PORTER’S FIVE FORCES ANALYSIS
ON THE GREEK LOW COST AIRLINE CARRIERS'INDUSTRY
ECO 610 – MANAGERIAL ECONOMICS
November 2014 Course
Supervisor Professor: Ken Troske
Student: Zoe Kaminaridi
CONTENTS
CHAPTERS / PAGE1 / BACKGROUND AND MARKET DEFINITION / 2
2 / ΒARRIERS OF ENTRY / 3
3 / BARGAININGPOWEROFSUPPLIERS / 4
4 / BARGAININGPOWER OF BUYERS / 6
5 / THREAT OF SUBSTITUTES / 6
6 / INTERNAL RIVALRY / 7
7 / CONCLUSIONS ANDFUTURE TRENDS / 8
8 / REFERENCES / 10
1.BACKGROUND AND MARKET DEFINITION
One of the main drivers behind the movements of the liberalization of the EU internal market in 1993 and the granting of cabotage rights in 1997 has been the emergence of low cost carriers, which now compete with full service network carriers (FSNCs), holiday carriers, regional carriers, and hybrid carriers. It is widely known that the basic principle of the low cost carriers ("LCCs") lies in the fact that they offer flights with a much cheaper price than the traditional airlines. Besides the premium pricing,other characteristics of that business is that the tickets have substantially more restrictions and conditions, LCCs' even charge extra services that other companies render for free, and in many cases they donot provide any services which may be considered self-evident to the traditional airlines.
In Greece, similarly to what happens across the rest Europe, the LCCs' attempt to reclaim market share from traditional airlines with that phenomenon to be more intense during the summertime when the passenger traffic is significantly enhanced due to the tourism in Greece. More specifically since 2014, there has been a turn in the interest of airlines to return to the Greek market (many of them have been abolished flights during the recent past being afraid of the financial and political status quo in the country). It is especially noted that the low cost airlines have to face nowadays a powerful player in Greece , Aegean Airlines with its subsidiary Olympic Air, which have a market share of over 35 % and go through a period of growth.
The main bulk of the passengers travel from Athens, the capital of the country where the half local population lives and the business and vacation center lies. The low- cost airlines in Greece, which consist the 29.3 % of the companies of the Athens International Airport ("AIA"), are currently connect Athens during the summer period with a total of 39 airports and 35 destinations (40% more than in 2013). Moreover, despite the widespread grumbling of low-cost airlines for the high cost of using AIA, their presence in 2014 climbs to 17 of 12 companies last year , while enhancing their flights by 42 % from Athens (Reference 1).
The current players in the gulfs of the low cost carries industry in Greece are, in their majority,otherEuropean LCCs' that have previously launched their routes in other countries. The largest of them (either in Athens or in the outside of Athens' region) are Ryanair, EasyJet, Germanwings, Vueling, Transavia, Volotea, Aerlingus, Meridianna Fl, Niki Luftfahrt, Brussels Airlines, Airberlin and Condor -Thomas Cook (Reference 2). In particular, Ryanair (Reference 3) and EasyJet(Reference 4)have significantly increased its routes during 2014.
2. ΒARRIERS OF ENTRY
The airline industry traditionally requires large fixed cost capital investments into the fleet of aircrafts. Also, operating costs, such as yearly maintenance expenses, are remarkably high. The above financial obstacles can be somehow surpassed through leasing schemes for aircrafts, maintenance facilities and aircraft parts (i.e. “Power-by-the-hour”, a time-based jet engine rental program from Rolls-Royce, per Reference 5).
The protection of acquired rights associated with the slot landing rights or gates at airports benefit incumbent airlines and creates barriers to starting up new LCC companies. According to the current slot allocation system, which controls the landing rights in most European airports, the carrier has available landing time for a certain time within the day. Carriers that used their slots in the previous year have the right to continue using them and this year (rules called "loss in the event of non -use") . Under this system, the non - effective, high cost airline companies may have access to an airport, even if a new LCC could use the slot much more effectively (Reference 6, pages67-68 of the file).
