Porter Analysis on the High-End Airline Industry

8/3/2019 Porter Analysis on the High-End Airline Industry

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Porter Flies First Class


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Air transportation is directly correlated to economic growth. According to Boeing 0

to 80% of air travel demand is driven by the stability of economy. After the 2009 recession,

the passenger air traffic industry suffered a 2% decline. However commercial aviation has

successfully bounced back in the past and this time there is not exception. For the first half

of 2010 the industry saw an increase of 8% growth that is forecasted remain throughout

2014 (The Boeing Company, 2011).

From massages, en-suite showers, Bvlgari toiletry bags and Dom Prignon over a

seven-course meal the range of services for luxury airlines competes in a recovering

industry still suffering the effects of the 2009 economic crisis.

Demand in air transport would only need to build an additional 1.4 percent to "return to

pre-crisis levels," reported the International AirTransport Association.

Following the crisis the demand for luxury travel has regained growth as well.

There are roughly 35 airlines that offer first class service including flat beds and

outstanding customer service with a one-to-three crewmember per passenger. In business

class the ratio is about 10 to 1. However, first class profits dont represent the biggest

revenue for the high-end service carriers as the concept has become more of a marketing

tool than it is a money-maker (Vora, World's Best First Class, 2007). On the other hand,

"Business class is one of the biggest sources of profit for airlines," explains Aram Gesar,

editor of the New York-basedAirGuide magazine and AirGuideonline.com


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Forbes magazine divides the worlds best airlines in two categories, first (Table 1) and

business class (Table 2). However most US carriers have consolidated the two in one class

altogether. Curiously enough, there arent any North American carriers in either one of

these lists.

This paper will examine the full service airlines that offer luxury accommodations in

each of Porters five competitive forces that shape strategy.

Contending forces

I. Threat of entryThere are seven major sources of barriers to entry:

1. Supply-side economies of scaleWhen firms produce at large scales they are able to enjoy lower costs per unit as the cost

will be shared by a larger output.

The most significant example is the creation of airlines alliances. The alliances concept can

be defined as lumping, where the firms integrate together their common activities to

achieve economies of scale.

British Airways is the leading airline in the UK and has two major hubs at Heathrow and

Gatwick airports that allow a greater capacity and better benefits for passengers. Similarly

as part of one of the three major worldwide alliances, oneteam, they are able to capitalize

in the resources of the other members as well. Out of the three alliances, oneteam is


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leading in utilizing their networks and Internet resources and offers their customers a

streamlined process for scheduling and collecting points for each of their loyalty programs.

The other two large airlines alliances, SkyTeam and Star Alliance also provide a

continuous collaboration between each other. This way, they are able to utilize their

resources and provide a higher value service to their passengers.

Through alliances, airlines are able to achieve a higher level of economies of scale. Most of

the carriers that provide an exceptional value to customers belong to one of the three

major leading airline alliances in the world (Table 1 and Table 2). Star Alliance, SkyTeam

and oneworld account for 60% of the worlds air transportation (Euromonitor

International, 2010).

2. Demand-side economies of scaleThe benefits for this side, arise when a buyers willingness to pay for a service or product

increase with the number of buyers who also patronize the firm. In the case of luxury air

travel, there are a considerable number of buyers that patronize air travel. Despite the

2009 crisis, International premium traffic volume increased 9% in 2010 (Euromonitor

International, 2011). Although it is a positive outcome the numbers cantbe compared to

pre-recession levels in 2008. However the increase of demand for high-end air

transportation does bring a higher number of customers demanding the service (Table 3).

3. Consumer switching costs


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In the air traffic industry, customers face switching costs when they give up the benefits

associated with the multiple loyalty programs that airlines offer.

4. Capital requirementsThis high end product is very expensive and as mentioned previously for first class

services, these premium seats do not drive profits but they are a great marketing tool for

branding and the added value aspect much needed in this category. On the other hand, the

sales from business class seats do bring the most profit for the airlines.

5. Incumbency advantages independent of sizeThe current players on the high-end passenger transportation hold a significant power that

does not take into consideration the size of their fleet. For example Qatar airlines parent

company is the Government of Qatar which gives the company extra leverage over any

possible competitors.

6. Unequal access to distribution channelsAirlines alliances have lumped its members activities all together to utilize each others

resources. The ability of an airline to join an alliance is closely analyzed in terms of law

and regulations.


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7. Restrictive government policyThe airlines are highly government-regulated industries. However some enjoy the benefits

that bring when they are owned by it like the Qatar Airlines case.

With the creation of the Open Skies Treaty in 1992 several territories have been able to

benefit from less-regulated policies and enhance government relations as well.

This force is very strong given the capital intensity needed to enter the market.

