About UK Airline Industry - Case Study Example

Micro-environmental analysis of current firms in the UK airline industry can be analysed using the porter’s model to serve as a tool for assisting the UK airline industry to identify various external forces depending on five factors which are new entry threats, the buyer’s power, supplier’s power, substitute’s threats and competitive rivalry. Threats of new entrants Currently, there are two industries in the manufacturing of airline which are Airbus and Boeing. These companies have been engaging in deep competition over who will have the highest share of the market. In order to overcome the threats on competition from new entries, these companies have acquired different strategies in order to target different a certain section in airline industry. Airbus is focused transporting passengers in large numbers between major hubs while the Boeing is focused in direct travels from point to point particularly between cities. The Airbus A380 construction was designed to carry a capacity that is more than twice the Boeing capacity but having a lesser range. On the other hand, Boeing constructed a low cost aircraft, B787 which had great speed and the range was farther. These each company were able to maintain its market share and to prevent any threat of new entrants by raising the entry barriers for new comers ( Clark 2010). The UK airlines are incurring the highest taxes on flight due to numerous increases in the charges in air passenger duty. These charges have increase the overall flight charges in UK airline to a point that, other airlines from Ireland and France have low flight charges due to low taxes on air passenger duty. As they are all travelling at the same destination with different fares, UK airlines is losing its market share in such regions due to high charges as compared to other airlines. This makes it difficult for them to prevent threats from the new entrants. Due to weaker economic performance in Europe, the European airlines have been observed to be lagging behind as compared to other parts with mature airline industries. This has resulted to low profit and even falling with high values. Due to weak economic performance the region may not be in a condition to get rid of the new entrants (Clark 2011). For other airlines such a budget and Ryanair they keep their airplanes flying for around nine to ten hours per day. In addition, they look for chances of cheap plane deals and by reducing the costs of crew. Even if they are faced by the challenges of rising prices of fuel, they can manage to maintain the travel costs or even cut down these cost. Management of these factors make the cost of travelling an entry barrier for other airlines and even if the new entries manage to get in, they find themselves in a competitive disadvantage due to uncomfortable travelling costs (Scheers 2001). Buyer’s power Presence of strong buyers in the industry result to forced reduction of prices with corresponding low profits in the firms producing the product. Boeing was considering redesigning its most widely used commercial jet by constructing a new aircraft that consists of a body which is made of the composites of plastics while maintaining the traditional aluminium wings. This move was made in order to increase their customers by reducing the costs of the aircraft which will also be reflected through reduced travel costs. On the other hand, Airbus also had a plan to look for the ways of reducing the costs of its aircraft. Due to pressure from Boeing, Airbus decided to redesign its most frequently used A320 and 737 families of jets by putting a new engine which would reduce the consumption of fuel by around 15%. The power of buyers for reduction of their costs has lead to bargaining for aircrafts with higher quality, increased levels of service, and more efficient aircrafts with lower prices. The achievement of these outcomes has been through encouraging of competition battles among the Boeing and the Boeing and Airbus manufactures of aircrafts (Clark 2011). Supplier’s power If the power of the suppliers is stronger, the companies will find more difficulties to make profits as the suppliers will have the ability to control the business through determination of terms and conditions for conduction of the business. The aircraft manufacturing company do not have powers as the suppliers and they have little on the control of the operation of airplanes due to competition between these manufacturers. The suppliers are competing for the markets of their aircrafts which is making it easier for the airlines to make profits. This is because manufactures are providing high quality aircrafts at lower prices. Although there is a challenge in fuel prices, airlines can be able to control the additional costs incurred in fuel through buying high quality aircrafts at lower prices thus maintaining or increasing their profits (Severin & Borenstein 1989). Substitute’s threats Buyers can be able to easily change one product to another which serves the same purpose. Buyers can be able to change from one manufacturer to the other. Boeing and Airbus manufacture the same product and according to the quality, efficiency and price of different aircrafts, the airline companies can switch from one manufacturer to the other. This is made possible by the competition existing between these two manufacturers. Airbus may be manufacturing an aircraft that is efficient and cheap. Boeing may also be manufacturing an aircraft with the same capacity and as efficient as the one for Airbus but with higher price. This will make the buyers from Boeing to switch to Air bus. On the other hand, the reverse may also be true ( Clark 2010). As the British and other airlines have been involved in running air cargo cartels, some of the customers affected by the cartel and