A strategic analysis of the European airline industry applying the Porter business model

1. Di Nola Marianna
Moroni Laura
Karbay Koray
Victorova Ksenia
- Client Market
- Profitability
- Strategic Groups
- Case Study
- Client Market
- Profitability
- Strategic Groups
- Case Study
Airline
Industry
in Europe
Business Strategy
June, 9 2014

2. Airline Industry in Europe: FSCs and LCCs
Full Service
Carriers
• Point to Point&Connection
• Small&Large Airports
• Slow Turnaround
• High Ground Times
• High Frequencies
• Service on Board
• Gds&Basic or No Direct
Sales
• Strong Cooperation With
Travel Agencies
• Strong Targeted Sales
• Fares for Each Target
Group
• Large Employee Structure
& Offices
Low Cost
Carriers
• Point to Point Network
• Small Airports
• Quick Turnaround
• High Block Hours
• No Frills on Board
• Direct Sales
• No Cooperation With
Travel Agencies
• No Target Differantation
• One Type Fare
• No Direct Employees
• No Office

3. *AerLingus, AF-KLM,
Airberlin, Alitalia,
easyJet, Finnair,
IAG, Lufthansa
Group, Norwegian,
Ryanair, SAS,
Turkish Airlines,
Vueling Airlines.
13 major European airlines* 2012:
Financial and Operating Statistics
EUR million 2011 2012 % change
Revenue 100,528 108,552 8.0%
Operating profit 2,002 1,662 -17.0%
Operating margin % 2.0 1.5 -0.5
Fuel cost 25,444 30,260 18.9%
Fuel as % of revenues 25.3 27.9 2.6
Ex fuel cost 69,596 72,916 4.8%
Total costs 98,526 106,889 8.5%
Net profit 243 69 -71.8%
Operating 2011 2012 % change
ASK bn 1,235 1,274 3.2%
RPK bn 978 1,026 4.9%
Pax m 521 546 4.7%
Load Factor % 79.2 80.6 1.3
Average sector km 1,877 1,881 0.2%
RASK EUR cent 8.14 8.52 4.7%
CASK EUR cent 7.98 8.39 5.2%
CASK ex fuel EUR cent 5.87 5.94 1.3%
Fuel CASK EUR cent 2.14 2.47 15.0%

4. •*easyJet,
Norwegian, Ryanair,
Vueling Airlines.
Source: CAPA
(Analysis of
Company Financial
Statements).
4 major European LCCs* 2012:
Financial and Operating Statistics
EUR million 2011 2012 % change
Revenue 10,723 12,346 15.1%
Operating profit 1,047 1,174 12.2%
Operating margin % 9.8 9.5 -0.3
Fuel cost 3,299 4,130 25.2%
Fuel as % of revenues 30.8 33.4 2.7
Ex fuel cost 6,377 7,042 10.4%
Total costs 9,676 11,172 15.5%
Net profit 823 1,015 23.3%
Operating 2011 2012 % change
ASK bn 221 237 7.0%
RPK bn 182 198 8.3%
Pax m 158 171 8.0%
Load Factor % 82.5 83.5 0.9
Average sector km 1,155 1,158 0.3%
RASK EUR cent 4.85 5.22 7.6%
CASK EUR cent 4.38 4.72 7.9%
CASK ex fuel EUR cent 4.01 4.00 -0.4%
Fuel CASK EUR cent 2.08 2.34 12.9%

5. Airline Financial Outlook Strengthens
Forecast Drivers
Regional Variation:
Europe
Increasing regulatory and tax burdens, Some Governments are
backtracking on deregulationRisks
IATA: $12,9B Global Net Profit Expected in 2013
$19,7B Global Net Profit Expected in 2014
Lower jet fuel prices, Increasing efficiency (joint ventures),
Increasing Demand (5%-6% range), Increasing Ancillary Revenues
Net Profit 2013: $1,7B
Net Profit 2014: $3,2B

6. The Industry: Porter’s 5 Forces
#1 Bargaining Power of Suppliers High
• Aircraft Manufacturers have all the power;
• Labor is highly unionized;
• Airports = local monopolies;
• High Switching Costs;
• Low concentration of main suppliers;
• Airport services concentrated in a small number.
#2 Bargaining Power of Buyers/Channels High
• Buyers are fragmented;
• Air travel is perceived as standardized product;
• Low switching costs;
• Quite price sensitive;
• Channels are highly concentrated;
• Price transparency.

