Download - Industrial Organisation of Tourism
Structural change in the outgoing industry
Prof. Hon. Dr. Peter F. Keller
Business and Economic Faculty, University of Lausanne
Switzerland
Industrial Organisation of Tourism Fall Semester 2012
Chapter 3
Uncertainties in the tour operating sector
Structural change in the
outgoing industry
Civil passenger aviation as key
industry of global tourism
The difficulties to differentiate car rental services
GDS as a mature BtoB distribution system
Uncertainties in the field of tour operating
Definitions and concepts
Desintermediarisation
Consolidation of TO industry
Pricing strategies
New TO business models
Introduction
Tour Operating is undergoing important structural changes through ICT
innovation. More and more individuals are able to plan, to organize and to
book their trips online without the support of TO’s and travel agencies.
This leads to a desintermediarization of the traditional services TO can
provide but it gives them also the opportunity to produce in a more efficient
way.
Tour operators opened new markets and made tourism global by
developing travel packages.
They solved with the charter flights the problem of peak airline travel
during the high season.
Introduction (2)
There are few bigger tour operators and many retailers which normally
organize also trips but only in certain niches.
This industrial structure is threatened by internet and the trend to
reduce commission of the providers of services for which retailers do
the distribution.
The part of tour operators at the travel market is changing from country to
country. It is in Europe in most cases under 25%. Most visitors organise
their travelling themselves.
The characteristics of the tour operating industry
- Licenses - TO rules
Demand
Politics
- Innovations in tourism - Efficient production - Interesting working places - Weak value added
Performance - Volume and Pricing - Development of strategic products - Economies of scale - Technical progress
Strategies
- Small number of tour operators and big number of retailers - Strong market position in negotiation with service providers - Vertical integration - Diversification of products
Structure of the market
- High elasticity - Substitution by FIT - Important growth potential - Mass Marketing - IT distribution by GDS - Advices to the customers
- Product development by using the services of third parties - Opening of new markets - Specialists in charter flights - Industrial production - Ecological problems
Supply Basic conditions
A glossary with the main definitions
Package Tour • connection of at least two services
(transportation, accommodation and others)
• one total-price • lasts for more than 24 hours or
includes an overnight stay
Tour Operator • Obligated by contract to organize
journeys • Sells „Package Tours“ – completely
prepared journeys • Product of mass-tourism • Dominates the market
Travel Agency • Provides travel-information,
counseling and planning • Organizes the trip, the
accommodation and the transportation for business and private customers
• Retailers between travelers and tour operators
Excursions • All journeys by private persons • No overnight stay • Primarily motivated by leisure
Private Trips • All journeys by private persons • At least one overnight stay • Include all leisure reasons
Basic conditions
Future supply trends which are influencing tour operating
Variety of travelling
– Air travel & Last-minute as leading factors
– Air travel: No frills airlines (Ryan Air, easy Jet etc)
– Modular products
Rise of individual trips
– Dynamic packaging as new principle
– Classical combination of single performances
Online selling
– Online availability of products
– Last-minute booking
– Cheapest products as bestsellers
Tour operating will have to focus more on strategies which provide important consumer surplus
Favoring air- and long-distance travel
More and more exotic destinations
Growing last minute business
Difficulties in customizing vs. growing variety of offers
More booking via internet than in travel agencies
Rising demand of quality vs. price consciousness
Mass tourism vs. luxury orientation
Structure of the market
There is an ongoing price competition and consolidation process
Ongoing consolidation process
– High supply density of retailing travel agencies
– Strategy of tour operators : foundation of international,
capital intensive fully integrated tourist conglomerates with
possibilities to manage every step of the value creation process
(e.g. tour operators, agencies, distribution channels, hotels,
transportation, car rentals, etc.)
