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Porter Flies First Class

Air transportation is directly correlated to economic growth. According to Boeing 0 to 80% of air travel demand is driven by the stability of economy. After the 2009 recession, the passenger air traffic industry suffered a 2% decline. However commercial aviation has successfully bounced back in the past and this time there is not exception. For the first half of 2010 the industry saw an increase of 8% growth that is forecasted remain throughout 2014 (The Boeing Company, 2011).

From massages, en-suite showers, Bvlgari toiletry bags and Dom Prignon over a seven-course meal the range of services for luxury airlines competes in a recovering industry still suffering the effects of the 2009 economic crisis. Demand in air transport would only need to build an additional 1.4 percent to "return to pre-crisis levels," reported the International AirTransport Association.

Following the crisis the demand for luxury travel has regained growth as well. There are roughly 35 airlines that offer first class service including flat beds and outstanding customer service with a one-to-three crewmember per passenger. In business class the ratio is about 10 to 1. However, first class profits dont represent the biggest revenue for the high-end service carriers as the concept has become more of a marketing tool than it is a money-maker (Vora, World's Best First Class, 2007). On the other hand, "Business class is one of the biggest sources of profit for airlines," explains Aram Gesar, editor of the New York-based AirGuide magazine and AirGuideonline.com

Forbes magazine divides the worlds best airlines in two categories, first (Table 1) and business class (Table 2). However most US carriers have consolidated the two in one class altogether. Curiously enough, there arent any North American carriers in either one of these lists. This paper will examine the full service airlines that offer luxury accommodations in each of Porters five competitive forces that shape strategy.

Contending forces I. Threat of entry

There are seven major sources of barriers to entry: 1. Supply-side economies of scale When firms produce at large scales they are able to enjoy lower costs per unit as the cost will be shared by a larger output. The most significant example is the creation of airlines alliances. The alliances concept can be defined as lumping, where the firms integrate together their common activities to achieve economies of scale. British Airways is the leading airline in the UK and has two major hubs at Heathrow and Gatwick airports that allow a greater capacity and better benefits for passengers. Similarly as part of one of the three major worldwide alliances, oneteam, they are able to capitalize in the resources of the other members as well. Out of the three alliances, oneteam is

leading in utilizing their networks and Internet resources and offers their customers a streamlined process for scheduling and collecting points for each of their loyalty programs. The other two large airlines alliances, SkyTeam and Star Alliance also provide a continuous collaboration between each other. This way, they are able to utilize their resources and provide a higher value service to their passengers. Through alliances, airlines are able to achieve a higher level of economies of scale. Most of the carriers that provide an exceptional value to customers belong to one of the three major leading airline alliances in the world (Table 1 and Table 2). Star Alliance, SkyTeam and oneworld account for 60% of the worlds air transportation (Euromonitor International, 2010).

2. Demand-side economies of scale The benefits for this side, arise when a buyers willingness to pay for a service or product increase with the number of buyers who also patronize the firm. In the case of luxury air travel, there are a considerable number of buyers that patronize air travel. Despite the 2009 crisis, International premium traffic volume increased 9% in 2010 (Euromonitor International, 2011). Although it is a positive outcome the numbers cant be compared to pre-recession levels in 2008. However the increase of demand for high-end air transportation does bring a higher number of customers demanding the service (Table 3).

3. Consumer switching costs

In the air traffic industry, customers face switching costs when they give up the benefits associated with the multiple loyalty programs that airlines offer.

4. Capital requirements This high end product is very expensive and as mentioned previously for first class services, these premium seats do not drive profits but they are a great marketing tool for branding and the added value aspect much needed in this category. On the other hand, the sales from business class seats do bring the most profit for the airlines.

5. Incumbency advantages independent of size The current players on the high-end passenger transportation hold a significant power that does not take into consideration the size of their fleet. For example Qatar airlines parent company is the Government of Qatar which gives the company extra leverage over any possible competitors.

6. Unequal access to distribution channels Airlines alliances have lumped its members activities all together to utilize each others resources. The ability of an airline to join an alliance is closely analyzed in terms of law and regulations.

7. Restrictive government policy The airlines are highly government-regulated industries. However some enjoy the benefits that bring when they are owned by it like the Qatar Airlines case. With the creation of the Open Skies Treaty in 1992 several territories have been able to benefit from less-regulated policies and enhance government relations as well.

