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    Perfectessay essay sample_harvard_style_2 Perfectessay essay sample_harvard_style_2 Document Transcript

    • Etihad Airlines 1 A detailed analysis of Etihad Airways using Porter’s five forces and analyzing sources of competitive advantage By Name of Student [Presented to] [Name of institution] [Date]
    • Etihad Airlines 2 Contents Executive Summary.....................................................................................................................................3 Background on Etihad Airways....................................................................................................................3 Vision.......................................................................................................................................................4 Airline Industry Analysis..............................................................................................................................5 Porter’s Analysis......................................................................................................................................5 Bargaining Power of Customers...........................................................................................................5 Bargaining power of Suppliers.............................................................................................................6 Threat of new entrants........................................................................................................................7 Threat of Substitute Products..............................................................................................................9 Rivalry among Competitors...............................................................................................................10 Sources of Competitive Advantage deduced from the Porter Analysis.................................................11 Analysis of the Strengths and Weaknesses of Etihad Airways...................................................................12 Adopted Strategy of Etihad Airways..........................................................................................................13 Recommendations.....................................................................................................................................13
    • Etihad Airlines 3 A detailed analysis of Etihad Airways using Porter’s five forces and analyzing sources of competitive advantage Executive Summary The main aim of this paper is to provide an analysis on UAE’s Etihad Airways and suggest possible solutions to any potential or current problems; and discuss various options available to the airline. This is accomplished by providing a brief history of Etihad Airways, followed by a thorough industry and company analysis, and finally a number of suggestions are provided to improve performance of the company. The industry analysis is conducted through the Porter’s five forces framework to gauge the various sources of competitive advantage available to the company. Background on Etihad Airways Etihad Airways commenced operations in July 2003 in Abu Dhabi, which is the capital city of the United Arab Emirates. It is the National Airline of the UAE. Initially, the company possessed capital of about half a billion Dirham, which is the official currency of the UAE. The main objectives behind the launching of Etihad Airways are that an airline should exist that carries the flag of the UAE and also to show a good and hospitable nature to guests on the flight. The word “Etihad” means “United” and portrays the unity and brotherhood between all the Emirates of the United Arab Emirates (Etihad Airways, 2008).
    • Etihad Airlines 4 The first flight to commemorate the launch of the airline was in early November 2003 to Al Ain, a city in Abu Dhabi. Later in the same month, the first commercial flight took place when an Etihad airline touched Beirut in Lebanon (Etihad Airways, 2008). As Etihad proceeded forwards with time, it started to expand at very high proportions. Their different routes and destinations also increased, with around ten to twelve different routes being added every year. According to the official website, they have estimated that by the end of the decade, they will reach about 70 destinations, which means that they plan to maintain their ratio of about one route per month (Etihad Airways, 2008). From inception to now, Etihad Airways has added several feathers in its cap. It has won three awards for Leading New Airline of the Year in 2004 and the next two years as well awarded by the World Travel Awards (Etihad Airways, 2008). Etihad Airways has received a four star ranking from SKYTRAX, a consultancy in the UK for airline research (SKYTRAX, 2009). In 2008, Etihad Airways won three prestigious crowns from World Travel Awards for Middle East’s Leading Airline, Middle East’s Leading Airline Website and Middle East’s Leading First Class (World Travel Awards, 2008). Vision Etihad Airways has a very simple, yet meaningful vision. They want to become a true Middle Eastern Airline that symbolizes Arabian hospitality and culture and traditions. Also, they aim to be innovative and inline with technology to be a leading twenty first century airline. Moreover, they plan to stay “in touch with” customers’ needs and expectations and providing a relaxing environment (Etihad Airways, 2008).
