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Performing Strategic AnalysisDr Frankie O’ConnellIstanbul Technical UniversityAir Transportation Management, MSc. ProgramAirline Business Models and Strategic ManagementModule #39 December 2016

Performing Strategic AnalysisDr Frankie O’ConnellTurkish Airlines Executive MScDecember 2016

Outline Current Traffic and Cargo Indicators Porters Diamond (achieving competitive advantage in home markets) Porter’s five forces for business strategy (Airline operating environmentis also influenced by the Macro (PESTEL) and Micro environment) An examination of an airlines strategic capabilities (SWOT and TOWS) Strategic tools for decision making (BCG and Ansoff) Conclusion

Total International Passenger Traffic Growth by RegionMay 2016 vs May 0%Source: IATA Air Passenger Market Analysis

Passenger and Air Freight trends2007 - 2016Sources: IATA and ICAO

Porter’s DiamondPorter identifies 4 attributes in a company’s home market which will promote orimpede a firms ability to achieve competitive advantage in global marketsStrategy,Structure and RivalryDemandConditionsFactorConditionsAdvantage on a national level: Ireland corporate tax 12.5% France corporate tax 33.3% Japan has highest no. ofengineering graduates percapita (leader in electronics)Rivalry pressurises the industryto improve and innovateRelated andSupporting IndustriesInnovation triggers demand: Some airports (e.g. Malaysiaand Bordeaux) have opened lowcost terminals which attracteddifferent passenger segmentationGermany well known for Engineering:Thus Lufthansa Technik have taken advantageby creating 4 major related units: Maintenance,Source: Adapted from Porteroverhaul, engines and landing gear

The Operating Environment PESTEL (important) See earlier presentation Micro Environment (important) . See earlier presentation Porters 5 Forces (important) Porters Value Chain Strategic Choices

Porter’s five force framework It was developed as a way of accessing the profit potential of a specific industry Competitive rivalry is the degree to which companies respond to competitionPotentialentrantsThreat uyersBargainingpowerThreat ofsubstitutesSubstitutesSource: Porter, Harvard Business School

1 .Potential EntrantsNetwork Airlines for example will need to access the threat posed by entrantsFrom: Low cost carriers All business class airlines Long haul low cost airlines Regional airlines Charter airlines Cargo carriers Middle East carriersThe level of threat posed by new entrants will be affected by:Legislative framework of market access (Deregulation / Open Skies)Ability to gain access to airport slotsCapital requirementsMarket share, Network and Brand strength of domiciled incumbentEconomies of scale and scope (Scale:Cost per unit falls as output increases. Scope: costadvantages that result when firms provide a variety of products rather than specialising in a single outputAccess to distribution channels

Emirates Weekly Departures from Dubai – Relentless PushWeekly frequencies (1 – 7th August)2000200420092012India2545152171184 (now allowed to operate A380)UK356410511205698122149206 (Problems in Nigeria, Kenya)Germany 1435496363 .Germany fighting back274963 . Big shift to USAfricaUS002015Source: OAG

Air Asia XLong Haul Low Cost2015 dataAir Asia X Current long-haul Currently operates 17 A330sAir Asia X aircraft on order 71 A330 10 A350s

Air Asia X is strong out of MalaysiaJuly 2015 to July 2016 dataKuala Lumpar - MelbourneKuala Lumpur - SydneyKuala Lumpur - JeddahKuala Lumpur - Soeul (Incheon)Kuala Lumpur - Gold CoastDeparting seats12 month period July 2015 to July 2016Source: O’Connell, OAG analysis November 2016

Air Asia X Network 2012 and 2016Air Asia X from KL – 2016Air Asia X from KL – 2012Will Air Asia X return to Europe again? Istanbul BarcelonaAir Asia X will return to Europe this October 2016 More to come!!Air Asia X also has subsidiaries: Indonesia AirAsia X and Thai AirAsia XAspirations to add Air Asia X outposts in India & Japan and operate to the USA

