Analyzing the Market for Airline Services - Research Paper Example

? Analyzing the Market for Airline Services al Affiliation This document analyses the market for airline services, which are sold by airline companies to avail flight services to the passengers. The services are offered in quite a competitive market that is characterized by firms, which operate the business based on mutual interdependence. The airline services are sold in a market structure that follows an oligopolistic nature, which is characterized by barriers to entry and delivery of a similar product, but differentiated in other aspects as an additional advantage over others. The competition for the market share in providing the service is always high and the competitors prefer non price competition to attract the demand for their flight services. The paper concentrates more on factors that influence demand and supply, discusses the price elasticity of demand that produces a kinked demand curve in the oligopolistic airline’s service competition, and the point of equilibrium. It also describes the benefits of the intellectual property (patents and trademarks), and how it protects the owning airlines in their operations. It finally includes the input factors used in generating airline services. Keywords: Passengers, Airline, Flight, Demand Supply, Price Elasticity, Oligopoly, Product Differentiation, Trademark, Patent, Pricing Strategy, Competition, Market Introduction The success or failure of airline services depends most critically, with the established efforts to attract and retain customers to their services. Several airlines have failed before, some able to rise up again, others still struggle to cover losses while most of them end up merging with other well performing airlines. The entry into the airlines business is not only difficult in a field considered to be an oligopoly market, but maintaining and thriving while in competition with large airlines is quite a challenge. Providing airline services require a keen and clear strategy in management and operational activities, to facilitate the services required by the passengers in time. It is therefore a core factor that any airline should build good relationships with their customers as a marketing strategy, so that their future long term profitability can be safeguarded, by retaining more customers and influencing the choice of most undecided passengers in the market. The airline’s reputation, ticket prices, safety record, possible delay times, and services provided (ranging from different travel classes and the associated beneficial facilities, services by the cabin crew) among others, influence the customer preference or satisfaction with an airline, and generally its performance in the market. Airline’s Services Market Competition Competition in the airline industry is very high and sensitive, such that with the high fixed costs in their operation, the profit margins are usually low. However, the competition and profit margins may vary with the small changes brought about by the sizes of the airlines, the capacity of the aircrafts, the routes served by airlines, means of customer attraction (such as the in flight services) and discounted fares, which make it possible for some airlines and their services to have a competitive advantage over the others. According to Papatheodorus, the modern airline services competition arises from the differentiation or the best cost provider strategy, while considering the marketing initiatives and the economic advantage, to ensure they consistently provide the service in the market place (2006). Airlines both large and small, whether providing long haul and short haul services struggle to retain and add a market share. Large airlines may compete against others through its popularity, and if it has a good safety record, or high quality services, it makes it worse for its smaller rival companies. Most of the times, competing airlines have used generic strategies to achieve their fair share in the market. Differentiation has been a major factor among airlines, as others engage in cost leadership to ensure minimized costs for the business and the customers. Ryanair airline is one of the well performing European airlines that uses the low cost strategy to compete against its rivals, such as the large and famous British airways (BA); though a seventh of BA size in consideration to its revenue generation, Ryanair operating margin reached 22.7 percent, which effectively raised its market capitalization to $ 7.3 compared to the BA’s 7.35 percent and $7.3 (Kumar, 2006). Other airlines also compete against it by offering services out of similar routes and better facilities for customer satisfaction. Other domestic airlines prefer to set their energy to acquiring the internal market share by focusing on the needs of the domestic market, which gives them an advantage over other airlines that offer both short and long hauls. The services provided by Ryanair airline are highly strategic focusing on markets with lesser competition and ensuring it facilitates high volume, but efficient routes, capable of suitable returns. The Ryan air airline also enjoys capturing a market share through its favorable reputation for punctuality, creativity, management and customers’ satisfaction with its proposition on the value for money (O’Higgins, 2005). It is clear that any small change that positively influences the passengers’ choice could also affect the market share of the competitors. The Market Structure Over the past decades, since the intervention of governments in airline services, the entry of new firms and the expansion of the existing carriers from different airline companies, influenced the industry’s market structure. Based on the competitive make up of most airlines and how they operate, the market structure has been shaped into an oligopoly. The industry employs the game theory to be effective and maintain their share in the market. Taking an example of several rival airlines, customers