    • Etihad Airlines 5 Airline Industry Analysis Before the commencement of the analysis, it is important to realize that the airline industry is a global industry with many players interacting in the market. These include airlines such as Etihad Airways, Emirates, Cathay Pacific and United; air craft manufacturing companies such as Boeing, Airbus and Douglas; governmental organizations, regulation authorities, and the millions of customers travelling with the airlines. From the view point of analyzing this industry or any other industry, it is extremely important, rather essential, to carefully scrutinize the nature of these industry players and how they affect the industry, both individually and interacting with each other. We used the classical Five Forces framework designed by Michael Porter to conduct an analysis of the Airline industry. The five forces are Bargaining Power of Customers, Bargaining Power of Suppliers, Threat of new entrants, Threat of Substitutes and Rivalry among competitors. Together, these five forces act and affect the cost and price of business in a given industry and consequentially the profit one can make in the business. Therefore, it is important to loot at each of these five forces very carefully, and then apply the aspects of these forces to the relevant industry – the airline industry in this case. Porter’s Analysis Bargaining Power of Customers An airline has hundreds of thousands of people in its customer base and many more if we include the potential customers who might decide to travel some time later, either for the purpose of business or leisure. Customers have bargaining power in an industry if there are only a few
    • Etihad Airlines 6 customers. For example, if the business is a B2B organization and does not provide directly to the end consumer, rather to other businesses, then these businesses are the customers of that company. If there are only a handful of these businesses operating in the market, then this means that the bargaining power of these customers is very large and they can affect the prices of the products that they are buying, hence making it very difficult for the organization to operate according to its own preferences. However, in the airline industry this is not the case. There are millions of people who travel each year for business, leisure, adventure or religious purposes. Therefore, customers have limited power individually to affect the airline industry. Bargaining power of Suppliers The same theory applies as above. If there are numerous suppliers in an industry, they have limited power over their customers as is the case in the auto mobile industry. In the auto mobile industry there are hundreds of small vendors who produce spare parts or specialize in different components of an auto mobile. They have no bargaining power over the large automobile organizations who are their competitors. In the airline industry, there are very few suppliers such as aircraft manufacturers, namely Boeing, Douglas and Air Bus. There are also fuel suppliers and they are also relatively few. Airline industry organizations have limited influence over their suppliers and have to cooperate with these organizations. The prices of petroleum and petroleum products have sky rocketed over the last few years. This has been due to rising demand of petroleum and depletion of reserves of crude oil. This fact has
    • Etihad Airlines 7 made the cost of doing business very high for airlines as the major factor of their costs is fuel. Suppliers such as OPEC nations are the price setters of the petroleum market and as they are they own the majority of fuel reserves, it is mandatory for their customers, such as the airline industry to follow their demands otherwise face strict circumstances. Etihad is a national carrier and based in an OPEC nation, therefore it is not as badly affected in this department as other airlines. Also if the suppliers are inclined to increase the prices of their products even if their costs have not increased, to make a bigger profit, and there are only a few suppliers in the market, customers have little or no option but to comply. The added cost to the airlines if the suppliers raise their prices is transferred to the end consumer, that is to say the airplane passengers. Therefore, if suppliers raise their prices, the airlines will have to charge their own customers more money and this will mean that as prices increase, the demand for their product that is the number of passenger seats, decreases by a margin. Threat of new entrants New entrants can enter into an industry or market if they believe that doing so will provide them positive returns on their investment to scale that would not be possible if they invested elsewhere. The threat of new entrants causes players in the industry to construct invisible walls or as the jargon goes barriers to entry that prevent or at the very least weaken the new entrant when it enters the market. Barriers to entry can be of many different forms. Firstly, the barrier of capital or investment is huge in the airline industry. This is termed as economies of scale. It would take billions of dollars just to conduct a preliminary analysis and market research, let alone the money needed to
    • Etihad Airlines 8 actually purchase the air craft and other investments. If a small player enters the market, sooner or later it will be absorbed by one of the major corporations. Therefore, the barriers are very strong when it comes to capital. Second is the barrier of experience and learning curve effects. In the highly technology oriented sector that is the air line industry, the degree of learning and experience counts for a great deal. It is a highly important barrier and a source for competitive advantage if the companies in question act fast and hire the best minds available and incur costs in time, money and effort to train these minds to provide higher productivity and efficiency in their operations. Etihad Airways is doing just that as they have launched a training program for pilots, which takes place in Al Ain, a city in the United Arab Emirates. This program extends for over eighteen months and candidates who qualify after the program are offered jobs as pilots in the air line (Etihad Airways, 2006). Also, other such programs have been launched such as the UAE National Graduate Entry Management Program and the UAE National Engineering Program (Etihad Airways, 2006). Such initiatives by the players in the industry will increase the learning and experience curve barriers in the industry and force new entrants out of the market. Another important factor that is a barrier to entry is regulations or patents. The Middle East air line industry is heavily protected by the governments of the region. Etihad Airways, being a national carrier is afforded even more protection and is relatively safe even when it does not show profits on a consistent basis. For a private organization to enter into this market would be tantamount to an athlete having to jump over a 50 feet hurdle. Unless that organization has ample resources at its disposal, quality people and a clear and unobtrusive type of a business model, it
    • Etihad Airlines 9 would be in its best interests to steer clear of the air line industry in the Middle Eastern region of the world. Another important barrier is brand loyalty. For example, very few Americans who associate Coca Cola with sporting events like base ball and other important events in their life would consider switching to other brands, regardless if there is a tastier product in the market and at a lower price. As there are very few air lines in the region due to the large amount of start up capital needed, it can be very important to develop brand loyalty to stay ahead of the competitors and also prevent new entrants into the air line industry market. Also, as the costs of switching to another air line are very low or nothing, brand loyalty can play a major factor in deterring all forms of competition and new entrants into the market. Threat of Substitute Products The substitutes for an air line industry, which is of course a segment of the larger travel and tourism industry include other modes of transportation. For over seas travel, the substitute is traveling via shipping lines and cruisers. For domestic market, the available alternatives for consumers are traveling by road, buses and railways. Firstly, looking at the overseas market, we see that the threat is basically non-existent for air line passengers who are business travelers. For them, time is more important than money. They will prefer to spend more rather than reach their destinations in a longer period of time. For leisure travelers, shipping industry will have more appeal than for business travelers. Here, the experience of a shipping cruise and cost are the trade offs. If the cost of traveling via air line is significantly cheaper, for price sensitive buyers it will be the preferred option.