The vast deregulation in 1993 (European agreement for a new ‘open skies’ policy) drastically reduced the barriers to entry into the industry. Since then, low cost carriers and other carriers have entered at such a rate in that no commercial European airline controls more than 9% of the market share. However, there are still regulations imposed by the government or professional associations that may create barriers to entry and airlines are subject to price regulation though the airport taxes that are included in the ticket price(Reference 6, page 25 of the file).
Due to the fact that the sky of Greece and other European countries is very congested and the aforementioned competition on airport slots and flight permissions is intense, any new entrance to existing routes, usually results in price wars which eventually acts as disincentive an LCC to enter the industry (Reference 7).
3. BARGAINING POWER OF SUPPLIERS
The power of the suppliers in the airline industry is considered as high. The suppliers for airlines are manufacturers of the airplanes, jet-fuel distributors, labor force and the airports.
A. Airplane manufacturers are very interdependent with the airline companies. The manufacturers worldwide are the following eight: 1.Airbus Corporate Jets (France), 2.Beechcraft Corporation (US), 3.Boeing Business Jets- (US), 4.Bombardier Business Aircraft (Canada), 5.Cessna Aircraft (US), 6. Dassault Aviation (France), 7. Embraer Executive Jets (Brazil), 8. Gulfstream Aerospace (US), (Reference 8).However, the two major competitors are Boeing and Airbus which control the market for planes with a capacity of more than 130 seats and they tend to collude to avoid the costs of maintaining a very diversified fleet. LCCssave money through negotiating lower prices when purchasing new aircraft and through purchasing similar aircraft to standardize maintenance. However, after an LCC purchases a certain model, the switching costs are very high since heavy investments must be put into to modify the supply chain for maintenance and spare parts of the fleet and to re-train the personnel.
B. Jet-fuel prices volatile in prices and the airlines are struggling to find ways either to take advantage by the prices decreases or try to protect themselves from future unexpected increases in prices through hedging (Reference 7). A natural offset to the increase of oil prices is the manufacturing of more fuel-efficient aircrafts in the future.
C.Labor costs are usually of low-cost since LCCs' tend to employ new staff with cheap labor contracts salaries, especially for cabin crew and, in many cases, employees work multiple roles. Online check-in is becoming common, in the interest of avoiding personnel costs. Current labor conditions vary by airline; but, overall, the power of the labor supply has dwindled since deregulation of the airline industry.
D.Some LCCs (i.e.Ryanair) try avoiding large airports with high fees and restricted space and to focus on newer, secondary airports because of a higher level of buyer power and, thus, cheaper rent for airport slots. Of course, as time passes, many small airports do not depend on just one LCC anymore and the above benefits are reduced. Other airlines (i.e. EasyJet) rely on larger airports and hubs, while they try to decrease the expenses through the arrangement of flights at non rush hours.
4. BARGAINING POWER OF BUYERS
The main concern of LCCs' customers is the price of the ticket since what they look is to travel from one place to another in the cheapest possible way (provided that acceptable safety conditions and reasonable time scheduling are included) and LCCs do not provide any differentiated services and the customer service is basic or nonexistent. However, in the Greek industry of LLCs rarely there is more than one available option of LLC and, thus, the passengers have no or restricted bargaining power because they cannot easily switch from one carrier to another.Furthermore, one additional reason for which the passengers have limited power is that even in cases that they have two options (i.e. flying to London with EasyJet of Ryanair), they may be not solely driven by the cheapest flight and end up to choose the LLC with the most convenient time schedule of the flights (i.e. when one visits London for short vacation).