This force is very strong given the capital intensity needed to enter the market. Similarly, the three worldwide alliances make have brought make it very difficult to new players to enter and succeed in the market The concept started out as a simple marketing tactic and now has evolved into strategic agreements that allow a continuous collaboration in between its members. Airlines alliances have contributed to a large part of the biggest airlines development as the branding of such collaborations have a positive effect on the airline brand itself. Airlines see many benefits in alliances such as the ability to serve country-specific regulations in certain geographic areas without actually operating there and keeping their costs to a minimum. Further cost reductions are seen through the evolution of communication and integration of IT networks. Passengers also enjoy extra benefits at airports facilities and rewards in different loyalty programs. 16 of the worlds 20 most profitable airlines belong to one of the three alliances (Euromonitor International, 2010).

II.

The power of suppliers

A supplier force is powerful based on a few different aspects: i. It is more concentrated than the industry it sells to When talking about the luxury airlines and the rest of the industry in general, including cargo, the aircraft production is concentrated in two dominant players Boeing and Airbus, therefore in this B2B relationship the suppliers are stronger in respect to the airline organizations it sells to.

ii.

The supplier group doesnt depend on the industry for its revenues All of the suppliers heavily depend on the industry revenues, as they cannot serve another industry, especially aircraft manufacturers.

iii.

Industry participants face switching costs on changing suppliers Since most airlines fleet has a combination of both Boeing and Airbus models, the cost of switching from one supplier to the other are not significant. Nevertheless, the fact that there are only two major manufacturers brings a higher leverage to the suppliers.

iv.

Suppliers offer products that are differentiated There is no doubt that if you were to flight with either one of the best business or best first-class airlines, you will be riding either an Airbus or a Boeing. Both companies hold the largest market share of aircrafts production worldwide.

Its really not a coincidence that the two most popular models for 2010 were the Boeings 737 and Airbus 320 models (Euromonitor International, 2011). With creation of planes like the Airbus 380, this supplier ensures that their product is highly differentiated among the rest. There is no aircraft today that can offer better fuel burn per seat and therefore eco-efficiency than the a380. This famous model offers numerous benefits to the airlines and ultimately the passengers that could even take a shower in the private en-suite first class cabins. The demand for the product is extremely high and even though the company had some delays in the product, firms are patiently waiting for the aircraft. As of September of 2011 Airbus.com reported there are 236 orders placed for the $300 million aircrafts have been delivered.

v.

There are no substitutes for what the supplier group provides - In terms of aircrafts and labour there are no substitutes available to the aircraft industry. Especially in the luxurious first and business classes where the customer experienced is excelled to exceptional levels. To fulfill such expectations the industry is very labour intensive and similarly for the goods to provide such service there has to be an airplane. Given that flying cars have not been invented yet.

vi.

The supplier group can credibly threated to integrate forward into the industry This would occur if the airlines profit margin is significantly larger to make the

manufacturers start up their own airline. This is very unlikely given that the aircraft manufacturers themselves have a significant profitability themselves.

Given that there are only two dominant players in the aircraft manufacturing, this force is very relevant to the success of the industry. With more than a two year delay of the Airbus A380 model, some companies like Singapore Airlines, Emirates and Qantas have been highly affected as in some cases new business plans were developed around the twodecker 500-passenger capacity boost.

III.

The power of buyers

A consumer group has negotiating leverage if: i. There are a few buyers or each of the volumes they purchase is very large in comparison to a single vendor Just like any category of air transportation, the economy plays a significant role. Upon the 2009 recession some airlines completely removed their first class session while others invested extra resources in serving the privileged market. Business traveling shows a steady growth for the next couple of years. However, domestic business trips will experience a fast growth thanks to emerging countries like China, Brazil and India whose booming economies are likely to lead the way (Table 4).

ii.

The industry products are standardized or highly undifferentiated First class or business passengers have a wide range of options when flying especially if commenting between the most popular hubs in the world.

iii.

Buyers face few switching costs if they switch vendors There are not significant losses in switching airlines. However, there may be costs associated with the switch of airlines if a loyalty program is well establish and the switch represents the loss of miles that can eventually obtain the consumer an actual seat. Also if for organizations or individuals that have an agreement with an organization to provide special fares over the sale of numerous business class seats, they can loss the discounted price if they take their business elsewhere.

iv.

Buyers can credibly threated to integrate backward and product the industrys product themselves if vendors are too profitable This aspect ties back to the barriers to entry. Since the airline industry in general is extremely expensive to enter into there are very little chances that individuals can provide the service themselves.