Price competition
– Pricing policy as dominating demand and competition criteria for
receiving market shares
– Importance of price competition inherits problems for whole branch
_ importance of brands: to get away from price competition
Smaller independent travel agencies are in danger
Threat for smaller, independent tour operators
– Reasons: market concentration, technological progress with
necessary capital intensive IT-investments
– Dominating players with advantage of certain brands, business
knowledge, capital power and new distribution channels
brand building measures as a key factor for a successful
surviving in the travel business
dropping number of travel agencies in medium-term
Technological change asks for competitive distribution channel
Fast changing environment requires continuous improvement of
distribution channels
High cost of infrastructure leads to clear domination of main players,
smaller companies are unable to follow
Due to mature branch - indicated by hard competition and low margins -
most supplier earn less and are unable to invest in state-of-the-
art infrastructure
Strategies
Booking behaviour influences strategies in the field of tour operating
Internet vs. GDS
Source: UNIC (2004)
General strategic possibilities for tour operating business
Cost leadership – Supply standardization – Tightness of product variety – Rationalization of distribution
Market share strategy – Enlargement of product variety – Branding – Horizontal integration – Geographical diversification
Quality leadership
– Market segmentation
Backward integration – Set-up of hotel chains and transport capacities
Complete vertical integration – Backward and forward integration
Pricing strategies
Early booking vs. last-minute
– Last-minute-business is gaining importance
– Incentives by reduction of prices for early bookings
Low budget vs. high quality customization
– Less competitiveness for average offerings
Yield Management
Get the highest yield possible
Fees vs. commission
– Due to the cut of commissions by transportation and accommodation travel agencies implement modified invoice systems (e.g. “management fee”, “transaction fee”)
Grafik/Präsentationen/USI_TO_GDS_031604
Positioning strategies
Aim of brand positioning is well perceptible product differentiation
Branding offers larger possibilities in positioning and differentiation
than product itself
Facing varieties of brands and growing transparency thanks to e-Media,
branding is an important factor for defending market share
Highly substitutable products lead to strong push of differentiation in
the field of services and quality
Due to the growing market, the smaller travel agencies focus on
consulting services
Grafik/Präsentationen/USI_TO_GDS_031604
Alternative channels of distribution
Alternative Channels of distribution
Price line.com
– “You pay what you are willing to pay”
– First supplier following price idea gets the deal
Power shopping
– Cheaper prices for large groups of customers
Pool of travel agencies (alliances)
– Concentrated market approach while remaining independent
– Leads to higher efficiency of every partner (synergy effects)
Business models
The asset-light strategy of Kuoni:
The Kuoni Group follows a strong asset-light strategy which means that
the group ownes only very few assets like aircrafts, cruise ships or hotels
The integration model of TUI:
TUI is an international, capital intensive fully integrated tourist
conglomerate with possibilities to manage every step of the value creation
process (e.g. tour operators, agencies, distribution channels, hotels,
transportation, car rentals, etc)
There are two major business models of big companies
A limited number of business models in the field of tour operating and retailing
Standardized mass production of big TO’s (which implies price competition)
Concentration on certain lucrative niches (which implies the danger of
shrinking demand)
Focus on the high end business which customer based solutions (avoiding negative impacts of standardization)
Threat of direct booking through internet
Enlargement of the internet with second-generation websites Social Media Wikis Music and picture sharing platforms Virtual games
Use of the internet via mobile devices Applications based on Augmented reality Location based services
Interface between tourism organization, TOs & TAs, and customer
Provide visitor with product information and booking facilities Support tourism enterprises to integrate into the tourism
The web based technologies allow direct booking of tourism services and compete GDS
The way potential visitors inform themselves is changing
The sovereign consumer
“Web 2.0” created the consumer who produces its content himself. The visitors
depend less on the informations of the provider of services and win market
power. “Web 3.0” will offer them advice from provider of services on how and
where to consume.
The price transparent hotel and destination evaluation system
The well established hotel and destination evaluation system provide potential
visitors with neutral transparency offer and prices. They have an impact on the
reputation of companies and organisations.
The e marketing strategy should allow to accompany the potential visitor before, during and after the travelling
Function of a web site for a destination
Dream Plan Go Come back
Audio-visuel systems
Hotel Evaluation system
Booking systems
Repeater system CRM
Fa
Cornerstones of E-marketing on destination level
Make access easy (“searching engine”) Give advice to potential visitors
Seduce potential visitors by multimedia tools Communicate with the visitors
Cooperate with the partners by intranet
Gather common information in one date bank Assure a worldwide distribution of the information
Simple travel product suit perfectly for online-distribution
Travel products suit perfectly for online distribution
– Reduction of costs (e.g. for catalogues)
– Growing sales market
– In-time offers, information and availability
Advantages: possibility of detailed market segmentation,
targeted marketing, customized products through broader
client data
Disadvantages: forced competition due to easier
comparability for clients
Direct booking from airline websites is a threat
Growth potential
- Markets shares of 20 % in the long run
Pure online suppliers
- Consolidation: mostly candidates for acquisitions
B2B
- Vertical integration along the supply chain (e.g. travel agencies,
airlines, hotels, car rentals, etc.)
Airlines as electronic competitors to travel agencies
- Reduction of 50 % of distribution costs by online selling of tickets
Questions to be asked
Which is the difference between tour operator and travel agencies?
What is a charter flight?
What do we understand by “consolidation process”?
Why does IT threaten the tour operating business?
How can small tour operator and travel agencies survive?
How important is the market share of tour operators?
Where do we have a high number of travel agencies?
« Global Distribution Systems (GDS) as mature BtoB distribution system
One of the first industrial application of information technology but still in
function for distributing products of airlines, hotel chains etc.
Definitions and Concepts
GDS service chain
GDS architecture
Direct access and seamless connectivity
Introduction
Global Distribution Systems GDS were founded by the airlines and became companies of their own when legal rules forced them to put on screen connections in a neutral way. GDS allow to give to the customer of travel agencies real time information of available seats and tariffs . They are a business to business systems which doesn’t appear for the clients. GDS implement the PNR from the booking to the gate including the luggage. GDS have an oligopolistic organisation and follow volume strategies. Their architecture is complex and expensive. The fee GDS’s are asking from their customers (the airlines, hotel chains etc) are high. Direct booking on internet based by a commercial transaction between an airline and visitor doesn’t offer full transparency on the available connections and tariffs. It is not totally neutral.
