1/ Strategic segmentation of the passenger air transport industry

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2 1/ Strategic segmentation of the passenger air transport industry a) Business passengers Opportunities for Differentiation A) Characteristic of the Buyers b) Leisure passengers c) Distribution Channel d) Geographical Location B) Characteristic of the Product C) Strategic group within the world air transport industry Base on Comptemporary Strategy Analysis, Robert M.Grant P.110 Figure 4.3

3 A) Characterisitcs of Buyers a) Business Passengers b) Leisure passengers c) Distribution Channel Demographic Lifestyle Less in absolute value Can be in group Looking for speed & high quality Purchase occasion Weekly basis Demographic Lifestyle More in absolute value Alone or little group Looking for saving Purchase occasion Yearly basis d) Geographical location Direct (Internet) vs Indirect (Travel agency) Short trip vs long trip Base on Comptemporary Strategy Analysis, Robert M.Grant P.110 Figure 4.3

4 B) Characteristic of the product Physical size: Seat narrow or comfortable Medium or Big plane Price level: Low/Medium/High/Extremely High Product features: Magazine, Free drink, Tv, Cable Imput use: Leather seats/ standard seats Performance characterisitcs: Speed/Kindness of the personal Pre-sales and Post-sales services: Call centre, payment, change of the reservation, policy in case of problem, travel agent vs internet Base on Comptemporary Strategy Analysis, Robert M.Grant P.110 Figure 4.3

5 C) Strategic group within the world air transport industry Virgin Galactic Only long trip Distance South West PanAm American Airlines Delta Continental TWA United Airlines, Low Fares Flag/Network Carreer Air France Jet Blue KLM Concorde British Airways Private jet Easy Jet Bangkok Airways, Air Andaman, PB Air Low Cost Ryanair Only regional trip No frills Cebu Pacific Airways Virgin Express Quality and Comfort Many frills Base on Comptemporary Strategy Analysis, Robert M.Grant p115

6 2/ Differences between traditional and low cost airlines A) Context B) Comparison

7 A) Context New demand Internet makes easier the price comparison Low Cost Airlines companies benefit from the deregulation the competition between Flag and Low Cost Companies is intense in a sector with poor rentability

8 B) Comparison Fields Flag/Network Low Cost Comments Alliance Increase of alliances between companies No alliance at that time Destination Worldwide «Regional» Wages Working Hours Aircraft utilization Type of clients Around 30% of the costs 30% less than LC «stock» of hours/day Richer/business class (40% of the revenues) Around 15% Intensive use of planes New travellers Hubs Very Costly Try to establish in new airports (RyanAir ) The trend is to reduce costs on wages for the flag companies To reduce costs, a plane is rentable when it flys Both use yield management but LC is based on the concept of price elasticity Frills Yes No frills LC provide just a fly between 2 points. Every charge is for the passenger

9 3/ Industry analysis (Porters 6 forces) for short haul Western European flights leisure segment. Each force to be explained (and graded from 0 (low) to 5 (high) regarding their intensity) (4 points)

10 Industry Analysis: Porter 5 s +1 forces model B) Threat of entry Capital requirements Economies of scales Absolute cost advantages Product differentiation Access to distribution channels Government and legal barriers Retaliation by established producers E) Supplier power C) Industry rivalry Factors determining power of suppliers relative to producers; -see «Buyer Power» box Concentration Diversity of competitors Product differentiation Excess capacity and excit barriers Cost conditions A) Threat of substitutes Buyer propensity to substitute Relative prices and perfomance of substitutes F) Role of States Deregulation movement However governements still have a great role to play Price Sensitivity Cost of product relative to total cost Product differentiation Competition between buyers D) Buyer power Bargaining power Size and concentration of buyer relative to producers Buyer s switching costs Buyers information Buyer s ability to bacward integrate Base on Comptemporary Strategy Analysis, Robert M.Grant P.70 Figure 3.3

11 A) Threat of substitute Buyer propensity to substitute: Train (TGV, Ter, ), Car (own car, carpool, ), Buses (Eurolines, ), Boat, Other It depends on buyer expectation: No Time consuming, level of comfort, low price. Elasticity is higher for low cost compagnies. Relative prices and perfomance of substitutes: Example of a Barcelona-Paris Price Time Comfort Low cost Plane 30 Low Low «Major» plane 75 Low High Bus (Euroline) 50 High Low Car (Carpool) 60 Medium/High Medium/Low Car 160 Medium/High High Base on Comptemporary Strategy Analysis, Robert M.Grant P.70-71

12 B) Threath of entry Capital requirements: High (You need to buy planes, ) But you can focus only on one route. High «sunk cost» which avoid firm to do «hit and run» strategies. Economies of scales: Relatively low However using circular routes offer huge scales economies Absolute cost advantages: Flag/Network Carriers are supported by countries Older firms have easier access to hubs slots Civil Aviation Authorities hinder getting an authorization (sometime on chauvinistic aspect) Product differentiation: Consumer loyalty relatively low (you can book on a compagny whitout using it on any segmment of the flight ). However it exists fidelity cards Security ranking: Access to distribution channels: Internet allow to circumvent barriers of distribution Government and legal barriers: Deregulation since 1993 (and EEC Justice Court policy) No more subsidation But right for foreign airlines are highly controlled Retaliation by established producers Major use predatory pricing against Low cost firms Base on Comptemporary Strategy Analysis, Robert M.Grant P.70-74