    • Etihad Airlines 10 Rivalry among Competitors When there are only a few players in the market and all are vying for the coveted position of market leadership, rivalry is at its most intense level. This is the case in the air line industry in the Middle East where a few major players exist in the market such as Etihad Airways, Emirates Air line and Qatar Airways. Etihad Airways has yet to report a profit in its short history and this is mainly because of the competition and also because of the huge amounts of investments being made for the future and the fast growth that it is experiencing (Anna Aero, 2008). There is great scope for product differentiation in the air line industry. Etihad is already a low cost producer. Because of its governmental backing, it can afford losses in these initial years for the sake of gaining market share. To increase its margins, it needs to conduct more research in the market and analyze customer needs. The South West Air line business model is an excellent model. South West provides only basic services for business class domestic travelers and has stripped away all extra benefits and luxuries for these small distance travelers. Etihad should follow suit and offer basic services for such segments of consumers so that cheaper prices can be provided to them. Differentiation policy should be applied to more affluent and financially stronger travelers. High quality cuisine, liquor and service are some of the examples. Market niches serve as important cash generation segments for air lines. For example, flights from Abu Dhabi to Brussels and Dublin are provided only by Etihad and not by Emirates or Qatar Airways. It will be in the best interests of Etihad to build more such niches and take a first movers advantage which can enable them to charge premium prices till competitors move in and help in generating that long awaited profit.
    • Etihad Airlines 11 Sources of Competitive Advantage deduced from the Porter Analysis Based on the Porter Five Forces Frame work, many sources of competitive advantage exist in the air line industry. It should also be mentioned that capital is not a competitive advantage in this case as all the major air lines have abundant supply of money. The sources of competitive advantage include: • Strategic Alliances can be built with the key suppliers for important inputs. By partnering with suppliers, efficiency is achieved and a key victory is scored over competitors. • Experience and learning curve effects are one of the most important sources of competitive advantage in such a high technology industry. By investing in recruitment and training and development, new and existing workers are provided with the tools to exceed which translate into growth and profitability for the company. • Regulations play a significant role in providing competitive advantage to the Middle Eastern air lines over prospective foreign entrants. Etihad Airways has the additional benefit of being the official air line of the United Arab Emirates. This provides them with greater protection over their rivals. • Brand Loyalty is also a huge source of competitive advantage. By building the brand, Etihad can retain its customer base and venture forth with aggressive marketing to build its customer base even further. • Niche marketing can provide a nice cushion to the air line. By finding small, untapped segments and serving them before the competitors do, it can reap huge margins and promote not just the brand, but the category.