previously using their services may opt to switch to another airline. Customers may do this with an aim of reducing the transportation costs incurred. Due to challenges in prices of fuel, some airlines may decide to raise the cost of travelling by increasing fares in order to recovery the profitability of the airline. However, another airline such as Ryanair and budget airline may decides to reduce the number of crew and to look for cheap deals in planes in order to recover the prices incurred due to rise in fuel prices. This means that the fares of the latter airlines remain the same. Low travelling cost attracts passengers making them to switch from airlines offering higher cost on transportation to cheaper ones. This poses a threat to some airlines (Lovelock, Vandermerwe & Lewis 1996). In a move to further reduce the fuel cost, IAG is focusing on the replacement of four engine, older and long-range aircrafts in the British Airways with twin engine, long-range modern jets. This will lead to increase in operating profits. According to the specifications of the required aircrafts, IAG may prefer to switch from one manufacturer to the other to obtain the required quality. This may be a strong threat to the sidelined manufacturer ( Clark 2010,). Rivalry The higher the rivalry, the higher the degree of competition and the more difficult it is for incumbent firms to get high profits. Being two equal competitors, Airbus and Boeing show a high rate of rivalries between them. These two manufacturers are competing to win the markets by improving the quality of aircrafts they are manufacturing leading to availability of high quality, efficient aircrafts at low prices. Rivalry in these two firms is becoming more intense as they are battling to increase their share in markets through attraction their customers. The competition causes instability in the market which is reflected by reduction in profitability in many firms in the aircraft industry. In order to expand the share of the market, Airbus and Boeing aggressively compete by new product introduction and differentiation of product and service. The firms have the likelihood of losing some and winning other battles (Clark 2011). The most important threats in UK airline industry are increase in fuel prices, current economic crisis and home country rule. The airlines from European region were worst hit by the 2009 economic crisis with more than 30% losses out of the total world losses. Although it is in the process of recovery of the economy, European air industry is also facing challenges of rising competition from US airlines and Middle East hubs. The European aviation is also directly affected by the value of oil barrel. The unrest in Middle East and the Eastern Europe disputes will continue to make the unstable cost of oil to rise. Fuel costs have accounted to more than 31% of the total cost of the business airline companies in Europe. This has made the airline industry to undergo additional expenditure. The home country rule is also a major challenge in UK airline industry as this rule prohibiting the countries where aircrafts from Airbus and Boeing are built from giving back export credit to their own airline for buying aircraft. This rule has resulted to promotion of airline industries from other region. This makes other regions to be able to provide cheaper services which leads to unfair competition. These challenges lead to rise in competitive rivalry thus making it difficult for UK airlines to make new entries in different regions (Anonymous 2011) The potential strategies to these issues include consolidation of industries; cost reduction and alliances a European regulatory framework that is well coordinated to address the crisis in economy. Airlines should also find more ways of improving efficiency in their operations by introducing measures such as delaying push back and start-up, one engine taxing and removal of all weight that is discretionary. This will reduce the costs incurred in fuels. In order to reduce the effect of the home market rule, it is advisable to discuss with the shareholders on the ways of scrapping this traditional rule to prevent this significant threat (Morrison 2004). Strategic position The UK strategy on its product include quality flights, flight services, various destination in Europe and throughout the world, business and executive class, security, speed, years of experience and support facilities. The positioning of UK airline industry is an international up-market carrier which caters people in business and Americans and Britons who are travelling for holidays. Its positioning is a budget European airline. UK airline marketing strategy has undergone significant changes in order to respond to the current developments in business environment. Due to opening of European market, there has been increased competition where different airlines have been on the move to expand their networks. These expansions have resulted to competition for low costs. The success of cheap competitors operating on short haul in Europe has lead to significant challenges in UK airline. Some of these cheap competitors include Ryanair and Easy-jet (Odell 2011). The key business segments addressed by UK airline marketing strategy are passenger flight, cargo transportation and aviation engineering. The marketing strategy on passenger flight allows provision of transportation services in different levels. The services have attracted passenger in different background through provision of premium service and economy seats. The cargo transportation operates in Europe, Asia and Africa providing both premium and general cargo. The aviation engineering offers technical services which reduces the costs while maintaining high quality. However, the industry has not been able to achieve its goals due to the following