This document discusses Porter's five forces model and its application to the airline industry. It analyzes the competitive forces of industry rivalry, threat of substitution, threat of new entry, bargaining power of customers and suppliers in the aviation industry. It also discusses Porter's generic strategies of cost leadership, differentiation and focus and how airlines have implemented these strategies. Common mistakes in airline marketing strategies are outlined such as unclear objectives, improper diversification, overexpansion and overoptimism. Alliance strategies between airlines are also covered.

1. Airline Marketing 5:
Airline Marketing Strategies
Dr Narudh Cheramakara
1/2017
Bangkok University

2. 1. Porter’s Five Forces
• Porter's five forces analysis is
a framework for analyzing the
level of competition within an
industry and business
strategy development.
• five forces that determine the
competitive intensity and
therefore the attractiveness o
an industry.
• Attractiveness in this context
refers to the overall industry
profitability.
• An "unattractive" industry is
one in which the combination
of these five forces acts to
drive down overall
profitability.

3. 1. Porter’s Five Forces:
Industry Rivalry
• Industry rivalry
For most industries the
intensity of competitive
rivalry is the major
determinant of the
competitiveness of the
industry.
• Potential factors:
• Sustainable competitive
advantage through innovation
• Competition between online
and offline companies
• Level of advertising expense
• Powerful competitive strategy
• Firm concentration ratio
• Degree of transparency

4. 1. Porter’s Five Forces:
Threats of new entrance
• Government policy
• Capital requirements
• Absolute cost
• Cost disadvantages
independent of size
• Economies of scale
• Economies of product
differences
• Product differentiation
• Switching costs or sunk costs
• Expected retaliation
• Access to distribution
• Customer loyalty to
established brands
• Industry profitability (the
more profitable the industry
the more attractive it will be
to new competitors)

5. 1. Porter’s Five Forces:
Threats of new entrance
• Government policy
• Capital requirements
• Absolute cost
• Cost disadvantages
independent of size
• Economies of scale
• Economies of product
differences
• Product differentiation
• Switching costs or sunk costs
• Expected retaliation
• Access to distribution
• Customer loyalty to
established brands
• Industry profitability (the
more profitable the industry
the more attractive it will be
to new competitors)

6. 1. Porter’s Five Forces:
Threat of substitutes
• Buyer propensity to
substitute
• Relative price
performance of
substitute
• Buyer switching costs
• Perceived level
of product
differentiation
• Number of substitute
products available in the
market
• Ease of substitution
• Substandard product
• Quality depreciation
• Availability of close
substitute

7. 1. Porter’s Five Forces:
Bargaining power of customers
• Degree of dependency
upon existing channels
of distribution
• Buyer switching costs
relative
to firm switching costs
• Buyer information
availability
• Availability of existing
substitute products
• Buyer price sensitivity
• Differential advantage
(uniqueness) of industry
products
• The total amount of trading

8. 1. Porter’s Five Forces:
Bargaining power of supplier
• Supplier switching costs
relative to firm switching
costs
• Degree of differentiation
of inputs
• Impact of inputs on cost
and differentiation
• Presence of substitute
inputs
• Strength of distribution
channel
• Supplier concentration
to firm concentration ratio
• Employee solidarity (e.g. labor
unions)
• Supplier competition: the
ability to forward vertically
integrate and cut out the buyer.

9. 2. Porter’s Five Forces:
Aviation Industry (Rivalry)
• Intensed rivalry for Thai Aviation industry
• Openskies Policy: Thailand, Asean, China, etc.
• Increasingly liberalised attitutes internationally in
terms of aviation competition
• Particularly in the short-haul market
• Products and services are pretty much comparable
among the operator.

10. 2. Porter’s Five Forces:
Aviation Industry (Substitution)
• Internet as a means of communication
• High-speed rail
• In some cases, better road infrastructures:
particularly in the developing countries.
However, this is not a strong threat for Thailand at
the moment – why?

11. 2. Porter’s Five Forces:
Aviation Industry (New Entry)
• Entry requirement: Easy to obtain traffic rights/Difficult
to obtain AOC and meet safety regulations
• Resources:
- Capital Intensive
- Lack of labour expertise (crew, operations, etc.)
- Airport capacity
- Economy of scale is difficult to achieved (EK, FD v new
entrance)
- However, smaller and new entry can achieved lower
labour cost and being efficient as these tend to go up
after the first 5 years.