Snapshot of the long haul routes operated by today’s Long Haul LCCsLCC / LCC GroupEurowingsNorwegianJetstar AirwaysAir Canada rougeAzulCebu PacificWestJetScootAirAsia XLongest RouteCologne - PhuketCopenhagen - Los AngelesMelbourne-HonoluluToronto - AthensSao Paulo - LisbonManila - RiyadhVancouver - LondonSingapore - JeddahKuala Lumpur - JeddahFlight Time12 hours10.5 hours10 hours9.5 hours10 hours10 hours10 hours9 hours9.5 hoursAircraft 7Seat Configuration21B, 48 PE, 261E32PE, 259E21PE, 314E24PE, 35E , 221E21B, 100E , 151E436E with 30' pitch24PE, 238E35B, 45E , 295E12B, 365E Scoot will operate to Athens in 2017 Talks circulating that JetStar may also operate flights to Europe

2 .Buyer Power The buyer market is comprised of all the firms or individuals that purchase theproduct or service. In the airline industry there are a large number of buyers (passengers) anda specific number of airlines. Nevertheless, Alliances (reciprocal FFP) hasreduced this choice. However on many markets there are lots of LCCswhich increases the buyer power of the consumers. Many carriers on theN. Atlantic operate through 5th freedom traffic rights like SIA, ANZ, EK, PIA, KUCustomer buying power is likely to be high due to some of the following conditions Customers can easily switch (low switching costs) between airlines as the farebetween airlines has become highly transparent as well as the in-flight products Corporations (e.g. IBM, Shell Oil) use bargaining power to negotiate discounts forvolume. For example Lufthansa’s corporate contracts accounts for around 38.6%of its total passenger revenues. For Alitalia its 25%

The Buying power of CorporatesShell Oil spends around 500 million on corporate travel each yearwhich includes airlines, hotels, ground transport, food & beverage

3 .Supplier PowerThe supplier market is comprised of all the companies that provide service tothe airline industrySupplier power is likely to be high when:There is a concentration of suppliers (e.g. Airbus and Boeing)However airlines can influence aircraft prices by: purchasing during a recession;bulk purchasing; or playing one manufacturer against another.Therefore the switching costs from supplier to supplier are high as the airlines’operation are dependent on these specialised products. To switch from an allBoeing to an all Airbus fleet for example would be very costly. easyJet did thisas Airbus wanted to get into the LCC market which was dominated by Boeing 737sMonopolies or near monopolies may exist in supplier markets such as groundhandling (McKinsey), DNATA in Dubai, fuel (Air BP), catering (LSG Sky Chefs), etc

4 Threat of SubstitutesSubstitutes reduce the demand for a particular product or service as customersswitch to an alternate that provides the same end result.Business travel Video conferencing, internet, phone Surface modes (particularly high speed rail) Company concerns about their carbon footprintLeisure travel Surface modes – ferry, high speed rail (becoming a major problem for carriers) Internet, phone, facebook, twitter, instagram

High Speed Rail network in the Spanish Market

Impact of High Speed rail between Barcelona to MadridWeekly airline seat capacity (August)Number of Airline 0002003200620072008200920122015 Barcelona to Madrid high speed line was opened after 2007 Airline Traffic collapsed – fares fell to boost traffic Airline traffic continues to fallNote: Barcelona airports include: Barcelona (BCN); Girona; Reus. Only Madrid Airport (MAD) was included for Madrid.

