Application of Models to the airline industryChapter 3

In the previous chapter the 3 models (Diamond, Five Forces and PEST) were discussed. In this chapter we are going to apply the various aspects of the models where it is applicable. We are comparing the Pakistan airline industry with the Indian Airline Industry. This will give us a bigger picture about the airline industry’s competitiveness which will help us in determining the missing pieces for our research and what needs to be done.

Diamond Model

Factor Conditions

Airline industry requires a large amount of raw materials for the construction and maintenance of the aircraft. Some basic include metal alloys (aluminum and titanium) and steel. The construction of the aircraft is not locally done but the aircrafts are imported from abroad. As manufacturing takes place in the US and Europe, there is no need for local raw materials. One of the problems is also over employment in this sector which results in inefficiency (30-35 thousand is the employment figure).Skilled labour is approximately 68-74%.Infrastructure is desperately needed for the development of runways and new airports. The major airports of the country are situated in Karachi, Islamabad, Lahore, Peshawar .Multan and Gwadar. Jinnah International Airport (Karachi) is the largest airport in the country.

Demand Conditions

Recent development has shown an increase in the demand for the services.(figure). There has been generally high growth pattern in businesses and the size of the population. Safety standards have also improved. There has been deterioration in other modes of transport which are both time consuming and uncomfortable when compared to air-travel. Local demand in Pakistan is primarily concentrated in five major cities – Karachi, Lahore, Islamabad, Peshawar and Quetta. Internationally, the strongest market for Pakistani airline industry is the Middle East. Failure to diversify.

Firms Strategy and Rivalry

In the airline industry, PIA is the largest, followed by Airblue and then Shaheen. There is some form of collaboration with foreign airlines. difficult to determine r and d investment. Inter-firm rivalry can only really be assessed on a domestic level seeing as PIA is the only truly international airline with 40 international routes. Airblue has a total of 4 international destinations and Shaheen has 7 or 8. The domestic market shares for each airline company are as follows

PIA – 74%

Airblue – 20%

Others 6%

It can clearly be seen from this market composition that competition is mainly between PIA and Airblue. PIA’s basis of competition is because of its brand name and advantage of customers’ loyalty.

Related Supporting Industries

The civil aviation industry lacks alliances and coalition that would allow it to perform better, especially considering its given situation. In cases of delays in long-haul flights each airline company has contracts with different hotels in the area, particularly for flight crew. So we can say that a lot of development is needed.

Pest Model

Political Conditions

As far as Pakistan is concerned, Political factors have impacted the operations, profitability, growth and development of each and every industry. The political environment of a country is of vital importance to businesses and domestic political uncertainty in Pakistan which has prevailed for too long and has invariably affected the country’s investment, trade, growth and development. Travelers will not prefer visiting countries that are prone to political instability. The impact on tourism gives testimony to the fact that political climate has indeed effected this industry. Numerous foreign airlines stopped their business in Pakistan after 9/11. These include British Airways, Singapore Airlines, Malaysian Airlines, Gulf Air, China Air and Saudi Airlines.

Open Skies Aviation Policy was adopted in the early 1990s by the government which was basically a memorandum of understanding with a number of countries of the region and outside. The purpose of this was to call for the liberalization of rules and regulations on international aviation industry and open a free market for the airline industry.

Economic Factors

There has been persistent rise in jet fuel prices and oil price volatility which has made it extremely difficult for the airline industry to cut its costs. Cost of borrowing is also higher because the increase in interest rates. Consumer demand has fallen greatly due to the ever

increasing inflation which has also led to an increase in the price of aircrafts, food, products of related and supporting industries.

Social Factors

Increased popularity of foreign travel due to a variety of factors has resulted in a boom in demand for air travel. People are now more eager to travel to other countries is due to changing tastes and trends. Media has invariably contributed to culture and norms of people and due to increased urbanization there has been an increase. Hajj attracts a huge number of customers However this increase in demand has been somewhat offset by an increase in international terrorism.

Technological Factors

Major technological changes are taking place in the airlines industry with innovations in the reservations and booking systems. Internet plays a key role in e-ticketing as consumer can easily reserve tickets or check the status of the flight. Airblue was the first airline in Pakistan to install Sabre system followed by the market leader, PIA. Pakistani Airlines have to be abreast of the technological developments in e-commerce and aircraft manufacturing technology in order to gain a competitive advantage.

Porter’s Five Forces:

Threat of new entrants

Initially, PIA enjoyed a complete monopoly. But in 1990’s after the declaration of the Open Sky Policy it encouraged private sector investment. This lowered barriers to entry. However it cannot be forgotten that the initial investment is extremely high and requires a great deal of credit from banks which acts as a significant barrier. Economies of scale are often difficult to achieve due to under utilization of aircrafts.

Threat of substitutes

Substitutes for air travel are other modes of transport which include trains, buses and cars. Distance from Islamabad to Lahore is shorter and hence buyers may be inclined to use cars or buses to save cost. However it is not a solution for long distances. This factor depends upon the customer segment which depends upon time, money and convenience.

Bargaining power of suppliers

The price of jet fuel is directly related to the cost of oil. This price is determined by international markets. An individual company does not have the power to influence it. There is cut throat competition among suppliers and they are very likely to integrate vertically. Oil is an integral input of the airline industry and has the power to directly influence airfares. Hence, the oil suppliers have high bargaining power.

Bargaining power of buyers

Travelers can easily compare prices and can find price variations for the same flight. Vacationers will want the best deals, whereas business travels are frequently more pressed to time and are less price sensitive. Despite intense competition, air travel is not cheap and command substantial finances of a vacation. Hence, for vacationers the demand is highly elastic (as the price drops demand increases) and for business travelers it is less elastic or inelastic. However, airlines may move their prices in tandem with competition and force buyers to pay market price until a price war breaks out.

