Low-Cost Airline Industry: Sustainable Competitive Development

Published: 2019-08-28 07:30:00
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The European airline sector has been faced with enormous changes in terms of its dynamics and structures brought about by a substantial amount of EU legislations through the liberalisation of the industry, as well as the abandonment of state aid for national carriers. With deregulations intended purpose to encourage increased competition among airports and improve efficiency among airline operators, this report looks into the impact of the deregulation of the European air transport industry to the low-fare airline business model using an imaginary new entrant airline business.

Moreover, this report takes a look into the strategic direction that the low-fare business model has to undertake in order to succeed in the face of increased rivalry and in the light of economic uncertainties. The proposed low-fare airline business has carefully selected the Brussels South Charleroi Airport and UK-Stansted Airport as its initial route.

Deregulation: Origin and Benefits

The airline deregulation aimed at creating a single market in Europe has been a landmark achievement in the history of aviation in the region. The European air transport liberalisation is said to be best understood by looking at its aviation situation prior to completion of the regional integration of the common airspace of the European Union (EU) member states into a single aviation market in 1997 (Kawagoe 2009; Berechman & de Wit 1996).

It is observed that the European aviation scene prior to 1997 have been dotted by bilateral deals, which continued to contain ownership and control limits on traffic rights, including many restricted market access and capacity (Burghouwt, Mendes De Leon & De Wit 2015). Likewise, these bilateral agreements restriction to mere one airline from each country to operate services, often on a limited number of specified routes, was a cause of worry among operators and passengers. Finally, the international and domestic fares were controlled between airline operators under the auspices of IATA, and subject to government regulation (ICAO 2003).

Hence, the deregulation of the EU internal market in 1993, including the liberalisation of the cabotage rights in 1997, paved the way for the easing off of restrictive regulatory barriers, such as cross-border ownership within the EU (Air Transport and Airport Research 2008). The expected effects of liberalisation in EU or the single aviation market include further airline consolidation, more innovation, more routes served and greater competition on many existing routes. For passengers, the benefits are more cheaper ticket fares and more options to choose, in terms of routes in Europe served and in quality and types.

However, the International Civil Aviation Organization have noted about the difficulty of assessing the precise impact of liberalisation of the aviation markets in Europe. On the account of the lower fares, there remains some uncertainties whether this benefits not just the leisure-loving travellers but also business travellers. Then, another thing of note is the full impact to the basic structure of the airline sector because such remains under the influence of traditional international regulatory framework (International Civil Aviation Organization 2003).

PESTE Analysis

The details of this reports PESTE analysis are explained in sequence below, as well as their relevance and impact on the proposed low-fare airline scheduled service:

1. Political Factors. The deregulation of the aviation sector can have a direct influence on the way airline firms can do business and engage in investment. Through air transport liberalisation, the opening up of the market to competition will obviously influence the development of this industry for many years to come (. The indirect consequence of breaking so many regulatory barriers then would spur economic development through the building of airport within a region. In effect, long-term sustainable growth are sustained once the respective countries receive a leading role in the region. Meanwhile, the drawbacks of political instability, such as terrorist threats and health concerns in some parts of the world, among others, have the ability to alter travel throughout the world. Likewise, shocks and events could result in shifting traffic from one airport to another.

2. Economic Factors. The varying degrees economic factors can influence firms and the industry can be viewed in the level of expected market demand for air travellers in the region and how they expect to do during certain period of time. The economic issues that airline operators must be ready to face include inflation, business cycles, interest rates, unemployment rate, economic growth, disposable income, and more (Gasparini & Del Bianco 2011). There also other market forces that can influence the operation of airline firms, such as buying power of consumers, willingness to spend, consumer expenditure levels, and supply and demand. In view of the latter, cited to have big influence include the globalisation of business and trade. It is therefore with greater economic value that the development of an airport is encouraged to allow the region in which the airport operates to achieve greater economic relevance.

3. Social Factors. The way social and cultural factors may influence the firms marketability and attractiveness must not be taken for granted. One of its significant uses is to assist the company to determine beforehand the challenges it will face in the current period of time, such as ensuring that the brand is responsive with customer attitudes or behaviours. The socio-cultural factors that may have an impact on the air transport industry include the demographics and population of the customers in the region, customers attitude to work and travel, level of education, cultural differences within and between the European member states, language barriers, presence of national and regional stereotypes, and influence of consumerism, among others. These factors play important roles in determining the overall competitive environment where the airline business will operate.

