Overview of Garuda Indonesia - Essay Example

?Garuda Indonesia Table of Contents Garuda Indonesia Table of Contents 2 Part A 4 0 Introduction 4 1 An Overview to the Airline Industry in Indonesia 4 1.2 Background of PT. Garuda Indonesia 4 2.0 Factors Affecting Demand and Supply (theories & applications) 4 2.1 Factors Affecting Demand 4 2.1.1 Price 5 2.1.2 Number of Buyers 6 2.1.3 Income 7 2.1.4 Expected future prices 8 2.2 Supply and Demand 8 3.0 Market Structure and How It Affects Competition 10 3.1 Oligopoly Market Condition 10 3.1.1 Few Sellers 10 3.1.2 Concentration 10 3.1.3 Homogeneous Service 11 3.1.4 Barriers to Entry 11 3.2 How the Market Structure Affects the Competitive Structure in the Industry 11 3.2.1 Price Leadership 11 3.2.2 Price Warfare 12 3.3. How the Firm Creates Value 13 4.0 Conclusion 13 References 14 Bibliography 15 Part A 1.0 Introduction 1.1 An Overview to the Airline Industry in Indonesia The Aviation industry in Indonesia is growing rapidly. During the last seven years, the aviation industry has experienced a raid growth. In the year 1990, the country has around 10 airlines where in the year 2005, the number has increased to more than 30. Some of the leading airlines include Indonesia Air Asia, Garuda Indonesia, Lion Air, Merpati Nusantara Airlines, Wings Air, Mandala Air, Batavia Air etc. 1.2 Background of PT. Garuda Indonesia Garuda Indonesia is a leading airline organization. The airline’s first flight started off in the year 1949. Despite of financial downturn in 2007, the airline company has been able to secure considerable profitability in the years 2007, 2008 and 2009. Part B 2.0 Factors Affecting Demand and Supply (theories & applications) 2.1 Factors Affecting Demand There are several factors affecting the demand side of the airline industry. Factors like price, quality, number of buyers, number of suppliers, income, expected future price, demographics, population growth, seasonality etc. In this segment, four factors have been discussed in this sector to describe the impact of the same on the airline industry. 2.1.1 Price The following is the demand curve showing the movement of demand against price movements. Figure: Demand Curve (Source: Stanford, n.d.) As the price of the product would increase the demand is supposed to decrease, while the demand would increase with the declining price. In the decreasing airfares will increase the demand. In case, the airline companies decide to decrease the airfares, they are expected to experience less demand than before as more and more travelers would prefer to travel by train and other transportation mediums rather than taking the expensive flights. In this case, the movement will happen along the demand curve. The figure 1.1 diagram shows what would happen to the demand of any product or service incase of price variation when all other influential variables are held constant. 2.1.2 Number of Buyers Number of Buyers is a significant factor to determine the demand in the airline industry. When the number of customers would increase, the quantity demanded would increase leading to increased market demand (Mankiw, 2008, p. 71). However, if the number of customers decreases in this industry, the demand would decline. For an instance, after the tragic incident of 9/11, the airline industry has experienced a decline in the number of air travelers due to some security related issues. So, if the number of buyers increases, the demand curve would shift rightwards. As more customers would want to buy the tickets, the quantity demanded would increase incorporating a shift in the demand curve in the rightward direction, from d1 to d2. As the quantity demanded would increase at a fixed price, the demand expected to increase keeping the price point constant. If the quantity demanded is less, then the demand graph is going to shift leftwards. In simple terms, as the number of customers would increase for the airline industry, the demand curve is expected to experience shift in its position. 2.1.3 Income The demand curve would also experience shift with changes in the income amount. In the recent economic downturn, there was a decrease in the purchasing power of the customers. As a result, the airline industry has experienced a downturn in the demand. People were more comfortable to travel through train or take other transportation mediums which are less expensive than the air carriers. Moreover, as the individual income has decreased the customers would cut on their travel cost and as a result the demand in the airline industry is expected to decrease. With the growing income, the demand curve is expected to shift rightwards, from d1 to d2; while, with declining demand, the demand curve would shift downwards. 2.1.4 Expected future prices An increase in the expected price compared to the present price level, would surely increase the present demand. As the customers would be expecting an increase in the ticket prices, they would try to secure the future tickets at the present price, pushing up the demands. Increase in the expected future price would push the demand curve rightwards, while decrease in the future price would push the demand curve in the opposite direction. In the above diagram, with the increasing expected future price, the demand curve will shift from d1 to d2. 2.2 Supply and Demand The following figures display the equilibrium point against any change in the supply or demand amount. This would be discussed taking the factor ‘Income’ as in how the change in this factor would change the equilibrium position and would affect on the price of air tickets (Loudon, 2004, p.296). An increase in income would increase the demand shifting the equilibrium position in right direction. In such a case, the price would also increase. A decrease in the income of the customers would lead to the decrease in the demand amount pushing the demand curve in the downward direction, leading the airfare to be lower. Figure: Supply-Demand Equilibrium Curves (Source: Penn State University, n.d.) 3.0 Market Structure and How It Affects Competition 3.1 Oligopoly Market Condition The Indonesian airline market has many players in its. However, the majority of the market share is held by the leading airline companies including Garuda Indonesia, Lion Air, Trigana Air Service and Express Air. As the market is dominated by few airline companies; the market is seemed to be oligopoly in nature (Goldberg, 2000, p.154-162). 