12. 2. Porter’s Five Forces:
Aviation Industry (Customer Power)
• Effectively airlines have little or no power unless it’s
Bangkok Airways’ Samui or Monopoly routes
• Porter argues that the power of their customers will
be a crucial determinant of profitability for the
firms in any industry.
• In turn, customer power will be related to two
variables: the number of customers a firm has, and
the existence – or otherwise – of so-called
Switching Costs.
•

13. 2. Porter’s Five Forces:
Aviation Industry (Customer Power Cont’d)
• customer turns into a competitor occurs when a
tour operator grows bigger and bigger, giving larger
amounts of business to existing charter airlines.
(Chinese Investors in Thai airlines)
• FFPs have been used to gain the customer’s power
(TG’s ROP to attract Thai business travelers)

14. 2. Porter’s Five Forces:
Aviation Industry (Supplier Power)
• Airbus v Boeing
- Long deliveries
- Training
- Spare parts
• Engine
• MRO
• Monopoly on Airport
• GDS

15. 3. Porter’s Generic Strategy
• Porter wrote in 1980 that strategy targets
either cost leadership, differentiation, or
focus. These are known as Porter's three generic
strategies and can be applied to any size or form of
business. Porter claimed that a company must only
choose one of the three or risk that the business
would waste precious resources. Porter's generic
strategies detail the interaction between cost
minimization strategies, product differentiation
strategies, and market focus strategies of porters.

16. 3. Porter’s Generic Strategy
• If a firm is targeting customers in most or all segments of an
industry based on offering the lowest price, it is following a
cost leadership strategy;
• If it targets customers in most or all segments based on
attributes other than price (e.g., via higher product quality or
service) to command a higher price, it is pursuing a
differentiation strategy. It is attempting to differentiate itself
along these dimensions favorably relative to its competition.
It seeks to minimize costs in areas that do not differentiate it,
to remain cost competitive; or
• If it is focusing on one or a few segments, it is following a
focus strategy. A firm may be attempting to offer a lower cost
in that scope (cost focus) or differentiate itself in that scope
(differentiation focus).

17. 3. Porter’s Generic Strategy

18. 3. Porter’s Generic Strategy
• Lost-in-the-Middle is a situation where a firm is in none of the major boxes.
• In many countries the small village store represents this position. As car
ownership has grown, it has become commonplace for people to drive to an
out-of-town hypermarket, rather than patronise the local store in the town or
village where they live.
• In fighting back, the owners of village stores have few weapons at their
disposal. They will not have the buying power of an Aldi which would allow
them to offer very low prices, whilst they cannot stock the 30,000 or more
items typical of a hypermarket.
• Finally, there would be insufficient demand in a small town or village for a store
which specialised in a narrow area such as Indian grocery products.
• The Lost-in-the-Middle nature of the village store’s position is illustrated by the
fact that over the last ten years, many of them have been forced to close. As
we shall see, many medium-sized airlines are likely to follow them in the years
to come.

19. 3. Cost Leadership: Airlines
• Pioneered by
Southwest
• Laker Skytrain
• Air Asia
• Ryan Air
• Easyjet
• Most new
entrances adopt
this strategy

20. 3. Cost Leadership: Airlines
• Fuelled by regulartory liberalization
• EU Single Aviation Single Market (Easyjet, Ryanair,
Cabotage)
• Internet reduces the distribution cost
• Air passengers has changed from mostly business
travelers to more leisure based  from company
pay to self-paid  cost conscious
• As a result, it’s the main strategy that airlines head
to
• We see drastic cost cutting across the industry, see
the following slides;

21. 3. Cost Leadership: Airlines
3.1 Low Fleet Cost
- Fleet Commonality
- Single Type Fleet
- TG Fleet Rationalisation
- Nok Air V Air Asia

22. 3. Cost Leadership: Airlines
3.2 Low Landing Fees
- Ryan Air seeks out-of-town, rarely used airports, in
other cities and sometimes in different countries
- Sometimes these airports are subsidized
- Less traffic congestion  saving on fuel
consumtions
- Other airlines follow suits
- Thailand, AOT owns both DMK/BKK, no incentive
for competition
Examples: Charleroi, Bergamo, Hahn, Bauvais

23. 3. Cost Leadership: Airlines
3.3 Aircraft Utilisation
- Aeroplanes can make money only when they are
flying.
- Reducing unit cost (CSK)
This is done through
- Short turn around time
- Route network optimisation (China/India at night).
CCU market case

