Is the UK Airline Industry Competitive - Case Study Example

IS THE UK AIRLINE INDUSTRY COMPETITIVE? An Analytical Research in Industrial Economics The UK Airline industry, at one time, was government controlled and the large airlines deemed “flag carriers” which were readily bailed out by government in case of financial difficulty (Rodger & MacCulloch, 2009). Competition was non-existent. In the 1980s, however, the national airline company was privatised and the industry was deregulated. Initially a move by the US and UK, the liberalization was in full swing in Europe in the 1990s (Graham, 1993; Cento 2009). Today, airlines are generally classified into the full-service airlines and the low-cost carriers. The development of low-cost carriers is attributable to five factors: (1) market liberalization; (2) entrepreneurs; (3) population and relative wealth; (4) airport availability and capacity sold cheap; and (5) internet diffusion for ticket sales, liberating the distribution channel from control of travel agents (Cento, 2009). The greater competition ushered in a market-oriented approach to product optimization (Pels, Njegovan & Behrens, 2009). Industry Structure Industry structure is deduced from the number and size distribution of buyers and sellers, entry and exit conditions, product differentiation, vertical integration and diversification. For brevity, the more active UK airline companies are provided in Appendix A of this assignment, of which five are full-service, eleven are low-cost passenger, and the remaining five are exclusively cargo airlines. There is one more low-cost airline not shown on the non-exhaustive list, Ryanair, which performance shall be in the performance analysis. The distinction between full-service and low-cost airlines, however, are gradually blurring as several of the low-cost companies have turned hybrid, and full-service have aligned their services closer to the low-cost model (Gray, 2003). The number of UK airlines is not the determining factor for structure per se, because airline capacities vary in terms of routes and number of flights. Pels, Njegovan & Behrens (2009) provide the data on the following tables that show route distribution and share among the airlines and airports. It is understandable why Pryke (1987) said that considered ‘route-by-route, the airline industry is incurably oligopolistic’ (p.9). The sentiment is echoed by Button (1989, p. 197) when he said, ‘The key point is not how many airline companies serve the market, but rather the degree and nature of competition which exists between them.” The foregoing tables suggest that airlines operating out of major cities would tend to benefit more from economies of scale, which suits most full-service airlines. Low-cost airlines that operate from smaller cities, however, are able to carve out a new demand segment, which would not have availed of full-service airline services. Low costs, more routes, and fewer flights spell the strategic competitive advantage of the low-cost airline service. Conduct Features The salient conduct features include significant distinctions in business objectives, pricing policies, and product design and branding. Apparently from the structure of the industry, the business objective has been spelled out for the low-cost airlines in terms of what the full-service airline could not cater to: the market that can afford only the lower fares. According to Pels, et al. (2009), airline pricing is characterized by extensive price discrimination, and even within the same segment there is likely to be more variation in air fares between different airlines for the same route. Other than the supply side, the way the industry viewed its market had also changed. The greater number and types of customers drawn by a more competitive industry had challenged the former delineation of customers into only two groups – business and leisure. Customer segmentation in the airline industry was traditionally divided into two, the business and the leisure passengers (Teichert et al., 2008). Pels, et al. found that partitioning into business and leisure no longer sufficed to describe customer heterogeneity in the UK market. For example, among those for leisure, there is at least one distinct group emerging, the “visiting friends and relatives traffic” (p. 343) which now accounts for 30% of total international travel. This segment appears to be more price sensitive than other segments of the leisure travel market. Since the passengers are visiting friends and relatives, they do not typically incur accommodation