a model for analysing sustainable competitive advantage
In this component, the student will apply critically a model for analysing sustainable competitive advantage to a case study in a liberalized market in the travel sector, e.g. European scheduled airlines. This case study, selected by the student, will be used as empirical evidence to be discussed in the form of an essay. Weighting 30%, 2000 words (plus or minus 10%).
The abolition of restrictive bilateral Air Service Agreements in the European Union has encouraged competition on scheduled intra-European routes, many of which were previously operated by national flag carriers to the exclusion of new entrants. Initially at least, deregulation lowered the barriers to market entry, allowing new players to enter the field, including small airlines competing with much larger and more established ones. The essay asks you to consider whether this is still possible today by undertaking a short PESTE analysis of the current business environment, and by applying Porter’s ‘Five Forces’ model to one route that you will choose as your case study.
STRUCTURE AND CONTENT
The introduction and conclusion are important features of the essay. The introduction (about 150 words) should interpret the main questions, and explain the context and scope of the essay as a whole. The conclusion (about 250 words) should bring together the main points relating to your findings (see below). The main body of you essay will have two main sections:
First Section
Please assess the current business environment in the ‘Open Skies’ of Europe, summarizing the main external factors that would influence the strategy of the new entrant – Political, Economic, Socio-cultural, Technological and Environmental – in the form of a PESTE analysis (a box diagram with bullet points).
To what extent should newer smaller airlines be well placed to deliver a more customer-focused approach, compared with more established airlines that may be larger and more ‘bureaucratic’?
(This section should be about 300 words plus the PESTE box diagram)
Second section
In the second section (about 1200 words), you will critically examine the prospects for an imaginary entrepreneur: an optimist who wants to use his/her own wealth (not borrowed money) to set up a new scheduled airline within the EU, starting with just the one route (and perhaps 2-4 aircraft). You will consider the broad market opportunities for the entrepreneur, and critically apply Porter’s ‘Five Forces’ model to assess the significance of barriers that may still inhibit market entry to that particular route, and thus discourage the imaginary new airline.
Please select one deregulated route between any city pair (pair of cities) in Europe that the new entrant might fly. Ideally, this should be a route that you have experienced as a passenger. This
may be a route that crosses national borders (e.g. London – Copenhagen) or a domestic route (e.g. Frankfurt – Berlin). You may choose a route that is already being operated with a direct service by one or more established carriers. Alternatively, you may identify a route between two cities where no direct flights are currently offered and passengers are obliged to change (if so please identify the airport where they change ‘planes). For your chosen route, you will consider the market opportunities for the new low-cost scheduled airline service, set up by the (imaginary) optimistic entrepreneur.
Identify the two airports (i.e. the one at either end of the route). In each case, what distance is the airport from the main centres of passenger demand (i.e. cities, resorts etc)? Please show this on a map. Please comment (especially from your own experience as a passenger) on how easy, quick and convenient (or not!) it is to get to/from the airports by road (car, bus, taxi) and/or rail to these main centres? Identify all the competitors (if there are any) that the passengers for this route might use: other airlines, high speed rail, and in some cases road transport on fast roads (for shorter routes).
On this particular route, what type of passenger demand is there likely to be: identify the market segments that are characteristic of your case study route, e.g. cultural tourists taking city breaks, spa and health tourism, conference-goers? What are the prospects for growth on this route, i.e. in the foreseeable future: is this a ‘growth’ market, ‘flat’ and unchanging or in decline? Please comment on any other aspects of passenger demand on this route that might affect airline strategy and operations. For example, are there any pronounced peaks and troughs in passenger demand (seasonal, weekly or daily, e.g. business meetings returning the same day)? Is most demand generated at one end of the route, or else fairly balanced between the two cities served?
Drawing from Porter’s ‘Five Forces’ model with respect to ease/difficulty of market entry, critically assess the importance of any barriers to entry that remain, despite the freedom allowed through deregulation. Please use the following framework of potential entry barriers as a checklist with reference to your chosen route. In each case you must explain what the term means and apply it critically to air transport on your case study route:
a) economies of scale (do incumbents have an advantage over the small new entrant?)
b) capital requirements of entry (are these a significant deterrent for the new entrant?)
c) access to supply or distribution channels (is the new entrant disadvantaged here?)
d) differentiation by incumbents (airlines already established on the route) that distinguish them from the new entrant, and which mean that customers remain loyal
e) experience (which incumbents have and which the new entrant hasn’t got)
f) expected retaliation from incumbents
g) legislation or government action (are these likely to affect the new entrant more than the incumbents?)
Use these headings as a check list, and critically assess their relevance to your case study route. You may decide that some of these will be significant problems for the new low cost airline service. Others may be less important in the context of the route you have chosen. Please make reference to the module literature, especially Johnson, Scholes, and Whittington (2007) and Lynch, R. (2006), key extracts from which are in your Reader.
In your conclusion, please use your findings in section two of your essay to comment on the effectiveness of airline deregulation on this particular route to lower entry barriers and enable the new airline service to challenge the existing ‘incumbent’ operators and thus to deliver the intended benefits of the Open Skies agreement to passengers.
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