Managerial Economics: Traded Firm and the Global Competition - Research Paper Example

? Topic: Managerial Economics - Traded Firm and the Global Competition The airlines industry is a large and booming industry which facilitates growth, international trade, international investment, accelerates tourism. It can be considered as an apex tool of globalization occurring in several other industries and developing them as well. In the past decade the percentage of air travel has enhanced by almost 7% per annum. All over the world travelling in business and leisure purposes have increased manifold. In the last year the scheduled airlines carried approximately 1.5 billion passengers. In the leisure market due to the availability of large aircraft like Boeing 747 has made it very convenient and affordable for the common people for travelling and exploring new destinations for luxury purposes as well as business needs (The Airline Industry, 2012). With enormous growth in the airline industry the governments of many developing countries are reaping mammoth benefits and utilizing those benefits in spurring massive development in different sectors of the economy (The Airline Industry, 2012). But with this extensive growth many new potential competitors (airlines companies) are infiltrating the industry and there exists cut throat competition. The companies who are thriving in the industry are developing and implementing strategies on a daily basis for gaining competitive edge over one another. The company who loses its edge comes out of the market and has to shut down its business operations. The airlines industry is almost a perfectly competitive market where each players influence is minimal. The paper will discuss the market dynamics of Etihad airlines which is an Asian airline with the price elasticity of its products, cost structure, strategic decisions and recommendations which will allow the company to strive in this highly competitive airlines market. Propulsive expansion in the Asian airline industry As Etihad airline is an Asian airline and so highlight will be entailed on the current Asian airline industry. The Asian airlines industry despite of some exceptions have encountered tremendous recovery from the year 2008/2009 which was predominated by deep recession which adversely affected the global demand for air travel and air freight. There has been an escalated expansion in the numbers of passengers, premium travels and so on. The load factors of Asia Pacific airlines have recovered and have surpassed the peak levels of 2007. A large part of this can be attributed to the cautious move made by these airline companies in reinstating the capacities cut during the economic downturn. This has led the industry to either raise ticket or the cargo charges or that of reducing the discounts previously offered. The rise in the number of passengers and higher traffic has yielded positive results reflecting in the operating profits for most of the airlines. Although the hike in the jet fuel prices have been a symptom of worry for the airlines. Since the year 2009, the price of the jet fuel has multiplied around two times keeping in line with the rise in the price of the crude oil. Higher fuel prices are indeed an important constraint which hampers the present profitability as well as the future growth trajectory of the companies (Seah & Yusof, 2010, p.1). Etihad airways -Legacy Etihad Airways is a national airline of United Arab Emirates. In eight years the airline company has been able to establish itself as one of the world’s leading airlines company. The airlines company was established by Royal (Amiri) Decree in July 2003 and has been able to establish itself as fastest growing in the commercial aviation history. The airline’s fleet of around 66 aircrafts has the operation capacity of 1000 flights per week. The airline provides serves unparalleled network of around 84 passengers and cargo destinations in areas like Middle East, Africa, Asia, Australia and North America. The company also owns around 30 percent of airberlin which is the sixth largest carrier and 40 percent of Air Seychelles. The airline company has also in its kitty a myriad of awards which reflect the position of the company as a leading premium airline brand in the globe. Among the prestigious awards the company bags World Travel Awards in 2009, 2010 and 2011 (Our Story, 2012). Price elasticity of demand for the services of Etihad airways The price elasticity of demand is a microeconomic concept and it is incorporated for the purpose of determining the sensitivity of the consumers to that of price. In mathematical terms the price elasticity of demand is the proportional change in demand with respect to change in price. Price elasticity of demand measures the way in which the price of a good will affect the demand for that good. If the percentage change in price is more than the percentage change in demand then the price elasticity of demand is said to be elastic and if the percentage change in demand is less than the percentage change in price the elasticity of demand is said to be inelastic. The percentage change in demand when equals the percentage change in price then it is said to be unit elastic. The extreme cases are perfectly elastic (infinite change in quantity demanded with very small change in price) and perfectly inelastic (infinite change in price with very small change in quantity) (Price elasticity of demand, 2009, p.1). The airlines have always targeted the high income levels of the people as it provides a sophisticated service at premium price level. The company specializes in the international transportation of the people. The products of the company are mainly Diamond First Class, Pearl Business Class and Coral Economy Class. The concentration of the airways is highly on the sophisticated classes of the society and so the price elasticity of demand is inelastic for these premium class products. This is because there is a standard demand for this premium class’s air travel always and the target customers avail such travels without changing their demands too much. They are less sensitive to price increase or decrease. But with the global recession hitting hard it has been seen that there is a dip in the demand with the price changes and a large fraction of the people are switching their preferences over economy class travel and emphasizing on cost cutting mechanisms. The low price elasticity of demand has significantly contributed to the tremendous success of the airlines but the company has to concentrate on the economy class travel as well as with economic downturns the price elasticity