Industry competitors are also k forthwithn to prepare alliances. Reasons for airline companies to build alliances scale economies, access to food markets or engineering science, market function, and pitiful gearer direct approach. Many alliances start as a code-share -out lucre whose benefits are cost reductions from sharing of sales offices, investments and purchases in order to negotiate extra volume discounts, operational staff (ground intervention personnel and check-in and boarding desks), and operation facilities (catering or computer systems).We sack up find drivers for different types of alliances and divorce them into three categories deregulation of the industry, changes in customer preferences, and changes in technology and infra organize. Deregulation has opened up the market and led to intensifying competition and consequently a battle to secure market straw man and change magnitude costs. Changes in customer preferences comprise such moversas overall internationalization of businesses, the diminishing role of airline nationality in customers choices and the preference by customers for high flight frequencies, and seamless connections to nearly any point in the globe. Technological and infrastructural changes include the in troduction of medium size long-range aircrafts and the development of sales and distribution technology (i.e. the Internet and many airports in many areas). The strength of buying power that firms face from their customers, and so the sharing of the value created by the transactions, depends on two factors buyers expenditure sensitivity and their relative negociate power.The airline industry shows two germs of potential price sensitivity. First, the importance of flight cost as a pro great deal of fundamental cost of travel this is exemplified in leisure travel where price typically represents twenty-five percent of total travel costs. The exact percentage varies depending on the length and type of travel, and increases in the non-liberalized markets. Secondly, the low or non-existent differentiation perceived by the customers increases the willingness of the buyer to switch airlines on the basis of price. Deregulation has increase price competition and has exposed buyers price sensitivity. A study by Gillen, Morrison and Stewart found substantial use up elasticity. It completed that business travelers are usually less price-sensitive (less elastic) than leisure travelers, and that elasticity on short-haul routes are largely higher than on long-haul routes, a result explained by the presence of potential fill out for the first.The bargaining power of buyers relative to that of the seller is imagineably by the size and concentration of buyers relative to producers as well as the buyers switching costs. The airline industry has achieved 598 billion of r up to nowue in 2011, carrying 2.75 billion passengers. These figures clearly show that a large number of buyers acquire very small individual purchases compared to industry revenue, thus losing a champion traveler has a low impact on the total revenue. Although we can say that this first factor is favor up to(p) for the airlines, in the airline industry switching costs are relatively low, because of the minimal try costs to find alternative providers, and learning costs, linked to the specific knowledge indispensable to use a product, as well as the total absence of emotional cost, and psychological and social risk. Airline companies establish successfully tried to increase them through frequent flyer programs, whichcreate rewards to the customer for their loyalty. Finally we can state that the relative bargaining power of buyers is medium, because of the opposite effects of the two described factors.However, when considering the high price sensitivity and the relative scotch power of buyers their share of the created value is relatively high. Prices and profits within an industry depend on buyers propensity to substitute its products with existing alternatives found on their prices and performance. Air passage does non collapse any perfect substitutes for intercontinental flights, however, short-haul routes, induce potential substitutes car, bus, and train. Cars are higher in convenience, allowing the traveler to reach the place nearest the final destination, but are control by potential vocation and other complications. Moreover the trend of rising gas prices in recent decades has dramatically curbd the feasibleness of driving. Busing is a similar substitute to driving, but is less convenient though frequently less expensive. We consider trains to soon act as the main substitute to air transportation.The development of high-speed rails, chiefly in Europe and Asia, allows for a huge ebb in the transportation time by train. Considering that trains are much cheaper than flights and allow travelers to reach a destination nearest their final one, they represent a formidable substitute for air transportation. We observed the existence of high supplier power in the airlines industry. These suppliers predominantly consist of airplane providers, airports, beat back unions, and fire providers. These suppliers increase competition in the airline industry as well as decrease the profit potential for airlines by raising prices, decreasing product quality, and by making products incomparable. Boeing (US) and Airbus (EU) largely dominate the global airline supply industry. The reduction in product availability resulting from long waitlists, including Boeings three years waiting period for the 777 jet, and design/production delays cause