5. THREAT OF SUBSTITUTES
Any means of transportation that can compete either on price or time requirements is a threat to a low cost carrier. Substitutes to air travel are train transportation, car, bus, and boat. More analytically:
- Greece does not have such an extensive and modern domestic train system and no high-speed rail to cover long distances among different countries, as it happens in many European countries. The lack of extensive infrastructure is partially due to the fact that the geomorphology of Greece (lots of mountains and bulk of sea around) is not suitable. However, for domestic short or medium distance travel (distances in the territory of Greece are not vast) trains are a good substitute since they take passengers directly into city-centers, there are no check-in procedures, no security checks, more available seats, lower prices and they offer a higher level of comfort. As far as travelling abroad is concerned, there are no substitutes with the exception of the nearby countries such as Turkey and Balkanian countries where one can go easily from North Greece via train (and, of course, car and bus).
- Similar as the above mentioned arguments apply for travelling by car or bus for domestic reasonable distances whereas last years travelling by car is not "value for money any more" due to the increased petrol and tolls' prices.
- Travelling by boat is a good enough substitute for all islands close to Athens and some other islands in Northern Greece which are near to Kavala and Alexandroupoli. The competitive advantage of this way of transport -in comparison to the plane- is thefact that you can carry your car with all the necessary luggage loaded which ensures increased portability, autonomy and -in some cases- money saving, as well.
6. INTERNAL RIVALRY
As already mentioned before, LCCs need to have the lowest price to be successful and, consequently, the competition among LCCs is strong. Moreover, cost advantages or new ideas can easily be copied by competitors and the LCCs do have the option to cope with competition through investing on differentiation on service quality or other soft factors. In the Greek market the competition is not yet so fierce due to fact that the players are few. The main players currently in Greece are Ryanair which is the leader (both domestic and foreign routes) , EasyJet (solely foreign routes) and the Greek Ellinair (both domestic and foreign routes), per Reference 9-10. In addition, it is worthwhile to mention that Ryanair has announced a deal worth $22bn for up to 200 Boeing 737 MAX 200 aircraft, which will offer more seats, 18pc fuel savings and allow the low cost airline to almost double in size over the next decade (Reference 11).
As far as alliances are concerned, LLCs are usually independent newer, low-cost non-network operators, which forge international relationships but in a more tactical and less strategic manner (Reference 12). It is interesting though that several of the established airlines (e.g. Lufthansa with “Germanwings” per Reference13) have already started to push onto the market of discount prices with their own low-cost brands.
7.CONCLUSIONS AND FUTURE TRENDS
The Greek industry of low-cost air services is a growing business. Greece does not have an extensive air transport network,as other countries especially in West Europe, and the main reason for which the airlines invest in Greece is due to the tourism during summertime. The interest of Ryanair and EasyJet in the Greek market toned up the local industry and contributed to the increase of the touristic movement to and from the country.
The future trends show that the lines between budget airlines and legacy carriers are no longer clear cut. Both traditional and low cost carriers make movements towards the direction of the rival. Ryanair has recently launched "business plus" products, EasyJet introduced a more flexible fare in 2010 to target the corporate travel markets, both of them have verged corporate travel agents and global distribution channels. In their turn, legacy carriers -such as British Airways- commenced to offer cheaper hand luggage-only fares (Reference 14).
In the light of the above future trends, LLCs in Greece have to follow the needs of the overall industry trying to differentiate among the carriers to create unique customer value for their brand while keeping the price low. Increasing demand from business travelers, makes it necessary for LLCs to cater to passengers needs for flexibility and productivity, to provide routes from major airports with often time schedules. Taking these thoughts into account, EasyJet seems to be the LLC which is best prepared since itenjoys better connectivity with major airport hubs (as far as departures towards Greece are concerned since domestic infrastructure currently allows solely one airport per city).
8.REFERENCES
[1] (article byAl.Kassimi dated 10.5.14)
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(articleby S. Gordon and J. Wild in London dated 22.6.14)
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[14] (article by N. Thomas dated 27.8.14)
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