Airlines Industry Australia Five Forces Analysis Report
Market Analysis
Fluctuating growth has been seen in the Australian airline industry over the 2003-2007 period. This trend is expected to stabilize and start to decline over the forthcoming years towards 2012. The Australian airline industry generated total revenues of $15.3 billion in 2007, representing a compound annual growth rate (CAGR) of 9.3% for the period spanning 2003-2007. In comparison, the Chinese and Japanese industries grew with CAGRs of 20.8% and 10.7%, respectively, over the same period, to reach respective values of
$22 billion and $26.1 billion in 2007.
Industry volumes increased with a CAGR of 9.4% between 2003-2007, to reach a total of 58.6 million passengers in 2007. The industry's volume is expected to rise to 72.7 million passengers by the end of 2012, representing a CAGR of 4.4% for the 2007-2012 period.
Domestic flights dominated the Australian airline industry and accounted for 47.2 million passengers in 2007, equivalent to 80.6% of the industry's overall volume. In comparison, the number of international flight passengers reached 11.4 million in 2007, equating to the remaining 19.4% of the industry's volume. The performance of the industry is forecast to accelerate, with an anticipated CAGR of 10.1% for the five-year period 2007-2012, which is expected to drive the industry to a value of $24.7 billion by the end of 2012. Comparatively, the Chinese and Japanese industries will grow with CAGRs of 9% and 7.9%, respectively, over the same period, to reach respective values of $33.9 billion and $38.2 billion in 2012.
Airlines have struggled throughout 2008 amid a cocktail of soaring fuel prices, slowing consumer demand and the impact of the credit crisis on bank liquidity. More than 30 airlines have collapsed around the world, including business class-only airline Silverjet SILJ.L and travel giant XL in the UK. Although the oil prices dropped down in third quarter 2008, airline bankruptcies around the world are set to rise over the winter. The crisis has had severe impact on suppliers like B/E Aerospace, the world's biggest supplier of plane seats due to a lack of demand. Nevertheless the airline industry in Australia is characterized by strong supplier power; a consequence of the global duopoly of Boeing and Airbus that exists in the manufacture of aircraft globally and the fact that, as yet, no viable substitute for jet fuel has been discovered.
The air industry in Australia has been deregulated to a certain extent, which makes it more attractive for new entrants, although the bureaucracy and large financial outlay involved in setting up an airline serve as a deterrent to new companies. The desire for Intensity of competition relatively fast domestic travel and international travel means that other forms of transport pose only a weak threat to air travel.
Buyer Power
The Australian airlines industry will be analyzed by taking airlines as players, and leisure and business travellers as the main buyers. The large number of individual consumers in this market diminishes buyer power, as the impact on an airline of losing one customer is marginal. Switching from one player to another does not incur any additional costs and customers are therefore free to shop around for the best deal on their particular journey. On the whole this industry is highly price sensitive and the majority of customers are keen to find the lowest priced ticket for their journey.
Buyer power is increased marginally by the presence of online booking sites that allow customers to compare and contrast tickets according to price, flight times and number of stops en route and travel agents who assist customers in finding the best deal. In response to the ease of switching from one player to another, many airlines offer loyalty schemes such as Qantas Airlines’ Privilege Club. Buyer power is
assessed as moderate overall.
Key inputs for airlines are fuel, aircraft and labour. Airlines employ a relatively large number of flight and ground personnel, including mechanics, and reservation and transportation ticket agents. As the airline industry is labour-intensive, staffing costs are substantial, and may contribute more than 40% of an airline’s total costs. Aircraft are either leased or purchased from manufacturers by negotiating a separate contract
for each order.
