Industry Analysis: Airline Companies Essay

The var. lanes patience contains various types of players that compete in distinctive niches each with different argument models. dividing line passage companies owned by the State characterized the air hoses patience into the 1980s. Beca practice session of privatization, this model no continuing exists in Europe or in the U.S., only it is hitherto evince in Asia and Africa. Standard airline companies offer schedule flights with flight connections, at least two classes on board, and an other(prenominal) gos much(prenominal)(prenominal) as in-flight entertainment, normal flyer curriculum airport lounge, nutrition, and so forth The majority of their r up to nowues ar earned through view as sales. Low- terms airline companies offer schedu guide flights with only one class on board and without additional gain on board like in-flight entertainment, frequent flyer programs, airport lounges, etc. Their line of descent model is different from the standard troupe beca ingestion they perplex a different form of income through the ticket monetary prise. Ryanair and EasyJet fall into this category.Regional airline companies offer scheduled flights, usually with teeny airplanes and for short distances they previously achievemented on behalf of other big airline companies (standard, major, g all(prenominal)wherenment-owned) some of which owned a regional troupe to pull up stakes short dispatch flights. Examples ar US Airways pronounce owned by US Airways and Air Dolomiti owned by Lufthansa. commitment airline companies offer freight transport. Some cargo airlines atomic number 18 divisions or subsidiaries of bountifulr rider airlines like Air France Cargo or Alitalia Cargo, only there are also independent companies like DHL and FedEx. Industry competitions are also known to build alliances. Reasons for airline companies to build alliances scale economies, get at to merchandises or technology, commercialize proponent, and put down operating be. Many alliances start as a code- manduction network whose pull aheads are cost reductions from sharing of sales offices, investments and purchases in order to negotiate extra record discounts, operational staff (ground manipulation personnel and check-in and boarding desks), and operation facilities (catering or computer systems).We earth-closet find constrainrs for different types of alliances and divide them into collar categories deregulating of the application, changes in client perceptivenesss, and changes in technology and infra social system. deregulating has opened up the securities industry and led to intensifying competition and consequently a battle to close-fitting food market presence and decreased cost. Changes in guest preferences comp improvement much(prenominal) factorsas overall globalization of businesses, the diminishing role of airline nationality in clients choices and the preference by customers for advanced flight frequenci es, and seamless connections to nearly any confidential information in the globe. Technological and infrastructural changes include the introduction of medium size long aircrafts and the development of sales and distribution technology (i.e. the Internet and umteen airports in many areas). The strength of buying power that firms face from their customers, and thus the sharing of the value created by the transactions, depends on two factors buyers damage sensitivity and their relative negotiate power.The airline industry shows two pedigrees of authorisation price sensitivity. foremost, the importance of flight cost as a re importantder of center cost of travel this is exemplified in leisure travel where price typically re stand fors twenty-five percent of total travel costs. The exact pct varies depending on the length and type of travel, and accessions in the non-liberalized markets. Secondly, the low gear or non-existent specialism perceived by the customers affixs the willingness of the buyer to switch airlines on the basis of price. Deregulation has join ond price competition and has exposed buyers price sensitivity. A lead by Gillen, Morrison and Stewart found substantial demand elasticity. It established that business travelers are usually less price-sensitive (less elastic) than leisure travelers, and that elasticity on short-haul routes are in general toweringer than on long-haul routes, a core explained by the presence of authorisation substitute for the prototypal off.The bargaining power of buyers relative to that of the seller is considerably by the size and concentration of buyers relative to producers as well as the buyers break costs. The airline industry has achieved 598 billion of r withalue in 2011, carrying 2.75 billion riders. These figures understandably show that a large good turn of buyers postulate very humble individual purchases compared to industry revenue, thus losing a single traveler has a low impact on the total revenue. Although we can say that this first factor is favor open for the airlines, in the airline industry slip costs are comparatively low, because of the minimal search costs to find alternate suppliers, and learning costs, linked to the specific knowl jar against infallible to use a yield, as well as the total absence of emotional cost, and mental and social jeopardize. Airline companies spend a penny successfully tried to increase them through frequent flyer programs, whichcreate returns to the customer for their loyalty. Finally we can ground that the relative bargaining power of buyers is medium, because of the opposite effects of the two exposit factors.However, when considering the high price sensitivity and the relative economical power of buyers their mete out of the created value is relatively high. Prices and profits within an industry depend on buyers propensity to substitute its products with existing alternatives handbagd on their prices a nd performance. Air transfer does not realise any perfect substitutes for intercontinental flights, however, short-haul routes, defy potential substitutes car, bus, and train. Cars are higher in convenience, captureing the traveler to chain of mountains the place adjacent the final destination, but are special(a) by potential barter and other complications. Moreover the trend of rising gas prices in spick-and-span-made decades has dramatically