of demand tends to be elastic. Cost and the Market instructor in which the firm operate The company operates in terms of product share with 60% of the total share is attributed to the international transportation of passengers, 30% is attributed to the Etihad Crystal Cargo with 10% share in the Etihad holiday. In the profit and revenue forefront the company enjoys almost 40% of its revenues from the Etihad Pearl Business Class, around 20% from the Etihad Diamond First Class and around 40% from the Etihad Coral business class. The Etihad Coral Economy class has a relatively high market share with high market growth rates. The company has highly focused on cost cutting scenario. In the year 2011, prioritizing on the cost reduction the company signed a 10-year technology deal with Sabre Airline Solutions which is the single largest technology enabled business change in a decade and the company has utilized cutting edge with the implementation of integrated software across reservations, inventory, marketing, planning, e-commerce and distribution and distribution of the control operations (Annual Report, 2011). The company advanced notably in the arena of oil price hedging techniques for protecting the company from the notorious price volatility. The company has instilled a three year rolling fuel hedge with around 75% of it’s fuel costs hedged at around US $ 80 per barrel. In November 2011 it was seen that around 77% of the company’s 1st quarter fuel costs were hedged at US $ 80 per barrel and it has hedged around 75% of its overall 2012 fuel costs (Etihad Airways’ bright profit result against a dark background, 2012). The staff cost was also another dimension in which the company paid immense focus. The airlines also adopted an online learning system which turned out with great success with a 500 per cent increase in the courses delivered online and the training costs were reduced by US $ $2.7 million. Over the last two years the airlines have reduced the costs per available seat kilometer, excluding fuel which has reduced by around 16 per cent. The company will stress on the ongoing cost control strategy for executing the business with more efficiencies and smoothness. The CEO of the company states that, “While we deliver an exceptional full service product, our management culture is that of a low cost airline. We have a forensic focus on cost control in every area of the business, aggressively targeting operational efficiencies” (Annual Report, 2011, p.10) Impact of global competition on Etihad Etihad airlines face tough competition in the aviation market and its competitors are barons in this market. The largest competitor of Etihad is Emirates airlines which have established its low cost operator with popular names like FlyDubai and carriers like Air Arabia in Sharjah, Jazeera Airways in Kuwait with expansive market shares. The impact of recession has produced substitute products and the customers are showing an increase for flying low cost airlines and airlines having no fringe benefits. These airlines are providing service at very cheap rates like Oman Air and jet Airways. This pose a threat as Etihad is majorly known for serving a high class customer. The supplier market is captured by two main suppliers and they are Boeing and Airbus. The bargaining power of the supplier is also tight. Other international competitors like Singapore airlines and other international airways are the direct competitors of Emirates Airlines (Etihad Airways to introduce new economy service, 2010). The sports sponsorship of the competitor airlines has been also a dominant competitive strategy but Etihad also pioneers in this field. For reinstating its brand on a global basis the most high profile sponsorship of the company till date is a three year sponsorship deal with the Ferrari F1 team and the logo of the airlines will be displayed prominently on the cars in the race and on the uniforms of the drivers. The airlines is also the official airlines of the popular Chlesea football club and it also bags the title sponsor of Formula 1 Abu Dhabi Grand Prix and it is also the official airline of the Abu Dhabi Golf Championship and sponsors the Abu Dhabi Harlequins Rugby Union Football Club (Our Sponsorships, n.d.). There is a recent head to head competition of the airlines with Air Arabia Egypt on the Abu Dhabi on the Abu Dhabi to Alexandria Egypt sector and it has become very difficult for the company in competing in this market where the front end traffic will be at a premium and Air Arabia will be yielding high in this market. The competitors are highly stressing on economy flights for capturing the market on large scale. The most potential competitor Emirates possess its own low cost subsidiary Fly Dubai caters around twenty destinations from Dubai to destinations in the Middle East, North Africa and the sub continent by providing cheap air fly. Nearly 200,000 passengers were carried by Fly Dubai in between the time frame May 2009 and 2010 which has allowed the airlines Emirates in concentrating on the mainline fleet which focuses on larger market yields. Jazeera Airlines in Kuwait has also expanded their market share. Thus it can be stated that the competition of Etihad airways is tough and the potential customers are concentrating on the provision of economy class air travel while Etihad is known mainly for providing luxurious and sophisticated air travel to the elite classes of the society. The company has to highly concentrate on the provision of the economy class air travel so that it can give strong completion in the market (Etihad Airways to introduce new economy service, (2010)). Etihad’s decision to expand market by enhancing economy class travel In the airlines industry business success lies in making a customer loyal towards a brand. The manager of the company asserts that the customer who possesses a good experience with an airline brand will not shift immediately to other brands unless there are some unfortunate issues. Loyalty generation of the customers should be the prime motive of the airlines companies. Thus after the analysis of the tough competition stated in the above segment it becomes clear that for Etihad not only delivering premium services to the elite class of the society will not provide long run sustainability. Etihad needs to broaden its horizons and also take into account the needs of other sections of the society for stealing the maximum market share. From October 20, 2012, the company has started rolling out the first all economy class aircraft on select short-haul destinations which actually have a low demand for the premium class seats. The