Number of passengersPassenger traffic by Air between London and ParisAnnual airline passengers in millionsSource: UK CAA and Anna.aero

Strategic ChoicesStrategic choices are concerned with decisions about a firms future and theway that it needs to respond to the pressures of the marketplaceStrategicChoicesBusiness levelcompetitive strategy(About how to compete better) Bases of competitive strategyCorporate andInternational StrategyDirection & Planning(Decisions about the Scope of the business)(Identified through 5 categories) Product/market diversity- WIFI Sustainability of competitive International diversity & strategyadvantage- Increase traffic feed to Hub- Strong marketing campaigns- Equity investment in other carriers Strategies in hypercompetitive Creating value (achieve more returns)conditions- Selling FFPs to Banks- Develop ancillary revenues Competition vs collaboration Seeking markets with potential- African markets- Emirates & Qantas partnership Game Theory (a complete plan of action Managing the business model- Adopting analytical tools (e.g. BCG)for whatever situation might arise) )- Cargo specialisationSource: Adapted from Johnson, Scholes and Whittington - Exploring Corporate Strategy1) Retain profitablecore competencies2) Protect & Build3) Product development4) Market development- Create brand awareness5) Diversification thru:- Internal development- Mergers/acquisitions- Strategic alliances- Develop niche markets

Pursue strategies to defend/influence/exploit position Raise barriers Select suppliers with less power Build switching costs with buyers (loyalty schemes) Recognise potential substitutes Strengthen Brand Position Build Product differentiation to reduce direct rivalry

Capabilities SWOT (important) Value Innovation Analysis PUV TOWS (important)

SWOT AnalysisSWOT analysis summarises the key issues from the business environment and thestrategic capability of an organisation that are most likely to impact on strategydevelopmentThe aim is to identify the extent to which the current strengths & weaknesses arerelevant & capable of dealing with the changes occurring in the business environmentSWOT is very useful when it is used as a comparative study. For example theaverage age of Ryanair’s fleet (5.5 years) compared to BA (12.8 years) or comparethe total unit cost of BA is 0.43.6/ATK verses 0.26/ATK for EmiratesThe analysis should identify critical success factors e.g. TAP’s long haul networkto Brazil; Virgin Blue code sharing arrangements with Intl carriers; Jet Airway’ssuperior passenger service in the Indian market; Emirates hub and spoke networkof long-haul to long-haul flights; Saudi Arabian Airline Hajj flights; Korean Aircargo operations, etcIdentify around 6-7 key issues in the organisation’s environment about each attributeand be ‘specific’ rather than ‘general’ as stating ‘poor management’ (means very little)

What is the SWOT for TK?

SWOT Analysis - lwwLCCwS StrengthW WeaknesswFull ServiceOrganisationalSource: O’Connell, 2007

Product Strength Value InnovationSource: Boeing

Identifying and assessing Opportunities and ThreatsOpportunities and Threats are external and the company has little control overIt is important to analyse the marketplace at a Macro level to determine the extentof the Threats facing the industry and any potential OpportunitiesAccess or measure the impactsSources of Opportunities for carriers Untapped international markets Void left by other carriers (Failure of Malev) Unfulfilled customer needs (Pax wanting WIFI) Arrival of new technologies (e.g. 3G phones) Favourable demographic conditions Loosening of regulatory policy Acquisition of rival firms (BA Aer Lingus) Changes to internationaltrade barriers (e.g. foreign ownership - India)Sources of Threats for carriers Economic downturn High unemployment Periods of high inflation New government regulations (travel tax) Substitute products Infringing International competition Supplier has increased prices Shifts in consumers tastes away fromthe firm’s products New innovations that render existingproducts obsolete

JetBlue and Lufthansa Equity PartnershipLufthansa purchased 19% equity in Jetblue in 2008 for 309 millionSold entire stake (reduced to 15.2%) in 2015 for 503 million due to its ongoing issues: Pension contributions Pilot strikes Germanwings accident Severe competition from LCCs and Gulf CarriersThis sale enabled Lufthansa to produce a Net profit of 425 million for Q1 of 2015

JetBlue Airways Partners Largest International US gateway It brought over 10.2 million passengers to/from JFKfrom the rest of the United States & Caribbean in 2012 (PaxIS) It brought around 6.3 million passengers to/from Bostonfrom the rest of the United States & Caribbean in 2012 (PaxIS) Currently offers 78 destinations (85% in US and 15% Intl) It has 6,000 flights per week Jetblue has a valuable slot portfolio at JFK - 330 slots Its now located at the new T5 at JFK (cost 743 million) Jetblue’s low unit costs 7.2 cents CASM (ex fuel);compared to 9.1 for Delta; American Airlines is 8.8 (2014 data)JetBlue has partnerships with34 Intl carriers including:

Air Cargo WeaknessWhat’s happening here?

