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Bm045 3-3-smgt tp021569 3rd question Document Transcript

  • 1. BM045-3.5-3 TP021569 Executive SummaryThe main objective of this assignment is to answer the 3rd question where by the given part A,part B and part C which refers to the Low-Cost Carriers industry in India. The part A disccussabout the Critical Success factors of LCCs player globally. As for such, in this assignment, Ihave used WestJet and Air Asia as examples. WestJet has been using their 7 domain ofattractiveness opportunities model, sustainable advantage on corporate culture and low faremodel whilst Air Asia has been using absolute cost advantage model comparing to Ryanair.More case studies of LCCs have also been given in the appendix of the end of assignment.In the part B, I have discussed about the performance of LCCs in India on macro development,costing and pricing and diversification, also employee shortage, fuel prises arise, low regionalconnectivity, gaps in infrastructure, declining yields high input costs are the reasons behindthe failure of LCCs in the country.In part C, I have suggested the strategic options available to the LCCs in India which prior toeconomically viable. There are basically restructuring or turnaround strategy, competitiveticket price against traditional full service airline, flying out of secondary airport, making thetravel distance short and enforce political advantages.In conclude for this assignment, I have suggested for Indian LCCs to revise strategies done byothers and adopt the needed in order to remain sustainable advantage in the industry. 1
  • 2. BM045-3.5-3 TP021569 Table of Contents No Content Page Number 1 a) Critical Success Factors of LCC player globally 3-5 2 b) Performance of LCCs in India and the reasons behind the 6-9 failure of LCCs in the country 3 c) Strategic Options to make Indian LCCs operations 10-12 economically viable 4 Conclusion 5 Reference 13 6 Appendix 13 2
  • 3. BM045-3.5-3 TP021569 a) Critical Success Factors of LCC player globallyCritical Success Factors of WestJet AirlinesWestJet Airlines is a Canada’s leading airline and the founders are Clive Beddoe, TimMorgan, Donald Bell and Mark Hill- a group of entrepreneurs who embarked with the ideason creating a low cost model airline following the practices of Southwest airlines. WestJet’sjourney started in the year 1996 and there are many critical success factors contributed by thisairline.In the beginning, WestJet has adopted the business model namely “7 domains of attractiveopportunities” which helped them to search for market attractiveness. From the model, theyhave found the market results of demand buyers who would consider on cheap travellingoptions when they offer lower pricing for air fare to purchase. They started on targeting thepassenger who has the purpose on visiting friends and family and then business travellers innorth America and later global travellers.Sustainable advantage would be one of their success factors which give additional corporateculture of bringing out WestJet having the mission to provide extra ordinary environment tofly in. Also, WestJet has value chain of connecting up and down which had made their staffs,owners to interact directly with the customers and clients, and empowering them somenecessary authorities on exercising out for some decision making which allows enjoyableexperience. Thus, it becomes the vital role of WestJet’s ability in executing the criticalsuccess factors.From the interviews with WestJet’s staff, the Times business magazine had shown that thereare 3 main critical success factors of the airline- the staffs, the customers or clients, and thelogistics.WestJet put on the message on “Employees are also the Owners” which embarks worldwidecorporate. Also, having the vision and mission- “The entire environment is conducive tobringing out the best in people, it is the culture that creates the passion to succeed,” said CliveBeddoe, previous CEO of WestJet Airlines in the organisation management culture believingif employees are happy, the customers will be too, and keeping customers happy means returnon investment for the investors. 3
