Prof. Erik Larsen

Università della Svizzera italiana

Corporate Strategy

Winter Term 2009/10

“The European Airline Industry on a Collision Course”

by Gimeno et al. 2004

–

A SWOT Analysis for the “flag-carriers”

handed-in by:

Martin Fett

Via Pedemonte 17

6962 Viganello

Student-ID: 09-987-413

Master in Corporate Communication

Date: November 18th, 2009

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Table of Contents 1. The European Airline Industry – Current Overview ........................................................................ 2

2. SWOT-Analysis ................................................................................................................................. 2

2.1 Internal analysis: Strengths and Weaknesses ......................................................................... 3

2.1.1 Strengths ......................................................................................................................... 3

2.1.2 Weaknesses ..................................................................................................................... 3

2.2 External analysis: Opportunities and Threats ......................................................................... 4

2.2.1 Opportunities .................................................................................................................. 4

2.2.2 Threats ............................................................................................................................. 4

3. Core strategies ................................................................................................................................. 5

3.1 Strengths and Opportunities ................................................................................................... 5

3.2 Strengths and Threats ............................................................................................................. 5

3.3 Weaknesses and Opportunities .............................................................................................. 5

3.4 Weaknesses and Threats ......................................................................................................... 6

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1. The European Airline Industry – Current Overview

Due to exogenous shocks like the 1973 oil crisis or the 2001 terrorist attacks as well as the 2003 Iraq

war the worldwide Air Transport Industry faces its most severe crisis in its history. Many companies

since then downsized their workforce and even European flag carriers like Swissair and the Belgian

Sabena did not succeed to re-invent themselves, went bankrupt and so out of business.

The business and social world is getting more and more mobile, individual and flexible – and so the

people’s lives are determined by a high desire for mobility and travelling.

Copenhagen on Thursday: Attending an opera at the Royal Danish theatre. Cologne on Friday.

Watching a football match at the stadium. London at the weekend. The people in 2003 like to spend

their time abroad and enjoy the world’s most popular spots – even just for a couple of days. By

pursuing a low-cost-strategy, budget airlines such as Ryanair and easyJet understood and met market

needs the best and therefore should not be underestimated as rivals by the flag-carriers.

Although they have been growing rapidly over the last years, it is not clear how big the market niche

for the low-cost carriers would grow, how quickly this segment would reach saturation. The Low-Cost

Carriers (LCC) are big new competitors for the flag-carriers and made a rethink of every marketing-

strategy for all market-members a necessary condition for a possible reshape of the whole industry.

Not being capable of successfully competing against low-cost carriers in price, most attempts to

succeed in point-to-point operations failed in general.

How can flag carriers survive in an industry, which has a rapid growth on the one hand1 – but has to

suffer an enormous economic loss on the other hand? How can they respond to the structural and

competitive challenge? At least they have to elaborate a clear understanding of the consumers’

preferences regarding destinations, prices, products and services.

For that reason, a sound SWOT-Analysis is inevitable.

2. SWOT-Analysis

The SWOT-Analysis of the flag carriers points out the strengths and weaknesses of flag carriers in

general and also focuses on the market as a whole by elaborating opportunities and threats.

1 Traffic rose from roughly 250 million passengers in 1978 to approximately 600 million in 1996 (cf. Gimeno et

al. 2004: 2).

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2.1 Internal analysis: Strengths and Weaknesses

2.1.1 Strengths

Low-Cost Carriers had shown that catering was an avoidable expense in short flights. They cut down

services like catering, convenient seating or offered a manual check in. In short: They reduced the

service level. This is probably the biggest difference between flag and discount carriers.

Flag carriers offer their consumers (as well as their personnel) high-quality service and convenience.

But since the demand for air travel is divided into two segments (business and leisure travelers) only

one of those segments tend to be a proper target group for the flag carriers: The Business Travelers.

Because they are more willing to pay higher fares for premium quality in services and greater

flexibility in travel conditions. Passengers of flag carriers in general do not have to set aside the

convenience and “First-class-feeling” and it is quite obvious that those who want to fly first-class

should fly with flag carriers.

Furthermore, flag carrier companies enjoy a high prestige throughout the world which contributes to

their brand equity and is without a doubt a great asset. As one can assume the so called “Network

Carriers” (a synonym for flag carriers) are known to have a great network. That condition and the fact

that they have a well-established relationship among their partners. These relationships are a core

advantage, for example in negotiations with airports about time slots. They are crucial for the

Network Carrier’s big bargaining power since slots in congested airports are very valuable, and the

flag carriers still benefit from privileged access to those “time windows” for landing and departure.

In contrast to LCCs the Network Carriers do not just work within “point-to-point” networks. They

have developed and established a hub-and-spoke network, which empowers them to provide a wide

range of long-distance-connections (and even overseas), which LCCs do not have.

A main strength is a swell the after-sales program of established Network Carriers. The so-called

Frequent Flyer Program (FFP) is a loyalty program that offers rewards to frequent passengers and

bind the passengers to the Network Carrier Company.