A buyer is price sensitive if: i. The product it purchases form the industry represents a significant fraction of its cost structure or procurement budget In terms of business travel, the portion of flight tickets costs may be a minimal fraction of the cost in terms of business transactions. If a senior executive is working on a business deal with an international corporation,

the cost of the ticket may be irrelevant to the return of investment in a large business negotiation. On a similar case, for first-class leisure travels the cost structure of their trip would be more valued at the experience level rather than the hefty price ticket. Since the average business class customer travels about six to 12 times each year (Vora, World's Best Business Class, 2007), the competition for their market share is very high. With continuous innovation and a combination of service and product that provide the customer with a superior experience they are able to do that.

ii.

The buyer group earns low profits and is under pressure to reduce its purchasing costs The great recession placed a decrease in airlines industry all together. However, the industry has optimistic forecast for the next 20 years. Airbus predicts there will be a 26% growth from emerging economies by 2030 (Table 5). Nations like China, Brazil and India are likely to lead the way in domestic business trips thanks to their growing economies (Euromonitor International, 2011).

iii.

The quality of buyers product or services is little affected by the industrys product In the case of luxury airlines accommodations. Passengers that value conform and believe that the fact that being rested and more relaxed after a flight will have a significant impact on their performance, they will pay little attention to the prices of business or first class seats.

iv.

The industrys product has little effect on the buyers other costs In order for this aspect to make the buyer group sensitive, firms would have to value the service enough to believe that a business class seat pays for itself in the event that a very important executive would be more likely to close a deal if he/she flew on business class.

IV.

The threat of substitutes The threat of substitutes is high if:

i.

It offers and attractive price-performance trade-off to the industrys product In terms of price trade-off, consumers can highly benefit from flying with the low cost airlines or if they enjoy the experience with the full-service airlines, they can simply booking a seat in their economy class. Since most of the luxury airlines most frequent flights are between major international hubs, its not possible for consumers to use a different mean of transportation other than fly.

ii.

The buyers cost of switching to the substitute is low This can be also referred to the benefits that loyalty programs bring to consumers. If the benefits are high, i.e. fast earning on miles to accumulate for a real ticket, consumers will bear the cost of the possible rewards by switching.

V.

Rivalry among existing competitors

The intensity of rivalry is greatest if: i. Competitors are numerous or are roughly equal in size and power There are numerous air transport providers. For full-service luxury accommodations the players are as powerful as they are many. Alliances have also increased the power and their resources by the integration of activities.

ii.

Industry grow is slow which precipitates fights for the market share available Projections show a growth in the airline industry of over 50% by the year 2030 (Table 5).

iii.

Exit barriers are high In the airline industry, the investment to enter the market is very capital intensive, therefore in order to exit the industry the firm must be willing to sustain significant loses and debt. When Mexicana ceased to fly in August of 2010, they had filed for bankruptcy protection with Mexico and the US with a debt over one billion dollars (Euromonitor International, 2011) .

iv.

Rivals are highly committed to the business and have aspirations for leadership, especially if they have goals that go beyond economic performance in the particular industry This aspect if probably the strongest in the luxury airlines. Emirates Airlines is one of the leading of its kind. Number ten in most profitable airlines

(Table 5). The company reportedly spent about $112,000,000 in cabin and entertainment upgrades in 2010 (The Emirates Group, 2011).

v.

Firms cannot read each others signals well This does not occur in the airline industry as some of the major players that provide the highest ranked business and first class seats have been in the market for a while and have a clear understanding of the market itself.

Price competition is most likeable to occur if:

i.

Products or services of rivals are nearly identical and there are a few switching costs for buyers For airlines that offer business class the differences on the service and amenities do not vary widely. The differentiations would be based mostly on company reputation and the benefits passengers seek in loyalty programs and alliances.

ii.

Fixed costs are high and marginal costs are low Given that the service is perishable and the competition is tight, with services like first class some airlines do not even expect to make a high profit but to utilize such offerings as a marketing tool to add value to their brand.

iii.

The product is perishable Just like any other services, airline seats are perishable; they cannot be replaced or charged after a flight has departed.

Politcs There isnt probably an event more significant to an industry as 9/11 and the impact it had in had in the airline industry. Similarly, Economics According to Boeing, 60-80% of air travel demand is driven by economic growth, which further affects the high-end service airlines. Social Flying first and business class is also socially seen and a high status and part of an eliteonly member club that is true to the price level of each seat, ten times more than the economy class.

Technological Mobility has started to become a major factor in the airline industry. Some airlines like British Airways in 2010 have developed mobile applications that not only allow passenger to check in but also purchase and manage bookings. The proper utilizations of resources can highly benefit a firm if used wisely, however, as previously mentioned can also bridge customers closer to competitors. Mobility commerce sales will nearly double

by 2015 especially in the Asia-Pacific regions where most of the business class seats are sold with (Table 4). Similarly, on the technological aspect, with more fuel-efficient planes, airlines will become more competitive and also benefit with marketing efforts aligned with their environment causes.

