industrial organisation of tourism c… · –modular products ... –strategy of tour operators :...

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


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


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


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 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 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


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


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 $


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


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


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


US: largest market, $21 billion in 2009 (4.8% decrease) airport ~50%

Car rental industry revenues in the U.S


• 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


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?

industrial organisation of tourism c… · –modular products ... –strategy of tour operators :...

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