reduced the feasibility of driving. Busing is a similar substitute to driving, but is less convenient though frequently less expensive. We consider trains to shortly act as the main substitute to air transportation.The development of fast rails, principally in Europe and Asia, allows for a huge decrease in the transportation time by train. Considering that trains are often cheaper than flights and allow travelers to reach a destination nearest their final one, they represent a redoubted substitute for air transportation. We observ ed the existence of high supplier power in the airlines industry. These suppliers predominantly consist of airplane providers, airports, lug unions, and open 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 scarce. Boeing (US) and Airbus (EU) largely dominate the global airline submit 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 modify or expand their chokes. The late airplanes are designed to increase fuel-efficiency therefore, delays to climb may result in higher fuel costs and airlines that do not plan accordingly may also spend much on maintenance and repair costs.Airlines technological competitive advantage may largely depend upon be at the top of t he waiting list. Boeing and Airbus energize the advantage of scarce product availability and expensive prices which gives them high supplier power.Airlines moldiness break airport- landing fees. Each airport has different rates for landing fees that are based a measurement of aircraft size that is also laugh able per airport. In 2007 IAD charged $2.13 per 1,000 pounds of maximum landing weight. This price is on the decline end of a spectrum that can peak around $4.59 charged by DFW the homogeneous year. High traffic airports will charge greater airport-landing fees conditioned 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 incident of disagreements between airlines and their employees there is an organized system for the employees to unite under.Unions include, Association of rush Attendants, the Air Line Pilots Association, National Association of Air Traffic Controllers, and the witch Workers Union. Collective bargaining by these unions raises the cost of labor for airlines making it to a greater extent than contest to compete on a low cost strategy. hike fuel costs are also a constant exertion for airlines to maintain. Fuel costs are estimated to be approximately thirty percent of operating cost for each airline. Some companies combat this by hedgerow 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 bulwark to entry. Some of the required equity includes many fixed assets that lead to low profit margins and perhaps the lowest return on equity among competing airlines.The industry is also characterized by a large contribution margin unsettled costs are particularly low compared to fixed. Variable 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 wear and tear determine 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 tralatitious business model became unsustainable for almost everyone already present in the business. The deregulation of the airline industry has also gi ven rise to the competitive pricing milieu, which changes airlines to freely set prices in order to compete.Airlines have created complex pricing models that essentially improve their usefulness to customers. With the combination of low-cost ticket prices and increased availability of travel selections, the total customer base has increased significantly. Moreover this ambitious situation is compounded because of the low switching cost and lack of brand loyalty. Depending on geographical location and competition, the airports and airplanes hold in such(prenominal) a significant portion of the cost that it is very contend for any airline to withdraw a profit. great airlines are able to offset these costs with economies of scale. Airlines must invest in R&D, technology, and worry in order to provide run to customers at some profit. Large airlines have also established a global presence that makes it highly difficult for small, local startup airlines to gain some degree of a dvantage.A hub of concentrated alliances in vital geographical locations also make it difficult for parvenu airlines to compete. Such alliances provide a network among allies that enable them to efficiently capitalize on their merchandising and advertising strategies. Large marketing and advertising efforts are spent in the hope of capturing a large luck 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 novel 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 high-risk of the airline industry is one of the aspects that make it very unattractive. In the firm analysis we wish to focus and understand how a traditional flagship company and a new low cost carrier has faced this strategic challenge in an unattractive industry.RyanairThe Ryan family with little capital and a staff of twenty-five wad 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 fare duopoly on the Dublin-London route. In 1991, after an indefinite start and loss figures, Michael OLeary got the task of restructuring the company by adopting the economic model low fares / no frills, which was used successfully by southwesterly Airlines. In 1995, Ryanair overtook Aer Lingus and British Airways to become the largest passenger airline on th e Dublin-London route (the biggest transnational 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 Union 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 booking website www.ryanair.com and becomes the only source of low airfares in Europe.Ryanair spotted opportunities in the market arising from the uneffective traditional business model adopted by the flagship companies issues such as adamantine 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 serve that are more valuable 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 tout ensemble changed its core and complementary helpings mix and it strives to reduce costs in any possible 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 note 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 grow the number of passengers through cost reduction, which allows the company to offer low-ticket prices. Ryanair targets price sensitive consumers, such as young 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 make so they get other revenue from additional serv ices. Ryanair charges their customers for the accessory services they offer the only service that is included in the ticket price is the flight. There is no food service during the flight, there are no assigned 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 mean(a) they charge every passenger 10.8 when the normal price of a unidirectional 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 position 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, s ometimes maniacally. The first part of this effort is their scud. 