8009070080600705006040050300402001995 1997302005 2007Passenger Revenue2010 2012 2014 2016FCargo RevenueAir Cargo Revenues are no higher no than they were 10 years agoSource: IATA 20162000 2002US Billions (Cargo)US Billions of Dollars (Pax)Very different businessesGlobal Air Cargo vs Passenger Revenues

Rating Threats for network airlines (Short-haul)Probability of occurrenceHighLow1SeriousnessHigh- Airport charges at home base increase122Low- Major LCC sets up base inneighbouring airport34- Competing carrier sets up a new baseat domiciled base- Regional carrier that feeds domiciledcarrier dropping contract (Air Dolomiti)34- Competitor does a majoradvertising campaign in local market- Government increases tax onpassengers ticket by 2%- Competing carriers re-introducinga failed strategy

Ryanair operating to the US?Threat to Long Haul market?

TOWSTool used to enhance a companies competitivenessManage the Threats, Capitalise on Opportunities; Circumvent theWeaknesses; Make the most of the firms Strengths1)2)3)4)Internal Strengths (S)1)2)3)4)Internal Weaknesses (W)1)2)3)4)External Opportunities (O) 1)2)3)4)S-O : Max – Max strategyStrategies that use strengthsto maximise opportunitiesW – O : Min – Max strategyStrategies that minimiseweaknesses by takingadvantage of opportunitiesExternal Threats (T)S – T : Max – Min strategyStrategies that use strengthsto minimise threatsW – T : Min – Min strategyStrategies that minimiseweaknesses and avoid threats

Strategic Management Tools BCG (important) ANSOFF (important)

Boston Consulting Group Matrix AnalysisHighStarsQuestion MarksInvest for the futureInvest or DivestCash CowsDogsMarket Growth RateorMarket Attractiveness(Cash Required)Manage for cashLowHighDivestMaintainRelative Market ShareLow(Cash generated)StarsAre products (services) where a company has a market share greater than your mostrelevant (largest) competitor and where the market is growing ‘above average’. Starsrepresent an investment priority - as the market is maturing and you can maintain agreater market share than your nearest competitor – then Star becomes a ‘Cash Cow’

Boston Consulting Group Matrix AnalysisBCG is a good indicator of a company’s competitive positionStarsQuestion MarksMarket Growth RateHighAn airline is a leader in a high growthmarket.An airline in a growing marketbut has a low market shareHowever investment is still required tomaintain growth and defend theleadership positionThe airline may have to spendheavily to gain market shareAs an industry matures and its growthslows, all business units becomeeither cash cows or dogs.It will be difficult for the airline toachieve a sufficient cost reductionto offset such an investmentCash CowsDogsAn airline with a high market share ina mature marketThe need for heavy marketing issignificantly reducedLowAn airline with a low market share ina static or declining marketThese airlines burn through cash and arethe worst of all combinationsThe carrier should be able to maintainunit cost levels similar to competitorsHighMore than 11.0Relative Market ShareLess than 1Low

BCG for Emirates – Measuring its positioning in the market

Regional Growth Rates for the Middle EastMarket growth rates (RPKs)RegionMarket GrowthRate2014 – 2034Intra Middle East5.0%Middle East - Europe5.4%Middle East – N. America6.1%Middle East - Africa7.3%Middle East – S.E. Asia5.6%S.E Asia – S.E. Asia*8.9%* Highest growth rate in Boeing ForecastSource: Boeing Market Forecast, 2015

