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Airline Marketing 5 airline marketing strategies
- 1. Airline Marketing 5: AirlineMarketing Strategies Dr Narudh Cheramakara 1/2017 Bangkok University
- 2. 1. Porter’s FiveForces • Porter's five forces analysis is a framework for analyzing the level of competition within an industry and business strategy development. • five forces that determine the competitive intensity and therefore the attractiveness o an industry. • Attractiveness in this context refers to the overall industry profitability. • An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability.
- 3. 1. Porter’s FiveForces: Industry Rivalry • Industry rivalry For most industries the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. • Potential factors: • Sustainable competitive advantage through innovation • Competition between online and offline companies • Level of advertising expense • Powerful competitive strategy • Firm concentration ratio • Degree of transparency
- 4. 1. Porter’s FiveForces: Threats of new entrance • Government policy • Capital requirements • Absolute cost • Cost disadvantages independent of size • Economies of scale • Economies of product differences • Product differentiation • Switching costs or sunk costs • Expected retaliation • Access to distribution • Customer loyalty to established brands • Industry profitability (the more profitable the industry the more attractive it will be to new competitors)
- 5. 1. Porter’s FiveForces: Threats of new entrance • Government policy • Capital requirements • Absolute cost • Cost disadvantages independent of size • Economies of scale • Economies of product differences • Product differentiation • Switching costs or sunk costs • Expected retaliation • Access to distribution • Customer loyalty to established brands • Industry profitability (the more profitable the industry the more attractive it will be to new competitors)
- 6. 1. Porter’s FiveForces: Threat of substitutes • Buyer propensity to substitute • Relative price performance of substitute • Buyer switching costs • Perceived level of product differentiation • Number of substitute products available in the market • Ease of substitution • Substandard product • Quality depreciation • Availability of close substitute
- 7. 1. Porter’s FiveForces: Bargaining power of customers • Degree of dependency upon existing channels of distribution • Buyer switching costs relative to firm switching costs • Buyer information availability • Availability of existing substitute products • Buyer price sensitivity • Differential advantage (uniqueness) of industry products • The total amount of trading
- 8. 1. Porter’s FiveForces: Bargaining power of supplier • Supplier switching costs relative to firm switching costs • Degree of differentiation of inputs • Impact of inputs on cost and differentiation • Presence of substitute inputs • Strength of distribution channel • Supplier concentration to firm concentration ratio • Employee solidarity (e.g. labor unions) • Supplier competition: the ability to forward vertically integrate and cut out the buyer.
- 9. 2. Porter’s FiveForces: Aviation Industry (Rivalry) • Intensed rivalry for Thai Aviation industry • Openskies Policy: Thailand, Asean, China, etc. • Increasingly liberalised attitutes internationally in terms of aviation competition • Particularly in the short-haul market • Products and services are pretty much comparable among the operator.
- 10. 2. Porter’s FiveForces: Aviation Industry (Substitution) • Internet as a means of communication • High-speed rail • In some cases, better road infrastructures: particularly in the developing countries. However, this is not a strong threat for Thailand at the moment – why?
- 11. 2. Porter’s FiveForces: Aviation Industry (New Entry) • Entry requirement: Easy to obtain traffic rights/Difficult to obtain AOC and meet safety regulations • Resources: - Capital Intensive - Lack of labour expertise (crew, operations, etc.) - Airport capacity - Economy of scale is difficult to achieved (EK, FD v new entrance) - However, smaller and new entry can achieved lower labour cost and being efficient as these tend to go up after the first 5 years.