  • 4. BM045-3.5-3 TP021569.Furthermore, Low Fare model is another crucial success factor for WestJet to capture andmaintain loyal customers. From the starting of the flight service, WestJet founders realisedthat it is an opportunity to satisfy the need of Western Canada population for making the airtravel affordable and sufficient service. The success factors of the Low Fare model practisedby WestJet are Lower staff cost which their Pilot salaries are 75% of the industry averagewhere staff salaries are 95% of industry median. The employees are staying with thembecause of their profit sharing model. WestJet uses 75 employees to support one of its aircraftwhere, its competition Air Canada uses 180. Also, Maintenance and training costs are low forWestJet because they are using one type of airplanes which is Boeing 737. As a resultstocking cost of parts and training employees are significantly lower than that of itscompetition Air Canada. Continued by implemented direct consumer phone bookings andelectronic ticketing system. This also includes online booking, self-checking at kiosks andonline check in. Ticketing costs and distribution overhead is lower as a result of this. Last butnot least, Efficient Flight schedule and service model. They use one destination to anotherdestination model rather than a web and spokes model. Higher infrastructure and logisticalcosts are involved with web and spokes model which accumulates people in hub cities to getthem to the spokes, which are smaller destinations. WestJet’s destination one to destinationtwo helps them keep the cost lower which in turns helps them keeping the price of ticketslower for its customers.Sources from: Muhammad Afruzur Rahman, 4 March 2009, WestJet Airlines: CriticalSuccess Factors – From Marketing Point of View, available from:http://www.seriousopinion.com/westjet-airlines-critical-success-factors/Critical Success Factors of Air Asia airlineAir Asia is the second Malaysian National Airline which gave different type of service in linethat the nations aspirations to benefit all the citizens and worldwide travellers. The servicetakes the form is no frills with low airfares flight offering, 40%-60% lower than what iscurrently offered in this part of Asia. Their vision is "Now Everyone Can Fly" and theirmission is to provide Affordable Airfares without any compromise to Flight Safety Standards. 4
  • 5. BM045-3.5-3 TP021569The story of emergence of AirAsia is similar to Ryanair, since both carriers underwent aremarkable transformation from a money-losing regional operator to a profitable, low costairline.Practically, Air Asia is using Absolute Cost Advantage where there is Low cost per averageseat kilometre which AirAsia focused on ensuring a competitive cost structure as its mainbusiness strategy. It has been able to achieve a cost per average seat kilometer (ASK) of 2.5cents, half that of Malaysia Airlines and Ryanair and a third that of EasyJet. AirAsia can leasethe B737-300s aircraft at a very competitive market rates due to the harsh global marketconditions for the second-hand aircrafts because of the September 11th event in 2001. On theother hand, the operating cost of the company is also dropped drastically.Also, Low distribution cost that Air Asia focus on Internet bookings and ticketless travelallowed it to lower the distribution cost which also claim for corporate social responsibility tothe society and environment. Next is with Attractive ticket price, providing the average farebeing 40-60 % lower than its full-service competitor, Air Asia has been able to achieve strongmarket stimulation in the domestic Malaysian air market (Thomas 2003). For instance, thefare for the trip from Kuala Lumpur to Penang on Air Asia starts from 39 ringgit. Comparingto trip by bus charge 40 ringgit and 80 ringgit by car. The effect of attractive low fare is moretravellers switching from bus to air, similar case as Ryanair in Europe.Last but not least is with Good Management Team that brings up Air Asia value propositionwhich is more sophisticated than Ryanair placing equal emphasis on brand reputation andcustomer service/people management, by a senior advisor to Ais Asia’s top management team.AirAsia pursue a Ryanair operational strategy, Southwest people strategy and an Easyjetbranding strategy.Note: More examples of LCCs critical success factors case study refer to Appendix 5
