Upload
nguyen-tam
View
2.254
Download
131
Embed Size (px)
Citation preview
IV.FIVE COMPETITIVE FORCES
Although Vietnamese airlines industry as well as world airlines industry has not overcome
the global financial crisis in last three years, due to the need of a developing country,
Vietnamese domestic airlines industry has developed in a rapid speed. Mr. Lai Xuan Thanh –
Deputy Director of Civil Aviation Administration of Vietnam said “In 2011, the estimated
number of passengers carried by airlines was approximately 36 million through domestic
airports, up to 14% more than last year” (Vinh Hai, 2011).
Not only having a significant growth, within five years, the domestic market has become
colorful with the participation of private airlines including Indochina Airlines (2008) and
AirMekong (04/2011). In 12/2011, VietJet Air (VJA), the first private airlines operated in
low-cost business model, jumped into the pool which has shown the attractiveness and
potential of this market to investors (Quynh Trang, 2011) (Quynh Anh, 2011) (Vietjet Air
official website).
The airline industry is very competitive and Michael Porter’s five forces model, which is a
business unit strategy tool which is used to make an analysis of the value of an industry
structure, can be used to analyze the intensity of the competition and the profitability of this
industry.
1. Potential new entrants
The threat of new entrants refers to the possibility of new competitors entering the industry
and raises the level of competition, thereby reducing its attractiveness (Defining an industry,
Tutor2u). It seems that the entry threats in airlines industry are WEAK because the pool of
entry candidates is small and industry members will strongly contest the efforts of new
entrants to gain a market foothold (Thompson, A., Strickland, A., Gamble, J., (2007), pg 61).
However, there are several BARRIERS that new entrants encounter and must hurdle,
including:
- High capital requirements: The airline industry is one of the most expensive industries, due
to the cost of buying and leasing aircrafts, safety and security measures, customer service and
manpower (Tutorial: Industry Handbook, Investopedia).
- Restrictive regulatory policies: According to Decree No. 76/2007/ND-CP dated May 09,
2007 of the Government on air transportation business and general aviation, enterprises
applying for this industry’s business licenses must satisfy the conditions of quality and
quantity of aircrafts; operation, maintenance and human resources to operate and maintain
aircraft, capital source to assure the possession of aircraft; and legal capital ranging from
200-1000 billion. This legal capital is so high that it prevents enterprises from operating
private airlines in Vietnam.
Another obstacle for new entrants is brand value. Brand identity is important in airlines
industry, and benefits large airlines. Major carriers allocate considerable resources to
marketing efforts. Frequent flyer programs and other incentives have been successful in
enticing travelers to fly with certain carriers. This incentive can often be strong enough to
cause a customer to choose one carrier over another - even when another carrier offers a
lower fare.
Barriers to entry are also heightened by the hub system. Carriers can offer travelers more
choices while tying up less capital through their hubs. As a result, the hub system creates
market power for large carriers
The financial and Government policies pressure put on newbies of domestic airlines
industry is so heavy that it is greatly difficult for them to jump in.
2. Substitutes
The availability and threat of substitutes refers to the likelihood that companies in one
industry come under competitive pressure from the actions of companies in a closely
adjoining industry whenever buyers view the products of the two industries as good
substitute (Thompson, A., Strickland, A., Gamble, J., (2007), pg 64). Substitutes for air travel
include travelling by train, bus or car to the desired destination. The degree of this threat
depends on various factors such as money, convenience, time and personal preference of
travellers. The competition from substitutes is affected by the ease of with which buyers can
change over to a substitute consisting of three factors:
- Availability and Price Attractiveness of Substitute: comparison to other means of
transportation, airlines ticket price is much higher. Nevertheless, this gap will get smaller on
the long route from the North to the South. So, airlines still has its stand in domestic market.
- Comparibility of Substitute (quality, performance, and other relevant attributes): airlines
has the highest level of quality, speed and safety. However, in domestic market, esepecially
on short routes, competitive advantages get worse because it takes time for passenger both on
air and to travel to airport and vice versa while airports are located far from city centers.
- Switching cost: Due to low fare non-stop flights, Jetstar Pacific and Vietjet Air can lure
both price sensitive and convenience oriented travellers away from these substitutes.
Furthermore, two full-service airlines Vietnam Airlines and AirMekong have programs
named Golden Lotus Plus Program (VNA) and Mekong Club (AirMekong) which can be
seen as a commitment of customers with airlines carriers in which frequent flyers can benefit
from the number of miles travelling with these airlines including free tickets, priveleged
service and remarkable convenience (VNA and AirMekong oficial website). As long as
passengers join in these programs, their switching cost will be higher.
Because the majority of Vietnamese people is budget-income, the switching cost is low
and the location of airport is far from city center, in domestic travel, airlines is left behind
other means of transportation because of its price and inconvenience.
