Informing a competitive strategy on considering establishment of a New Airline – A case of the African Market
By Lubinda Mufalo Sakanga
Some Layman Facts
1. National airlines are a pride to their respective governments.
2. Most African governments aspire to have and run their own airlines.
3. For the past 25 years, No National Airline has made a profit from operations.
4. Most SADC regional flights barely fill 50 percent of their seats per flight.
5. Most African airlines dictate that all government officials from their country, use their airline.
6. Most African governments assume that bigger and modern airports attract aviation passengers.
7. International airports floor space rentals to (duty free) shops make good revenue if they attract international brands as occupants. This requires attracting the international elite to fly through these airports.
8. Operational costs of airlines are complex and multiple, they cover headquarters and satellite/agent costs, waiting and taxing costs, fuel and maintenance costs, in-flight costs.
9. National airlines encourage tourism but, real and strategic investment in tourism yields the demand for national airlines not vice versa.
10. National airlines operating domestic and international flights crowd out domestic air private airlines. Basic Market Analysis Using Michael Porter’s (5) Forces Model
1. Competitive rivalry
This force examines how intense the competition currently is in the marketplace, which is determined by the number of existing competitors and what each is capable of doing. Rivalry competition is high when there are just a few businesses equally selling a product or service, when the industry is growing and when consumers can easily switch to a competitor's offering for little cost. When rivalry competition is high, advertising and price wars can ensue, which can hurt a business's bottom line.
1.1 Identify the market leaders: Say you have 2 dominant players in Africa AEPX Airlines and ASAX Airlines.
1.2 They influence ticket prices by offering services in addition to flights that make their airlines marketable. What are these?
1.3 What are their economic variables for them to retain price competitiveness? 1.4 Which routes do they have dominance and why? 1.5 How do they cover their operational losses?
2. Bargaining power of suppliers
This force analyzes how much power a business's supplier has and how much control it has over the potential to raise its prices, which, in turn, would lower a business's profitability. In addition, it looks at the number of suppliers available. The fewer there are, the more power they have. Businesses are in a better position when there are a multitude of suppliers.
2.1 Who is supplying the fuel for the Dominant airlines’ planes and at what price? Can they supply our airline at the same price and/or better terms?
2.2 Who is supplying our pilots and crew? International flights means international competences too. For pilots, ZERO compromise on competence is a must, especially if the airline is to retain its customers - the service they get does count.
2.3 Who is supplying in-flight services-food, beverages, magazines? A compromise on quality of food served could attract law suits. What is the cost for this? Do you have them locally or are they internationally sourced?
2.4 Who supply’s the airline stationary and e-media support services?
2.5 Who is and where are we servicing our aircrafts from? What is the cost? Is it sustainable?
3. Bargaining power of customers
This force looks at the power of the consumer to affect pricing and quality. Consumers tend to exert more power when there aren't many of them, but lots of sellers, as well as when it is easy to switch from one business's products or services to another. Buying power is low when consumers purchase products in small amounts and the seller's product is very different from any of its competitors.
3.1 Have we identified our customers and their respective profiles?
3.2 What incentives are being offered to these customers to choose to fly on the new airline as opposed to the dominant ones with a ‘reputation’ already?
3.3 How do we make the airline tickets customer centric on-line?
3.4 How do you capture international clients as opposed to domestic ones, so that you avoid flying back with barely any customers? How do you cushion against huge parking charges?
3.5 Do we have a guaranteed minimum number of customers to ensure going concern of the airline? Do we in addition have some non - aeronautic revenues to ensure the airline breaks even? How revenue diversified is the airline?
4. Threat of new entrants
This force examines how easy or difficult it is for competitors to join the marketplace in the industry being examined. The easier it is for a competitor to join the marketplace, the greater the risk of a business's market share being depleted. Barriers to entry include absolute cost advantages, access to inputs, economies of scale and well-recognized brands.
4.1 For AEPX and ASAX Airlines, the opening of any new national airline eats into their market share. Considering their many and multiple regional routes, once a new airline introduces a direct flight between two capitals ( international airports) it means they either cancel that route from their products or they partner and share the revenue with the new airline or they keep the route and compete with the new entrants thus sharing the few customers available of course relying on their already existing strong reputation to help them retain their customers.
4.2 As a new entrant, what is your competitive edge for entry into the market?