Increasing of productivity
« Consumer surplus »: Immediate confirmation
Neutral agency: protection of the consumer, best connections
and prices
« Global Distribution System GDS »
Distribution system for putting on screen available seats, reservations and delivering of tickets
Facilitation for travel intermediates
Technological competencies in treating transactions in real time
Producer / Customer (not the distributor)
Travel agencies as distributors/ users
System of multi-access terminals
The customer doesn’t see the GDS
Oligopolies in a universe of volume
Maturity of the industry and fight for market shares
High barriers to market access and exit
Multiple actors in the distribution chain
Strategies
Size as competitive advantage
Contracts with the main producers
Mastering of the distribution channels
Strategy of volume: regional and international
domination
Strategy of distribution: important customers
International treaties
on the neutrality of the
information
Duration of the flight,
priority of direct flights
on screens
Structure
Performance
Basic conditions
Service chain of GDS
Producer Travel agents
TO
GDS
Clients
Consolidators
The hosts of the system
Producers
National
Distribution
Systems
Travel
agencies
Commuters
for hotel
industry and
rent a car
firms
GDS
Producers and GDS don’t have the same customers
Producers GDS Travel agencies Consumers
are customers of …
are costumers of…
Distribution of travel products
Actors of reservation and distribution
T.O.
RS
Airline
company
RS
Avis
RS
Hertz
RS
RS
Hotel Chain RS
Hotel R.S.
Hotel
TA
Travel Agency
TA
TA
TA
TA
TA
CL I ENTS
Rent a car commuter
Hotel commuter
G.D.S
Multi-access terminals
IT terminal
RS Internal
reservation
system
R.S. External
reservation
system
IT
distribution
chain
The architecture of the system is complex
Tele- communication
Network
Data base
Central computer and
programme
Transformers
Terminals of agencies
There is a real time flow of information between providers of services, GDS and its intermediaries
Airline company
Data provider (ABC, ATPco.SITA)
time table and tariffs reservations
by electronic transfer of data by recorder or cable
by recorder or cable
availabilities
all time tables and tariffs
GDS
Booking is treated by the producers real inventories, the GDS putting on screen the data and the travel agencies
Reservations system of the producer,
real inventories, optimisation of tariffs
GDS: global distribution system,
putting on screen of time tables,
availabilities, bookings, printing tickets
Interface with travel agencies:
management of terminals, routine of
putting on screen, of communication
and adaptation of the screens
The electronic chain covers the whole handling from the reservation to the boarding
Travel agencies,
reservation and
deliverance of the
ticket
Global distribution system
Time table, availabilities, PNR: tariffs
Departure control system
Establish the list of
passenger, follow the
luggage track.
Reservation system of
the airline company
Availability of
seats, tariffs, copy
of NPR
Network
M
The USA introduced neutrality with the C.A.B. rule (1984)
§ 255.4 – Neutrality of publication on the screen
It is not possible to use the identity of a carrier as a criteria of putting the flight on the screen. The list of flights must be transparent. Each carrier has a equal chance for having the same service by the GDS.
§ 255.5 – Equality of the contracts of the transporters
Transparency and no discrimination in the field of the pricing of the commissions.
§ 255.6 – Equality of the contracts about subscription
No contract for a period superior to 5 years, possibility to change the distribution system.
§ 255.8 – Information marketing
All US carriers receive the same information about the system. No marketing on international flights.
GDS were first reservation systems of airlines and where obliged later on to give neutral information
1989: The European Civil Aviation Conference (ECAC) created a code of ethics which follows the recommendations of CAB
which proposes a stricter classification of the
flights on screen: the time of the flight is the criteria for classification, priority is given to direct flights, only than follow the connections.
The European Union declared the ECAC rules as binding on July 24 1989.
What is a PNR?
The « Passenger Name Record » corresponds to the travel documents of a passenger.
It identifies the traveller’s… - name
- address and phone number
… bundles the services booked: - the ternaries of a flight - the confirmation of the booked services - the location - other services (ferry, insurance…)
the travel agent who does the booking
reservations by the costumers
Reservation and process of the “sell on status” (1/2)
1 GDS
Data base
The requests of the confirmation
correspond to the seats « on request »
Airline company
Inventory
Status of the seats:
Open Waiting List On Request
Closed
Primary screen
2
4 5
Actualisation of schedule and tariffs
Messages AVS
3
Request of confirmation
Booking and process of “Sell on status” (2/2)
One data base actualised for each record records with schedules and tariffs are issued by the provider of
the datas (Reed, APCo, SITA) Allocation of a contingent of seats The availability of seats and the status of the flight are
authorised by the GDS which sends a AVS message (Availability Status) by using the IT networks of SITA or ARINC (US)
A postponed handling of the reservation A request for reservation is sent to the GDS. If the status is « On Request », the GDS asks the company to
confirm the reservation and the reservation is confirmed. The transactions are not immediate and cause delays.
1
5
2
3
4
Direct access (1/2)
GDS
Date base
Request: booking
is transmitted later on to the
company
Airline company
Inventory
Status of the seats:
Last seat available if the agent asks for a specific flight (CSD)
1
2
1
3
Confirmation possible
Mise à jour OAGActualisati
on of time tables and
tariffs
Actualisation of availabilities
Direct access (2/2)
Grafik/Präsentationen/USI_GDS_022604
This type of access corresponds to a request of a reservation agent for a given flight, the availabilties don’t appear on the primary screen.
The stages are the following:
The reservation agent has a look on the last seats available in the reservation system of the carrier.
He operates the reservation on the GDS which transfers the reservation to the reservation system of the carrier with a special priority code (LK).
