Effect of Competition in Leisure Industry: UK Airline Industry - Case Study Example

Effect of Competition in Leisure Industry: UK Airline Industry Introduction The Leisure Industry deals with products and services related to entertainment, automotive, recreation, fishing, tourism, sports and gambling and many more. Recently, Government spending has been enhanced in developed as well as developing countries in order to promote this contemporary industry. As a result, this industry is experiencing opportunities for high growth in future. Such high future prospects are attracting a large number of market players; consequently, high degree of competition prevails in this industry. In order to evaluate to what extent such competition leads to affect the pricing of Leisure Industry, the nature of competition in UK Airlines Industry will be analysed in the paper along with the effect of such competition on pricing of services (Langabeer and Napiewocki, 2000). The UK airlines industry is world’s third largest Aviation Network, only after USA and China. The industry tends to provide world class services at an economically beneficial price. UK airlines contribute more than £11 billion to the GDP of the economy and creates provision for approximately 200,000 jobs; thus accelerating trade and investment, supply chain and tourism for the economy. Airlines industry of UK is an important part of the Leisure industry of the country that brings wide range of benefits for individuals and society as a whole, creating scopes for travel and visit to family and friends (PWC, 2014). Discussion Airlines Industry in UK operates in a highly privatised and competitive international market, though safety and security, airport charges, air traffic control and environmental standards are regulated in national, international and European levels. The major market players are Atlantic Airlines, British Airways, Eastern Airways, Thomas Cook Airlines and Virgin Atlantic Airways (Belobaba, Odoni and Barnhart, 2009). Since privatisation of British Airport Authority in late 1980, uncertainties arise in the UK airlines industry which has left significant economic impact on the aviation market. Hence, after reviewing the current position, Government regulations has been invited in order to control uncertainties and price war and to foster healthy competition among the existing market players (Ganesh, 2009). However, possibilities of reduced industry expansion were also assumed if strict regulatory framework will be implemented. In contrast, experts have shown that airlines competition arises out of privatization will lead to benefit the customers through reduction in price level (Bush, 2009). Intense competition prevails in the UK airlines industry. With the industry growing at an exponential rate as a result of privatization and deregulation, the market became exposed to perfectly competitive forces. Hence, the nature of competition in UK airlines industry changed due to inclusion of low cost carriers into the industry. Previously, the focus was on long haul flights which have been modified to short haul and point to point strategies as a result of massive entrance of new firms. Earlier, the UK Airlines Industry experienced significant performance related problems due to lack of adaptability and inferior management. In recent time, the industry has become price elastic i.e. price of services decrease in response to an incremental demand (Starkie, 2008). Alliances among the airlines companies also play vital role in changing nature of competition into the industry. The industry is concentrated on the four global alliance groups such as Wings, Star Alliance, Sky and One World that constitutes more than 56% of the UK revenue from this industry. Such defensive economic strategy leads to reduce price level and increase passenger tariff. Anti competitive forces such as creating monopolistic behaviour also arises from these strategic alliances. For instance, acquisition of Air Lingus by Ryan Air resulted in control over 70% of the British routs, hence created monopoly power inside the industry (Cento, 2009). Porter’s Five Force Model Porter’s Five Force Model helps to evaluate the degree of competition prevailing in the UK Airlines Industry. The Airline Industry in UK has changed the lifestyle through reducing travel time and making distance shorter. However, the high level of competition changed the structure of the industry to some extent. The five forces as suggested by Porter will help to analyse the nature of industry and its competitive position. UK’s airlines industry is characterised by high level of competition. Most of the market players deal with similar kind of aircrafts with almost same configurations. Frequency and timing are also closely differentiated and pricing policies are also similar; high price is charged for business class and for economy class, price level has been kept moderately flexible. Though there are some options available in regional carrier segment, in international context there are no substitutes of flights. Substitution arises for airlines industry in a different form. With the rapid development of technologies and increasing access of telecommunication system, video conferencing, teleconferencing and emailing systems appear to be substitutes for business travellers and cargos (Cook, 2007). As a result of privatization, entry of new firms, especially for short hauls is not very complicated due to regulatory limitations. Firms with handsome resources are always welcome into the industry as important resources required for this industry segment, are very rare and expensive. New entrants are also invited to provide supportive services to the parked and unused aircrafts as a result of recession. Though requirement of capital cost is very high in this industry, once established, the running cost is really low. Hence, the industry is experiencing huge threat from new entrants as a large number of low cost airlines such as Ryan Air and Flybe, Virgin Atlantic are entering into the market segment (Department of Transport, 2013). As the price level is set by the competing firms, the bargaining power of buyers is not an area of concern. Switching airplanes involves high costs for buyers. The list of suppliers is huge in Airlines industry which contains traffic control, airport services, aircraft requirements, Boeing and airbus. The airlines are compelled to pay airport charges and due to restricted number of airports prevail in the economy; many airports practice monopoly power and enjoy strong financial return. The strongest supplier of the industry is Global Distribution System (GDS) which has created provision for travel agents to make reservations of various airlines (Aviation Economics, 