    • Etihad Airlines 12 Analysis of the Strengths and Weaknesses of Etihad Airways Etihad Airways has a number of strengths at its disposal that can be used to overcome most of the internal weaknesses, and external threats and utilize potential opportunities that are currently present or may arise in the course of time. Some of their key strengths are: • A very strong capital base. Etihad Airways has a significant amount of financial resources at its disposal which has been used effectively to generate growth in terms of size of fleet as well as markets. Recently, Etihad Airways used this advantage when they purchased 55 Air bus carriers in 2008 (Newser, 2008). • The national air line. Etihad is the flag carrier for the United Arab Emirates and a source of pride for the people of the nation. Being the national air line, it is afforded with key benefits such as resources, networks, and a broad base of loyal customers. On top of it all, it gets protection from the government in the form of regulations as well and if times are bad and losses are reported, it is not as problematic an issue as it would have been for a non government backed air line. • Capable Employees. With the training programs mentioned earlier and other such means, Etihad Air lines is developing a very skilled base of employees that provide the company with a very useful and important source of competitive advantage. • Large fleet and still growing. As mentioned earlier, Etihad Air line has been purchasing many carriers and growing at a fast rate. They have the staff and the resources to bear this growth. Etihad has very few weaknesses in my opinion. They are listed below:
    • Etihad Airlines 13 • Lack of experience as compared to competitors. As it is a new company, it does not yet know the complete tricks of the trade. But this is a source of growth and improvement and more of an opportunity if utilized effectively. • Small customer base. Due to the fact that Etihad Air line is in its infancy, it has not yet developed a strong enough customer base. Many flights are barely occupied (Randhawa, 2009). Adopted Strategy of Etihad Airways Etihad is obviously pursuing a growth strategy, as it is heavily investing in the fleet and infrastructure at airports. This is in line with their vision of becoming one of the leading international airlines and providing customers with high quality service. They are also pursuing a low cost strategy by providing similar or lower rates than competing airlines. This will confirm that they do not lose any market share due to price. According to the Ansoff Matrix, they are following a market development strategy by focusing on the same product and developing new markets, such as the flights from Abu Dhabi to Brussels and Dublin. They are also following a market penetration strategy as they are entering into existing markets with the same product with competitive prices. Recommendations Etihad is a new company with a promising future ahead of it. It needs to build on its current base and then consolidate its position. It should not grow beyond the point that it cannot control. Bearing in mind the current global financial scenario, it needs to slow down and focus on
    • Etihad Airlines 14 specialization. It also needs to partner with key suppliers such as Boeing and Airbus to gain competitive advantage. Also important is to press home the inherited advantage that it is indeed the national carrier. This point needs to be emphasized time and again so it is deeply entrenched in the minds of the UAE based traveler. This will help tremendously in building brand loyalty. Etihad needs to find more market niches so that it can expand in those markets and gain the first movers advantage. This can be done through extensive research. Finally, Etihad has to hire experienced people in its staff. It should be a blend of youth and experience so that the experienced staff pass their knowledge to the youth to carry on in the future.
    • Etihad Airlines 15 • List of References Anna Aero. (2008). Etihad racing to catch up with Emirates and Qatar Airways. Anna Aero Available At: http://www.anna.aero/2008/02/22/etihad-racing-to-catch-up-with-emirates-and- qatar-airways/[ accessed February 9, 2009] Etihad Airways. (2008). Our History. Etihad Airways - National Airline of the UAE: Available At: http://www.etihadairways.com/sites/Etihad/ae/en/aboutetihad/etihadstory/pages/etihadhistory.asp x [ accessed February 9, 2009] Etihad Airways. (2008). Our Vision. Etihad Airways - National Airline of the UAE: Available At: http://www.etihadairways.com/sites/Etihad/ae/en/aboutetihad/etihadstory/Pages/EtihadVision.as px [ accessed February 9, 2009] Etihad Airways. (2006). UAE National Programme. Careers at Etihad Airways: Available At: http://careers.etihadairways.com/ehire/english/GraduateMgmt/NationalJobList.aspx [ accessed February 9, 2009] Newser. (2008, July 15). Etihad airways buys 55 airbus aircraft, including the A380 and A350. Newser: Available At: http://www.newser.com/archive-business-news/1G1-181357844/etihad- airways-buys-55-airbus-aircraft-including-the-a380-and-a350.html [ accessed February 9, 2009]
    • Etihad Airlines 16 Randhawa. (2009). Etihad Airways. Ciao-Shopping Intelligence: Available At: http://travel.ciao.co.uk/Etihad_Airways__5645513 [ accessed February 9, 2009] SKYTRAX. (2009). ETIHAD AIRWAYS : official 4-Star Ranking. SKYTRAX: Available At: http://www.airlinequality.com/Airlines/EY.htm [ accessed February 9, 2009] World Travel Awards. (2008). Middle East - Winners 2008. World Travel Awards: Available At: http://www.worldtravelawards.com/winners2008-10 [ accessed February 9, 2009]