Similarly, the three worldwide alliances make have brought make it very difficult to new

players to enter and succeed in the market

The concept started out as a simple marketing tactic and now has evolved into strategic

agreements that allow a continuous collaboration in between its members.

Airlines alliances have contributed to a large part of the biggest airlines development as the

branding of such collaborations have a positive effect on the airline brand itself.

Airlines see many benefits in alliances such as the ability to serve country-specific

regulations in certain geographic areas without actually operating there and keeping their

costs to a minimum. Further cost reductions are seen through the evolution of

communication and integration of IT networks.

Passengers also enjoy extra benefits at airports facilities and rewards in different loyalty

programs.

16 of the worlds 20 most profitable airlines belong to one of the three alliances

(Euromonitor International, 2010).


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II. The power of suppliersA supplier force is powerful based on a few different aspects:

i.

It is more concentrated than the industry it sells to When talking about the luxury

airlines and the rest of the industry in general, including cargo, the aircraft

production is concentrated in two dominant players Boeing and Airbus, therefore in

this B2B relationship the suppliers are stronger in respect to the airline

organizations it sells to.

ii. The supplier group doesnt depend on the industry for its revenues All of thesuppliers heavily depend on the industry revenues, as they cannot serve another

industry, especially aircraft manufacturers.

iii. Industry participants face switching costs on changing suppliers Since most airlinesfleet has a combination of both Boeing and Airbus models, the cost of switching

from one supplier to the other are not significant. Nevertheless, the fact that there

are only two major manufacturers brings a higher leverage to the suppliers.

iv. Suppliers offer products that are differentiatedThere is no doubt that if you were toflight with either one of the best business or best first-class airlines, you will be

riding either an Airbus or a Boeing. Both companies hold the largest market share

of aircrafts production worldwide.


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Its really not a coincidence that the two most popular models for 2010 were the

Boeings 737 and Airbus 320 models (Euromonitor International, 2011).

With creation of planes like the Airbus 380, this supplier ensures that their product

is highly differentiated among the rest. There is no aircraft today that can offer

better fuel burn per seat and therefore eco-efficiency than the a380. This famous

model offers numerous benefits to the airlines and ultimately the passengers that

could even take a shower in the private en-suite first class cabins. The demand for

the product is extremely high and even though the company had some delays in the

product, firms are patiently waiting for the aircraft. As of September of 2011

Airbus.com reported there are 236 orders placed for the $300 million aircrafts have

been delivered.

v. There are no substitutes for what the supplier group provides - In terms of aircraftsand labour there are no substitutes available to the aircraft industry. Especially in

the luxurious first and business classes where the customer experienced is excelled

to exceptional levels. To fulfill such expectations the industry is very labour

intensive and similarly for the goods to provide such service there has to be an

airplane. Given that flying cars have not been invented yet.

vi. The supplier group can credibly threated to integrate forward into the industry Thiswould occur if the airlines profit margin is significantly larger to make the


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manufacturers start up their own airline. This is very unlikely given that the

aircraft manufacturers themselves have a significant profitability themselves.

Given that there are only two dominant players in the aircraft manufacturing, this force

is very relevant to the success of the industry. With more than a two year delay of the

Airbus A380 model, some companies like Singapore Airlines, Emirates and Qantas have

been highly affected as in some cases new business plans were developed around the two-

decker 500-passenger capacity boost.

III. The power of buyersA consumer group has negotiating leverage if:

i. There are a few buyers or each of the volumes they purchase is very large incomparison to a single vendor Just like any category of air transportation, the

economy plays a significant role. Upon the 2009 recession some airlines completely

removed their first class session while others invested extra resources in serving

the privileged market.

Business traveling shows a steady growth for the next couple of years. However,

domestic business trips will experience a fast growth thanks to emerging countries

like China, Brazil and India whose booming economies are likely to lead the way

(Table 4).


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ii. The industry products are standardized or highly undifferentiated First class orbusiness passengers have a wide range of options when flying especially if

commenting between the most popular hubs in the world.

iii. Buyers face few switching costs if they switch vendors There are not significantlosses in switching airlines. However, there may be costs associated with the switch

of airlines if a loyalty program is well establish and the switch represents the loss of

miles that can eventually obtain the consumer an actual seat. Also if for

organizations or individuals that have an agreement with an organization to provide

special fares over the sale of numerous business class seats, they can loss the

discounted price if they take their business elsewhere.

iv. Buyers can credibly threated to integrate backward and product the industrysproduct themselves if vendors are too profitable This aspect ties back to the barriers

to entry. Since the airline industry in general is extremely expensive to enter into

there are very little chances that individuals can provide the service themselves.

A buyer is price sensitive if:

i. The product it purchases form the industry represents a significant fraction of its coststructure or procurement budget In terms of business travel, the portion of flight

tickets costs may be a minimal fraction of the cost in terms of business transactions.