complications for airlines attempting to update or go ballistic their pass offs. The new airplanes are designed to increase fuel-efficiency therefore, delays to upgrade may result in higher fuel costs and airlines that do non plan accordingly may also spend more than(prenominal) on maintenance and repair costs.Airlines technological competitive value may largely depend upon being at the top of the waiting list. Boeing and Airbus have the advantage of scarce product availability and expensive prices which gives them high supplier power.Airlines must pay airport-landing fees. Each airport ha s different rates for landing fees that are based a measurement of aircraft size that is also unique per airport. In 2007 IAD perpetrationd $2.13 per 1,000 pounds of maximum landing weight. This price is on the subvert end of a spectrum that can peak around $4.59 charged by DFW the same year. proud traffic airports will charge greater airport-landing fees knowing that airlines will pay them in order to have access to those customers. Although the airports supplier power is not as high as the airplane providers, they still have a high supplier power because they are able charge higher prices. In addition, the majority of airline industry labor is unionized, which contributes to high supplier power in the industry. This means that in the final result of disagreements surrounded by airlines and their employees there is an organized system for the employees to unite under.Unions include, Association of Flight Attendants, the Air Line Pi circularizes Association, theme Association o f Air Traffic Controllers, and the Transport Workers Union. Collective bargaining by these unions raises the cost of labor for airlines making it more difficult to compete on a low cost strategy. Rising fuel costs are also a constant struggle for airlines to harbour. Fuel costs are estimated to be or so thirty percent of operating cost for each airline. Some companies combat this by hedging costs, but even with these measures airlines have very little control over fuel prices. The ability of fuel providers to decrease the profit potential for airlines and increase fuel costs gives them high supplier power. The capital investment required to start an airline industry alone is a huge barrier to entry. Some of the required fair play includes many fixed assets that lead to low profit margins and perhaps the lowest return on loveliness among competing airlines.The industry is also characterized by a large contribution margin variable costs are particularly low compared to fixed. Vari able costs are landing fees, paid by the carriers according to the number of passengers, and catering and selling fees, paid mainly to online sellers and travel agencies. Staff, fuel, airplane maintenance and leasing, and amortization and depreciation make up ones mind fixed costs. Given the high contribution margin, volatility in the volume of passengers seriously impact companies operating profit losing a customer means a large loss for the company. Government regulation limited competition with rules about prices and routes, but deregulation drove theindustry towards ticket price competition. Because of this the traditional business model became unsustainable for almost allone already present in the business. The deregulation of the airline industry has also stipulation rise to the competitive determine surroundings, which enables airlines to freely set prices in order to compete.Airlines have created complex pricing models that essentially improve their service to customer s. With the combination of affordable ticket prices and increased availability of travel options, the total customer base has increased significantly. Moreover this difficult situation is compounded because of the low switching cost and lack of brand loyalty. Depending on geographical location and competition, the airports and airplanes comprise such a significant portion of the cost that it is very repugn for any airline to make a profit. Large airlines are able to offset these costs with economies of scale. Airlines must invest in R&D, technology, and management in order to provide services to customers at some profit. Large airlines have also established a global presence that makes it extremely difficult for small, local startup airlines to gain some degree of advantage.A hub of concentrated alliances in vital geographical locations also make it difficult for new airlines to compete. Such alliances provide a network among allies that enable them to efficiently capitalize on the ir marketing and advert strategies. Large marketing and advertising elbow greases are spent in the rely of capturing a large share of the market, and frequent flyer programs are created in an effort to secure this market share. Nevertheless, the regulatory hurdles within the airports are extremely challenging for new entrants. There are a number of federal requirements that airlines must obtain within an airport to include the use of airfields, terminal facilities, limitations on capacity, specifically take-offs and landings, to resolve the issue of air traffic congestion.In addition, the bargaining power of suppliers makes it difficult for new airlines to enter. Today, the two major airline suppliers, Airbus and Boeing, have already established exclusive agreements with firms within their value chain that make it very difficult for new entrants to enter the industry. The sorry of the airline industry is one of the aspects that make it very unattractive. In the firm analysis we wish to guidance and understand how a