3.1.1 Few Sellers The Indonesian market has few leading airlines that have the majority of the market shares. Garuda International is one of the leading airlines which have a considerable amount of market share in the industry. Indonesian airline industry has a number of players operating. However, many of them are idle and some of them are in trembled situation in the decreasing demand due to the economic recession (Goldberg, 2000, p.154-162). 3.1.2 Concentration As in the oligopoly market, the concentration of market power among the leading players is large compared to the other players. As a result, the concentration ratio is higher among the leading airline companies operating in Indonesia (Goldberg, 2000, p.154-162). 3.1.3 Homogeneous Service The airline industry has many players init and in most of the cases, the services offered are quite homogeneous in nature. The players compete based on the cost rather on differentiated products, leading to competitive rivalry among the leading players (Goldberg, 2000, p.154-162). 3.1.4 Barriers to Entry As few players are dominating the Indonesia airline market, it would be pretty difficult for the new players to enter into the industry. Furthermore, the companies are operating based on the cost and take every effort to minimize the costs further. The large economies of scale help the existing airlines to cut on the cost and offer comparatively low fare to its customers. This can be difficult for the new entities as they would not be able to enjoy such economies of scale and as a result survival would be difficult for the new companies. Moreover, the players are operating more on cost; the new entities would face enough difficulties to operate in such a competitive environment. They would always face the threat of acquisition by the other leading players. 3.2 How the Market Structure Affects the Competitive Structure in the Industry 3.2.1 Price Leadership In the earlier times, in Indonesia, “…there were a few other carriers serving domestic or regional routes, they either had they either had business relationships with Garuda or were owned by people close to inner government circles” (Damuri & Anas, 2005, p.1). The dominant position of the airlines, along with the government protection, has allowed the airline companies to charge higher fare on the services, specifically for the regional and domestic flights. In this way, the airlines were able to fetch high yield. However the situation changed after the 1990s. Due to the recession, the number of travelers decreased leading to the price cut among the existing players to attract more customers in the industry. 3.2.2 Price Warfare The competition in the aviation industry in Indonesia is quite intensive with the airlines cutting the tariff rates. The price war is quite intensive and reflects from the fact that the airlines provide lower airfares even on the busy routes like Jakarta- Surabaya and Jakarta – Medan. The competition is getting intensified with more number of airlines are pouring into the regular flights. The ceiling price of the airfares is set by the government; however, the airline companies are free to cut on their air fares. Although these policies are meant to give the customers enough advantage; however, this has raised enough competition among the players causing considerable damage to the quality. The airlines may not concentrate on the quality to reduce the cost amount. Enhance efficiency can be achieved through cutting on costs leading to the decline in the maintenance costs (Indonesian Commercial Newsletter, 2008). In an Oligopoly market, the ‘Game theory’ is used to evaluate the strategy of the competitions and in response to decide on its own strategies. As discussed earlier, the airline industry is an oligopoly market where there is a few number of leading players. It would be helpful for Garuda Indonesia to evaluate the tactical options of its competitors, assess the pay-offs and frame its won strategies to attract more customers, increase the market share and survive the competition. 3.3. How the Firm Creates Value Garuda Indonesia is a leading airline organization in the Indonesia airline market. After the recession in 1997, people prefer the cost effective airlines more than the airline offering differentiated service. Garuda can evaluate the sources of its cost and try to minimize its further, however, keeping the quality intact. In such a case, the company would be able to offer quality services at a comparatively lower price. The company must assess the requirements of its customers. Recently customers are getting increasingly environment aware and prefer airlines with less carbon footprints. Garda Indonesia can look into these matters to add value to its customers. 4.0 Conclusion Airline Industry has experienced a number of ups and downs in the recent times. Due to the recent recession, the demand in the airline industry has decreased leading many airlines to make huge losses. This situation has also raised the price war among the existing players leading to huge reduction in the airfares. Garuda Indonesia must assess its value chain and look for the stages where it can reduce its cost and the operational activities which can enhance its service further more. The company can evaluate the supply- demand as well as game theory to develop s strong tactical framework to attain a sustainable growth in the future. References Damuri, R. Y. & Anas, T. (2005). Strategic Directions for ASEAN Airlines in a Globalizing World: The Emergence of Low Cost Carriers in South East Asia. Retrieved from http://www.aseansec.org/aadcp/repsf/docs/04-008-FinalLCCs.pdf. Goldberg, K. (2000). An introduction to the market system. M.E. Sharpe. Indonesian Commercial Newsletter. (2008). AVIATION INDUSTRY SERVING SCHEDULED FLIGHTS IN INDONESIA. Retrieved from http://www.datacon.co.id/Air%20Transportation.html. Loudon, F. G. (2004). Financial Risk Exposure in the Airline Industry. Retrieved from http://www.agsm.edu.au/eajm/0412/pdf/loudon.pdf. Mankiw, N. G. (2008). Principles of Microeconomics. USA: Cengage Learning Penn State University. (No Date). Equilibrium, Changes in Supply and Demand, and Price Ceiling and Floors. Retrieved from http://elearning.la.psu.edu/econ002/unit-3/equilibrium-point-and-equlibrium-price. Stanford. (No Date). THEORETICAL BACKGROUND OF MARKET ANALYSES. Retrieved from http://www.stanford.edu/group/FRI/indonesia/courses/manuals/multimarket/Output/chapt1.html. Bibliography Adil, J. R. (2006). Supply and Demand. Capstone Press. Henderson, H. D. (2004). Supply And Demand. Kessinger Publishing. Read More