- 12. 2. Porter’s FiveForces: Aviation Industry (Customer Power) • Effectively airlines have little or no power unless it’s Bangkok Airways’ Samui or Monopoly routes • Porter argues that the power of their customers will be a crucial determinant of profitability for the firms in any industry. • In turn, customer power will be related to two variables: the number of customers a firm has, and the existence – or otherwise – of so-called Switching Costs. •
- 13. 2. Porter’s FiveForces: Aviation Industry (Customer Power Cont’d) • customer turns into a competitor occurs when a tour operator grows bigger and bigger, giving larger amounts of business to existing charter airlines. (Chinese Investors in Thai airlines) • FFPs have been used to gain the customer’s power (TG’s ROP to attract Thai business travelers)
- 14. 2. Porter’s FiveForces: Aviation Industry (Supplier Power) • Airbus v Boeing - Long deliveries - Training - Spare parts • Engine • MRO • Monopoly on Airport • GDS
- 15. 3. Porter’s GenericStrategy • Porter wrote in 1980 that strategy targets either cost leadership, differentiation, or focus. These are known as Porter's three generic strategies and can be applied to any size or form of business. Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources. Porter's generic strategies detail the interaction between cost minimization strategies, product differentiation strategies, and market focus strategies of porters.
- 16. 3. Porter’s GenericStrategy • If a firm is targeting customers in most or all segments of an industry based on offering the lowest price, it is following a cost leadership strategy; • If it targets customers in most or all segments based on attributes other than price (e.g., via higher product quality or service) to command a higher price, it is pursuing a differentiation strategy. It is attempting to differentiate itself along these dimensions favorably relative to its competition. It seeks to minimize costs in areas that do not differentiate it, to remain cost competitive; or • If it is focusing on one or a few segments, it is following a focus strategy. A firm may be attempting to offer a lower cost in that scope (cost focus) or differentiate itself in that scope (differentiation focus).
- 17. 3. Porter’s GenericStrategy
- 18. 3. Porter’s GenericStrategy • Lost-in-the-Middle is a situation where a firm is in none of the major boxes. • In many countries the small village store represents this position. As car ownership has grown, it has become commonplace for people to drive to an out-of-town hypermarket, rather than patronise the local store in the town or village where they live. • In fighting back, the owners of village stores have few weapons at their disposal. They will not have the buying power of an Aldi which would allow them to offer very low prices, whilst they cannot stock the 30,000 or more items typical of a hypermarket. • Finally, there would be insufficient demand in a small town or village for a store which specialised in a narrow area such as Indian grocery products. • The Lost-in-the-Middle nature of the village store’s position is illustrated by the fact that over the last ten years, many of them have been forced to close. As we shall see, many medium-sized airlines are likely to follow them in the years to come.
- 19. 3. Cost Leadership:Airlines • Pioneered by Southwest • Laker Skytrain • Air Asia • Ryan Air • Easyjet • Most new entrances adopt this strategy
- 20. 3. Cost Leadership:Airlines • Fuelled by regulartory liberalization • EU Single Aviation Single Market (Easyjet, Ryanair, Cabotage) • Internet reduces the distribution cost • Air passengers has changed from mostly business travelers to more leisure based from company pay to self-paid cost conscious • As a result, it’s the main strategy that airlines head to • We see drastic cost cutting across the industry, see the following slides;
- 21. 3. Cost Leadership:Airlines 3.1 Low Fleet Cost - Fleet Commonality - Single Type Fleet - TG Fleet Rationalisation - Nok Air V Air Asia
- 22. 3. Cost Leadership:Airlines 3.2 Low Landing Fees - Ryan Air seeks out-of-town, rarely used airports, in other cities and sometimes in different countries - Sometimes these airports are subsidized - Less traffic congestion saving on fuel consumtions - Other airlines follow suits - Thailand, AOT owns both DMK/BKK, no incentive for competition Examples: Charleroi, Bergamo, Hahn, Bauvais
- 23. 3. Cost Leadership:Airlines 3.3 Aircraft Utilisation - Aeroplanes can make money only when they are flying. - Reducing unit cost (CSK) This is done through - Short turn around time - Route network optimisation (China/India at night). CCU market case