  • 6. BM045-3.5-3 TP021569 b) Performance of LCCs in India and the reasons behind the failure of LCCs in the countryPerformance of LCC in IndiaGlobally there are macro developments taking place rapidly in LCC industry but there areuncertainties prevailing too raising questions such as, Will the trend continue to increasethrough the horizontal and vertical forms on integration? What will be the impact ofdeploying capacity through ever-larger aircraft such as A380? What timeframe are carrierslooking at in their search for new collaborative structures? How are the other market playersi.e. the non-carriers likely to build their strategies? Will some carrier become powerful toimpose other players including airport authorities and ground handling agents? With theseuncertainties one can construe that the players would be anticipating one other’s moves anddevising proactive strategies.Ability of the Carrier to benefit from economies of scale and economies of scope is anothercritical factor. When the carrier operates in hub or base in the airport, it would act as astructural entry barrier to other players and new entrants. Sales and marketing costs, customerservice facilities, and flight cancellation costs would reduce in this case. Moreover, with theincrease in the size of the base, the flexibility to switch slots, to switch crew staff from oneroute to another and to adjust the connections with the fluctuation in demand would increase.Large scale carriers would benefit from the negotiation power they have to get attractive timeslots and other services from the airport. Hence, the advantages would increase with theincrease in size of the hub or base and it would become an important factor when companiescompete for merger or alliance with an incumbent having such a base or hub. In India, SpiceJet which had its hub in Mumbai is planning to open hub in Chennai in South and in Gujaratto realize the importance of economies of scale and scope. Jet Airways which started itsoperations in 1993 has its main hub in Mumbai with secondary hubs at Chennai, Ahmedabad,Delhi, Bengaluru, Pune and Kolkatta.Like costing and pricing, the competition among players invariably comes down to anothercritical factor which is the available capacity. The players increase the capacity by introducingmore routes and by choosing airports that are congestion free and less of bottlenecks. Theseapply to both in the air and in the ground level. Congestion incurs costs and can lead theplayer to compromise its competitive advantage. The number of aircrafts and the seating 6
  • 7. BM045-3.5-3 TP021569capacity would be advantageous to the incumbent especially in busy routes where the newentrant would be required to incur huge fixed costs. In India, Spice jet which began its servicein 2005 has firmed up its strategic expansion plan with an order of 30 Boeing 737-800 aircraftduring the month of September 2010 with the expected deliveries of these aircraftcommencing in Jan 2014 through till 2019. Indigo which began its services in 2006, hasstarted its preparation for international expansion. In January 2011, Indigo signed a majorprocurement deal with Airbus to buy 180 A320s in one of the largest ever deals of its kind.Diversification is identified as another critical factor while designing strategies for Airlineplayers. Air freight which was once considered as a separate product has now become anexclusive product of the Airline players. In some cases the freight helps the carriers to crossfinance the lower passenger fares. Diversification has also led the airlines by providing accessto products such as hotel and/or restaurants booking and shops in the airports by formingstrategic alliances with these groups. One such examples of diversification is IndiGo Airlinesoffering a diverse array of packages for its passengers: Holiday packages, business packages,religious packages, Gods Own Country, hill station trips and Goas sun & sand.Sources from: ARIVAZHAGAN G D, PGP BATCH OF 2012, INDIAN INSTITUTE OFMANAGEMENT AHMEDABAD (IIM AFailure reasons of LCCs in IndiaThe growth in the aviation sector and capacity expansion by carriers has posed challenges toaviation industry on several fronts. These include shortage of workers and professionals,safety concerns, declining returns and the lack of accompanying capacity and infrastructure.Moreover, stiff competition and rising fuel costs are also negatively impacting the industry.First of all is the Employee shortage which it is clearly a shortage of trained and skilledmanpower in the LCCs sector as a consequence of which there is cut-throat competition foremployees and in return, is driving wages to unsustainable levels. Moreover, the industry isunable to retain talented employees.Secondly is the Regional connectivity: One of the biggest challenges facing the aviationsector in India is to be able to provide regional connectivity. What is hampering the growth ofregional connectivity is the lack of airports. 7