It is possible to obtain a confirmation of the reservation for more security (service which is more expensive for the carrier).
1
2
3
Total access, direct sales and “seamless connectivity” (1/2)
GDS
Data basees
Airline company
Inventory
Status of the seats:
Last seat available on the primary screen
Permanent link
Actualisation of the time
table and the tariffs
Request
Immediate confirmation
Total access, direct sales and “seamless connectivity” (2/2)
Process of putting the real availabilities on the principal screen (in
opposition to the direct access); this creates the only neutral system.
This way to do consists in a instant duplication of executed operations
in the GDS and the reservation system. The data base of the GDS is
the exact and synchronic representation of the reservation system of
the travel agent.
The costs of this process of communication are high.
Questions for consideration
How does the GDS function?
Who is the client of the GDS paying the commission?
What is the full service solution GDS offer to their customers?
What is the future of GDS?
Civil passenger aviation as key to international tourism
Definitions and Concepts
Bilateralism and liberalisation
Hub & Spoke innovation
Strategic alliances
Flagship, Networks and low cost carriers
Charter flight
Business aviation
Introduction
Demand of the airline industry is volatile despite the long term growth trend. Only two of the last three years were profitable for the world civil aviation. The civil aviation system was organised following the international shipping rules . It started with a bilateral system where national carriers subsidized by the states and were linked together by a price cartel „interlining“. De-reglementation in the USA led to an organisational innovation through the hub and spokes system. The ongoing liberalisation in Europe and North America and the ownership limitations stimulated the emergence of three big strategic alliances which restrain competition but increase cooperation between airlines which fit to their quality standards. World tourism and particularly the countries in the Southern hemisphere depend largely on civil aviation. Remote destinations which rely strongly on tourism, have an interest to maintain their “flagship” carriers for securing access to the destination.
Structure, strategy and performance
Basic Conditions
Supply Demand
- Stagnating technology - Network reorganisation - Difficulties to finance growth - Land and air congestion
. Higher growth than world economy - Dependence on exogenous factors - Expense IT distribution - Frequent flyer programs (customer retention)
Market
- Difficult access for new comers - « hub & spokes » system
- Business traveller subsidises leisure traveller Policy
- Ownership regulation - Subsidies
- Open Sky and bilateral agreements
Strategies
- Commercial policy: National or flag carrier - Strategic alliances: Network carrier
- Oligopolistic position: Merger and acquisition - Price strategy: Low cost carrier
- Business aviation
Performance
- Fast and cheap travel - Reduction in waste and pollution
- Opening of intercontinental markets
55
-15%
-10%
-5%
0%
5%
10%
15%
2000 2001 2002 2003 2004 2005 2006
Traveler Accommodations Passenger Air Transportation Recreation and Entertainment
The volatility of airline demand
Source: Bureau of Economic Analysis, Travel and Tourism Satellite Accounts (TTSAs)
Impact of September 11, 2001
External factors which make growing air travel
Traffic Growth
Weak Medium Strong
Exte
rnal F
acto
rs
Low economic growth High economic growth
Activities aimed at
local/national market
Activities aimed at
international markets
Low household income High household income
Tight-knit family
structure Dispersed families
Internal factor for growth
Traffic Growth
Weak Medium Strong
Inte
rnal F
acto
rs
Security Problems
High Safety
Low service quality
(delays) High service quality
High relative prices Low relative prices
Undeveloped network Highly developed
network
Inefficient and
inhospitable distribution
system
Distribution system well
adapted to customer
needs
Inefficient commercial
policy
Efficient commercial
policy
Bilateralism in the pioneer times (post 1911)
since 1911: Highly regulated civil aviation system dominated by bilateral
agreements; high government involvement and financing
Chicago conference, 1944: Establishment of framework of international
aviation => creation of the 5 « freedoms »
IATA (International Air Transport Association): Authority to dictate
international prices
Very protective system
Expansion of « national flag carriers »
Political agenda dominates economic aspects
Consolidation and limited competition
Deregulation of the US American civil aviation
since 1938 « Civil Aeronautics Act »: Legal basis for domestic aviation
1978 « Airline Deregulation Act »: Deregulation by removal of barriers to
entry and freedom to fix prices and to merge
Passage from regulated market to a uniquely competitive market
High M&A, entry and exit activities
Experimenting with new itineraries, price strategies and technologies
Today only 6 great competitors are left (American, Continental, Delta,
Northwest, United et Southwest )
History of the European airlines
Majority of airlines government owned => towards 1980s over 100 airline companies
(approx. 30 in USA)
excess capacity
low productivity
company losses covered by subsidies
1985: Decision of the European Court: Commission of European Union gain authority to fix
prices => policy goes from member states to the European Commission.