3. Rivalry
Competitive rivalry describes the intensity of competition between firms in an industry
(Defining an industry, Tutor2u). Since carriers are involved in a constant struggle to take
away the market share from each other, industry growth is average and as it is easy for
buyers to switch between the airlines companies, depending on price, the rivalry is
INCREASED. Rivalry is also high in the airline industry due to high fixed costs. Base on
Principle #3: “Rational people think at the margin” of “Ten principles of economics”, as
much of the cost of a flight is fixed, there is a great opportunity for airlines to sell unsold
seats cheaply to cover its cost as much as possible, which resolve in pricing wars between the
airlines. The airlines are continually competing against each other in terms of prices,
technology, in-flight entertainment, customer services and many more areas.
With different strategies (full-service vs. low-cost), rivalry force of Vietnam domestic
airlines industry is very strong, which requires carriers to have strong competitive
advantages to win the game.
4. Suppliers
Factors relating to the bargaining power of suppliers include the threat of forward
integration and the concentration of suppliers in the industry. Suppliers for aviation
industry ranging from aircraft makers, fuel corporation, flight academy which provides
pilots, flight attendances, etc to a catering company. Generally, bargaining power of
suppliers in aviation industry is strong for following reasons. Firstly, Vietnam aviation
industry is dominated by Boeing and Airbus. In details, VNA has 10 Boeing 707 and
around 50 Airbus for all kinds (VNA official website). The concentration supplier is
undermines the ability of airlines to exercise control over suppliers. It sounds impossible for
Vietnam airline industry to integrate backward into aircraft makers to self-manufacture on
its own. Secondly, according to Mr. Luu Thanh Binh, Vice president of VNA, main force to
aviation industry comes from aviation fuel which constitutes around 80% of operating cost
(Sharma, 2012) and directly effect to the price of each air ticket. High fuel prices forced
airlines to cut 10-20% of current spending on all items, use fuel-efficient aircrafts, operate
flexible schedule. Besides, the monopoly of Vietnam Aviation Petroleum Corporation-
Vinapco (Vinapco official website) pushes domestic companies into a dilemma which is
they have no option but to choose Vinapco as their fuel suppliers. A typical example which
clearly show the huge power of Vinapco is the case of JPA on March 31 st 2008, Vinapco
sent a written request to increase the cost of Jet A1 fuel from VND 593,000/ton to VND
750,000/ton with the deadline within 1 day (LD, 2008). While Jetstar had not agreed and
tried to negotiate, on April 1st, Vinapco stopped supply fuel for this airline which leads to
30 delayed flights and more than 5000 affected customers.
Valuable and critical characteristics in product provided as well as the jejuneness for
particular inputs (aircraft and fuel) enhance bargaining power of suppliers versus
Vietnam airline industry.
5. Buyers
Buyer power is determined by switching costs, the relative volume of purchases, the
standardization of the product, elasticity of demand, brand identity, and quality of service.
Because of the Internet, pricing information is less fragmented and easier to compare.
Often, a traveler can find price discrepancies for the same exact flights. Airline travel is not
cheap, and can be the most expensive part of a family vacation. Hence, for some buyers,
price sensitive and search for the best deals available, demand is very elastic. Nonetheless
in Vietnam airline industry, bargaining powers of buyers is not that strong. There are
limited options of choosing a low cost airline with relatively quality standard. They may
choose Jetstar (which recently merger with VNA) or some newbie in the market such as
AirMekong or Vietjet in which reputation has not yet developed and received negative
feedbacks from customers (Anonymous, 2011). In other words, variation of choosing for
customer is narrow. In terms of long-haul flight which is purchased infrequently, there are
few foreign airline companies which exploit international routes from Vietnam due to the
monopoly of VNA.
Limited in options especially for long distance, infrequently in purchase item and
monopoly in providing core product have decreased the bargaining power of buyers
in airline market.
IV. Key success factors:
Key Success Factors are those competitive factors that most affect industry members’
ability to prosper in the marketplace such as product attributes, resources, competitive
capabilities, etc ( Thompson, A., Strickland, A., Gamble, J., (2007), pg 87). Therefore,
identifying these key success factors is always the most essential mission.
In the airline industry, as well as other industries, key success factors can be determined
by analyzing and inferring from the industry’s characteristics, competitive forces, driving
forces, market position, and next moves of competitors.
First of all, in current economy, people become more and more price- sensitive. On other
hand, as be mentioned above, airline now is the most expensive mean of transportation
compared to other substitutes like train, bus, and car. Consequently, the airline industry
must provide services which are worthy of the amount of money customers have to pay.
Besides that, services or service quality also can help airline carriers differentiate
themselves from the others. Young fleet of nearly 100 modern aircrafts like Boeing 777,
Airbus A330, Airbus A321/320, booking and check-in online system, European, Chinese,
Japanese meals, luxurious seats for Business class… are all kinds of in- flight services
which enable Vietnam Airline ( VNA) to compete successfully. From that point, the
corporation can create a professional and trusted brand name or reputation as well which
is a vital consideration of customers when choosing among carriers.