traditional flagship company and a new low cost carrier has confront this strategic repugn in an unattractive industry.RyanairThe Ryan family with little capital and a staff of twenty-five population founded Ryanair in 1985. In 1986 Ryanair obtained permission from the regulatory authorities to challenge the British Airways and Aer Lingus, flagship of Ireland, a high sleep together duopoly on the Dublin-London route. In 1991, after an uncertain start and loss accounts, Michael OLeary got the task of restructuring the company by adopting the economic model low fares / no frills, which was used successfully by Southwest Airlines. In 1995, Ryanair overtook Aer Lingus and British Airways to die the largest passenger airline on the Dublin-London route (the biggest international scheduled route in Europe) proving that Ryanairs low fares, high frequency formula continues to win acceptance in every market between Ireland and the UK. The European Un ion finally completed the Open Skies deregulation of the scheduled airline business thereby enabling airlines to compete freely throughout Europe. In January 2000, Ryanair launches Europes largest involvement website www.ryanair.com and becomes the only source of low airfares in Europe.Ryanair spotted opportunities in the market arising from the inefficient traditional business model choose by the flagship companies issues such as inflexible labor roles, high staff numbers and salaries, and extravagant airport fees could work adequately only within the previous regulatory constraints. In this environment Ryanair has been able to build a cost competitive advantage that offers air transportation services that are more rich to its customers than similar offers for a simple reason, price. The airline, in its effort to achieve becoming the lowest cost European airline, has implemented a double faced strategy it has completely changed its core and complementary services shuffle and i t strives to reduce costs in any executable way, thus dramatically reducing its the core service, air transportation, price, and created new sources of revenue.Ryanair has a different kind of revenue in respect to the other airline carriers. For standard airline companies revenue is made by ticket prices, but not for Ryanair. The goal of the firm is to invoke the number of passengers through cost reduction, which allows the company to offer low-ticket prices. Ryanair targets price sensitive consumers, such as immature people or occasional travelers that usually use substitute products like trains and cars. The company offers tickets for a price that does not allowthem to cover all operative costs, but their cost structure is built so they get other revenue from additional services. Ryanair charges their customers for the accessory services they offer the only service that is include in the ticket price is the flight. There is no food service during the flight, there are no assign ed seats on the plane, customers must pay for checked baggage, and they pay an extra fee for booking with a credit card. These service charges account for the thirty percent of the companys total revenue.On average they charge every passenger 10.8 when the normal price of a one-way ticket is 50. With this business model the company does not need to hire as many employees because some the services are provided by the customers, one example is the check in line that is mandatory if you do not want to pay 50 for every boarding card. This has brought the company to an important cost advantage maculation with respect to competitors, and their cost structure allows them to win every price war battle. Under the guidance of OLeary, Ryanair has always sought to reduce its costs, sometimes maniacally. The first element of this effort is their fleet. The companys fleet history can be split into two epochs. In the beginning, Ryanair followed the behavior a lot of small low-cost companies and b ought whatever best met its needs in terms of price, passenger volumes, and financing abilities, this resulted in a fleet with many different types of aircrafts with many different capacities and requirements.This attitude changed in 2002 when Ryanair ordered a hundred of Boeing 737-800, its first move in creating a standardized fleet. Currently the airline has a fleet of 305 Boeing 727-800s with a unique design characterized by having the maximum density possible and the lowest average age among competitors. All these features allow for lower maintenance costs, training costs, fuel consumptions, and cheaper parts and equipment supplies. Regarding aircraft usage, Ryanair has some particular features, mainly focused on reducing turnaround time and fuel consumption, such as choosing to land at secondary, less congested, airports, avoiding large hubs, relying on point to point routes thus maximizing aircraft ready time, and imposing unforgiving fuel consumptions limits on its pilots to avoid repetitive refueling. Ryanairs human resource policy clearly shows its effort to cut costs.Personnel, both cabin crew and pilots, has a dominant variable component on salary, this is based on hours flown, the same or increased duties relative to other airlineemployees, training, uniform costs at the employees own expense, and no trade union representation. Despite the inevitable high turnover ratio and disgruntled employees, these policies allow the company to have a very flexible and relatively cheap labor force. other important cost advantage is in flying to secondary airports this policy allows the company to dramatically reduce its fees cost. Frequently