« Reform package »:
1st in 1987: Reduction of capacity restrictions, increased corridors and creation of areas with
greater price flexibility
2nd in 1990: Increased market access (5th freedom), extension of wide range for cash
discount rate
3rd in 1997: Full airline liberalisation of European Union (including Switzerland)
Transformation of industry towards greater competition
Consolidation appears inevitable
History since 1987 until today
1987: Privatisation of British Airways => movement towards privatisation 1989: KLM Royal Dutch Airlines makes a « leveraged buyout » of Northwest Airlines 1992: « Open Skies » agreements: Allow US airlines open access to participating European member countries and vice versa Today => few big alliances left => Star Alliance, Oneworld, Skyteam) => in 1999, 70% of international traffic transported by these groups However: The liberalisation process remains unequal – an entirely open transatlantic system is not yet realised
The eight feeedoms which liberalised passenger air transport
1st freedom: The right to fly over (without landing) a country. 2nd freedom: The right to make technical stop-overs in a country. 1st + 2nd freedom: Technical freedom (transit agreement, concluded in Chicago 7.12. 1944) 3rd freedom: The right to transport passengers, for profit, from your own country into another country. 4th freedom: The right to transport passengers, for profit, from another country to your own country.
The eight freedoms which liberalised passenger air transport
5th freedom:
The right to transport passengers, for profit, from another country to a third country, or from a third country to another country. In the 5th liberty, one distinguishes according to the position of the third state on the way between the two contracting countries. One talks of a spot below, beyond or an intermediary point. 3rd, 4th and 5th freedoms: Commercial freedoms (Agreement concerning the transport, concluded in Chicago on 7.12.1944; bilateral rule). 6th freedom: The right to transport passengers, for profit, within the territory of another country whilst exercising the 3rd and 4th freedoms, this traffic having arrived (by another flight) from your country, or going from your own country to a third country.
The eight freedom which liberalised civil passenger aviation
7th freedom: The right to transport passengers, for profit, without going via your own country, from another country to a third country, or from a third country to another country (special case of 5th freedom) 8th freedom: The right to transport passengers, for profit, between two or more points inside another country’s boundaries (internal traffic). (The 6th, 7th and 8th freedoms are not official concepts)
The graph of the eight freedoms
Contracting state Partner state
Third state
3 / 6
4 / 6
5 / 7
5 / 7 6
6
a
c
c
b
1
2
8
d
a = neighbourhood traffic
b = intermediate traffic
c = collecting traffic
d = interior traffic or cabotage
The market structure follow the technological change
1940 to 1970 « Point-to-point » (« City Pair Service »)
1980 « Hub-and-Spoke »
1990 « Network »
Regulated market
Deregulated market
Possible connections by changing the hub
Hub and spokes system as organisational innovation
A
G
H
I
J
B
C
D
E
F A
G
H
I
J
B
C
D
E
F
HUB
5 city pairs of equal capacity 55 city pairs of equal capacity
Number of affiliated
airport (spokes)
Number of
connections in and
out the hub
Proportionally
increasing
connection
possibilities out of a
hub
Total number of
connections (hub
included)
N 2N N(N-1)=N²-N N(N+1)=N²+N
1 2 0 2
5 10 20 30
10 20 90 110
50 100 2’450 2’550
100 200 9 ’900 10’100
Connections increase in the hub and spokes system by geometric progression
Nature of competition in the airline industry
Since its beginning, civil aviation is undergoing important changes. The
industry was first a system of national carriers strongly supported by
the governments and organised as a cartel (IATA).
With the liberalisation and competition. The answer of the industry was
cooperation among partners for reducing competition. Today three
strong strategic alliances, each of them with a leader airline, dominate the
liberalised market.
The entrance of new competitors is difficult and only possible by niche or
renunciation strategies.
Characteristics of the natural monopoly
• There is no single company for the whole world market which can exclude
consumers by high prices (exclusiveness) and the service is open to
everybody (indivisibility)
• Very high fix cost and extremly low marginal costs (sunk costs)
• The more the quantity of flights is increasing the more average costs are
decreasing
• « Price-maker » (if the producer wants to increase its selling it has to reduce
the price=price discrimination=yield management)
• Profit maximisation when the marginal revenues corresponds to the marginal
costs
The actual competitive structure
• Civil aviation has some elements of a natural monopoly and some of the oligopoly.
• The oligopolistic structure is a possiblity and not a today’s reality.
• The leaders of the strategic alliances try to become bigger by M&A but they will probable not dominate the whole markets.
• There still to many companies, legal rules and continental differences which in fact make competition ongoing in the civil avation industry.
Strategic alliances are a form of horizong cooperation
conglomerate
Cooperation
Type Integration Level
Distinction according to
horizontal without
Classic Cooperation
with
Participation in capital of partner simple
One activity
advanced
Several activities
vertical
Factors influencing the creation of alliances (1/3)
Strategic Alliances
Legal factors Economic factors Network factors
- Growth potential
- Cost reductions
- Brand
- Deregulation
- Barriers to foreign ownerships
- Economic efficiency
- Demand stimulation
- Market share
Factors influencing the creation of alliances (2/3)
Factors Examples
Legal Deregulation Market opening since 1980s in USA and since 1990s in Europe
Barriers to
foreign
ownership
Legal restrictions limiting ownership share of foreign capital (Eg.
Europe: foreign participation is maximum 49%)
Economic Growth potential Exploiting growth potential of aviation industry
Cost reductions Integration, administrative cost reductions, technical and
marketing cost reductions, procurement scale, competency
development of firms
Brand Common global corporate culture and identity => « one alliance
= one brand »: shared marketing, common logos, common
sales platforms, customer retention programs
Factors influencing the creation of alliances (3/3)
Factors Examples
Network Economic
efficiency
« hub and spokes »: physical rationalisation of network =>
reduction in costs, increase in occupancy rates
Exploiting synergies: Economies of scale, of scope and density,
code share
Demand
stimulation
Better offer for customers: One check-in, automatic luggage
following, better connections etc.