If a senior executive is working on a business deal with an international corporation,


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the cost of the ticket may be irrelevant to the return of investment in a large

business negotiation.

On a similar case, for first-class leisure travels the cost structure of their trip would

be more valued at the experience level rather than the hefty price ticket.

Since the average business class customer travels about six to 12 times each year

(Vora, World's Best Business Class, 2007), the competition for their market share is

very high. With continuous innovation and a combination of service and product

that provide the customer with a superior experience they are able to do that.

ii. The buyer group earns low profits and is under pressure to reduce its purchasing costs The great recession placed a decrease in airlines industry all together. However,

the industry has optimistic forecast for the next 20 years. Airbus predicts there will

be a 26% growth from emerging economies by 2030 (Table 5). Nations like China,

Brazil and India are likely to lead the way in domestic business trips thanks to their

growing economies (Euromonitor International, 2011).

iii. The quality of buyers product or services is little affected by the industrys product Inthe case of luxury airlines accommodations. Passengers that value conform and

believe that the fact that being rested and more relaxed after a flight will have a

significant impact on their performance, they will pay little attention to the prices of

business or first class seats.


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iv. The industrys product has little effect on the buyers other costs In order for thisaspect to make the buyer group sensitive, firms would have to value the service

enough to believe that a business class seat pays for itself in the event that a very

important executive would be more likely to close a deal if he/she flew on business

class.

IV. The threat of substitutesThe threat of substitutes is high if:

i. It offers and attractive price-performance trade-off to the industrys product Interms of price trade-off, consumers can highly benefit from flying with the low cost

airlines or if they enjoy the experience with the full-service airlines, they can simply

booking a seat in their economy class.

Since most of the luxury airlines most frequent flights are between major

international hubs, its not possible for consumers to use a different mean of

transportation other than fly.

ii. The buyers cost of switching to the substitute is low This can be also referred to thebenefits that loyalty programs bring to consumers. If the benefits are high, i.e. fast

earning on miles to accumulate for a real ticket, consumers will bear the cost of the

possible rewards by switching.


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V. Rivalry among existing competitors

The intensity of rivalry is greatest if:

i. Competitors are numerous or are roughly equal in size and power There arenumerous air transport providers. For full-service luxury accommodations the

players are as powerful as they are many. Alliances have also increased the power

and their resources by the integration of activities.

ii. Industry grow is slow which precipitates fights for the market share availableProjections show a growth in the airline industry of over 50% by the year 2030

(Table 5).

iii. Exit barriers are high In the airline industry, the investment to enter the market isvery capital intensive, therefore in order to exit the industry the firm must be

willing to sustain significant loses and debt. When Mexicana ceased to fly in August

of 2010, they had filed for bankruptcy protection with Mexico and the US with a

debt over one billion dollars (Euromonitor International, 2011) .

iv. Rivals are highly committed to the business and have aspirations for leadership,especially if they have goals that go beyond economic performance in the particular

industry This aspect if probably the strongest in the luxury airlines. Emirates

Airlines is one of the leading of its kind. Number ten in most profitable airlines


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(Table 5). The company reportedly spent about $112,000,000 in cabin and

entertainment upgrades in 2010 (The Emirates Group, 2011).

v. Firms cannot read each others signals well This does not occur in the airlineindustry as some of the major players that provide the highest ranked business and

first class seats have been in the market for a while and have a clear understanding

of the market itself.

Price competition is most likeable to occur if:

i. Products or services of rivals are nearly identical and there are a few switching costsfor buyers For airlines that offer business class the differences on the service and

amenities do not vary widely. The differentiations would be based mostly on

company reputation and the benefits passengers seek in loyalty programs and

alliances.

ii. Fixed costs are high and marginal costs are low Given that the service is perishableand the competition is tight, with services like first class some airlines do not even

expect to make a high profit but to utilize such offerings as a marketing tool to add

value to their brand.


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iii. The product is perishable Just like any other services, airline seats are perishable;they cannot be replaced or charged after a flight has departed.

Politcs

There isnt probably an event more significant to an industry as 9/11 and the impact it had

in had in the airline industry. Similarly,

Economics

According to Boeing, 60-80% of air travel demand is driven by economic growth, which

further affects the high-end service airlines.

Social

Flying first and business class is also socially seen and a high status and part of an elite-

only member club that is true to the price level of each seat, ten times more than the

economy class.

Technological

Mobility has started to become a major factor in the airline industry. Some airlines

like British Airways in 2010 have developed mobile applications that not only allow

passenger to check in but also purchase and manage bookings. The proper utilizations of

resources can highly benefit a firm if used wisely, however, as previously mentioned can

also bridge customers closer to competitors. Mobility commerce sales will nearly double


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by 2015 especially in the Asia-Pacific regions where most of the business class seats are

sold with (Table 4).