2.1.2 Weaknesses

Although Network Carriers (NCs) offer a great variety of strengths, they have to admit some

weaknesses as well. A major weakness obviously is the ticket-price. A vast number of passengers are

very price sensitive and would even accept cutbacks in terms of convenience and service if they have

to pay a lower price. Since the focus on convenience and comfort is a major strengths of flag carriers

the high price is a weakness in comparison to low-cost airlines.

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Most of the airlines in the industry are considered to be inefficient, undercapitalized and

unprofitable – because they do not exactly meet the needs of the customers. Since LCCs reduced

their level of bureaucracy via airline call centers or Internet websites on which a passenger can print

his/her tickets manually, the level of complexity related to flight bookings with NCs is still high. In the

current situation the NCs cannot really compete with LCCs on the basis of short-distance flights

because of these crucial weaknesses of higher pricing in combination with higher standard of

complexity and bureaucracy.

NC-Airlines had traditionally integrated many value-chain activities, e.g. engineering, maintenance

and repair. Lufthansa, one traditional Network Airline disposed of its ground-handling provider and

outsourced the service of overhauling. Lufthansa seems to be one of only a few airlines which

decided to behave like this to save money and offer cheaper prices. And also LCCs like Ryanair or

easyJet contracted out all their maintenance – in order to save costs.

2.2 External analysis: Opportunities and Threats

2.2.1 Opportunities

Since 1978 the Airline industry has been expanding, fares had been falling from 1996 to 2000 – and

the demand for (cheap) flights is as high as it has never been before.

Due to liberal open sky bilateral agreements with Asian and European nations the market is fully

deregulated and faces open competition. Any EU airline could operate any route within the EU with

any frequency, schedule and price. With help of the internet it is easier (and cheaper!) for airlines

than in former decades to advertise, sell tickets (without a intermediary like a travel agency) and

bind the passenger to a certain airline company.

2.2.2 Threats

Although the tough market situation contains opportunities it also shows threats for the competitors.

One threat that almost every economic market in the world faces is the threat of “exogenous shocks”

– i.e. wars or attacks of terrorism like in September 2001 as well as political instabilities (in many

African or Asian countries). Especially acts of terrorism are a common issue in the 21st

century all

over the world and especially among long-distance flights, the core element of flag carriers.

A big threat for the flag carriers is as already mentioned the pricing policy of the Low-Cost Carriers. It

helps the LCCs to abstract market share from the Network Carriers – especially consisting of those

people who do not care about convenience benefits which the NCs have over LCCs.

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Modern substitutes like fast trains can reach almost every location in the world and are threats

especially for short-distance flights. Those substitute offer last-minute-tickets at an affordable level

to their customers. An element which the flag carriers are not offering yet.

3. Core strategies

3.1 Strengths and Opportunities

Which of the flag carriers’ strengths fit to the opportunities they find on the market? One of the

major strengths pointed out before is the well-established customer-relation among flag carriers. In

combination with the opportunity of online marketing this strength could be reinforced by improving

the relationship to the customers via those online platforms. Network Carriers could offer special

tariffs for those who book their flights on the internet or offer more points for frequent flyers.

Since one of the major strengths is the good service quality and prestige, it could help them to focus

deeply on business and first class passengers – and also put the emphasis on budget-passengers. Of

course those customers are willing to accept reductions in services, but Network Carriers could offer

the highest comfort as possible on a price which is only slightly higher than the LCCs’ ones (or even

the same?).

For example they could do 1st

degree price discrimination: Those who pay the “high-demand”-ticket

pay for the catering and high convenience and those who bought the “low-demand”-ticket accept

lower convenience and a reduction in catering. But what if they bought a low-demand-ticket and

want to eat anyways? They can buy a delicious meal at the airplane as well – those and many more

offers can be purchased separately and in addition to the “basic offer” – just to perfectly meet the

individual and perpetual needs of the customers.

3.2 Strengths and Threats

In order to win against substitute products such as trains, Network Carriers could use their Frequent

Flyer Program to attract new customers and build a certain loyalty to the brand.

Safety and Experience as a core element of flag carriers should be communicated in a serious manner

to convince the customers that – even in times of terrorism – it is safe to fly, and especially with flag

carriers.

3.3 Weaknesses and Opportunities

Since any EU airline could operate any route within the EU with any frequency, schedule and price

the LCCs are getting a higher market share on short-distance flights. The NCs should decrease their

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price, especially on those distances. Because in the market of short-distance-flights there is a real

competition with LCCs, whereby the NCs act as a monopolist in the market of oversea-flights. As they

are acting as a monopolist they could finance the reduction of price with increasing the prices on

long-distance flights. One of the major weaknesses of the NCs is the missing presence on the

internet. The internet seems to be reserved for LCC-offers. That weakness of the NCs could be turned

into a strength by focusing on internet activities and other attractive distribution channels.

3.4 Weaknesses and Threats

The present weaknesses should not be a target for future threats. And therefore the flag

carriers should reduce their complexity in booking and check-in. And should not charge

those high fees they are charging at the moment. To succeed in competing with LCCs and

potential substitutes, they have to be more profitable and attractive to the target group for

the LCCs and those substitutes, like trains or fast boats.