Price control within network, frequent flyer programs =>
preference for big networks
Market share Size advantages push firms to grow and increase market share;
less competition on some destinations
Traditional strategy: commercial policy of flagship carriers
Promotion of the place
Maintain international direct flights
& incoming flights
Guarantee employment in aviation industry
& Related services
Promotion of brands & partnerships with NTOs
Traditional business model : national carriers as public service
National carriers:
Air transportation system originally conceived as reliable public service to be guaranteed by state
Protected by monopolies to preserve national independency (economic effects), security and identity
Created as independent private companies to ensure these public objectives
Originally, national carriers embedded in highly regulated and protected civil aviation markets dominated by bilateral agreements with foreign authorities and strong financial support of governments
Political criteria dominating commercial objectives
Low productivity and overcapacities are typical
Limited consolidation and competition
Strategy in the era of globalisation: global presence and grouping national carriers under the umbrella of strategic alliances
Global presence with a network of many destinations
Full services and high costs
Economies of scale and scope (code sharing and distribution by GDS)
„The solution for the global traveller“
Reduction of competition through high business fares subsidizing
low economic fairs and high switching costs
Modern business model: Network carriers
“Hub-and-spoke” systems of international alliances between private companies for multiplying connections
Different types of aircrafts
Full service
Global distribution system and sales departments
Economies of scale and scope (mainly in marketing)
Network effects, synergies and cost savings (growth potential, utilisation ratio, code share, customer service, brand, market share)
Reduced competition through cooperation and price control
Avoidance of restricting regulations
Creation supported by market deregulations
Entering into the market through cost reduction
Cost reduction at all levels
Distribution Product Salaries
- efficient recruitment of personnel (on-board and other)
- no agencies, online-sales, direct link to client - no tickets - one-to-one marketing
Standardisation
- one airplane type (Boeing 737) economies of scale lower maintenance costs flexibility
Operating costs
- one class - limited on-board service, no meals - secondary airports tax savings lower congestion: more efficient - Keep aircraft in use
Business model which is more and more absorbed by the network carriers
„If you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make them sure they have a good time doing it, people will fly your airline.“
Rollin King et Herb Kelleher
creator of Southwest Airlines (SWA) –first „low cost carrier“
Low cost carriers – some characteristics:
-Niche strategy for short and medium haul flights -Mass market product, both younger generations and even business
men => price positioning only - « no frills » airlines
The example of easyJet (1/2)
easyJet Business Model
- easyJet operates point to point flights (no connections) - development of easyGroup brand with subsidiaries easyJet, easyCar, easyInternetcafé, easyMoney, easyValue - simplification of pricing – key to the system: a bottom-up price management - optimal use of people and equipment - strong corporate culture
EasyJet: founded in 1995 by Stelios Haji Ioannou inspired by the Southwest Airlines model (created in 1971)
The example of easyJet (2/2)
Characteristics of easyJet:
100 liaisons between 36 European cities (march 2003) around 4 bases: Liverpool, London, Amsterdam and Geneva
completely flexible pricing: price increases as a function of it’s popularity and how full the flight is up until a maximum price corresponding to around 50% of the price charged by a standard carrier
Efficient use of means of production: - one type of aircraft (average age of planes: less than 4 years) => Operational Flexibility - maintenance costs => lower due to one type of aircraft - productivity of aircraft => minimize time on ground - no intermediaries - no retention programs (frequent flyer) - no meals on-board => Some 250 millions in savings
Comparing the main strategies: no evasion from a niche position for low costs
« Network carriers » « Low cost carriers »
Business Model Global strategy & high
costs Niche strategy & low cost
« Network » « Hub & spokes »
Global Alliances
« Point to point »
between secondary
airports
Fleet Various types of planes Standardisation
Product Full Service Self service
Sales Policy Sales department
Distribution by « GDS »
Direct sales
« Call centres » / Internet
Strategy for wealthy customer to overcome bad externalities of a growing mass industry: Business aviation (1)
• Provides services corresponding to the contemporary needs of wealthy customers
High quality & personalized services
Personalized schedules
High operational speed (boarding, immigration & security points, etc.)
Comfortable & calm environment
Anonymity & discretion
First-rate catering service
Top safety standards
• Customers
Senior officers
Business men
Fortunate people
Celebrities
Niche market : Answer to the decrease in quality of the common airline companies
Business aviation (2)
Airline services for the high-end market segment
• Global executive jet charter services, flight planning & flight
tracking
• Highly qualified personal, experts in the high-end segment
• Quick and performant operational system
Performant staff management system
Preparation of the planes and the flight plans in 1h30
Quick boarding procedures (customs, check-in, luggages)
• Highly personalized and customized services
• Large choice of jets, destination & special services
Flagship carriers and destinations: do tourism countries need national carriers?
Air Transport: essential factor for tourism development
both for in-bound and out-bound countries
Air transport shows greater growth than global tourism
industry as a whole
High price elasticity of demand
Sector is difficult to manage and subject to major
fluctuations and crisis
More and more destinations depend on the airline industry
The share of airline transport exceeds 70% in the major tourism countries – The case of countries with mio + arrivals
Country
Share of
arrivals by air
(%)
Country
Share of
arrivals by
air(%)
Japan
Taiwan
Australia
New-Zealand
Philippines
South Korea
Dominican Rep.
