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Strategic Analysis of Airline

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Strategic Analysis of Airline


The current competition

The competition in airline industry is very stiff and drastic. There are hundreds of airline in the world. Some are the big airline like the American Airways, United, Delta and some are smaller like the low-cost airline such as Ryanair air and Air AISA. In China, the Air China and China Eastern are other two of three larger and backbone airline, the Hainan airline an official 5star airline (award by skytrax) and some low-cost airline such as Spring air, they are the huge power dirty competitors to China southern airline. Also, on most of the international routes the foreign airlines with low price and high load factor characteristics usually share two third of the market. This put huge of competitive pressure on China southern airline improve their service and power of competition.

But as a result of the recession in European and American Airlines, 2012, CAAC proclaimed that China will introduce more international airlines, and involve in the international cooperation and competition. So the three major leaders in China asked for a capital injection. Many small private firms also planned to build airlines, hoping to join the golden airlines. China southern airline tried to raise 10.7 billion RMB. But unfortunately compared to the last year, its profit reduced about 70%, similar to its competitors.

Threat of new entry

The threat of the new entry will be very low in this industry because the features of the market present an oligopoly market and it exist high barrier to entry as excess capacity. The barrier to entry the market might be below factors.

  1. High fixed costs and low marginal costs. The high fixed costs are occupy80%-90% of total costs and the Marginal costs is less than one four of the whole allocated cost.
  2. The airport and en-route charges. Seriously, the most of the route are constrained by the government before the Open sky. The entrants must get the Flight right and purchasing the route from the government. Low-cost airline are generally restricted from the most profitable trunk route in China.
  3. Skill labor resources- such as pilot and mechanics are the important element of airline. The number of these kinds of staff is severe shortage in China; it is hard for entrants to recruit people.
  4. Fuel prices also the burrier for new entrants, this already discussion above.

Threat of substitutes

There are mainly 5 kinds of transportation. They are water, air, railroads, motor and pipeline. For the long haul and international travel it seems really no substantial competition to the air industry. The most significant transport tool can attack the air transport will be the railways in the short haul or the domestic journey. In the recent year, China is moving ahead with high-speed railway. In addition, China high speed railway networks already reach 13,073 km (8,123 mi) by 2011 and continue to spend $293bn plan 16,000km of built high-speed rail lines connecting whole major cities in china by 2020. The advantage of the high speed railway can be more convenient it can provide the city-center to city central travel, in addition, the high speed railway more reliable, punctual and safety than air plane, the train environment are more comfortable and relax than air. And the price will low than air travel in the short trips. Hence, HSR is a huge competitor to the airline in domestic market. China southern airline have above 160 domestic flight lines directly compete with the HSR link. So the influence is very huge to the China southern airline domestic market share. It is said that the firm may lose 15%-20% consumers.

The bargain Power of buyer

Form the performance of China’s airline market; we can conclude that the Seller's market has turned into buyer’s market. Though one single customer lakes the bargain ability, the large customer still can use the price difference to bargain. After all, most travel agencies and other deputies handle large amount of customers which increases their bargain power. Also some small agencies can use the internal information and the well understanding of airline companies to have lower price.

The bargain Power of suppliers

The most obviously supplier will be the aircraft manufacturers and the air fuel industry and last will be the high skill labors as the key factors. In line with the aircraft manufactures, there two main organizations which are Boeing Aircraft Company(US Based)and Airbus SAS(European based). These two main manufactories are play a significant function and role to influent the airline. And now the aircraft that airlines buy is more involved with some political factors. But the China southern airline has a good control over human resource. The main problem is the fuel price. Currently, China needs 3 million ton of aviation fuel, of which 1 million need to be imported. The cost of China’s airlines has reached 25% of the total cost, while that of the foreign airlines is average 11%-12%. So we can say the bargain power is low.

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