4. Technological Factors. The technological prowess of a firm can be an important profit driver that could increase its competitiveness in the airline sector. When the company achieve efficiency through its technological capabilities, its management of its business and satisfaction of customers are greatly enhanced. On the other hand, shifting technologies can often present new challenges to the incumbent firms, such as the entry of new firms that can offer at a much lower cost their services and the emergence of new industries. In light of the former result, there is then the tendency that the buying preference and decisions of customers may be influenced. In short, advancements in technology can either be a major source of competitive advantage to some and increased threats to those who will not be up to the challenge.

5. Environmental Factors. As a more recent concern in relation to the competitive environment in the airline industry, environmental issues such as air pollution control, climate change, waste disposal, and reduction in carbon footprint of airline flights are increasingly becoming a major cause of worries and concern. With the liberalisation of the air transport industry, environmental factors are presenting a much greater challenge to the whole airport industry. In many respect, there is an advantage that secondary airports enjoy in relation to environmental factors. For instance, many airports located or near the cities face the hurdles of expanding their infrastructure and operation due to the issue of carbon footprint issue (Bitelmal 2010).

Porters Five Forces Model Analysis

1. Threat of New Entrants. One of the barriers for new entrants in this industry is that big players are often offered the best slots in the major airport hubs but with the increased use of secondary airports, the barriers of entry are lowered. It is also noted that no significant economies of scale are foreseen in this sector, the barrier to entry has been lowered overall (Dalken 2014). Other than the predatory pricing which incumbents use to discourage new entrants from competing with their larger peers, there is the level of airport fees that new players contend with as barriers to enter (Sorensen 2005). Considering all these factors, and what the state is doing to act on these concerns, there is a moderately high risk to enter but not high since strong cash reserve is a prerequisite for entry.

2. Bargaining Power of Suppliers. There is a relatively low bargaining power that industry suppliers enjoy on account of the economic downturns, along with market liberalisation and competition (Dalken 2014). For instance, Airbus has overtaken Boeing as the world-leading aircraft manufacturer. Then another factor to consider is the shift to the business models used by airlines to take advantage of cost savings. Lower-fare airlines use secondary or regional airports in order to maximize their resources and avoid higher aeronautical costs. Therefore, forward integration in the industry is low since aircraft manufacturers and airports are not likely going to buy or create an airline (Sorensen 2005).

3. Threat of Substitutes. In terms substitutes for scheduled air transport, it is critical to consider the other alternative modes of transportation, such as bus services, automobiles, rail service, and a slew of technological advancements that are slowly changing the landscape of transport, such as videoconferencing. Low-fare airline services which offer competitive pricing for air travel can still be the preferred choice of travellers in Europe, hence, the threat of substitutes from alternative modes of transportation seem very low (Sorensen 2005).

4. Bargaining Power of Buyers. Unlike other products or merchandise where buyers can influence the prices, the case is different in the airline industry. Their bargaining power is low since purchasing flight tickets are neither concentrated nor do they purchase in bulk (Dalken 2014). However with the internet, consumers can now search for the airline services that offer the cheapest flight ticket rates, thereby making their bargaining power moderately higher. Through low-fare airlines, customers can have higher bargaining power because they can argue about the huge price gap between low-fare airlines and full service airlines (Sorensen 2005).

5. Rivalry Among Existing Firms. Industry observers have noted about the increase in rivalry among existing air transport companies in the recent decades following the air transport deregulation, which promotes competition (Dalken 2014). There has been significant developments in terms of the way low-fare airlines were able to influence the prices of air travel transportations, brought about by the price leadership business model. Other forms of competition that have sprung include internal rivalry between low-fare airlines and low-fare airlines and full-service airlines which created subsidies or other approaches to competed with the prices offered by the former (Sorensen 2005).

Conclusion

With the deregulation of the air transport industry in the pan-European routes, apparent developments have been witnessed in the industry as a whole. To find out whether this perceived and intended business scenarios still hold true in the latter years, this report inspected the proposed low-fare airline companys internal strategy to enter the market, in light of its macro and micro environment.

Thus, due to falling demand as a result of the economic slump, industry players are grappling with the prevailing business climate. However, the air transport deregulation have greatly affected the industry and all the players herein. While there are opportunities that can low-fare airline company exploit to increase ef...

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