2007
100
100
99
99
98
95
94
Cyprus
India
Thaïland
Greece
Egypt
Singapore
Puerto Rico
2007
84
83
80
79
76
74
73
Harmonizing tourism and aviation policies : the case of “Paradise Island (1/9)
Basic data for incoming tourism
tropical destination, 6’000 kms from customers
150’000 visitors per year, all arriving by plane
tourism policy aims to maximize tourist expenditure; expenditure is 125 $ / jour, no charters
hotel rooms:
- 150’000 visitors, 10 days average stay => 1,5 million overnights stays
- 3950 rooms => 380 overnights by room
- 1,6 persons per room / night
- occupation rate: 65%
- construction costs: 3’950 * 65’000 $ / room => Investment of 257 million $
Harmonizing tourism and aviation policies : the case of “Paradise Island” (2/9)
Basic data for incoming tourism
- Total tourism investments
million $ in %
Hotels 257 75
Other facilities 86 25
Total 343 100
- Total revenues
1,5 million visitors / day à 125 $ / day => 188 million $
Harmonizing tourism and aviation policies : the case of “Paradise Island” (3/9)
Basic data for Air Paradise
- Number of aircraft / capacity
million $
1 A310 (210 seats) 77
1 A320 (140 seats) 40
Total 117
- Number of passengers
Air Paradise through bilateral agreements has appropriated 50% of total traffic
Revenues / passenger-mile
(million)
A 310 (10h / day / 65%) 425 RPM
A 320 (8h / day / 65%) 265 RPM
Total 690 RPM
Harmonising tourism and airline policies: the case of “Paradise Island” (4/9)
Basic data for Air Paradise
- Passengers (10 cents / mile)
million $
Passengers (10 cents / mile) 69
Freight (+ 10%) 7
Total 76
- Operational costs
million $
Leasing 12
Other 64
Total 76
Harmonising tourism and aviation policies: the case of “Paradise Island” (5/9)
Foreign exchange leakages
Hotels as % of revenues of hotels Foreign exch. leaks %
Kitchen
Local employees
Foreign employees
Repairs
Rent
Amortization
Interest
Profits
28
14
5
20
6
10
2
15
10
0
5
10
0
5
2
8
Total 100 40
as % of the total
revenues in
tourism
Leakages in %
of the individual
activities
as % of the total
revenues in
tourism
Hôtels
Restaurants
Other activities
65
10
25
40
20
10
26
2
3
Total 100 70 31
Harmonising tourism and aviation policies: the case of “Paradise Island” (6/7)
Foreign Exchange Losses Linked to Aviation
Operational costs % of total cost Exchange loss in %
Crew
Kerosene
Leasing
Maintenance
Landing rights
Other rights
Séjours
Service to passengers
Tickets and sales
Administration
Other
7
15
16
11
4
2
10
10
15
6
4
5
15
16
8
2
2
5
4
9
0
0
Total 100 66
Harmonising tourism and airline policies: the case of “Paradise Island” (7/9)
« Tourism » and « Aviation » accounts
Results Tourism Air Paradise
Receipts in currency in mio. $ in mio. $
Gross Receipts
Currency loss (imports)
Net Receipts
Direct employment effect
Taxes
186
31 %
128
8250*
37
76
66 %
26
650**
7
* 100 visitors create 5.5 direct jobs
** over-seas personnel included
Harmonising tourism and aviation policies: the case of “Paradise Island” (8/9)
Liberalisation of Civil Aviation
- Lower price, more tourists, little effect on average expenditure
Visitors + 20%
Expenditure / day 120 $
Receipts in currency 149 millions of $
Gain + 21 millions of $
- Market share loss for Air Paradise, reduction in passenger numbers
Traffic - 25%
Occupation - 10%
Receipts per passenger -10 %
Total Receipts 60 millions of $
Loss - 16 millions of $
Harmonising tourism and aviation policies: the case of “Paradise Island” (9/9)
Regular flights Charter flights
Visitors 150’000 200’000 300’000*
Expenditure / day /
tourist in $ 125 100 90
Currency loss 31% 50% 50%
Net Currency
mio $ 128 100 135
* Social and environmental effects
Opening up to charter flights
Questions to be asked
Why is the demand of civil aviation volatile?
Which are the basic liberties allowing international air traffic?
What do we understand by “interlining”?
How does the “hub & spokes” system function and what does it bring to airlines and their customers? What is the nature of competition in the field of today’s civil aviation?
Do tourism countries need “flagship carriers”?
Rent a Car Industry
Definitions and Concepts
Dependance from airlines Fleet managment
Differentiation strategy Consolidation process
Summary
Car rental is an airline related business which combines fly and drive. It
is one of the innovations in the field of business tourism which was also taken
over as a segment of leisure tourism. The demand is as volatile as the one of the
airline sector.
Car rental has become an industry with few big players and some niche
players which offer the same but differently. The differentiation functions
through brand positioning, processes and services and the size of the fleet.
Car rental has all the characteristics of a mature industry where it is
difficult to enter into the market. The competition among companies is tough.