13 C) Industry rivalry Concentration: Not so much because of barriers & National firms But a bit via Alliance (3 Alliance 50% of the industry) Diversity of competitors: Not so much (multinational) Product differentiation: Low: a seat is a seat But you can add frills, adding comfort to the product. Difference of time using (because of airport or planes choice) Excess capacity and excit barriers: Increase of demand is falling in Western Europe Substantial barrier to exit: Cost conditions: High job protection (unions) Durable goods (planes!) Cost Structure: Very low variable cost of filling empty seats = Heavily discounted tickets Base on Comptemporary Strategy Analysis, Robert M.Grant P.75

14 D) Buying power Price Sensitivity: Cost of product relative to total cost: Important cost among the trip fee = Buyer are very sensitive to the price. Product differentiation: Price still is the more important for consumers Competition between buyers: No consumer competition ( We may could say yield management push consumer to rush on tickets Which coul represent a competition between them: first came, first served. Bargaining power: Size and concentration of buyer relative to producers: No buyer concentration (and yield management hinder grouped purchase) Buyers information: Internet made it efficient ( Buyer s ability to bacward integrate: Impossible to buy consumers! Base on Comptemporary Strategy Analysis, Robert M.Grant P.75

15 Cost Plane E) Suppliers power Cost of product relative to total cost High fix cost (But Low at long term) Product differen -tiation Slots Medium Difference of airports attractivness Wages Very High (1 st cost) Competition between suppliers Size and concentration of supplier Poor/Medium Very high Oligopoly (Boeing Airbus) Becoming higher (Beauvais or Gijon) Limited size of terminal Suppliers information High High Suppliers ability to bacward integrate Difficult (may only buy participation) Impossible (But may have national aggremements Increasing Low Medium High Hard ( Buying school? ) Maintenance High (2 nd cost) No Medium Medium Medium Very High (above all subsidiaries) G R A D E Fuel & Oil High No Low (OPEC) Very High (OPEC) High Low 4 Catering Very Low Little Medium but becoming higher Meteo information Ground Handling Very Low No No Very High (Monopoly) Medium Medium High 0 High Impossible (Create one..?) Low No Low Very High High Seem Impossible 4 Insurance Low Low High High Very High Low 1 5 Control tower Low No No Very High Very High Impossible 4

16 F) Role of states Deregulation movement: 1978 in the USA 1993 in Europe Asia is not deregulated yet No more subsudisation ( But still some exceptions exists) However governements still have a great role to play: Slots attribution: ex of Open Sky aggrements Airline of given country must have a majority of its shareholders from that country Right to do inter regional flight in a foreign country are highly controlled.

17 Sum up Threath of Entry: 1 Suppliers power: 3 Industry Rivalry: 4 Buying power: 0 1 Threath of Substitutes: 3 Role of states:?

18 4/ Value chain of an airline illustrate and discuss using the Porter model: A) Primary activities B) Support activities C) Influence factors of the value chain

19 A) Airlines value chain Inbound Logistics Primary activies Route networks: alliances Yield management: ticket pricing, seat and class reservation, discount allocation, overbooking. Cabine service Operations HUB management: central platform operations Aircraft operations and maintenances Ticket offices Field operation service ( aircraft dispatch at the airport) Passenger handling Outbound Logistics GDS: online passenger reservations Ramp service Marketing and Sales Travel agencies Fidelity programs Service Lost baggages complaints

20 B) Airlines value chain Support activity Firm Infrastructure HR Management Technology Procurement -Finance - Accounting - Legal (countries regulations & deregulations, companies agreements) - On-board staff - Pilots - Passengers handling staff - Baggage staff - Yield manager - Sales people - Aviation engineers - GDS - Yield management system Inventory management, aircraft purchasing

21 C) Influence factors Cost drivers Differentiation factors Technology leverage Outsourcing - Wages - Aircrafts maintenance - Airports - Fuel and Oil - Air Traffic Control - Catering - Flight planning and weather forecast - Ground handling - Insurance -in-board service - price (discount, reservation in advance) - fidelity program - destination and route - use of new planes - brand building -Reservation -Innovative incabin services (internet, live international TV broadcast) - Aircraft Maintenance - Cabin service (cleaning) - Passenger service (check-in counter, gate arrival and departure services) - Catering -Ramp service (catering trucks, luggage handling, water cartage etc) - Field operation service

22 What parts of the value chain the Majors should focus on? Focus on their core job: providing air transportation to customers and developing their image/reputation: Inbound logistics (alliances) Yield management Technical aspects (GDS, R&D, on-board variety and quality of services) Marketing

23 What parts might be outsourced? On the other hand other functions should be outsourced: Indirect contact with the customers: - Aircraft Maintenance - Cabin service (cleaning) - Catering - Field operation service - Ramp service (catering trucks, luggage handling, water cartage etc) Direct contact with the customers at the airport: - Passenger service (check-in counter, gate arrival and departure services)

24 How to rescue the major airlines? What is their future Two angles: What can they do on their own? What can they do with others players of the market?

25 How can the Majors save themselves? Increase their efficiency: Yield management (New price policies (categories + time of purchase) New categories: On existing flights Widen the range of products (think about premium and charters) Increase the profitability of aircrafts Schedule and staff Rationalize the take off locations: Primary/Secondary airports Explore other markets (risky)

26 How Majors will rely on partners Aircrafts manufacturers Partnerships in new aircrafts development Contract some alliances to work on ATC costs and insurance costs React to On-line travel agencies (Expedia) Partnerships resulting in the creation of all-inclusive kind if internet reservation system In terms of distribution, think about having a privileged distributor (commission)

27 Majors future? Definitely a time for concentration (both vertical and horizontal) A time for diversification and evolution They must be willing to take risks, especially in terms of image: The real question about their future: increasing costs partially due to oil consumption and aircrafts renewal.

28 Thanks for your attention! Questions?