The UK No-Frills Airline Market - Case Study Example

The UK No-Frills Airline Market Department: 17-Nov-09 Introduction A no-frill airline market can be described as a low-cost airline market where prices of frights have been reduced. Most of the airline companies that operate in the UK market operate under this kind of market. A common aspect in such kind of a market is that competition is always high and the companies that operate under such conditions must be well armed to compete actively. The no-frills airlines have faced great competition in the recent years both from within and from without and this competition has proved to be a challenge to the companies in the market for various reasons. The entry of new companies in the market is one of the factors that greatly affect the competition of companies in the sector since the new companies come with strategies to win customers into their company. Some other factors that affect the competition in the market are: the bargaining power of the suppliers, the bargaining power of the consumers, the bargaining power of the competitors and the presence of substitutes in the market. This paper seeks to analyze competition in the no-frills airline market and also compare it with the condition that was there about forty or fifty years ago. The issue of price discrimination and outsourcing is also discussed in the paper. Entry of New Companies One of the factors that have brought great competition in the no-frills airline market is the entry of new competitors in the market (Krishna & Eric 2003: p.49). The moment new companies join a market; they have an intention of winning some customers so that they can have a share in the market. They also come with new capacities in the market thus challenging the companies which are already in the market. They also come with a desire to gain some substantial resources in the market. The companies are willing to do anything to meet their goals. However, these companies are likely to be affected by the barriers that are present where these barriers are usually high meaning that entry into the market would mean that the company has to sell at a higher price so as to recover its expenses. This gives the existing companies a competitive advantage over these new companies making it quite hard for these companies to survive in the environment. The reaction of the airline companies that are already in the market also matters a lot. If the present companies collude so as to eliminate a new company, it is very easy because these companies have been in the market for quite sometime. Most of the companies will always be willing to eliminate these new companies and will do this by colluding with the other companies in the no-frill airline market. To bar companies from joining the market, the existing companies might decide to lower the prices of commodities per unit. This way, the company entering the market will be forced to buy goods in larger scales in order to manage to sell at the same price and make a profit. Otherwise, the company may be disadvantaged by the price where it will sell at a loss or sell at higher prices and end up lacking customers. The company also has to spend a lot in identifying their badge that will convince these loyal customers to leave their usual companies and join them. Some companies are quite large and have many customers in relation to other smaller companies and those who could be willing to join the market. Their strength and advancement poses a great danger to the survival of smaller businesses and more so those which are joining the market for the first time. Again, the bargaining power of the companies that are already in the market is much greater than that of the companies that may be willing to join the market (Krishna & Eric 2003: p.50). Another factor that may bar the entry of a new company into the market is government policies. At times, the government may come up with some ways of reducing the war that could be existing amongst some companies in the market. This can be achieved by the introduction of some license requirements and limits on access. Comparing the no-frills airline market in the UK with other leading operators, the market of the UK is quite mature and more stable. However, the expansion of the company into new markets may be hindered by the new companies that are joining the market in these other parts of the country. For an aeroplane to land or take off, it requires a landing slot in the existing airports (Krishna & Eric 2003: p.49). This makes it really hard for real carriers. The Suppliers and Their Bargaining Power Some of the companies in the airline market own the oil companies that produce the oil that is used to manufacture the aviation fuel. These individuals are in full control of the prices of the oil and have made the prices of oil to fluctuate steadily (Stephen, 2005). These other small companies have no say in it and competing with these larger companies becomes quite hard. Most of the airplanes that are manufactured for commercial budget airlines are manufactured by at most two companies. This means that if the airplane happens to be involved an accident and requires some spare parts, they can only be gotten from these very manufacturers. As more and more airline companies get established, the companies that supply them with the airplanes and the spare parts gain more power to exploit them making it really hard for small companies and those that are joining to survive. The suppliers have no competitors and therefore will sell their products at their own prices (Krishna & Eric 2003: p.49). The Bargaining Power of the Customers The trends have today changed where the customers no longer travel in the planes with the big names but go for those that offer their services at cheaper prices. The customers have options to check the different prices by the different companies and compare them to determine the one that they want for their use. These customers are also willing to save their money and spend it in other areas. This forces the companies to lower their prices so that the customers can go for their services. The companies are therefore involved in active competition leading to very low prices. In a bid to try and emerge the best in the market, the companies are now turning to investing in new space and offering the same services over there (Krishna & Eric 2003: p.49). The reduction in price caused by competition increases the strength of the consumer to use the airplane. This means that these consumers will constantly be visiting the internet to search for the company with the cheapest tickets. For any company to be successful, it has to be very careful on the way that it is displaying the prices on the internet as this might affect its relations with the customers a lot. The prices should always be updated and checked every now and then so that the consumers don’t take advantage of the disagreements in the prices. Another important aspect that any company that is seeking success should do is be loyal to the consumer (Stephen, 2005: p.47). To ensure that the individuals who have booked the tickets have received the services that they have paid