costs and thus air fare presents a much greater proportion of the total costs of travel than other leisure passengers. Teichert et al. (2008) arrived at the same conclusion, categorizing customers into five segments whose preference may be divided into three attributes: Comfort, Efficiency, and Price-oriented offerings. Efficiency consists of three features: punctuality, schedule and flexibility. By emphasizing their conduct on these characteristics, and designing service products that meet these needs in the combinations preferred by the five segments, then the service delivery will improve, presumably increasing sales. Performance features Performance features include profitability, growth, quality, and efficiency. Evidence for this discussion are included in Appendix B, showing the comparative analyses of two companies discussed in Kangis and O’Reilly (2003). Each company represented a segment of the industry: Ryanair was taken as a typical example of low-cost airlines, and Aer Lingus represented the full-service airlines. From their specific positions in the industry structure, each had a particular business purpose, strategic mission, and cost structure. Tables A-4 to A-10 provide data on their operations and, consequently, performance features. For instance, Table A-4 shows that low-cost airlines outsource more of their services than full-service airlines, thus slightly relinquishing control of quality in favour of lower costs. Table A-5 also shows low-cost utilises a smaller labour force with more flexible employment arrangements, and pay is activity-related. As to route networks, Table A-6 shows Aer Lingus uses main hub airports and scheduled destinations, and interlines with other major airlines. Low-cost operates point-to-point networks between regional UK airports. Table A-7 also shows differences in the airlines’ marketing strategies, and Table A-8 differences in load factors. In Table A-9 and A-10, the financial and market performance metrics of both airlines are given. While full-service airlines account for much higher sales (turnover), they spend more and require higher investments. Low-cost airlines operate more efficiently, as shown by Ryanair’s operating profit margin – ratio of operating profit to turnover - of 17% compared to Aer Lingus’ 7%), and with higher sales and profit per employee than the full-service company. Market shares of the low-cost airlines exceed that of full-service airlines across all destinations. Investigations In the late 1970s, an alleged cartel in the airline industry was given prominent coverage. At that time, Sir Freddie Laker started a cheap rate, cost-cutting air transportation service between the UK and the US, similar to the budget airlines of today. After a few years, however, his company was forced out of business, and he attributed this to an alleged conspiracy among the larger airlines one of which was British Airways. The conspiracy involved price fixing where all airliners dropped their fares collectively. Laker Airways filed suit in both the UK (against British Airways) and the US (against Pan American World Airways). In 2007 there was another case against British Airways for its part in a cartel relating to fuel surcharges for consumers; in this case British Airways was fined a hefty £121.5 million. Another inquiry was conducted in 2003 by the European Commission, into the legality of arrangements between Ryanair, a low-cost airline, and Charleroi, a publicly owned airport in Belgium. The arrangement consisted of special incentives in the form of subsidized rates, offered by Charleroi to Ryanair to entice the latter to use the airport. The European Commission ruled against the legality of the arrangement. (Smith, 2010) Another investigation was conducted in April 2007. It delved into the reported fraud in the e-ticketing services of several airlines, in which cases e-tickets were purchased with credit cards. Authorities have determined that credit card crime alone is costing each airline some £500,000 out of the £1,500,000 it loses each year to fraud – an increase of 500% in the past five years. Low cost carriers that are expanding rapidly appear hardest hit. As a result of this, compliance of the industry with the Payment Card Industry Data Security Standard (PCI DSS) has been urged, in order to stem the increasing trend in credit card fraud in the industry (Deloitte, 2007). Porter’s Five Forces Model Entry barriers - The industry normally has high entry barriers because of the existence of government franchise and high capital investment in order to