company increases the availability of seats with high economy class demand and promises the same award winning in flight service as provided in the premium class. The company is still the national airline of the UAE and claims that it will be providing the same fantastic product and service which has helped the airlines to become the World’s leading airline. The company has reconfigured two Airbus A320s and plans are being chalked out for expanding the number to 10. Etihad stated that this will enable them for launching new short haul destinations which have low demand premium travel and will also provide more seats on the existing destinations of the company. The company has also 15 A320 aircraft in the fleet and the company also ordered 35 aircraft from Airbus. The areas covered by the company are Alexandra, Calicut, Colombo, Damascus, Doha and Thiruvananthapuram. The provision by the company will be the same world class service and product which is featured on the current narrow body fleet and equipped with seat back screens which provide 600 hours of in flight entertainment and also with a wide selection of hot and cold meals with beverages with 32 inch recline. With this endeavor the company will be able to compete effectively in the low yielding markets which are predominated by the high proportion of O+D traffic (Same standards, more seats on our all-economy class aircraft, 2012). Rationale for expanding-Is it a judicious decision or not? From the enumerated predictions of International Air Travel Authority (IATA) the number of air passengers will be reaching a mammoth level. At this juncture Etihad airways has a two year winning history of the best airline award and it can be stated that the organization is in a comfortable position and possess edge over this new funding strategy. This move by the company will be also backed by tight response from the other competitors. It can be stated that many airlines will come up with diverse advertising campaign for accruing share of the traffic of the air travelers and also the revenues attached with it. The company has to be extremely cautious while implementing this strategy. But although there are risks weights attached to this expansion procedure the opportunity in front of the company is great. The potential air travelers has magnified in numbers and a sizeable portion of the air travelers belong from the middle class group. Thus a great opportunity is posed in front of the company and if properly implemented the profits earned from catering the section of the passengers will outweigh the risks attached in implementing this strategy. But the company’s underlying strategy is it is charging the maximum rates from the premium class travelers who are the potential customers of the airlines. As a recommendation it can be stated that the company will have to focus on the revenue generation from the high class travelers which are the signature of the company. So according to my opinion the company should first concentrate on the premium class travel and then turn its focus on the economy class section. Recommendations The company has a great potential of expanding and flourishing its business dimension. It must develop the economy class travel. There are good reasons. The organization is situated in a country which is one of the greatest oil hubs of the world. The funding of new marketing strategies will not at all be a problem for the organization. But the company must vehemently focus on its exclusive service provision for the premium class which accrues the nucleus of profit generation for the company. The Arab world has already developed itself as a central location for the diversity of income sources and tourism is a booming sector. The company must also comply with the government and legal provisions so that it runs the business in an ethical manner and abide by the antitrust policies of the government and legal bodies. Majority of the airlines are concentrating on the corporate social responsibility paradigm. The company must also ensure that it maintains the green business with the commitment of pollution free environment. Targeted tactical campaigns are recommended for the company which will create incremental traffic opportunities. The company must also comply thoroughly with the existing environmental legislation present in both national and international level. The supply chain of the company must be infused with best practices so that the environmental issues must be tackled in an ethical manner. The business concerns will be strictly aligned with the climate change and global issues. Other recommendations include taking proper actions in limiting the emissions and establish an efficient business platform. The principles of cost reduction with reuse and recycling should be properly incorporated for managing the resources and also deal with the environmental wastes in a responsible and ethical manner. The company must also work in close proximity with its business partners, the aviation industry, local and global stakeholders for developing robust programs which will lead to proper environmental practices and also support environmental research and technological development for obtaining future sustainability. References Annual Report, (2011), Retrieved on November 19, 2012 from: http://www.etihadairways.com/sites/Etihad/Etihad%20Images/Resources/annual-report-2011-en.pdf Etihad Airways to introduce new economy service, (2010). Retrieved on November 21, 2012 from: http://www.routesonline.com/news/36/the-hub/92984/etihad-airways-to-introduce-new-ecomony-service-/ Etihad Airways’ bright profit result against a dark background, (2012). Retrieved on November 21, 2012 from: http://centreforaviation.com/analysis/etihad-airways-bright-profit-result-against-a-dark-background-67776 Our Story, (2012). Retrieved on November 19, 2012 from: http://www.etihadairways.com/sites/etihad/ae/en/aboutetihad/Pages/etihadstoryposting.aspx Our Sponsorships,( n.d.). Retrieved on November 21, 2012 from: http://www.etihadairways.com/sites/etihad/global/en/aboutetihad/oursponsorships/pages/oursponsorship.aspx Price elasticity of demand, (2009). Retrieved on November 21, 2012 from: http://www.conventioncentertaskforce.org/resources/meetingdocs/8-4-09Price%20elasticity%20of%20demand%207-30-09%20VS.pdf Same standards, more seats on our all-economy class aircraft, (2012). Retrieved on November 21, 2012 from: http://www.etihadairways.com/sites/Etihad/ae/en/home/Pages/all-economy-class-aircraft.aspx The Airline Industry,(2012). Retrieved on November 19, 2012 from: http://adg.stanford.edu/aa241/intro/airlineindustry.html Read More