  • 8. BM045-3.5-3 TP021569Thirdly is the Rising fuel prices. As fuel prices have climbed, the inverse Rising fuel pricesand its effect on passenger growth. The increase in the international crude oil price has forcedmany domestic players in India to go ahead with a hike in their airfares since the beginning ofJanuary 2011. Although, the percentage of increase in the fares is not very significant, itshows the latest trend in low-cost flying. The only means for these airlines to sustain growthand increase profits is by increasing their tariffs. Although there will be lots of criticisms fromvarious groups on this, such an increase in the ticket fares will not have a drastic effect on thevolume of passengers. Compared to the time taken to reach from point A to point B in Indiaby train or other means, the number of people who will continue to use this means oftransportation will only increase as years pass by. Indian travellers are slowly getting used tothe fast paced and comfortable travelling by air and they are ready to spend on this.Main players in India’s domestic aviation: Kingfisher airline, Jet airways, Indigo airlines,GoAir airlines, Jagson airlines, Spicejet Airlines, Jetlite airlines, Paramount airways,Kingfisher Red (Air Deccan) and Indian airlines.Other than that, the declining yields LCCs in India and other entrants together now commanda market share of around 46%. Legacy carriers are being forced to match LCC fares, during atime of escalating costs. Increasing growth prospects have attracted & are likely to attractmore players, which will lead to more competition. All this has resulted in lower returns forall operators in the country.Also, the huge Gaps in infrastructure in India, Airport and air traffic control (ATC)infrastructure is inadequate to support growth. While a start has been made to upgrade theinfrastructure, the results will be visible only after 2 - 3 years. It is also a matter of concernthat the trunk routes, at present, are not fully exploited. One of the reasons for inability torealize the full potential of the trunk routes is the lack of genuine competition. The entry ofnew players would ensure that air fares are brought to realistic levels, as it will lead to bettercost and revenue management, increased productivity and better services. This in turn wouldstimulate demand and lead to growth.Into this, any form of aviation industry work need high input costs. Apart from the above-mentioned factors, the input costs are also high. Some of the reasons for high input costs are 8
  • 9. BM045-3.5-3 TP021569withholding tax on interest repayments on foreign currency loans for aircraft acquisition.Increasing manpower costs due to shortage of technical personnel.All of the mentioned are the factors of LCCs failure in India.Sources from: Civil Aviation, 2009, available from: http://www.civilaviation.nic.in/,Economic Times, Indian Times, 2010, available from:http://economictimes.indiatimes.com/news/international-business/airbus-lands-record-16-bn-indigo-airline-order/articleshow/7263627.cms, Ibef.org, Aviation Industry, 2011,http://www.ibef.org/industry/aviation.aspx, Deccan Herald.com, 2011, Kingfisher HikesAirfares, http://www.deccanherald.com/content/125297/jet-kingfisher-hike-airfares-friday.html Rediff.com, 2010, Why Indian Aviation grew by 400 pc?,http://www.rediff.com/business/slide-show/slide-show-1-why-indian-aviation-grew-by-400-pc/20101220.htm 9
  • 10. BM045-3.5-3 TP021569 c) Strategic Options to make Indian LCCs operations economically viableRe-structuring or Turnaround strategyFirst of all, the LCCs in has to restructure their operation and management style. Best is tohave Cost Saving strategy to reduce the unwanted waste or expenses such in Reduction inOperational Cost which LCCs in India have to strive to achieve the lowest as possible pricefor their products and services. To be reminded, Low prices can’t sustain unless the companyitself maximises its operational efficiency. Meaning that is to fully use the company resourcesefficiently which this can be done by having Service savings – the no frills cabin service andextensive use of outsourcing including NO drinks, NO food, NO headphones, NO newspapers,NO movies, NO VIP lounges, NO expensive offices, NO mileage programs, NO seatallocation, NO children’s fares, NO paper tickets for Electronic tickets only, NO connectingflights including all flight-legs must be booked independently. Operational savings which ispoint-to-point services and uniform fleet. Overhead savings refer to internet sales andstreamlined bureaucracy that can compare the operational cost in terms of costs per availableseat kilometer (ASK), a measure of the running cost of the airline.Competitive