Porter's 5 Forces on Airline Industry

The budget airline industry in Singapore presents an interesting situation for analysis. It has 3 main local players plus a foreign player, namely Valueair, Tiger Airways, Jetstar Asia Airway and Airasia but Jetstar Asia Airways has effectively merged with Valueair. There are also possibilities of more foreign budget airlines operating in Singapore, and big airlines may also slash their prices to compete with the budget airlines. The higher fuel price, terrorist threat and restrictive govt policies regarding open air travel right are some of the challenges in this industry. Use Porter's five forces model to critically analyse the budget airline industry. (100 marks)

Introduction of airlines

AirAsia is one of the businesses that have successfully adopted cost leadership

through operational effectiveness and efficiency. Being the first of its kind in Asia, the budget airlines have managed to mark its 'mighty presence' in the Asian region the way Southwest Airlines has done in the US market. Established on 12 December 2001, AirAsia has been such a big phenomenon in the Asian airline industry. By using a simple yet strong slogan "Now Everyone Can Fly", AirAsia has successfully positioned itself as Asia's leading "low fare no frills" airline.

Jetstar Asia Airways is the Singapore's new low fares airline for Australia and the Asia Pacific region. Established in 2004, it seeks out to provide consistent low fares to Australian, New Zealand and Asian leisure travellers. It's strong association with Qantas ensures the highest standards of operational excellence, whilst delivering real savings to customers.

Valuair, being the sister company of Jetstar Asia, provides value-for-money passenger and cargo flight services out of Singapore. Valuair begun operations in May 2004 and currently flies to Bangkok, Jakarta and Surabaya on its brand new A320's.

Tiger Airways took to the air on September 15, 2004 and is backed by SIA (major shareholder) and serves 16 cities around Asia with a fleet of nine new Airbus A320 aircraft with more new destinations to come. It addresses the needs of travelers looking for a reliable low fare carrier to serve the Asia Pacific Region

Applying the Porter's five forces model on the budget airline industry

1. Rivalry among competitors (existing competitors)

Exit barriers-It is difficult to exit the industry because of heavy investment in planes that are specialized in nature. The existing players may continue in the industry even at low levels of profitability. Exit barriers are high when the assets are specialized. At present the existing players use Boeing and Airbus planes for their daily operations.

Low switching costs- The intensity of rivalry is great as there is almost no switching cost for a customer to switch from one LCC to another. The internet allows the consumers to compare prices between the respective LCCs through their individual websites.

High fixed costs- Fixed costs of LCCs are generally high as costs like fuel, pilots, cabin crew, ground staff and airline depreciation/leasing need to be considered. In order to recover these costs, airlines would want to maximize the load factor by increasing revenue passenger miles.

Diversity of competitors and product differentiation- Competitors have to do things differently in order to gain a competitive advantage. The industry rivalry is pretty intense as price serves as a significant basis for competition. However, market participants tend to realize that price war is destructive for them thus they avoid direct price competition and they turn into 'friendly' competitors. The challenge for the LCCs now is to focus on what 'unique' services that they can provide as opposed to its competitors. ValuAir for example, breaks traditions of a 'no frills airline' by offering complimentary meals on board A320 airbuses for the Bali-Spore route. Jetstar Asia is the first LCC in Singapore to allow passengers to transit through S'pore via a 2-stage flight journey on one single ticket. This transit will occur seamlessly, with passengers not being required to claim their baggage, similar to that of a full-service carrier.

Product life cycle- There is room for potential growth for the LCCs in Asia even though the growth rate isn't rapid. The major macro-environmental factors suggest a very conductive environment for the growth of LCCs in Asia. The demographic fundamentals of large populations, rising middle classes with increasing leisure time and disposable incomes, combined with the lack of competitive forms of transportation, paint an extremely encouraging demand picture in the long run. Furthermore, air travel market is bound to continue to grow due to rapidly increasing lifestyle trends. Archipelago geographical structure of Asia continent is also contributable to the importance of air transportation. For example, there is no other viable and efficient mode of transportation between East and West Malaysia other than by air. While the impact of terrorism and SARS can be negative for the growth of LCCs, the long run forecast continues to be very positive. Based on this positive outlook, it has prompted the likes of TigerAirways to acquire 3 more brand new A320 aircraft this year and 8 new A320 aircraft between 2008 and 2010.

2.Threats of new entrants

The threat of new entry is moderate. High capital requirement and government barrier such as air service agreement can act as barriers of entry. However, the deregulation of

aviation industry in Asia Pacific region has resulted in more competitors entering