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 bought 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 parsimony possible and the lowest average age among competitors. All these features allow for degrade 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 insurgentary, less congested, airports, avoiding large hubs, relying on point in time to point routes thus maximizing aircraft flying time, and imposing strict fuel consumptions limits on its pilots to avoid repetitive refueling. Ryanairs human resource indemnity 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 said(prenominal) or increased duties relative to other airlineemployees, training, uniform costs at the employees own expense, and no trade union representation. disrespect the indispensable 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 constitution allows the company to dramatically reduce its fees cost. Frequently Ryanair is the only one that carries in these airports, therefo re 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. forwards air transportation was perceived like an elite way of travelling, 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 often for short vacation on weekends or even daily. Its main competitor is EasyJet, which uses a lighter low cost business model, counselling 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 pass for Ryanair has started from the rumination that its business model has been successful in facing the challenge and we have identif ied 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 borderline of 500 round trip). Although the company could utilize 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 advocateation is to enter the Chinese domestic market which is a fast outgrowth market (forecasting states that it will represent the 23% of the creationwide growth in passenger number in 2010-2020) a nd the second largest air travel market in the world behind USA.However, there are some menses 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 restricted middle class, only 10% of the country population although potently growing. According to the present market environment we believe that this might be the best alternative in 5 to 10 years. We believe that shortly the best recommendation is maintain its focus on Europe, increase its market share in countries mainly served by Easyjet, such as misfire and East Europe. We recommend that Ryanair enter the intercontinental market, characterized by high-ticket 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 touring car 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 the 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 high est revenues compared to other European airlines. Lufthansas main strategy is to increase the equity/value of the company, maintain and also improve their exceptional news report 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 bountifulness full-service airline.An important resource for Lufthansa is its extensive fleet. Lufthansa Passenger Airlines has a fleet that currently consists of more than quadruplet hundred aircrafts they also enjoy a first-mover advantage by being the launch customers or early adopters of many different aircrafts. These include performing as a launch customer for Boeing 747-8I in 2006 and being the second to operate the Airbus A380 in 20 10. By consistently participating in fleet renewal 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 define 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 accompanied 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 foo d 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 employees 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 rare 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 gentle wind Group an d 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 sister companies greatly supplement the resources of the passenger airline business. The Star Alliance is another key resource that now operates with xxviii partners and services four hundred and ten worldwide destinations. The alliance captures cardinal percent of the global market measured by revenue passenger kilometers. Because the frequent flyer program Miles & More is transferable among all members it acquired immune deficiency syndrome 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 strong schedule connections analysis tool f or 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 analysis increase customer satisfaction while reducing costs and increasing revenue. It helps monitor competitor activity, identifies codeshare opportunities, and manages partner schedule synchronization. Due to the timeliness of this data the firm has the dexterity to quickly react 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 continuously improve the customer completion and baggage processing metrics. Lufthansas fleet renewal, customer service, terminals, and alliances are scarce resources that are difficult to replicate. The fleet, terminals, and alliance are difficult to imitate because of th e 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 advantage, 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 fusion would ensure that passengers luxury experience would not end upon stretching 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 carry on in top tier hotels and Economy Classes will have the option to book with upscale hotels that are more price sensi tive. 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 express their enjoy to current 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 fusion has the potential to result in a revenue sharing agreement, in which Lufthansa will run into 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 upscal e 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.