The operational costs are high. There is a consolidation process among the
big players.
Overview
Supply
- Importance of partnerships
- High operating costs
- Importance of bargaining power
Structure
- Standardization
- Concentration, oligopolistic competition
- Barriers to market entry, saturated market
Strategy
- Hard to differentiate
- Additional services
- Fleet size management
- Airport vs. Non airport
- International expansion, acquisition
Performance
- Low to medium growth rate
- Dependent on the economy
- Opportunities in emerging markets
Demand
- Different consumer segments
- Low switching costs
- Importance of price, convenience
Politics
- Government regulations
- International implications
- Car rental policies
Car Rental: Definition
What? - Cars (no trucks)
To whom? - Private individuals - Corporations
Which purpose? - Business - Leisure - Accident replacement
How long? - Short term (less than a year)
Which locations? - Airport - Off-airport (local)
Economic Importance (1)
• Annual revenues exceeding $ 35 billion in 2009 in the U.S and Europe
Global car rental market share in 2005 stable but emerging market gain importance
Economic Importance (2)
US: largest market, $21 billion in 2009 (4.8% decrease) airport ~50%
Car rental industry revenues in the U.S
Economic Importance (3)
• Europe: $14 billion airport ~40%
• World: Performance fluctuating over time
growth until 2001 (8.2% in 2000)
drop in 2001
recovering
financial crisis in 2008
• In general: slow to medium industry growth
• Highly dependent on the state of the economy and on the tourism industry (especially leisure segment)
Particularities of Supply (1)
• The offer: – different cars – services related
• Bargaining power: – Low vis-à-vis their customers – Higher vis-à-vis their own suppliers
• Importance of partnerships with tourism-related industries – hotel chains – airline companies, …
• Existence of substitutes
Particularities of Supply (2)
• High competition among car rental companies
price war
• High operating costs – Acquire, clean, fuel, maintain, repair, ..
• Generally low margins
• Economies of scale – Leading actors: presence of economies of scale
– Small companies: specialized offer
• Importance of cars resale value
“repurchase program”
Particularities of demand
• Different kinds of consumers:
– Business: more informed, big volume more power
– Recreational: small volume, infrequently less power
– Accident replacement: small volume, infrequently, off-airport
locations less power
• Low switching costs
• Decisive factors
– Price
– Convenience
– Services related
Structure of the Market: an oligopolistic industry
• High standardization
Actors offering about the same
• Concentration – Small number of actors
– Saturated markets
– High entry barriers
– Economies of scale
• High competition
Based mainly on price
Structure of the Market: leading actors (1)
• In the U.S.
Generate 80% of the U.S. car rental revenues
Companies Brands
The Hertz Corporation Hertz
Avis Budget Group Avis, Budget
Enterprise Rent-A-Car National Car Rental, Alamo,
Enterprise
Dollar Thrifty Automotive
(soon acquired by Hertz)
Dollar, Thrifty
Structure of the Market: leading actors (2)
• In Europe
Companies Brands
The Hertz Corporation Hertz
Avis Europe Avis Budget
Europcar Europcar, National Car Rental,
Alamo
Sixt AG Sixt
Enterprise Enterprise
Structure of the Market: leading Actors (3)
• Few leading companies Concentration
• Differences between companies and brands although standardized – Different geographic market
– Different brand positioning
– Different offers
– Different services
– Different fleet size
Structure of the Market: the industries attractiveness
• Michael Porter’s 5 forces
– Good bargaining power vis-à-vis the suppliers +
– High entry barriers +
– Low bargaining power vis-à-vis the customers -
– High competition based on price -
– Existence of substitutes -
Not especially attractive
Framework conditions
• Government regulations specific to countries – Gasoline and diesel storage tanks
– Water treatment
– Insurance coverage
– Franchise operations, …
International implications
• Car rental policies specific to companies – Minimal age
– Cancellation fees
– Late returns, …
The Strategies (1)
• Differentiation although high standardization – Type of rented cars – Airport vs. non-airport locations – Value creation thanks to additional services – Branding strategies
• Increase customers switching costs • Fleet size: finding a balance and use of pools • Tendency: increasing mileage before resaling the cars • International expansion • Acquisition
The Strategies (2)
• Different brand positioning
Key success factors
• Efficient distribution system, good fleet management
Competitive price
Especially if target price conscious segments
• Good services offer
Especially if target premium market
• Technology integration
• Advertising, branding strategy
The performance: global situation (1)
• Economic importance
– Importance for tourism industry
• Fluctuating performance
– Sensitive to the state of the economy
• Tough industry
– But still possible to make profits
• Developed markets: saturated
• Low to medium industry growth
• Opportunities related to emerging markets
The performance: global situation (2)
• Growth until 2001/ Drop in 2001/ Recovering/ Financial crisis Sensitive to the state of the economy
Key challenges
• Dependency on air travel industry
• International expansion and developing markets
• Acquisition
• Fleet inventory management
• Partnerships with reservation system (importance of the Internet)
• Dependency on car manufacturers
• Substitutes threat
• Technology
Questions to be asked
Why is car rental a tourism related industry?
Why are the barriers to enter the car rental market high?
How do the individual companies differentiate themselves?
Why is there a consolidation process in the car rental industries?
Does the industry create a high value added?
Are there rules which regulate the car rental business?