operate. They have been considerably lowered by the deregulation policy. Threat of substitutes – Travel by land and sea take longer and are less convenient than airline travel, and pose little threat. Bargaining power of suppliers – Airports and other suppliers have low bargaining power and even tend to give discounts, a practice the EC has declared illegal. Bargaining power of buyers – Customers have a greater choice of services, prices, destinations and flight arrangements, and have strong command over prices Internal Rivalry – The rivalry is intense and a shake-out imminent, to the point that both low-cost and full-service airlines are now evolving into hybrid airlines, suggesting a consolidation. The foregoing analysis shows that competition is strong in the UK Airline Industry, such that actions and strategies adopted by one segment affect the decisions made by others in the industry. WORDCOUNT = 1,500 except title REFERENCES Button, K. 1989 ‘The deregulation of US interstate aviation: an assessment of causes and consequences’, Transport Reviews, 9. pp. 99-l18, 189-125 Cento, A 2009 The Airline Industry: Challenges in the 21st Century. Physica Springer-Verlag Berlin Heidelberg Deloitte Tourism, Hospitality & Leisure Group 2007 United Kingdom: Fraud in the Airline Industry – How to Plug the Gaps. Mondaq Transport, 30 April 2007. Accessed 21 February 2010. Graham, B J 1993 The regulation of deregulation. Journal of Transport Geography, vol. 1, no. 2, pp. 125-131 Gray, C 2003 No-frills change into ‘hybrids’. Travel Trade Gazette, 16 May 2008, p.18 Kangis, P & O’Reilly, M D 2003 Strategies in a dynamic marketplace: A case study in the airline industry. Journal of Business Research, vol. 56, pp. 105-111 Lipczynski, W & Goddard, 2006 Industrial Organization: Competition, Policy, Strategy, 2nd ed. Pearson Education Ltd O’Connell, J F & Williams, G 2005 Passengers’ perceptions of low cost airlines and full service carriers: A case study involving Ryanair, Aer Lingus, Air Asia and Malaysia Airlines. Journal of Air Transport Management, vol. 11, pp. 259-272 Pels, E; Njegovan, N; & Behrens, C 2009 Low-cost airlines and airport competition. Transportation Research Part E. vol. 45, pp. 335-344 Pryke, R. 1987 Competition among international airlines. London: Trade Policy Research Centre Rodger, B J & MacCulloch, A 2009 Competition Law and Policy in the EC and UK. New York, NY: Routledge-Cavendish Smith, D 2010 Airlines investigated for alleged price-fixing during World Cup. Guardian.co.UK, 29 January 2010. Accessed 21 February 2010 from http://www.guardian.co.uk/business/2010/jan/29/airlines-price-fixing-world-cup Teichert, T; Shehu, E; & Von Wartburg, I 2008 Customer segmentation revisited: The case of the airline industry. Transportation Research Part A vol. 42, pp. 227-242 APPENDIX A: List of Airline Companies in the UK Airline Industry 1. AFX Airfreight Express air freight cargo non passenger airline operating charter and schedule freight services from London Heathrow and Gatwick airports and also Manchester airport. www.afx-747.com 2. Air 2000 are a low cost UK charter airline serving europe, you can check out Air 2000 and flight destinations here. The site provides online search and booking system allowing you to check availability online. Part of First Choice. www.air2000.com 3. Air Foyle / Antonov Airlines is the largest operator in the outsize market, holding more world records for heavy lift than any other air cargo provider. www.airfoyle.co.uk 4. Air Southwest - the low fares airline for the South West of England. Frequent flights to and from Plymouth, Newquay and Bristol. Low fare flights to destinations including London Gatwick, Manchester, Leeds-Bradford, Glasgow, Newcastle, Jersey, Dublin, Cork and Chambery. Book your flights online, plus hotels, car hire and a wealth of destination information. www.airsouthwest.com 5. Astraeus one of the UK’s independent charter airlines. The website contains a whole host of information which will be of use if you are looking to book a flight. Charter services fly to destinations throughout Europe, Asia, the Middle East, North America and Africa. www.flyastraeus.com 6. Atlantic Airlines are Europe’s premier supplier of out-sourced cargo lift in both the Contract and Ad-hoc cargo markets. Originally part of the Air Atlantique Group of Companies which traces its origins back to the Channel Islands in 1969. In 2004 the airline was the subject of a Management Buy Out and is now owned by its board of Directors. www.atlanticairlines.co.uk 7. Aurigny in the Channel