may have to choose the services offered based on preference or other secondary characteristics, because each airline always tries to match up any improvement by another. Through the game theory, every airline’s service competes for an additional advantage that works to retain and attract customers, since the firms sell a standardized service. Large airlines may have a good reputation though costly, yet the small airlines can give them stiff competition with the low cost strategy. In an oligopoly market, the airlines that provide the similar but differentiated services are few; unlike in road transport, a country can have either one or few airlines providing flights to destinations of choice, which makes them to be few even at the global level. According to Gildner et al, the airlines services have minimal variation, hence each firm may have to offer particular incentives (such as in flight entertainment or quality food amongst) that can differentiate them from their competitors (n.d). Others airlines have had to form alliances, so that they would use a single airline ticket, and allow large carriers to transport the passengers by flying between the major airports that are customers’ destinations. The market structure is marked by difficult entries, which makes most new entrants to file bankruptcy or leave the industry within a short period of operation. Based on the case of the U.S. domestic airline market, several airlines that failed exited the industry through liquidation; in addition, reorganization and financial distress for new entrants and existing legacy carriers had been common in the industry, and as of 2007, since deregulation, only 9 of the 23 carriers had remained operational in the domestic market (Borenstein and Rose, 2008). Venturing into the supply for airline services is also accompanied by substantial financial costs, to raise the capital, acquire or hire aircrafts, employ labor, management and operational costs, which many entrants fail to keep up with. The market thrives on mutual interdependence, where each airline provides a service in a differentiated way after considering their rivals’ strategy and reactions. Demand and Supply in Airline Services. The demand for a flight from a one airline and not the other is influenced by several factors, the price of the service being at the center point. Both the cost and the demand influence each other; such that demand may vary over time, sector length and route traffic density that influence the type and size of the aircraft chosen for a particular route, all determine the unit cost (Doganis, 2002). Based on the demand theory, holding all other respective variables that may influence demand of a flight, the cost of the flight influences the demand of the service from the passengers, hence producing the downward sloping curve. However, including variables that influence passengers’ demand, there is a point that reaches where a decrease in the price of the airfare would fail to cause an increase in demand of the service, because of other availabilities substitutes. It is not common anyway, because the service providers prefer non price competition, allowing the demand to be influenced by the substitutes transport, market, carrier, flight, and rival products’ characteristics. Setting the fares lower may end up harming the airline instead of the expected boost. This is due to the interpretation of the passengers, who at times feel the cheap compromises quality. Demand goes with consumers’ choice for certain reasons; no wonder demand may be higher for some smaller than large carriers or vice versa (even though with similar pricing). Some prefer the luxury, entertainment, in flight services, which may not be for others. Others are strict observers of pricing and would contribute to the demand of the low cost carriers. Supply for airline flight services is generally influenced by the demand of the service in the market. This in turn acts as the determinant of the available seats the airline company is willing to offer, for passenger flights at any season. Seasonal swings in demand dictate the percentage of the available seats, which is higher during peak seasons. The ticket price, price of resources (fuel, landing fees e.t.c), technology used in modern aviation, competitive factors, inflation, random factors (such as catastrophic events) and government regulation also heavily affect the supply of the flights (Vasigh, Tacker and Fleming, 2008). However, holding other factors constant, it follows the supply theory where the quantity of services provided increases with increase in prices. With respect to other factors, the supply curve may shift from time to time, as its function is altered by the factors. Price Elasticity of Demand The quantity of demand for the service responds differently when the prices charged for the airline services change. In the oligopolistic market, the pricing strategy of the airline fares tends to decrease when the one airline company reduces the ticket price for a seat from a particular place of origin, to a destined location shared by others. As a result, other airlines that offer the service match the price reduction for the rival firms, and opt to retain their prices when a competing firm raises its price. Consider airline B among rival airline companies that offer a flight from point Y to point Z is sold quantity Qe for price Pe each. Suppose airline B changes its price and the rival airlines do not copy the pricing strategy, B would definitely sell more airline seats/services, if it lowers the price and the vice versa, if it hikes its price. This in turn makes B’s price elasticity in demand to be high when the rivals do not react to the changes as illustrated in Do. (See fig.1). On the other hand, when B’s pricing strategy is copied by the rival airlines, it reduces the competitive advantage, experiences a minimal increase in flight services sold and market share loss because the potential profits and losses are being shared. This