24. 3. Cost Leadership: Airlines
3.4 Limited Onboard service

25. 3. Cost Leadership: Airlines
3.4 Point-to-Point Service
- No need to wait for connecting flight
- No need to schedule banks of arrival/departure
- Missed connection/Accommodation
- Better revenue by selling two flights separately
- DD/FD transfer case

26. 4. Differentiation: Airline Business
Large numbers of airlines – mainly those which are
long-established – in today’s airline industry do not
seek out a Cost Leadership position for their mainline
activity (though, as we have seen, increasing numbers
of them have set up Cost Leader subsidiaries).
Instead, their argument is that they provide a value-
for-money solution to a wide range of customer
requirements, exploiting the synergies which become
available to a firm producing a range of different
products under the same umbrella. Such policies
conform very well to the “Differentiation” position of
the Porter model

27. 4. Differentiation: Airline Business
- Through innovation (Can be matched overtime)
- Service
- Branding
- This is to charge more!!
- However, it is likely to fall to cost leadership as
passsengers are generally price sensitive

28. 4. Differentiation: Airline Business
Singapore Airlines

29. 4. Differentiation: Airline Business
Bangkok Airways: Asia’s Boutique Airlines
- Problem: the public doesn’t understand the
boutique concept.
- To a certain extent, people think Bangkok Airways
is a low cost airline  Particularly the non-flying
public.
-

30. 4. Differentiation: Airline Business
Jetblue: Mint Service
Compared with US Airways

31. 4. Differentiation: Airline Business
Jetblue: Mint Service
Compared with US Airways

32. 5. Alliance
- 1993 KLM/Northwest
- Exploit the route network

33. 5. Airline Alliance: Star
-
-

34. 5. Airline Alliance: One World

35. 5. Airline Alliance: Skyteam

36. 5. Airline Alliance: Emirates Case
• Emirates refused to join an alliance and go on
its own.
• It has big enough a network.

37. 5. Alliance
• alliances can bring their members significant benefits to their
bottom line.
• Economies of Scale, which consist of cost reductions achieved
through size,
• Economies of Scope, which reflect the revenue benefits of
cooperation,normally brought about by increased marketing
muscle-power.
• Avoid having to obtain traffic rights
• This can be
- Codesharing
- Merger
- Minority Equity stake

38. 5. Alliance
• Cost Benefits
- Joint Purchasing
- Cooperation in ground handling
- Combining sale teams (BA/QF in BKK)
- Joint Marketing
- FFPs

39. 6. Focus Strategy: Airlines
• Porter proposes that successful Focusing can
comeabout in two ways.
1. Focus on adding a great deal of value, which
allows them to cover high production on costs
and still sustain profitability.
2. Use their expertise to achievevery low costs.

40. 6 Focus Strategy: Value Added
Focusing
• Premium Offers BA, Openskies, PG, Etihad Suite.
• Still often failed: Transatlantic Business class
• Nok Air tried and Failed
• Thai Smile

41. 6 Focus Strategy: Low Cost
Focusing
• As a result of fare war
• Everyone seems to try this strategy
• Developped from European Charter Airlines

42. 6 Focus Strategy: Lost in the
middle
Porter argues that there are firms that do not fit into any
of the boxes.
• Their costs are too high for them to pursue Cost
Leadership and
• there is too little about them which is distinctive for
true Differentiation to be achieved.
• We have seen FCCs try to reduce their services but still
fail to compete on costs while offering increasingly
inferior products.
• Sadly, the airline industry today has an almost endless
list of firms to which this description can be applied:
Nok Air, Most Flag carriers, eg

43. 7 Common Mistakes in Airline
marketing strategies
7.1 Objectives
- Airlines are sometimes for other purposes than to
make profits
- Transport service providers to remote area (The
reasons why many airlines are state control). In
latin America, some were operated by the military
- Political meddling
- Sometimes could be the results of management
ego – US carriers in the formative years

44. 7 Common Mistakes in Airline
marketing strategies
7.2 Diversification v specialization
- Airlines can be over-diversified without sufficient
resources
- Or airlines can have large/diversified network with
unsuitable fleet: PG to Japan

45. 7 Common Mistakes in Airline
marketing strategies

46. 7 Common Mistakes in Airline
marketing strategies
7.2 Pace of expansion: THY grew a bit too fast
7.3 Over-optimism: Ordering too many planes
- Indian carriers
- Lion Air
- PG with A350
- PB Air