2014). Cut throat competition prevails in among the rivalry firms as the cost of competition is higher as compared to the low return. The major market players in this segment are Rayanair, easyJet.com, British Airways, Flybe and Virgin Atlantic. Among all these, easyJet.com consumes more than 20% of market shares. The market share of Rayanair and British Airways are 16.5% and 10.5% respectively as on 2013 (International Transport Forum, 2014). Considerable volume of growth is unlikely in the key UK outbound leisure travel segment such as Airlines Industry until consumer confidence is achieved. Market players understood that, even then growth rates are likely to be modest as compared to the pre-recessionary period, domestic growth rate important to enhance demand for Airlines. In domestic market, there is a fundamental shift towards domestic rail, which are available at a competitive cost with air travel, as well as contribution towards greener and more CSR-friendly alternative business environment. Hence, the competing firms understood that rather than providing world class services, lowering airfare will help them to attract more and more customers. This initiates price cuts. The astrophysical growth of the pioneering new airline over the next two decades also caught the attention of several aspiring aviation executive across the Atlantic. Though KPMG suggested Rayanair to close down carriers, the company also shifted towards providing short hauls at a cheaper price to the passengers. easyJet followed the footsteps through advertising flights from Edinburgh to Glasgow at a very cheap fare. Clearly, it is evident that low-cost airlines are now becoming major corporate players (Daily Mail, 2014). The low cost carriers are also stimulating demands which lead to establish a new price demand equilibrium and enhance growth rate. Hence, the industry is becoming dominant by the low cost carriers giving rise to low fares and more destination options. The following graph reveals surprising trend of passenger tariff between UK and Europe between 1991 and 2013. During this period, the economy experienced a number of economic and environmental turmoil ranging from terrorism to volcanic eruptions, but none of them could counter the perpetual growth in low cost carriers. Figure 1: UK Passenger Traffic Though, the financial crash during 2008-2009 left a significant effect on Airlines industry like any other industry, it is also true that the industry growth was already decelerated by around 2% (Gov. UK, 2014). In the after recession period, it is the low cost carriers who took the industry growth rate into skies due to their internal competition. Such fare cut stimulates those passengers to fly who used to avoid aircrafts due to affordability issues. Hence, price cut strategy taken by firms helped then in broadening customer base. As the after effect of recession, individuals also tend to choose a flight with lower fare. For instance, scenario became such as, an established airline charging £200 may incur loss as against a low cost carrier charging £40, as the low cost carrier is having multiple number of travelers compared to the other companies (Schimmel, 2013). However, the competitive situation become so uneconomical in UK Airlines Industry that the revenue earned from the average fare charged, failed to cover the cost in short run. However, it became also difficult for an airline firm to increase price level for the fear of losing potential customer who will be expected to avoid the flights of the particular company due to its price hike. Quality of service also degraded. Apart from low fare stimulation, fight for market share also hampers normal competitive condition. The driver for traffic expansion bypasses from the airlines to the passengers: the state of the economy and the disposable wealth become the engines for further growth, similar as they used to be before the low-cost carriers entered the market. However, such market competition induces large number of passenger to avail flights. Figure 2: Demand Price Equilibrium in UK Airlines Industry As the market has been stimulated by low air fares, it became difficult for the industry to grow at an exponential rate. All such factors resulted in establishing a new relationship between demand and price, which was initially ignited from the prevalance of competitive forces into the industry (The Telegraph, 2014). Conclusion From the above discussion, it is evident that high degree of competition in UK airlines market definitely leads to lowring price level. However, such low cost have initiated some economic inefficiencies as well. In any case, achieveing spectacular growth rate in the matured UK market is impossible for any industry. If the firms involved in airlines industry can maintain healthy competition within the industry segment through eliminating uneconomic price war, the industry will experience sustainity in operations in upcoming future as well. Reference List Aviation Economics, 2014. Low-cost airlines: Stimulation effects wear off. [online] Available at: [Accessed 30 December 2014]. Belobaba, P., Odoni, A. and Barnhart, C., 2009. The Global Airline Industry. New Jersey: John Wiley & Sons. Bush, H., 2009. The development of competition in the UK airport market. [PDf] Available at: [Accessed 30 December 2014]. Cento, A., 2009. The Airline Industry: Challenges in the 21st Century. Berlin: Springer Science & Business Media. Cook, A., 2007. European Air Traffic Management: Principles, Practice, and Research. Farnham: Ashgate Publishing, Ltd. Daily Mail, 2014. BA joins the price war to fill its empty seats. [Online] Available at: [Accessed 30 December 2014]. Department of Transport, 2013. UK Aviation Forecasts. [PDf] Available at: [Accessed 30 December 2014]. Ganesh, G., 2009. Privatisation Competition and Regulation in the United Kingdom: Case Studies. New Delhi: Mittal Publications. Gov. UK, 2014. Promoting sustainable aviation. [Online] Available at: [Accessed 30 December 2014]. International Transport Forum, 2014. Expanding Airport Capacity: Competition and Connectivity. [PDf] Available at: [Accessed 30 December 2014]. Langabeer, J. R. and Napiewocki, J., 2000. Competitive Business Strategy. California: Greenwood Publishing Group. PWC, 2014. Airlines & Airports. [Online] Available at: [Accessed 30 December 2014]. Schimmel, M., 2013. Communication in the U.K. Budget Airline Industry. New York: Anchor Academic Publishing. Starkie, D., 2008. The Airport Industry in a Competitive Environment: A United Kingdom Perspective. [PDf] Available at: [Accessed 30 December 2014]. The Telegraph, 2014. Low-cost airlines have come a long way. But who will win the battle? [Online] Available at: [Accessed 30 December 2014]. Read More