produces curve D1. (See fig.1). Kinked demand curve of oligopoly pricing Fig 1. Illustration of price elasticity of demand, kinked demand curve and oligopoly point of equilibrium in providing flight service in the airline industry. Adapted from “Oligopoly,” by UNC, 2008. Copyright 2008 by UNC. Since the airlines react based on mutual interdependence, raising fare price for a flight seat is rare for any single airline. The common reactions operate on fare price reductions, which means that if B lowered the price below Pe, it reflect curve D1 as illustrated by points A to D1. If it raises the price above Pe, it reflect curve D0 as illustrated between the start of D0 from the price margin to point a. The effect is that the demand for airline’s B services produces a kinked curve, which also ends up generating different marginal revenues at points where the rival firms fail to adjust, and copy the pricing change of airline B. The kinked curve is given by beginning of D0 from the price margin, the point and D1. The kinked curve in the oligopolistic market structure of the airline industry, gives the equilibrium price of the airline service at the intersection of D0 and D1, which is point A. At the point of equilibrium any attempt to change the price fails to be an advantage of any firm in offering the service. Patents and Trademarks in Airline Services They make up the intangible assets in airline companies, and are used by the airlines as their intellectual properties protected by the state and federal laws from infringement. Every airline company or alliance of the airlines has a unique trademark that they identify with to sell their services to the customers. They serve as economically efficient communication tools to the customers, the business, and potential passengers from areas of origin and destination that airline carriers fly through. Trademarks carry the reputation of the company, brand, and its services. A passenger desiring to fly on a particular airline can locate the service easily, without confusion just by identifying the trademark. It is a violation of the law for any airline company to use another’s intellectual property without authorization. The trademark symbol stands to be of use to the owner, which makes it possible for an airline to use it as a means of expansion in business (e.g. from virgin airline services to virgin carbonated drinks), in marketing to support stronger sales volume, and as a tool against unfair competition (International trade association, n.d.). With a trademark (e.g. Virgin or British Airways), an airline company can sell its flight services and expand their business using the same identity to market themselves. It can be used on their internet services, written documents, hardware and software among other related miscellaneous services. Some airlines do sell their services through some of their patented products. Therefore, developing a similar product that is an IP for another airline, to sell the service is unlawful. In the past, airline companies involved in patent infringement have been sued for using original inventions of others. Singapore airline was sued by British Airways for the infringement of creating a product similar to BA’s first class sleeper seat launched in 1996 (“British Airways,” 1999). Such law suits may attract heavy compensations that are generally a loss to the infringer. Inputs in Delivering the Airline Service There are numerous considerable factors for an airline to practically avail a flight service. The ground facilities (airports), capital, reservation system, labor (pilot, cabin and maintenance crew, flight attendants) ticketing agents and aircrafts, and the customers who create demand for the service lead to generation of the service to fly passengers or cargo as the required output. These inputs contribute to make the service accessible, but do come with an accrued cost in the service business. Labor is readily provided by the population, but together with the aircrafts, they serve as sensitive areas that are affected, while airlines are trying to cut down costs during non performing seasons or during an airlines economic crisis. Some airplanes are kept off service to keep few planes and the airline company in operation, while controlling the demand for the service. If a route has few passengers, the flight schedule and frequency may have to be altered to adjust to the changes in demand. Reference List Borenstein, S., and Rose, N. L. (2008, October). Chapter 2: How Airline Markets Work...Or Do They? Regulatory Reform in the Airline Industry. Retrieved from http://faculty.haas.berkeley.edu/borenste/airreg08o.pdf British Airways Sues Singapore Airlines. (1999, July 16). Retrieved from http://www.airliners.net/aviation-forums/general_aviation/read.main/33338/  Doganis, R. (2002). Flying Off Course: The Economics of International Airlines. 3rd ed. London: Routledge Gildner, A. J., Babusca, R., Eisenhart, A., and Zlata, M. (n.d).The Status of the Airline Industries in the United States and Romania. Retrieved from http://www.neumann.edu/academics/divisions/business/journal/review2010/Gildner-et-al.pdf International Trade association. (n.d). Top Ten Reasons Why you should Care about Trademarks. Retrieved from http://www.inta.org/TrademarkBasics/.../INTATopTenReasonsforTMsPresentation.ppt Kumar, N. (2006, December). Strategies to Fight Low Cost Rivals. Retrieved from http://hbr.org/2006/12/strategies-to-fight-low-cost-rivals/ar/1 O’Higgins E. (2005). Ryanair- Low - Cost Fares Airline. Retrieved from http://pgsm.co.uk/members/teaching/strategic/ryanair.pdf Papatheodorou, A., ed. (2006). Corporate Rivalry and Market Power: Competition Issues in the Tourism Industry. New York: I. B. Tauris & Co. Ltd UNC. (2008). Oligopoly. Retrieved from http://www.unc.edu/depts/econ/byrns_web/Economicae/oligopoly.html Vasigh, B., Tacker, T., and Fleming, K. (2008). Introduction to Air Transport Economics: From Theory to Applications. Hampshire: Ashgate publishing limited Read More