for, an authority by the name Civil Aviation Authority was established. The authority usually helps in cases where those who have bought discounted air tickets, charter flights, and package holiday deals have failed to receive the services that they paid for. The authority also ensures that these companies comply with the standards and the requirements of the UK and the European legislation that relate to financial resources, liability and insurance of agencies (Krishna & Eric 2003: p.52). Threat of Substitute Products of Services So as to remain active in the competition, the companies established a price which they are not supposed to sell beyond. This will help in keeping the substitute companies away. These companies should also ensure that the qualities of services that they offer to the consumers are high. Advertising their services would be of great importance as this will keep the customers updated (Stephen, 2005: p.48). The presence of other modes of transport such as the train and the car pose a great danger since these modes will use the domestic routes and will also take the individual to the desired place especially the car. The one advantage of these airplanes is that they charge cheaper prices for longer distances and spend less time than the train and the car. The distance that a train will cover in eight hours will take the airplane about four hours and the cost for the same journey by airplane will be less than half of the time that the train will take (Krishna & Eric 2003: p.54). The train and the car are quite inconvenient at times and in some cases they can’t even be used as substitutes to the air travel. The train can be used in some cases where there are connections but very few long distances are connected for use by the train. This leaves the consumers with only one option to use for such long distances. The recent terrorist attacks and airplane accidents have led to the development of video conferencing where individuals need not to converge at one place so as to share ideas or carry out business. Some machines are set in a way that one can view all that is going on in a meeting and can share what he or she has with others over the network. Other people have turned to phone call conferencing where all business issues can be organized over the phone. Many people have turned to this method because it is safe and has therefore reduced the market for airplane travel (Krishna & Eric 2003: p.53). Bargaining Power of Competitors Competition among the airline companies that are already in the market have greatly increased where a few companies that have advanced are dominating the market. Companies such as BMIbaby, Easyjet and RyanAir have greatly enjoyed the market with many customers while smaller companies that have not been established have no consumers. The companies that are well established are also recording large amounts of profits and can afford to lower their prices extensively thereby winning many customers. This might also convince some customers that their prices are the cheapest in the market. For the smaller companies to still have a share in the market, they are forced to lower their prices to the extent that they almost sell at zero profit. Some traditional carriers are still offering some competition for their low prices in the market. However, these companies also target other market segments especially outside UK and therefore are not a large threat. They make most of their money from distant travelling and are not much interested in the local business. The rate at which the airline industry is growing has gone down. This has been greatly affected by the increased fear of terrorism by travellers and also the September 11 tragedy that killed one hundred and eighty four people after it was attacked by Al Qaeda. The deteriorated growth has also been affected by the prices of crude oil that have currently gone up. This is basically because the high prices affect the profit margins thereby affecting the extent to which the companies can lower the prices (Krishna & Eric 2003: p.50). There are over fifty companies that are offering the service in Europe and most of these companies are likely to suffer as a result of the increase in the price of crude oil. Those companies that are likely to survive are the ones that are well established and can run at reduced profits for quite sometime. A better opportunity exists for no-frills carriers in the UK where those small companies can be absorbed in the larger companies or be restructured to cover regional areas (Stephen, 2005: p.50). Divergence When a new company wishes to join the airplane market, the existing companies might decide to collude and lower their prices so that the new company is kept out of the market. This is an unfair competition because these companies that have colluded have not considered the needs of each and every company in the industry so as to determine the extent to which the prices should be reduced. Again, many companies rising against one company makes it very hard for the single company to survive. If a supplier in a market has no competition when there is great competition among the buyers, the supplier might take advantage of the situation to increase the price of his or her commodities. This will greatly affect the power of some companies to compete in the market especially those who have to buy the aeroplanes after the price has been raised. Competition in the Airline Industry Back in Time About four or five decades ago, competition in the airline industry in the UK was quite different. One of the differences is as a result of the number of companies which were there. There were about twenty companies in the UK in the 1960s. The rate at which companies were joining the industry was low in comparison to the present rate. As a result, the companies that were willing to join the market by then did not face much resistance like a company that is willing to join the industry today (Lipczynski, Wilson &Goddard, 2005). The number of suppliers of aeroplanes was very low and the situation hasn’t changed a lot as even today, the key suppliers of aeroplanes in the UK are Boeing and Airbus. This means that these companies are in full control of the prices of aeroplanes and they will sell at a price that they wish since there is nothing that the consumer can do. In the past, the buyers had no say in the airline industry. It was a bit hard to review the different prices of aeroplanes as it is today. The issue of shifting a chair from one aeroplane to another was also hard (Lipczynski, Wilson &Goddard, 2005). Since competition was not as extensive as it is today, the prices of the tickets were almost fixed and quite high reducing the bargaining power of the consumer. About fifty years ago, many people would prefer using the train or the car for travelling especially regional travelling. This is basically because the prices of substitutes such as the train were quite low in comparison to the price of using the aeroplane. Some individuals are not interested in using the aeroplane for their travelling and some were worried of using the aeroplane. This reduced the number of individuals and eventually