7. #3 Threat of New Entrants High
• Limited incumbency advantages;
• Low switching costs;
• Easy access to distribution channels;
• Demand-side benefits.
#4 Threat of Substitutes Medium-High
• Rising number of people who can afford air travel
• Fast technology development
• Fast trains compete on short distances
• Travel can be delayed, limited
• Environmental issues
#5 Competitors Rivalry High
• Rapid growth + many direct/indirect competitors;
• Perishable product;
• Limited differentiation;
• High costs/Low margins;
• Limited economies of scale;
• Significant exit barriers;

8. Industry
Suppliers
Substitutes
Buyers
Entrants
Attractive or
unattractive
Industry?

9. Industry Strategic Groups
European Airline Companies
Different strategic
dimensions:
- technological
leadership
- product quality
- pricing policies
- distribution channels
- customer service
Help Identify
Barriers to mobility
that protect a group
from attacks by other
groups
Assess
Competitive position,
future directions of
firms’ strategy

10. 0 1 2 3 4 5
12345
RyanAir
easyJet
Virgin
Atlantic
• Flybe British European
• British Airways
Lufthansa
Aer Lingus
ValueforMoney
Catering Service
Bad 1
Poor 2
Average 3
Good 4
Excellent 5
IndexStrategic Groups Map

11. !!!!
Best Worst
…in Addition to the Value for Money…
Other
Factors

13. The «Entrepreneurial Formula» Framework
•British Airways
•Easy Jet
•Aer Lingus
Competitive
System
•Upper Class
•Premium Economy
•Economy
Products and
Services
•Focus on business and leisure markets
•"To grow a profitable airline, that people love to fly
with and where people love to work."
Project
Stakeholders
Organizational
Structure
- Economic Forces
- Social Forces
- Communities
- Employees Deliver Brand Value
- Customers Enjoy Brand Value
- Brand Value
- People Oriented Structure
- Unorthodoxically Centralized Structure
No formal structure
for the organization
management
Long term direction
for the business and
financial control
remains centralized
with the CEO and
his team.

14. The «Basic Strategy» Framework
Cost
Leadership
Differentiation
Focus
Source of Competitve Advantage
Competitive
Scope
Industry-wide
Single Segment
Tangible
&
Intangible

15. The Competitive
Scope

16. The
The Company’s Performance (FY2013)
• + 4,3%Revenues
• + 1,8%Capacity
• + 5,3%
Load
Factor
Costs
Fuel Costs
Employees Costs + 6,1%
2013 = pre-tax loss of 51 GBPmln
2012 = pre-tax loss of 99 GBPmln
Losses in Decrease but
Cost Cutting Efforts
Neded

17. Duopoly on domestic routes to
Heathrow shared with BA;
Increased Revenues and Load
Factor (also in upper classes);
However, in FY2014…
P.P. > E.C.
Incomplete
differentiation
advantage
Differentiation
advantage
No
differentiation
advantage
Vulnerable
differentiation
advantage
«A great brand
in need of a
greater
finanacial
discipline»
Source: CAPA
2 Year Recovery Program
CEO: «Our strategy has
been to focus on network,
alliances and managing
our cost base in a way
which has not impacted
the customers. For
example, use of a new
fuel management system
delivered savings of £8mln
in a single year.»

18. Di Nola Marianna
Moroni Laura
Karbay Koray
Victorova Ksenia
THANK YOU FOR YOUR
ATTENTION!