- 24. 3. Cost Leadership:Airlines 3.4 Limited Onboard service
- 25. 3. Cost Leadership:Airlines 3.4 Point-to-Point Service - No need to wait for connecting flight - No need to schedule banks of arrival/departure - Missed connection/Accommodation - Better revenue by selling two flights separately - DD/FD transfer case
- 26. 4. Differentiation: AirlineBusiness Large numbers of airlines – mainly those which are long-established – in today’s airline industry do not seek out a Cost Leadership position for their mainline activity (though, as we have seen, increasing numbers of them have set up Cost Leader subsidiaries). Instead, their argument is that they provide a value- for-money solution to a wide range of customer requirements, exploiting the synergies which become available to a firm producing a range of different products under the same umbrella. Such policies conform very well to the “Differentiation” position of the Porter model
- 27. 4. Differentiation: AirlineBusiness - Through innovation (Can be matched overtime) - Service - Branding - This is to charge more!! - However, it is likely to fall to cost leadership as passsengers are generally price sensitive
- 28. 4. Differentiation: AirlineBusiness Singapore Airlines
- 29. 4. Differentiation: AirlineBusiness Bangkok Airways: Asia’s Boutique Airlines - Problem: the public doesn’t understand the boutique concept. - To a certain extent, people think Bangkok Airways is a low cost airline Particularly the non-flying public. -
- 30. 4. Differentiation: AirlineBusiness Jetblue: Mint Service Compared with US Airways
- 31. 4. Differentiation: AirlineBusiness Jetblue: Mint Service Compared with US Airways
- 32. 5. Alliance - 1993KLM/Northwest - Exploit the route network
- 33. 5. Airline Alliance:Star - -
- 34. 5. Airline Alliance:One World
- 35. 5. Airline Alliance:Skyteam
- 36. 5. Airline Alliance:Emirates Case • Emirates refused to join an alliance and go on its own. • It has big enough a network.
- 37. 5. Alliance • alliancescan bring their members significant benefits to their bottom line. • Economies of Scale, which consist of cost reductions achieved through size, • Economies of Scope, which reflect the revenue benefits of cooperation,normally brought about by increased marketing muscle-power. • Avoid having to obtain traffic rights • This can be - Codesharing - Merger - Minority Equity stake
- 38. 5. Alliance • CostBenefits - Joint Purchasing - Cooperation in ground handling - Combining sale teams (BA/QF in BKK) - Joint Marketing - FFPs
- 39. 6. Focus Strategy:Airlines • Porter proposes that successful Focusing can comeabout in two ways. 1. Focus on adding a great deal of value, which allows them to cover high production on costs and still sustain profitability. 2. Use their expertise to achievevery low costs.
- 40. 6 Focus Strategy:Value Added Focusing • Premium Offers BA, Openskies, PG, Etihad Suite. • Still often failed: Transatlantic Business class • Nok Air tried and Failed • Thai Smile
- 41. 6 Focus Strategy:Low Cost Focusing • As a result of fare war • Everyone seems to try this strategy • Developped from European Charter Airlines
- 42. 6 Focus Strategy:Lost in the middle Porter argues that there are firms that do not fit into any of the boxes. • Their costs are too high for them to pursue Cost Leadership and • there is too little about them which is distinctive for true Differentiation to be achieved. • We have seen FCCs try to reduce their services but still fail to compete on costs while offering increasingly inferior products. • Sadly, the airline industry today has an almost endless list of firms to which this description can be applied: Nok Air, Most Flag carriers, eg
- 43. 7 Common Mistakesin Airline marketing strategies 7.1 Objectives - Airlines are sometimes for other purposes than to make profits - Transport service providers to remote area (The reasons why many airlines are state control). In latin America, some were operated by the military - Political meddling - Sometimes could be the results of management ego – US carriers in the formative years
- 44. 7 Common Mistakesin Airline marketing strategies 7.2 Diversification v specialization - Airlines can be over-diversified without sufficient resources - Or airlines can have large/diversified network with unsuitable fleet: PG to Japan
- 45. 7 Common Mistakesin Airline marketing strategies
- 46. 7 Common Mistakesin Airline marketing strategies 7.2 Pace of expansion: THY grew a bit too fast 7.3 Over-optimism: Ordering too many planes - Indian carriers - Lion Air - PG with A350 - PB Air