factors; competition, economic crisis, government regulation and change in oil prices. The competitors declined to charge surcharges on rising prices of fuel leading to fall in its passengers and increase in its competitor’s passengers due to low flight charges. These competitors include easy-jet and Ryan-air (Vadhindan 1999). This has also led to poor punctuality as compared to its low cost rivals. As these discount airlines rise, the UK airline faces more threat. This faults their positioning strategy. Economic crisis have also added pressure on UK airlines. As the industry relies mostly on high level first class tickets, drop in premium tickets makes it difficult for their success in the industry. The industry punctuality is poor and the implementation of new regulation by the government on customer service and improvement of punctuality exposes the industry to fines considering its history of being poor in punctuality. Volatility of oil prices makes this industry to experience difficulties to hedge. It has competitive disadvantages because through hedging, it may lead to higher future prices as compared to its competitors. This means higher fares than its competitors. These drawbacks make it difficult to achieve its market strategies (David 2000). Capability UK airline business of capable of growing since the European Union fully liberalised and deregulated air services. This gives it the best opportunity for growth in this industry. Provided that the economy will be improved, the demand for flights is supposed to increase. In addition to other opportunities which include open skies, high potential for Asian and American market provide the best opportunity for UK airline if well exploited and explored. If the company observes reliability, consistency and quality, it will enjoy good reputation worldwide with efficiency and high customer service standards. It is also capable of increasing its large destinations and airline fleet. It adoption of its effective strategy in aircraft purchase makes it a benchmark or an industry leader and it will influence the decisions of other carriers. It is also has a competitive advantages over other carriers due to large destinations and fleet. Its strategy on partnership with other mature airlines will make it eliminate the aspect of competition with its main competitors as they work as a group. Its alliance increases its capability for business growth through extension of flight services. Its alliance will give it a competitive advantage over successful airlines as they will have a mentality that competing with UK airline would be a position that is already weakened (Bailey & Panzar 1981). However, UK airline industry may not influence its capabilities further due to its strategies on launching ‘connect’, and the ‘no frills’ airlines. The ‘connect’` provides involves scheduled services of charter airline operating to and from regions in UK. This schedule benefits the regional travellers so much. ‘Connect’ has been sold leading to termination of these routes. This poses a future threat attributed by potential loss of market and business opportunities. This would impact the industry’s effectiveness and efficiency in this key segment. The introduction of low cost carriers which is also known as ‘no frills’ is rapidly growing in the European market. The growth of these carriers has occupied more than half domestic services on UK and Europe route. UK airline decided to scrap one type of its aircrafts in order to cut down the cost hence a reduction of its effectiveness and services in this market. Its strategy to eliminate unprofitable market exposure while strengthening its profitable markets provided way for other competitors. The competitors took the advantage and they managed immediately to raise their market share. Some of the UK airline strategies made it difficult to achieve its objectives because their implementation took long. Other carriers took the advantage of long implementation and created opportunities favouring their conditions thus increasing the market share (Wernerfeldt 1984). References Anonymous 2011, Budget Airlines. Financial Times. London (UK), pg. 16 Bailey & Panzar 1981, ‘The contestability of airline markets during the transition to deregulation’, Law and Contemporary Problems Vol. 44 No. 1. Clark, P 2011, Boeing considers plastic 737 body. Financial Times. London (UK), pg. 16 Clark, P 2011, Industry suspends rivalry to fight air tax rises, Financial Times. London (UK), pg. 2 Clark,P & Tait, N 2010, Airlines hit by EUR800m fines over cargo cartel. Financial Times, London (UK), pg. 13 Clark, P 2010, Airlines in two camps over jet financing, Financial Times, London (UK), pg. 19 Clark, P 2010, BA chief says Europe must wake up to threat from Mideast airlines, Financial Times. London (UK), pg. 15 David, C 2000, ‘The development of the airline industry from 1978-1998 – A strategic Overview’, Journal of Management Development, Vol. 19, No. 6. Lovelock, Vandermerwe & Lewis, B 1996, Services Marketing – A European perspective, Prentice Hall Morrison, WG 2004, ‘Dimensions of predatory pricing in air travel markets’, Journal of Air Transport management, vol. 10, pp. 87-95 Odell, M 2011, Walsh says higher oil prices pose industry's 'biggest challenge', Financial Times. London (UK), pg. 16 Severin & Borenstein 1989, ‘Hubs and high fares: dominance and market power in the U.S. airline industry’, RAND Journal of Economics, Vol. 20, no 3, 1989, p. 346-354 Scheers 2001, ‘Attracting investors to European regional airports. What are the prerequisites?’, International Airport review 5, pp. 56-59 Vadhindan, K 1999, ‘Fuel price risk management using futures’, Journal of Air Transport Management, Vol. 5, 1999, p. 39-44 Wernerfeldt, B 1984, ‘A Resource-Based View of the Firm’, Strategic Management Journal, Vol.5.     . Read More