Similarly, on the technological aspect, with more fuel-efficient planes, airlines will become

more competitive and also benefit with marketing efforts aligned with their environment

causes.

PESTEL

Environmental

It is highly linked with technology and the advancements in the development of more

environmentally friendly aircrafts. The Air Transport Association (IATA) has a goal of

reducing utilization to 10% and employ alternative fuels by 2017 (Euromonitor

International, 2011).

Legal

The Open Skies agreement has brought numerous benefits to the airlines in participant

territories. For example, The UAE has one of the most open agreements in the world as

they hope to make Dubai a global hub.

Other nations need to keep their skies closed for some reasons. Due to the popularity

that Brazil will have for the next FIFA world cup in 2014, the nation has been more reliscint

towards the agreement only signing one with the US in 2010 (Euromonitor International,

2011).


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CONCLUSION

The future is very optimistic. As historical data has demonstrated that after

recessions and other environmental effects like SARS and 9/11 the industry has bounced

back and is en route to grow and double traffic by 2030 (Table 5).

North America still dominates world traffic today but by 2030 Asia-Pacific will take the

lead (Airbus, 2011).


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Works Cited

Airbus. (2011). Global Market Forecast 2011 - 2030. Blagnac: Retrieved fromhttp://www.airbus.com/.

Euromonitor International. (2011).Air Transportation: Clear Skies Ahead?Retrieved from

http://www.euromonitor.com/.

Euromonitor International. (2010). Global Airline Alliances Safety in Numbers. Retrievedfrom http://www.euromonitor.com/.

Euromonitor International. (2011). Luxury TravelCapturing the New Luxury. Retrievedfrom http://www.euromonitor.com/.

The Boeing Company. (2011). Current Market Outlook 2011 - 2030. Seattle: Retrieved fromhttp://www.boeing.com/cmo.

The Emirates Group. (2011).Annual Report 2010-2011. Dubai: Retrieved fromwww.theemiratesgroup.com.

Tinseth, R. (2011, August). Current Market Outlook 2011. Retrieved October 8, 2011, fromThe Boeing Company:www.boeing.com/commercial/cmo/pdf/2011_Paris_Presentation.pdf

Vora, S. (2007, 08 09). World's Best Business Class. Retrieved 10 10, 2011, from Forbes.com:http://www.forbes.com/2007/08/09/travel-business-airlines-forbeslife-cx_sv_0809bizclass.html

Vora, S. (2007, August 10). World's Best First Class. Retrieved October 10, 2011, fromForbes.com: http://www.forbes.com/2007/08/08/travel-airlines-firstclass-forbeslife-cx_sv_0809firstclass.html


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APPENDIX

World's Best First Class

1 Qatar Airways Qatar

2 Singapore Airlines Singapore Star Alliance

3 Cathay Pacific Aiways Hong Kong oneworld4 Malaysia Airlines Malaysia

5 Thai Aiways Thailand Star Alliance

6 EmiratesUnited ArabEmirates

7 Jet Airways India

8 Lufthansa Germany Star Alliance

9 Korean Air South Korea SkyTeam

10 Qantas Airways Australia oneworld

Table 1 -Source: Forbes.com

World's Best Business Class

1 Singapore Airines Singapore Star Alliance

2 Virgin Atlantic Aiways United Kindom

3 Cathay Pacific Airways Hong Kong oneworld

4 Malaysia Airlines Malaysia

5 Air New Zeland New Zeland Star Alliance

6 British Airways United Kindom oneworld

7 Jet Airways India

8 Qatar Airways Qatar

9 Qantas Airways Australia oneworld10 Etihad Airways UAE

Table 2 -Source: Forbes.com

Table 3 Source: IATA


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Table4 -Source: Euromonitor International

Top Airline Groups by Revenue

GroupRevenue($B)

Operatingresult ($B)

Net result($B)

1 Lufthansa Group 36.1 1.76 1.49

2 United Continental Holdings 34 1.82 0.85

3 Delta Air Lines 31.8 2.22 0.59

4 Air France-KLM Group 31.3 0.16 0.81

5 FedEx Express 24.6 1.23

6 AMR Corporation 22.2 0.31 -0.41

7 International Airlines Group(British Airways/Iberia)

19.5 0.3 0.13

8 Japan Airlines Corporation 16 2.22

9 All Nippon Airways Group 16 0.8 0.27

10 The Emirates Group 14.8 1.48 1.46

Table 1 - Source: Airline Business August 2011,FlightglobalData Research
http://en.wikipedia.org/wiki/Flightglobalhttp://en.wikipedia.org/wiki/Flightglobalhttp://en.wikipedia.org/wiki/Flightglobalhttp://en.wikipedia.org/wiki/Flightglobal


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Table 2 -Source: Euromonitor International

Table 3 - Source: Airbus

Porter Analysis on the High-End Airline Industry

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