Emirates positioning in the Intra- Middle East marketThis involves using the OAG databaseIntra-Middle East data (one way)Top 7,314,82610.9%Flydubai168,926,0349.8%RegionQatar Airways118,561,6016.9%Flynas100,390,8005.8%Air Arabia88,886,9165.2%Iraqi Airways86,946,9075%Oman Air79,395,8764.6%Etihad ,724,095,791100%Total ASKsEmirates Relative positioningIntraMiddle EastWeekly Seats were calculated from 1– 7 August, 2015, includes IranEmirates(ASKs /week)187,314,826StrongestCompetitorin RegionSaudia(ASKs /week)Emirates’Relative shareSaudia359,939,3970.52

BCG Matrix for Emirates - August 2015Emirates positioning in the Intra Middle East marketMarket growth rates9.0%RegionIntra Middle East5.0%Middle East - Europe5.4%Middle East – N.AmericaMiddle East - AfricaMiddle East – S.E.Asia4.5%Intra Middle EastMarketGrowth Rate2014 – 20346.1%7.3%5.6%S.E. Asia – S.E. Asia0%3.02.01.008.9%Source: Boeing Market Forecast, 2015Emirates Relativemarket is 0.52Size of circle refers to the number of seats by Emirates in that market

Emirates positioning in the Middle East- S.E. Asia marketThis involves using the OAG databaseMiddle East – S.E. Asia data (one way)ASKs/week%Emirates333,802,13726.9%Qatar Airways277,698,47522.4%Etihad Airways176,602,22014.3%Saudia118,759,2419.6%Top AirlinesCebu Pacific50,838,9084.1%Philippine Airlines46,036,5783.7%Oman Air43,419,6933.5%Singapore Airlines16,369,0441.3%Total Middle East –1,238,831,556S.E. AsiaEmirates Relative positioningRegionEmirates(ASKs /week)Middle Eastto S.E. Asia333,802,137100%* Weekly Seats were calculated from 1– 7 August, 2015, includes IranNext Strongest Qatar Airways Emirates’Competitor(ASKs /week) Relative sharein RegionQatarAirways277,698,4751.2

BCG Matrix for Emirates – August 2015Emirates positioning in the Middle East – S.E. Asia marketMarket growth rates9.0%RegionMiddle East – S.E. AsiaIntra Middle East5.0%Middle East - Europe5.4%Middle East – N.AmericaMiddle East - AfricaMiddle East – S.E.Asia4.5%S.E. Asia – S.E. Asia0%3.02.01.00MarketGrowth Rate2014 – 20346.1%7.3%5.6%8.9%Source: Boeing Market Forecast, 2015Emirates Relativemarket is 1.2Size of circle refers to the number of seats by Emirates in that market

Emirates Global Market position from the Middle EastForming the BCG MatrixEmiratesRegionASKs/WeekNext StrongestCompetitorNext StrongestCompetitor(ASKs /week)Emirates’Relative shareIntra Middle East187,314,826Saudia359,939,3970.52Middle East – S.E. Asia333,802,137Qatar Airways277,698,4751.2Middle East - Europe911,488,149Qatar Airways404,981,5452.3Middle East - Africa358,602,695Qatar Airways129,297,2612.8Middle East – NorthAmerica463,000,934Etihad Airways210,443,6992.2Source: O‘Connell

Emirates Global positioning from the Middle marketAugust 2015 dataMarket growth rates9.0%Middle East – AfricaRegionMiddle East – S.E. Asia6.75%Middle EastN. AmericaIntra Middle EastMiddle East - EuropeMiddle East – N.AmericaMiddle East - AfricaMiddle East – S.E.Asia4.5%Intra Middle EastMiddle EastTo EuropeMarketGrowth Rate2014 – 2034S.E. Asia – S.E. Asia0%3.02.01.005.0%5.4%6.1%7.3%5.6%8.9%Source: Boeing Market Forecast, 2015What about Middle East to Europe?Source: O‘Connell