In Vietnam aviation industry, despite the appearance of many new air carriers such as
Vietnam Aviation Service Company (VASCO), Air Mekong, Indochina Airlines, VietJet,
Vietnam Airline (VNA) still seems to monopolize the market. There are many reasons for
this. One of these reasons is that all new carriers are private and small- scale, so their
capital capability does not allow them to develop a wide route system. Meanwhile, VNA
is the only one air carrier which is patronized by the Government. Hence, they have both
opportunities and favorable conditions to exploit not only domestic but international
destinations. VNA has claimed themselves as leader of Vietnam Aviation industry with 84
domestic routes and 27 international ones with more than 300 flights per day (VNA
official website). It is defiantly a competitive advantage of VNA compared to other
carriers. Developing hub system will be the key for VNA to attract and keep customers.
As being analyzed before, though the competitive pressure from potential new entrances is
weak, VNA cannot make light of them. They are private and small- scale, they fall behind
VNA in term of hub system, service quality, and long-haul flights. As a result, they
attempt to focus on short-haul flights with low price and numerous of promotion
programs. That is why, besides service quality, a shortcoming of promotion might fall into
a disadvantaged competitive situation. In addition, the aviation industry in Vietnam is in
the early development stage of its life cycle (mentioned above) where market share or
market position are priority. Thus, promotion is considered as a key success factor.
In conclusion, service quality, hub system, and promotion are three key factors to the
future competitive success of Vietnam Aviation industry.
V. Outlook for the airline industry
With the aim of deciding whether the outlook for the airline industry presents the company
with a sufficiently attractive business opportunity, some important factors must to be
considered such as: the industry’s development potentials, the power of five competitive
forces, the degrees of risk and uncertainty in the future, the sufficient competitive strength
and so on. It is believed that the analyses below could deliver an overall outlook for Vietnam
airline industry in general and Vietnam Airlines Corporation in specific.
First of all, taking the growth potentials for Vietnam airline industry into consideration, it
could be said that on a whole, the industry would have convenient conditions to develop and
bloom in the future. As it is stated in the industry’s economic feature “Aviation market has
experienced significant growth after the implementation of open-door economic
development innovation policy in 1986”, Vietnam aviation industry is growing rapidly
in the recent years. Some good signals for the whole industry these years could include:
an increase in the population from average 87,84 million people in 2011 to an estimate of
over 88 million people in 2012 (Thanh Huong, 2012, www.qdnd.com.vn) which would lead
to a more expanded market; an outlook of Vietnam economy on the way of being settled as a
result of decreased inflation and better trade balance according to Fitch rating- Global Rating
Agency; GDP positively increases during hard time of the whole economy (5,89 % in 2011)
presenting a stable demand from the market. Also, taking advantage of the positive
development of both outbound and inbound tourism industry, Vietnam airline industry is
promised an increased profitability from visitors- both travel from and to Vietnam.
Along with general growth potentials of aviation industry is the outlook for Vietnam airlines
Cooperation in the upcoming periods. Obviously, after analyzing the economic feature of
aviation sectors as well as five competitive forces, it could be concluded that aviation
industry is totally attractive to Vietnam airline, in which it is protected by the government, it
has no direct rivals, it is extremely powerful over buyers, suppliers and competitors and it is
playing in a very potential area for development. Vietnam airline at this moment is a well-
entrenched leader in Vietnam aviation industry that may present adequate opportunity for
good profitability. That is why it is investing aggressively to capture the opportunities it sees
and improve the long-term position in the business. In addition, there are several signs of
airline industry being stronger and stronger. After a series of bankrupts in Indochina Airlines,
Air Mekong, Vietjet air, Trai Thien airline, and people saw only the Vietnam airlines and
Jetstar Pacific left in the industry. And Jetstar Pacific was eventually acquired by Vietnam
airlines. Plus, according to the information on electronic site Vietnamplus.vn, Prime Ministry
signed Decision No.123/TB-VPCP in 2009 requiring Aviation Corporation (Vietnam
airlines) coordinate relevant agencies to build long-term orientation in the overall
development of the Vietnam aviation industry. In particular, new approaches at the national
level with international standards are considered the key to build the aviation industry
commensurate with international stature. Besides, on the main website portal of Vietnam
airlines, it is stated that the airline is expected to reach 115 and 170 modern aircrafts in 2015
and 2020, respectively, making solid steps integrating into the global aviation industry as a
truly regional carrier of choice, which is fully ingrained with Vietnamese traditional culture.
From the above growth potentials, it is generally said to have a very attractive profitability
from Vietnam aviation industry in upcoming years.
Last but not least. Vietnam airlines’ problem at this moment is its limitation in capacity,
which affect negatively to the customers. Obviously, the overcrowd situations in special days
led to higher price, which dissatisfy the passengers and as a result, debates for more new
entrants become heated. It is obviously that acquiring more aircrafts and doing business for
the sake of passengers are good ideas for a more stable development in Vietnam airlines.
VI. Conclusion.
In conclusion, Vietnam aviation industry is very potential for development and quite
attractive in profitability as a whole. After analyzing the five competitive forces and strategic
group map, Vietnam airlines is proven to be the dominant player in the industry. It owns key
success factors that could ensure a long-term position in the business. Moreover, Vietnam
Airlines Corporation is making effort to be stronger and stronger not only in Vietnam but
also in the surroundings to be commensurate with international stature. Hopefully, Vietnam
airlines in specific and aviation industry in general could go long steps in development and
globalization proceeds.