For example, Australian player Virgin Blue entered into a contract with Boeing for up to fifty 737 airliners in January 2003. A disincentive for airlines to switch suppliers is the fact that they often sign contracts for a number of aircraft to be produced over a period of time, and that breaking this contract would incur financial penalties. Supplier power in this industry is boosted by the presence of a duopoly upstream. Globally, Boeing and Airbus are the only manufactures of airliners. A number of airlines have formed partnerships or alliances with other airlines in order to buy fuel or purchase aircraft as a bloc, thereby achieving higher bargaining power and reducing supplier power.
Owing to a series of treaties between countries, airline fuel is not taxed. However, airlines have little control over rising fuel prices, and must often use techniques such as hedging to mitigate the impact of price fluctuations. It is difficult to find substitutes for the inputs required for airlines to operate – an airline must have aircraft, a supply of jet fuel and a sufficient workforce before it can offer flights. Unlike other modes of Strength of supplier power transport, airlines have no alternative source of energy. Overall, supplier power is
strong.
New Entrants
To a certain extent the airline industry in Australia has been deregulated and airlines are now free to negotiate their own operating arrangements with different airports, enter and exit routes easily, and to set fares and flight volumes according to market conditions. The entry barriers for new airlines are lower in a deregulated market, making it a more attractive prospect for new entrants. However, air carrier companies must comply with a large number of rules, and there is a large amount of bureaucracy involved in setting up a new airline. For example, a new company must apply to the Civil Aviation Safety Authority for an air operator’s certificate. This is a costly process and it is difficult to generate any revenues during the application process. Entering the market as a new company requires considerable capital (for example, to acquire a fleet of planes); and, even for an existing company to begin operating in Australia, the market may impose significant costs in terms of overheads, wages, and so on. Scale is very important in this industry and more
consolidation can be expected in the future which creates a barrier for new entrants. Access to good distribution channels may be difficult. Infrastructure in Australia is lagging behind the growth in air traffic.
Congestion at major international airports means that ‘slots’ at certain airports (the right to take-off or land at a particular time) have become a highly prized asset for many airlines. This situation creates difficulties for a new airline aiming to negotiate primetime slots at busy airports and can result in it being restricted to offering flights only at off-peak times, or having to fly to airports further away from popular Likelihood of new entrants destinations. The year 2008 was difficult for the airline industry due to global economic meltdown and high oil prices and the situation on Australian airline market is no different. So although Australian market revenues have grown strongly in recent years, the likelihood of new entrants is weak to moderate.
The main substitutes for airlines are other forms of transport: road, rail and marine.Australia is a large country and many places, including some smaller towns, are served by airports. Domestic flights can be long in duration, but despite the time taken to reach the airport and check in overall journey times are considerably shorter than rail travel. There are several long-distance bus companies in Australia, including the national
company ‘Greyhound Australia’. Buses are comfortable but journeys between major cities can be time-consuming. Australia’s train network is serves only major cities and train travel remains slow and relatively expensive. Owing to Australia’s geographical position there are virtually no alternatives to flying when travelling internationally. Overall, the threat of substitutes for travel is weak.
Rivalry
The Australian airline industry is fairly concentrated, although the rise of the budget carriers has tended to decrease this; for traditional airlines, low-cost competitors have provided a key competitive challenge in recent years. Consumers can switch between different airlines quite easily, although the players at the high end of the industry differentiate their products in terms of quality of service, which makes it difficult for
them to abandon completely the more expensive services they offer for low-budget alternatives.
It is notable that the largest players in this industry own the majority of their aircraft (although they lease a few facilities and services). In consequence, exit barriers are high, since leaving the airline industry would require divestment of substantial - and often quite specialized - assets. Expanding an airline’s flight network may involve providing more frequent flights to a destination or adding new destinations to its service. It is possible to do either of these in a cost effective manner by signing a code share agreement with another airline. Fixed costs are likely to be high which also tends to intensify rivalry. Some leading players have diversified into carrying air freight and into other transport businesses, which reduces rivalry by making them less reliant on passenger airline ticket sales, and market revenue growth has been strong. There is a moderate degree of rivalry in this market overall.