Ryanair is the only one that carries in these airports, therefore their and all the linked business subsistence revolves around the company having a large bargaining power and some government subsides. Ryanair changed the environment of the industry.Before air transportation was perceived like an elite way of travellin g, in fact high prices of the tickets pushed people to use substitutes for the short haul routes, such as car and train. Ryanairs prices changed the people mind, allowing airplanes to be used more a good deal for short vacation on weekends or even daily. Its main competitor is EasyJet, which uses a lighter low cost business model, focusing on different kind of customers such as business travelers, although with lower margins. The two main differences are its use of primary airports, giving more convenience to the customers, and its unionized labor force. Our analysis regarding to the potential recommendation for Ryanair has started from the consideration that its business model has been successful in facing the challenge and we have identified three possible directions. First, Ryanair could enter into the intercontinental market with new routes between Europe and the U.S.This market is characterized by high ticket prices (a minimum of 500 round trip). Although the company could uti lize some of its sources of cost advantage, such as intercontinental point-to-point routes, personnel policy, revenue from supplementary services, its cost advantage is not completely replicable in this context. Indeed it would have to buy new long distance carriers with more capacity. Sacrificing their fleet standardization and intercontinental flights requires high turnover time for refueling, and the possibilities of using secondary airports are limited by legal issues concerning the necessity of opening new borders. Another potential recommendation is to enter the Chinese house servant market which is a fast growing market (forecasting states that it will represent the 23% of the population all-inclusive egress in passenger number in 2010-2020) and the second largest air travel market in the world behind USA.However, there are somecurrent constrains, mainly that airport systems are still in development, with a total number planned to increase from 175 to 270 in 2010-2020, and a relatively limit middle class, only 10% of the country population although strongly growing. According to the present market environment we believe that this might be the best alternative in 5 to 10 years. We believe that currently the best recommendation is maintain its focus on Europe, increase its market share in countries mainly served by Easyjet, such as Turkey and East Europe. We recommend that Ryanair enter the intercontinental market, characterized by big-ticket(prenominal) prices, with new routes between Europe and the U.S. Ryanair could benefit by utilizing some of its sources of cost advantage. Ryanair could use secondary airports in the U.S. and through its intercontinental, point-to-point, routes focusing on the main tourist and business cities. Its personnel policy could also be applied in this market by offering low core service prices they could increase their revenue with supplementary services. Ryanair could develop an alliance with Southwester Airlines using th e same airport and split their transatlantic flights, thus increasing the passenger volume for both companies in their core business continental flights. LufthansaSince its inception in 1953, the Lufthansa German Airline has been regarded as a premier airline company that has become the largest airliner in Europe. They have diversified both locally within Europe and globally. Their key strategic efforts have led them to be the founders of the worlds largest airline alliance, Star Alliance. They have diversified into various business segments to include passenger airline groups, logistics, MRO, catering and IT services. With this combination of efficient business segments, the airline group has been able to generate more than 30.1 billion euros, the highest revenues compared to other European airlines. Lufthansas main strategy is to increase the equity/value of the company, maintain and also improve their exceptional reputation on customer satisfaction, be very robust during economic fluctuations, and maintain profitability. In an industry involving high operational costs where competitors are increasing moving towards cost advantage strategies Lufthansa aims to meet their strategic goals through a differentiation advantage that emphasizes customer service, alliances, and its reputation as a premium full-service airline.An important resource for Lufthansa is its extensive fleet. Lufthansa Passenger Airlines has a fleet that currently consists of more than four hundred aircrafts they also enjoy a first-mover advantage by being the launch customers or early adopters of many different aircrafts. These include acting as a launch customer for Boeing 747-8I in 2006 and being the second to operate the Airbus A380 in 2010. By consistently participating in fleet replenishment Lufthansa is able to regularly update to more cost-efficient and more environmentally friendly aircrafts. In July of 2011 a Lufthansa Airbus A321 was used in a six-month bio fuel trial expected to reduce CO2 emissions by up to 1,500 tons in the trial period. Lufthansas extensive and modern fleet enable the airline to have extensive global reach, cutting edge aircraft technology to increase efficiency, and environmentally conscious technology to condition a new environmental industry standard. This attention to fleet quality ensures that customers have an excellent flying experience that is not hampered by old and inefficient planes. Passengers are also able to enjoy the distinctions accompany with first, business, and economy class.First class seats convert into a bed and seats in all classes feature personal Audio-Video-On-Demand screens. In addition, attentive staff on all flights generously offers a wide range of complimentary food and beverage. Many terminals include lounges for First Class flyers Frankfurt Airport even features a First Class Terminal that sports a full-service restaurant, bar, cigar lounge, relaxation rooms, offices, and even bath facilities. 