Islands. Scheduled services between Guernsey, Jersey and Alderney, and to destinations in the UK and Continental Europe. www.aurigny.com 8. BAC Express For nearly 20 years the BAC Group has served the aviation needs of Governments, Multi-National Corporations, the sporting world, entertainment industry and hundreds of companies, groups and individuals worldwide. Formed in 1992 BAC Express Airlines Limited has grown to become a leading force in the UK turboprop contract and charter market. www.bacexpress.com 9. Blue Islands From their base in the Channel Islands, a growing air network links UK and European cities with the islands of Jersey and Guernsey, as well as providing frequent inter-island services. Cheap flights to Guernsey, Jersey, Paris, Brighton, Bournemouth, Cardiff Southampton & other UK destinations with low all-inclusive prices & no hidden extras. www.blueislands.com 10. Britannia Airways Award winning service from the UK. Britannia fly to Europe and other destinations around the world, the website has provides availablity check, fares and routes and seat layouts so you can pre-book. Britannia is now Thomsonfly. www.britanniaairways.com 11. British Airways is the UKs largest international scheduled airline, flying to over 550 destinations at convenient times, to the best located airports. BA can meet all your travel needs including air fares flights business class schedules and prices for the holiday maker and executive traveller. Website has easy online booking system that offers competitive prices. Whether customers are in the air or on the ground, British Airways takes pride in providing a full service experience. www.britishairways.com 12. British International as well as scheduled flights to the Isles of Scilly, participates in military contracts, charter, training and helicopter leasing. www.islesofscillyhelicopter.com 13. British Mediterranean Airways B|MED was established in 1994 by a group of private investors under the chairmanship of Lord Hesketh as a limited company. In 1997, a joint franchise partnership was agreed with British Airways plc. www.flybmed.com 14. British NorthWest Airlines is the airline serving the busy Blackpool - Isle of Man and Belfast routes in the North West. Frequent, reliable services allow the business traveller, commuter, and tourist to take advantage of low BNWA prices and professional, caring services. www.flybnwa.co.uk 15. City Star Airlines Based at Aberdeen International Airport with a regional office at Stavanger lufthavn Sola, City Star Airlines is a fast growing executive airline. Founded by investors from Iceland and the UK, March 2005 saw the launch of City Star Airlines’ first and direct route to Oslo, Gardermoen. www.citystarairlines.com 16. Eastern Airways domestic flights covering the UK, 17 regional airports from Stronoway to Southampton. Operate to and from the majority of airports across both the UK and Europe. www.easternairways.com 17. Easy Jet easyJet currently has operating bases throughout the UK and mainland Europe. Known as the low cost airline which has changed much of the industry with dynamic lower cost air travel and doing things differently which others tend to follow. www.easyjet.com 18. Emerald Airways FlyJem.com is an aviation group employing upwards of 250 people in various roles. The company operates over 30 freight and passenger aircraft on scheduled and ad-hoc services throughout the UK and Europe. www.emerald-airways.co.uk www.flyjem.com 19. EuroManx Isle of Mans Airline. Flights from IOM Ronaldsway Liverpool John Lennon Belfast City Manchester & London City with FlyEuroManx ManxFlights fares complete routes and schedules Online. www.euromanx.com 20. European Aviation owns and operates a fleet of Boeing 737-200ADV jets throughout Europe, the Middle East and North Africa, which are available to fly Inclusive tour charters, Ad-hoc charters, as well as short term wet leases and sub-services on behalf of other airlines. www.european.aero 21. First Choice Airways Offers flight only, return and one-way as well as package and tailor made holidays. Flights from local airports accross the UK and Europe to selected destinations. www.firstchoice.co.uk/flights APPENDIX B Sourced from Kangis & O’Reilly, 2003 TABLE A-1 TABLE A-2 TABLE A-3 TABLE A-4 TABLE A-5 TABLE A-6 TABLE A-7 TABLE A-8 TABLE A-9 TABLE A-10 APPENDIX C The Structure-Conduct-Performance Paradigm Figure A-1  The structure–conduct–performance paradigm Lipczynski, Wilson and Goddard, Industrial Organization: Competition, Policy, Strategy, 2nd ed. Pearson Education Ltd 2006 Read More