PESTEL Environmental It is highly linked with technology and the advancements in the development of more environmentally friendly aircrafts. The Air Transport Association (IATA) has a goal of reducing utilization to 10% and employ alternative fuels by 2017 (Euromonitor International, 2011). Legal The Open Skies agreement has brought numerous benefits to the airlines in participant territories. For example, The UAE has one of the most open agreements in the world as they hope to make Dubai a global hub. Other nations need to keep their skies closed for some reasons. Due to the popularity that Brazil will have for the next FIFA world cup in 2014, the nation has been more reliscint towards the agreement only signing one with the US in 2010 (Euromonitor International, 2011).

CONCLUSION The future is very optimistic. As historical data has demonstrated that after recessions and other environmental effects like SARS and 9/11 the industry has bounced back and is en route to grow and double traffic by 2030 (Table 5). North America still dominates world traffic today but by 2030 Asia-Pacific will take the lead (Airbus, 2011).

Works Cited Airbus. (2011). Global Market Forecast 2011 - 2030. Blagnac: Retrieved from http://www.airbus.com/. Euromonitor International. (2011). Air Transportation: Clear Skies Ahead? Retrieved from http://www.euromonitor.com/. Euromonitor International. (2010). Global Airline Alliances Safety in Numbers. Retrieved from http://www.euromonitor.com/. Euromonitor International. (2011). Luxury Travel Capturing the New Luxury. Retrieved from http://www.euromonitor.com/. The Boeing Company. (2011). Current Market Outlook 2011 - 2030. Seattle: Retrieved from http://www.boeing.com/cmo. The Emirates Group. (2011). Annual Report 2010-2011. Dubai: Retrieved from www.theemiratesgroup.com. Tinseth, R. (2011, August). Current Market Outlook 2011. Retrieved October 8, 2011, from The Boeing Company: www.boeing.com/commercial/cmo/pdf/2011_Paris_Presentation.pdf Vora, S. (2007, 08 09). World's Best Business Class. Retrieved 10 10, 2011, from Forbes.com: http://www.forbes.com/2007/08/09/travel-business-airlines-forbeslifecx_sv_0809bizclass.html Vora, S. (2007, August 10). World's Best First Class. Retrieved October 10, 2011, from Forbes.com: http://www.forbes.com/2007/08/08/travel-airlines-firstclass-forbeslifecx_sv_0809firstclass.html

APPENDIX World's Best First Class 1 Qatar Airways 2 Singapore Airlines 3 Cathay Pacific Aiways 4 Malaysia Airlines 5 Thai Aiways 6 Emirates 7 Jet Airways 8 Lufthansa 9 Korean Air 10 Qantas Airways Table 1 - Source: Forbes.com World's Best Business Class 1 Singapore Airines 2 Virgin Atlantic Aiways 3 Cathay Pacific Airways 4 Malaysia Airlines 5 Air New Zeland 6 British Airways 7 Jet Airways 8 Qatar Airways 9 Qantas Airways 10 Etihad Airways Table 2 - Source: Forbes.com

Qatar Singapore Hong Kong Malaysia Thailand United Arab Emirates India Germany South Korea Australia

Star Alliance oneworld Star Alliance

Star Alliance SkyTeam oneworld

Singapore United Kindom Hong Kong Malaysia New Zeland United Kindom India Qatar Australia UAE

Star Alliance oneworld Star Alliance oneworld

oneworld

Table 3 Source: IATA

Table 4 - Source: Euromonitor International

Top Airline Groups by Revenue Group 1 2 3 4 5 6 Revenue ($B) 36.1 34 31.8 31.3 24.6 22.2 Operating result ($B) 1.76 1.82 2.22 0.16 1.23 0.31 Net result ($B) 1.49 0.85 0.59 0.81

Lufthansa Group United Continental Holdings Delta Air Lines Air France-KLM Group FedEx Express AMR Corporation -0.41 International Airlines Group 7 19.5 0.3 0.13 (British Airways/Iberia) 8 Japan Airlines Corporation 16 2.22 9 All Nippon Airways Group 16 0.8 0.27 10 The Emirates Group 14.8 1.48 1.46 Table 1 - Source: Airline Business August 2011, Flightglobal Data Research

Table 2 - Source: Euromonitor International

Table 3 - Source: Airbus

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