The UK Airline Industry - Case Study Example

IS THE UK AIRLINE INDUSTRY COMPETITIVE? An Analytical Research in Industrial Economics The UK Airline industry has been the topic of several research investigations ever since its deregulation early in the 1980s. Deregulation has been adopted purposely to encourage competition in the UK air transport industry. This brief research delves into a search for evidence of the competitiveness of the UK Airline Industry three decades after deregulation. In the course of discussion, it shall adopt as framework the Structure-Conduct- Performance paradigm, in order to determine the competitiveness of the industry. The diagram rendition of the paradigm is incorporated in the appendix of this paper. Describe the structure of the industry According to SCP, the industry structure is deduced from salient information about the number and size distribution of buyers and sellers, entry and exit conditions, product differentiation, vertical integration and diversification. Pertaining to the UK airline industry, Button (1989, p. 197) stated that ‘The key point is not how many airline companies serve the market, but rather the degree and nature of competition which exists between them.” Clearly, the industry is not one wherein entry barriers are understandably high because of the existence of government franchise and high capital investment in order to operate. This is why Pryke (1987) said that considered ‘route-by-route, the airline industry is incurably oligopolistic’ (p.9). At one time, the airlines industry was government owned and controlled and seen more as a public service. Understandably, competition was non-existent. In the 1980s, however, the national airline company was privatised and the industry was deregulated. More than other European Community countries, the UK is the only member to have implemented a relatively long-term policy of liberalization within its domestic and international scheduled airline industry. (Graham, 1993). Today, there are many variants, generally classified into two main groups: the regular, full-service airlines, and the relatively recent low-cost carriers. Low-cost carriers have entered the market and established themselves by penetrating significant parts of the markets. Whereas before, the industry used to be regulated and dominated by government players, it is now shaped by competitive offensives of companies. There is therefore the need for a market-oriented approach to product optimization (Pels, Njegovan & Behrens, 2009). Pels, et al. determined that in the new competitive environment, the three key dimensions of passenger choice appear to be air fare, surface-access costs and frequency. Low-cost airlines typically offer only a single class of service, high density seating, with few or low-cost, such as free food and drinks, and no connecting services. Also uses underutilised secondary airports, allowing for both operational savings from quick turnarounds of aircraft and direct cost savings through lower airport charges. However, secondary airports are often at some distance from main city airports. Following are some pertinent data sourced from Pels, et al. and their study of the market structure of the UK airlines industry. 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 would spell the strategic competitive advantage of the low-cost airline service. Account for the conduct features of the firms The conduct features include significant distinctions in business objective, pricing policies, product design and branding, advertising and marketing, research and development, collusion and mergers. 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. As an example, among those for leisure, there is at least one distinct group emerging, the “visiting friends and relatives traffic” 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. Customer segmentation in the airline industry was traditionally divided into two, the business and the leisure passengers (Teichert et al., 2008). Teicher et al. (2008) arrived at the same conclusion but for a different reason: to determine the customer preference profiles. From business and leisure, the study categorized 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. Is the performance features of this industry in accord with competitive industry? Performance features includes profitability, growth, quality, and efficiency. To provide evidence for this discussion, included in Appendix B are 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 favor of lower costs. Table A-5 also shows low-cost utilises a smaller labor 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. Clearly, performance shows a highly competitive industry, with strong market performance by the low-cost new entrants. What investigations have been done of the industry? What have been the results? Due to the fast-paced and increasingly competitive nature of the airlines industry, it is not surprising that there would on occasion be controversies surrounding its compliance with regulations. The more recent investigation that involved a British airline was reported in the Guardian on 29 January 2010. It looked into charges that several airline companies were involved in price-fixing infractions during the World Cup. Implicated companies include the British Airways subsidiary Comair, together with other airlines that operate within the African jurisdiction. The controversy was sparked by complaints by passengers of overcharging of air fares to the site of the World Cup. At present, there is still no conclusion reached as it appears the investigation is still under way (Smith, 2010). Another investigation, this time into the British industry as a whole was likewise conducted in April 2007. It delved into the reported fraud in the e-ticketing services of several airlines, wherein e-tickets were purchased with credit cards. Self-service electronic bookings are generally encouraged by airlines because of the greater convenience it affords customers, and greater cost-efficiency for the airlines. In the course of the transaction, customers provide personal details to the airline’s IT system, which is supposed to be robust enough to secure itself against fraudsters. However, 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). 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 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 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 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 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 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 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 Read More