55,236 e mployees as of 2012 are trained to deliver the highest quality customer service. Lufthansa operates as an upscale airline and is therefore able to charge premium pricing to absorb the costs of providing such exceptional customer service. Despite the higher ticket prices the services and ease of use for customers are incomparable to other airlines and often leads first time passengers to become loyal users. Lufthansa services eighteen domestic destinations and one hundred and ninety seven international ones. Its global reach is one of Lufthansas key resources it allows the company to provide greater and improved service to customers.These resources are greatly supplemented by the abilities of the other activities of the Lufthansa line Group and by their participation in the Star Alliance. The Lufthansa Aviation Group is a parent company made up of the passenger airline business, logistics, maintenance, repair, andoverhaul, catering, and IT services. The ability of these babe compan ies greatly supplement the resources of the passenger airline business. The Star Alliance is another key resource that now operates with twenty-eight partners and services four hundred and ten worldwide destinations. The alliance captures twenty-eight percent of the global market measured by revenue passenger kilometers. Because the frequent flyer program Miles & More is transportable among all members it aids to broaden the scope of Lufthansas reach. The alliance makes up the worlds largest airline alliance and is the worlds first multilateral airlines alliance. The abilities of Lufthansas other alliances would not be possible without OAG, who describe themselves as, the most powerful schedule connections analysis tool for modeling flight connections between every airline flight, anywhere.OAGs services provide them with current, detailed, and accurate data that enables Lufthansa to drive efficiency and optimize its business processes. The changes Lufthansa makes from this data ana lysis increase customer satisfaction while reducing costs and increasing revenue. It helps admonisher competitor activity, identifies codeshare opportunities, and manages partner schedule synchronization. Due to the timeliness of this data the firm has the capability to quickly fight back to market changes and counter-attack other competitors advantages. Excellent customer service is ensured through the critical connection of this data that enables Lufthansa to ceaselessly improve the customer completion and baggage processing metrics. Lufthansas fleet renewal, customer service, terminals, and alliances are scarce resources that are difficult to imitate. The fleet, terminals, and alliance are difficult to imitate because of the sheer size and scale of these resources, whereas its service is costly and would be difficult to incorporate into any firm that does not have the cost structure and capital resources to support it.As the majority of airlines already compete by cost advanta ge, we feel that Lufthansa would be disadvantaged if they attempted to replicate that strategy. Therefore, we recommend that Lufthansa expand its premium customer service differentiation advantage by partnering with hotels that also provide excellent customer service in areas near its terminals. As Lufthansas fliers already value their premium customer service this compact would ensure that passengers luxury experience would not end upon reaching their destination. The range ofhotels to partner with will correspond with flight class and frequent flyer status. First Class passengers will have the option to stay in top tier hotels and miserliness Classes will have the option to book with upscale hotels that are more price sensitive. The Miles & More program will be expanded so that fliers earn credits by staying with these luxury partner hotels.The hope is that the fliers will have such a wonderful experience with the complementary services that they will stock their delight to cur rent hotel customers. As the hotel customers already value premium customer service it is our hope that in the future they will be inclined to book with Lufthansa as they offer such service. The success of this alliance has the potential to result in a revenue sharing agreement, in which Lufthansa will receive a percentage when passengers book with a partner hotel through Lufthansa. Their risk will also be reduced, as they are engaging in a partnership instead of attempting to enter this foreign industry alone. Although this partnership would be Lufthansas first non-aviation venture we believe that they will benefit by offering such a complementary service. The goal of this partnership is to connect customers that value upscale customer service with Lufthansa, who enjoys a reputation as an upscale full-service airline, to increase their market share market share that their cost advantage competitors sorely need.