Ticket price against traditional full-service airlineLow cost airlines begins with two initial cost advantages arising from the very nature of theiroperation: higher seating density and higher daily aircraft utilization. By removing businessclass and reconfiguring their aircraft, low cost airlines can increase the number of seats ontheir aircraft. Seat pitch of a low cost airline is usually 28 inches, compared to a traditionalconventional economy class pitch with 32 inches. Doganis (2001) calculates that should beable to operate at seat cost that are only 40-50 % those of mainline rival. Combining the loadfactor benefit and beneficial distribution cost, low cost airline’s cost per passenger can reduceprice by one-third of conventional airline. With this, it can also create customer loyaltytowards their price against services in a longer term.Flying out of secondary airportsMany low-cost airlines keep expenses down by flying out of secondary airports, avoidingmajor hubs where take-off and landing fees are much higher while still getting passengersclose enough to their destinations. 10
  • 11. BM045-3.5-3 TP021569Making the travel distance shortAs the routes offered by low cost airlines are mainly short, domestic routes which may onlytake one to two hours, travellers might be fine with no amenities on flights. Since LCCs aretravelling between the regions in India, they should make the journey shorter and fasterbecause they do not need to deal with a lot of other issues such as custody, custom,immigrants and so on.Merging or Business AlliancesWith right choice of merging with strategic business alliances will help to recapitalise thecompany investment as increase in modal to sustain the market share. For LCCs in India,basically they can tie-up with Corporate by offering them benefits to ensure a longer run ofthe business such corporate would always have travelling needs for their employee.Enforce Political advantagesLCCs in India should establishe a political join venture with their government like Air Asia.For example, Thai Air Asia with Shin Corp. Shin Corp. is owned by the family of Thailand’sprime minister, Thaksin Shinawatra, and about 900 million baht will be invested in Thai AirAsia over a five-year period. Shin Corp. has financial strength, synergy in informationtechnology and telecommunications, which support Air Asia to grow in Thailand. Air Asiawith its politically powerful backer can well grow up to bite, and therefore it should enforcesuch political advantages in order to extend the growth in Thailand. Thus, LCCs in India canpresume the same established example as given by Air Asia 11
  • 12. BM045-3.5-3 TP021569 ConclusionThe airline industry is a dynamic industry and every player in the field have been anticipatingone another’s moves and devising strategies accordingly. With the success of the strategiesdevised by the management, Indigo, an unlisted company has been performing well and waseven conferred with Best Domestic Low Cost Carrier award in 2008. At the end of the dayhow big the airline company does not matter when it comes to devising the strategy for theairlines to remain competitive.Every business sector has a price leader, who however, can be challenged by new comersintroducing artificial low cost to gain market share. This practice is not sustainable over thelong run. WestJet’s critics were critical about this factor when they first started their journey.The truly successful businesses are those who have internal and superior low cost practice andstrategy in place. West Jet seems to do just that to save money at the end for its customers.From all of these, the LCCs in India should learn from the business strategy posted by eachand every other LCCs in Asia and the World to keep their company sustainable in the aviationmarket. 12
  • 13. BM045-3.5-3 TP021569 ReferencesArivazhagan G D, PGP Batch of 2012, Indian Institue of Management Ahmedabad IIMACivil Aviation, 2009, available from: http://www.civilaviation.nic.in/,Deccan Herald.com, 2011, Kingfisher Hikes Airfares,http://www.deccanherald.com/content/125297/jet-kingfisher-hike-airfares-friday.htm,Economic Times, Indian Times, 2010, available from:http://economictimes.indiatimes.com/news/international-business/airbus-lands-record-16-bn-indigo-airline-order/articleshow/7263627.cms,Ibef.org, Aviation Industry, 2011, http://www.ibef.org/industry/aviation.aspx,Rediff.com, 2010, Why Indian Aviation grew by 400 pc?,http://www.rediff.com/business/slide-show/slide-show-1-why-indian-aviation-grew-by-400-pc/20101220.htm Appendix 13