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A strategic analysis of the European airline industry applying the Porter business model

A strategic analysis of the European airline industry applying the Porter business model

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  • 1. Di Nola Marianna Moroni Laura Karbay Koray Victorova Ksenia - Client Market - Profitability - Strategic Groups - Case Study - Client Market - Profitability - Strategic Groups - Case Study Airline Industry in Europe Business Strategy June, 9 2014
  • 2. Airline Industry in Europe: FSCs and LCCs Full Service Carriers • Point to Point&Connection • Small&Large Airports • Slow Turnaround • High Ground Times • High Frequencies • Service on Board • Gds&Basic or No Direct Sales • Strong Cooperation With Travel Agencies • Strong Targeted Sales • Fares for Each Target Group • Large Employee Structure & Offices Low Cost Carriers • Point to Point Network • Small Airports • Quick Turnaround • High Block Hours • No Frills on Board • Direct Sales • No Cooperation With Travel Agencies • No Target Differantation • One Type Fare • No Direct Employees • No Office
  • 3. *AerLingus, AF-KLM, Airberlin, Alitalia, easyJet, Finnair, IAG, Lufthansa Group, Norwegian, Ryanair, SAS, Turkish Airlines, Vueling Airlines. 13 major European airlines* 2012: Financial and Operating Statistics EUR million 2011 2012 % change Revenue 100,528 108,552 8.0% Operating profit 2,002 1,662 -17.0% Operating margin % 2.0 1.5 -0.5 Fuel cost 25,444 30,260 18.9% Fuel as % of revenues 25.3 27.9 2.6 Ex fuel cost 69,596 72,916 4.8% Total costs 98,526 106,889 8.5% Net profit 243 69 -71.8% Operating 2011 2012 % change ASK bn 1,235 1,274 3.2% RPK bn 978 1,026 4.9% Pax m 521 546 4.7% Load Factor % 79.2 80.6 1.3 Average sector km 1,877 1,881 0.2% RASK EUR cent 8.14 8.52 4.7% CASK EUR cent 7.98 8.39 5.2% CASK ex fuel EUR cent 5.87 5.94 1.3% Fuel CASK EUR cent 2.14 2.47 15.0%
  • 4. •*easyJet, Norwegian, Ryanair, Vueling Airlines. Source: CAPA (Analysis of Company Financial Statements). 4 major European LCCs* 2012: Financial and Operating Statistics EUR million 2011 2012 % change Revenue 10,723 12,346 15.1% Operating profit 1,047 1,174 12.2% Operating margin % 9.8 9.5 -0.3 Fuel cost 3,299 4,130 25.2% Fuel as % of revenues 30.8 33.4 2.7 Ex fuel cost 6,377 7,042 10.4% Total costs 9,676 11,172 15.5% Net profit 823 1,015 23.3% Operating 2011 2012 % change ASK bn 221 237 7.0% RPK bn 182 198 8.3% Pax m 158 171 8.0% Load Factor % 82.5 83.5 0.9 Average sector km 1,155 1,158 0.3% RASK EUR cent 4.85 5.22 7.6% CASK EUR cent 4.38 4.72 7.9% CASK ex fuel EUR cent 4.01 4.00 -0.4% Fuel CASK EUR cent 2.08 2.34 12.9%
  • 5. Airline Financial Outlook Strengthens Forecast Drivers Regional Variation: Europe Increasing regulatory and tax burdens, Some Governments are backtracking on deregulationRisks IATA: $12,9B Global Net Profit Expected in 2013 $19,7B Global Net Profit Expected in 2014 Lower jet fuel prices, Increasing efficiency (joint ventures), Increasing Demand (5%-6% range), Increasing Ancillary Revenues Net Profit 2013: $1,7B Net Profit 2014: $3,2B
  • 6. The Industry: Porter’s 5 Forces #1 Bargaining Power of Suppliers High • Aircraft Manufacturers have all the power; • Labor is highly unionized; • Airports = local monopolies; • High Switching Costs; • Low concentration of main suppliers; • Airport services concentrated in a small number. #2 Bargaining Power of Buyers/Channels High • Buyers are fragmented; • Air travel is perceived as standardized product; • Low switching costs; • Quite price sensitive; • Channels are highly concentrated; • Price transparency.
  • 7. #3 Threat of New Entrants High • Limited incumbency advantages; • Low switching costs; • Easy access to distribution channels; • Demand-side benefits. #4 Threat of Substitutes Medium-High • Rising number of people who can afford air travel • Fast technology development • Fast trains compete on short distances • Travel can be delayed, limited • Environmental issues #5 Competitors Rivalry High • Rapid growth + many direct/indirect competitors; • Perishable product; • Limited differentiation; • High costs/Low margins; • Limited economies of scale; • Significant exit barriers;
  • 8. Industry Suppliers Substitutes Buyers Entrants Attractive or unattractive Industry?
  • 9. Industry Strategic Groups European Airline Companies Different strategic dimensions: - technological leadership - product quality - pricing policies - distribution channels - customer service Help Identify Barriers to mobility that protect a group from attacks by other groups Assess Competitive position, future directions of firms’ strategy
  • 10. 0 1 2 3 4 5 12345 RyanAir easyJet Virgin Atlantic • Flybe British European • British Airways Lufthansa Aer Lingus ValueforMoney Catering Service Bad 1 Poor 2 Average 3 Good 4 Excellent 5 IndexStrategic Groups Map
  • 11. !!!! Best Worst …in Addition to the Value for Money… Other Factors
  • 12. The «Entrepreneurial Formula» Framework •British Airways •Easy Jet •Aer Lingus Competitive System •Upper Class •Premium Economy •Economy Products and Services •Focus on business and leisure markets •"To grow a profitable airline, that people love to fly with and where people love to work." Project Stakeholders Organizational Structure - Economic Forces - Social Forces - Communities - Employees Deliver Brand Value - Customers Enjoy Brand Value - Brand Value - People Oriented Structure - Unorthodoxically Centralized Structure No formal structure for the organization management Long term direction for the business and financial control remains centralized with the CEO and his team.
  • 13. The «Basic Strategy» Framework Cost Leadership Differentiation Focus Source of Competitve Advantage Competitive Scope Industry-wide Single Segment Tangible & Intangible
  • 14. The Competitive Scope
  • 15. The The Company’s Performance (FY2013) • + 4,3%Revenues • + 1,8%Capacity • + 5,3% Load Factor Costs Fuel Costs Employees Costs + 6,1% 2013 = pre-tax loss of 51 GBPmln 2012 = pre-tax loss of 99 GBPmln Losses in Decrease but Cost Cutting Efforts Neded
  • 16. Duopoly on domestic routes to Heathrow shared with BA; Increased Revenues and Load Factor (also in upper classes); However, in FY2014… P.P. > E.C. Incomplete differentiation advantage Differentiation advantage No differentiation advantage Vulnerable differentiation advantage «A great brand in need of a greater finanacial discipline» Source: CAPA 2 Year Recovery Program CEO: «Our strategy has been to focus on network, alliances and managing our cost base in a way which has not impacted the customers. For example, use of a new fuel management system delivered savings of £8mln in a single year.»
  • 17. Di Nola Marianna Moroni Laura Karbay Koray Victorova Ksenia THANK YOU FOR YOUR ATTENTION!