The BCG could also look like this - esMarketGrowth5%Rate(Year overYear)CargoRevenuesPassengerRevenuesRevenues fromHoliday Division.DogsRevenues fromRegional Affiliate0Revenues from 3rdparty MaintenanceCash Cows5.01.0Relative Share (Total Revenues)0Source: O’Connell

The BCG can also look like this - Indian Domestic Market arketGrowth20%Rate(Year overYear)DogsAir IndiaGoAir0KingfisherCash Cows2.0Note: Circle size is proportional to trafficJet Airways1.0Relative Market Share0Source: O’Connell

Ansoff MatrixThis is used for identifying directions for strategic developmentThe development directions are the strategic options available to a firmin terms of products and market coverage, taking into account the strategiccapability of the company and the expectations of tsNewMarket penetrationProtect/BuildProduct developmentMarket developmentDiversificationNewSource: Ansoff

Ansoff Matrix (Incumbent airlines - short haul example)Products/servicesExistingExisting- Remain the Fare Leader- Frequency- Punctuality- Connections- Primary airport- In-Flight frills- FFPs- Corporate agreements- Strong Adverting/SponsorshipMarket extension/developmentNewMarketsMarket penetration?NewProduct/service development?Diversification- Focus on niche market (good yield)- Regional affiliate ?- Low cost subsidiary ?- Charter operations (night)- Subsidiary industries (Holiday division)- ACMI operations to alleviate seasonality- Premium Economy class-Trial new things (assigned seating – LCCs)- Create a standalone Ground Handlingfacility (e.g. DNATA)

Conclusion The market is picking up – the industry could finally be entering intoan Up-cycle Competitive advantage is Key The Operating Environment for an Airline is influenced by Porters 5 forcesas well as the Macro (PESTEL) and Micro environment, which all have adirect impact on airline strategy The carriers’ strategic capabilities are a very important indicator(SWOT and TOWS) The strategic decision making tools such as BCG and Ansoff are importantanalytical tools which underpin the core competencies of a company

Thank you all very much

Porter’s Value ChainAids in differentiation and competitive advantageAn example from Emirates CateringFirm Infrastructure (General Management)SUPPORTACTIVITIESHuman Resource ManagementTechnology DevelopmentProcurementOperationsOutbound 120m buildingLogistics 5,400 employees 34 in/outbound docks Provides services Incoming Foodto 110 airlinesproducts to produce 400 variations of menu115,000 meals/day 23 special meal types 98 catering trucks Special Request (70%) Load Catering (70% for EK)st Food hot & moist Require multiple 160% ratio for 1 Class On-time Aircraft Quality controlbeverage types Assembly of table wear 4.5 ton added to terrelationshipSales &MarketingService andSupport Catering is part of Cabin crewQuality standardservice Product mix –IFE Standards Meeting CustomerExpectation Advertise 5 StarproductMarketInterrelationshipSource: Adapted from Porter - Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press

The Strength of an AirportWhy passengers and airlines choose airportsPassengers Destination of flights Image of airport Fare Frequency of service Flight availability and timings Image and reliability of the airline Airline alliance policy and FFP Duty free shopping facilities Ambiance of Airport Range and quality of shops, catering Ease of access to airport, surfaceaccess cost and/or car parking costAirlines Slot availability Network availability Airport fees & availability of discounts Other airport costs (e.g. fuel, ground handling) Competition Marketing support Range and quality of services Ease of transfer connections Maintenance facilities Environmental restrictions Curfews Ability to deal with severe weatherSource: Anne Graham, Managing Airports - An International Perspective.

SWOT is very useful when it is used as a comparative study. For example the average age of Ryanair’s fleet (5.5 years) compared to BA (12.8 years) or compare the total unit cost of BA is 0.43.6/ATK verses 0.26/ATK for Emirates The analysis should ident