Firms Intensity and Rivalry

There is high rivalry in the airline industry. Due to this high rivalry airlines generally earn low returns because competition drives down prices. The massive increase in the international prices of jet fuel has put an enormous pressure on the airlines, to remain profitable. According to global standards aircraft, crew, maintenance, insurance and fuel make up 68 percent of an airline’s operating costs. The primary beneficiaries of the price war are the domestic travelers as the prices of domestic airfares have been substantially reduced.

The Pakistani airline industry has faced stiff competition from international competitors and our aging fleet as well as combination of various other factors has led to an overall decline in our competitiveness. A good comparison can be with the Indian airline industry.

The Indian airline industry has enjoyed much success and growth unlike Pakistan. Due to a much larger population and increased urbanization the Indian Airline industry has had increased number of airline flights as well as continuous growth in the sector. The Open Sky Policy in India has led to much more increase in the number of players in comparison to Pakistan. The Indian Airline industry expects to reach 4th World Rank by 2024 due to consistent growth Pakistan Airline is still struggling to find its feet. The Indian government has abolished taxes, reduced excise duty and abolished landing charges to assist its airline industry.

Unlike Pakistan the Indian Airline Industry is profiting from steady rise in the number of tourists. There has also been an increase in the female business population which is also something that Pakistan has neglected. This shows a much more open mindset of the Indians.

The use of CAT technology at Indian airports has helped pilots take off and move in low visibility conditions. The bargaining power of buyers in India is low as they are large in number and highly fragmented. The suppliers enjoy high power since the industry like Pakistan has few players. However, there is forward integration in the Indian Industry.

Even though, the completion rivalry is high in India, the intensity unlike Pakistan is low as. This is because many new airlines in India are emerging like Goair. It is expected that 6 new low cost airlines will emerge in the coming years. The competition and rivalry has also forced mergers and acquisitions.

Indian Airline has comparatively more strengths than Pakistan. One major strength is that of low fares. Another is tourism as mentioned. The liberalized growth in India is another advantage. The Indian government is paying more attention regarding the construction of new airports as well. Like Pakistan it is also subjected to poor infrastructure but not the rising oil prices. The government of India also heavily regulates their industry. India enjoys aviation growth of 20% in passengers which is highest in the world. India also looking to double its passenger traffic over the next decade.

One problem with the Indian Airline industry is that it is overly regulated by their government. Unlike Pakistan it does not suffer from the cost of borrowing.

In sum, the Indian Airlines Industry continues to blossom while the Pakistan airline is still under recovery.

However, we should not be very pessimistic about our industry since the performance of several other competitors is worse than us for example that of the African airline industry.

In contrast to Pakistan, the African Airline industry is in turmoil and is referred to as the ‘flying coffins’. The African aviation industry is overly regulated by the government and this has not led to the growth. This is due to numerous restrictions on routes and market access. It was suggested that the airline industry may be liberalized in 1988 to relax restriction and encourage growth however no such implementation was there. State involvement and poor safety and security are among other factors adversely affecting the industry and state involvement is hindering the full liberalization of aviation in Africa. Such factors make it extremely difficult for effective competition to take place as most African airlines are receiving state support in various forms.

Safety is a big issue in the flying industry. Most of the airlines in Africa are banned because of this.  It is quoted that in Africa planes are six times likelier to crash than elsewhere and travelers swap tales of crises averted. In announcing the ban on virtually all aircraft overseen by civil aviation authorities in Sierra Leone, Liberia, Equatorial Guinea, Swaziland and Congo from landing at European airports, EU Transport Commissioner Jacques Barrot labeled many of the

planes “flying coffins.” In Nigeria late last year, two planes flying domestic routes crashed within seven weeks of each other killing 224 people, including dozens of schoolchildren heading home for Christmas holidays. Corruption is another cause of the troubles in the aviation industry.

A continent wide trend of economic liberalization may be fueling faster-than average passenger growth as former state-owned airlines go private amid new competition—even as poor governments fail to adapt and oversee the growth.

“You’ve got the general problem of poverty and lack of government capacity. In Africa, everyone is encouraged to privatize, but there is a very important role of the state, strengthening oversight and regulatory mechanisms as you open up the economy,” says Princeton Lyman, a former U.S. ambassador to Nigeria.Even many of Africa’s larger airlines fly secondhand aircraft purchased from overseas.Many other airlines, particularly in vast Congo, fly rickety old jets or propeller-driven planes, including some old military aircraft converted to passenger aircraft with the addition of plastic patio-style chairs.

Stories proliferate of outrageous misfortune—like presidents’ wives commandeering entire sections of the now-defunct Air Afrique for shopping junkets in Paris, stranding paying passengers behind.One solution might be banning castoff aircraft from former Soviet-bloc nations. Spare parts can be hard to obtain and some of the aging planes’ maintenance documentation has been lost.

“We’ve witnessed accidents in countries with conflict, like Congo, Angola and Sudan,” says Elijah Hingosso, an official with Nairobi, Kenya-based African Airlines Association. “Many of these flights took place in areas outside of government control, so there’s no oversight. We’ve also tended to notice in the past that many aircraft come from the former USSR.”“We’re urging governments to stop getting these old aircraft,” said Hingosso, who says the number of passengers is growing at between 6 and 7 percent annually—slightly higher than the global rate. We can clearly see that the African Airline Industry is in a far worse position than that of ours.