reduced competition among the airplane industries for lack of customers. Price Discrimination Price discrimination is a common practice in areas where there is competition. There are two ways that price discrimination can be used in the market. The competitors in a market might decide to sell their products at different prices to different consumers as a way of winning customers. On the other hand, a single individual in the market may be the only supplier of a commodity meaning that he or she will determine the price at which he will sell his commodity. In the no-frills airplane industry in the UK, the well established companies like the EasyJet and the RyanAir lower their prices so that they can eliminate smaller companies from the market. Offering different prices for different consumers means that the most frequent travellers may be given discounts so that every time that they are travelling by using the plane, they will be prompted to use the services of that company. The companies at times offer their services at low prices that the new and inexperienced companies cannot afford. This shows active competition within the industry. On the other hand, the industry also experiences price discrimination in a monopolistic environment. The suppliers of the aeroplane in the UK are very few and therefore enjoy the monopoly of the market. They control the prices of their commodities and they might consider demand of the commodity to determine its price regardless of its cost. A very cheap commodity that is highly demanded may be sold expensively since the suppliers are aware that there is no other place that one can go for the commodity. Outsourcing Outsourcing is the process by which a company decides to offer its services outside the country and may give the work to another company with an intention of serving a wider market and maximising profit. Outsourcing can be used as a competitive strategy where a company will ensure that it maximises its profits in markets where other competitors haven’t reached. Outsourcing has its advantages and disadvantages. Advantages of Outsourcing One of the advantages of outsourcing is that it will increase the competitive advantage of the company that decides to outsource. Once a company that is in a highly competitive market decides to outsource, it increases its competitiveness in that it can now lower its prices in the competitive market and rely on profit from the other places where the competitors have not reached (Auerbach, 1995). In the long run, such a company will have won many customers due to their low prices and will eventually start earning more profits. A company that decides to outsource must ensure that their services are of high quality so as to retain their customers. Outsourcing has basically enabled many companies to maintain a high quality of standard of the services that they offer. Another advantage of outsourcing is that the company will be in operation all through the year. The business may be performing poorly in some regions due to different factors but for a company that outsource its services, the business will still be in operation in some other regions. Disadvantages of Outsourcing One of the greatest challenges in outsourcing is that it demands quality management and the managing team has to be committed to the service if at all a certain level of success has to be achieved (Auerbach, 1995). There will be more employees dispersed all over and managing them is not an easy task. The process of outsourcing is also expensive since the company has to buy some more aeroplanes in order to offer the services to different companies. Conclusion The no-frills airline market in the UK has allowed great competition among those companies that have decided to offer the airline service to the public. Competition in the airline industry in the UK is facilitated by the entry of new companies in the market. These are companies that come with new capacities with an intention of winning customers from the existing companies and having a share in the market. The existing companies being aware of the threats that these companies could be bringing into the market at times decide to lower prices so as to retain their customers. The aspect of competition is also seen in the side of the supplier in the market. The current condition of suppliers of aeroplanes in the UK is that there are a few suppliers thus they have full control of the market. Competition does not exist among the few suppliers and therefore, the suppliers will sell their commodities at the prices that they wish. Due to the fall in the price of airline travelling, the prices have gone down giving the customers the options of choosing the company to use while travelling. Most of the customers will go for the company that offers its services at a cheaper price. This increases competition among the companies and this time, competition is in terms of prices. The reduction in price has led to the active use of the aeroplane by many because the prices of using the aeroplane are much cheaper than using the train and the car. The market is also affected by the presence of substitutes which the customers can use in place of the aeroplane. Trains and cars have been used for transport when the aeroplanes have charged higher prices. These two facilities may however be inefficient especially when the distances are long and the facilities such as the roads and the rails are unavailable. The airplane companies are forced to fix a price ceiling so as to eliminate the substitutes from the market. Recent terrorist attacks and plane accidents that have killed many have instilled fear in some individuals who are now worried about using the aeroplane. Some companies in the industries have extensively grown in the market and this gives them an advantage over the companies that have not grown roots in the market. Traditional companies such as British Airways also offer competition in the market though they don’t rely on the local market so much. About forty or fifty years ago, the prices of using an aeroplane in travelling was quite high and the companies that offered the service were still few in relation to the companies that are there today. Price discrimination is a common factor in the no-frill airline in the UK where the companies lower their prices so as to win many customers while the suppliers enjoy the monopoly of the market and control the prices as they wish. Outsourcing enables a company to increase its competitive advantage and improve and maintain the quality of its services. However, outsourcing is quite expensive and requires high quality management. References Auerbach, P. (1995). Firms, Competitiveness and the Global Economy Ch. 12 of Mackintosh, M. et al. (Eds) Economics and Changing Economies Milton Keynes: Open University [Firms]. Krishna, G. P., & Eric, P. (2003). Business Analysis and Valuation: Text and Cases. Cengage publishers, 48-56. Lipczynski, J., Wilson, J., and Goddard, J. (2005) Industrial Organisation: Competition, Strategy, Policy, 2nd edition, Edinburgh: Prentice Hall. Stephen, H. (2005). Straight and Level: Practical Airline Economics. Ashgate Publishing Ltd, 47-52. Read More