The success of any research study depends upon a number of factors among which the proper guidance from the experts in the industry and a faculty plays an important role.
I take this opportunity to convey our sincere thanks and gratitude to all those who have directly or indirectly helped and contributed towards the completion of this project.
I take here a great opportunity to express our sincere and deep sense of gratitude our professors for giving us an opportunity to work on this project. The support & guidance from Sir, was of great help & it was extremely valuable.
1. Executive Summary
2. Introduction
3. Research methodology
4. Introduction to the airline industry
5. SWOT analysis of the industry
6. Scandinavian airlines
7. British airways
8. Cathay pacific
9. Finnair airlines
10. Recommendations
11. Conclusion
12. Bibliography
Executive summary
The report is designed to both provide the background needed to understand the state of
the aerospace industry and recommend actions that will improve the
capacity of the state to support the industry’s workforce needs both now and into the
future. While our focus was on workforce, the recommendations have relevance to other
competitiveness factors because workforce issues and these factors are too intertwined to
examine in isolation.
The Aerospace industry is a high-tech industry and is a powerful driver of innovation
in the economy as a whole. Aircraft development and production is by far the largest
component of the industry. Space activities account for less than 10% of the activities
in the Aerospace industry. The European Aerospace industry is world leader in large
civil aircraft, business jets and helicopters, aero-engines and defence electronics.
The industry is going through an ongoing consolidation process and the number of
major players has decreased from 30 to 11 in 2003.
The Aerospace industry is characterised by strong knowledge cumulativeness.
Knowledge production in the Aerospace industry is paramount: there are sustainable
competitive advantages for Europe’s established Aerospace companies with high
entry barriers for newly emerging competitors that want to compete on similar
technological levels. R&D subsidies and credit to the private sector have a positive
effect on the efficiency of research activities, whereas foreign direct investment and
monetary stability have a negative effect on research efficiency. Investments in R&D
depend positively on R&D subsidies, credit to the private sector and exposure to
international trade, but negatively on the intensity of domestic competition.
Competition
The Aerospace sector is highly R&D intensive and levels of competition are high.
Over time there is a certain degree of convergence in the level of competition across
countries, when countries with more protected or regulated domestic markets have
started to increase competition. On average, the relationship between R&D
investment and competition is positive. More competition acts an innovation driver in
Aerospace.
Aviation Industry overview
An Airline is a scheduled air transport facilitator. There has been a major increment in fleets to connect all major airports of the world due to technology development. This aids to reduce cost and flying more people. Since 1970, there has been a 5 fold increase of traffic at the airports of the old 15 Euro states airports. The contribution to total GDP of Europe is 3.1% (€ 275 billion). European Airline Industry focus is to offer steady, loyal, safe, environment friendly, competent and reasonable priced services. It aspires to maintain its position in the global competition and endeavour to strive to advance the performance in facets of services and products offered to clients.
It aids for about 7.7million jobs chipping in € 140 billion to GDP yearly. 80 million tourists (42%) visit Europe by air. 76% occupancy was achieved in 2010. The LCC have been assisted in many countries due to development of new airports and extension of current airports. 15% of inter European air traffic is due to LCC’s. Its main impact has been on the price of air fares, hence, in order to compete it has majorly strained national carriers to decrease their airfares.
India, China & Middle East
Africa, CIS, Asia & Latin America
N. America, Europe, Japan & Australia
Global Aviation Industry saw a total revenue of $380.5 billion with a CAGR of 2.5% over 2005-2009 and is expected to have a CAGR of 6.9% over 2009-2014 to reach a value of $532.1 billion. This industry is diversely distributed over the industry life-cycle pertaining to geographical segments. Evidently, whilst Africa, CIS and Latin America are developing on one hand, India, China and Middle East witness a superlative growth on the other. North America, Europe and Australia face maturity with insignificant scope for growth within their respective economies leading to palpable 2 speed world.
The global aviation is driven by various factors which could be internal or external to the organisation. These factors include industry economics, airlines business models and aircrafts, passenger demographics and services besides the networks and hubs (Airbus and Boeing, 2010) The Critical Success Factors in the industry which would further drive the firms’ in the industry to sustain their growth and potentially have more market profitability are depicted in the following figure.
RESEARCH METHODOLOGY
Objective of the study:
To study the aviation industry, subject wise.
Research Design:
Research methodology is the arrangement of condition for collection and analysis of data in a manner that aims to combine the relevance to the research purpose with economy in procedure. Research is conceptual structure within which research is conducted. It is way to systematically study and solve the research problems.
The research can be viewed from the following parameters:
The research is exploratory in nature. Explorative studies valuable means of finding out ‘what is happening’ to seek new insights to ask questions and to access phenomenon in a new light’. It also involves formulation of hypothesis.
The research is also descriptive in nature. Descriptive study is an extension of exploratory study. Research was done so that strategies can be made to establish products in the market in a better way, providing more awareness and place the product properly as well as promote the brand and emerge as a competition in the market.
Data Collection:
Secondary Data:
The data which has already been collected, complied and presented earlier by any agency may be used for purpose of investigation. The data collected through:
* Various publications in form of annual reports, various papers and journals published from time to time.
* Through internet and Books
Limitations of the study:
* Research is based on the collection of data from both primary and secondary sources.
* Time constraint.
* All the information, which is taken, is biased on primary and secondary data that has its own limitations.
Brief about the companies used to study our analysis
1. FINNAIR
Company Background:
Finnair Oyj was established in 1923 by the name of Aero Oy, and at present it is one of the oldest functioning airlines in the world. The company is public limited and the 55.8% of the shares are of Finnish government; the institutional investors hold the rest. More than 50% of the stake is always held and retained by the Finnish government. The Finnair Group comprise of numerous business offering such as scheduled traffic, charter, aviation services and travel services. Oy Aurinkomatkat – Suntours Ltd Ab is the leading tour operator in Finland which is a significant subsidiary also offering flight tickets. Other assisting travel services are the Finland Travel Bureau Ltd (FTB) (Suomen Matkatoimisto Oy (SMT)) – A/S Estravel Ltd, Area Travel Agency Ltd and Amadeus Finland Oy developing sales channels online. Since 1999 finnair has an alliance with OneWorld. It is the key performer domestically flying to 13 destinations. It also provides flights connecting Asia and Europe major destinations. Charter flights are also available to more than 60 holiday resorts.
2. THAI AIRWAYS INTERNATIONAL
Company Background:
Thai Airways International Public Company Limited is a state enterprise under the jurisdiction of the Ministry of Transport and is Thailand’s national flag carrier flying domestic and international routes. The Aviation Business and Business Units related to air transport form the Company’s core business.
Thai Airways International Public Company Limited is the national carrier of the Kingdom of Thailand. It operates domestic, regional and intercontinental flights radiating from its home base in Bangkok to key destinations around the world and within Thailand. The company’s fully paid up share capital amounts to 16,988,765,500 Baht (9 May 2005) and is 53.77% owned by the Ministry of Finance, the Thai Government. At the end of September 2004, consolidated total assets of the company amounted to 193,211 million Baht. In its operations, THAI has achieved profitability every year for the last 40 consecutive years
3. CATHAY PACIFIC
Company Background:
Cathay Pacific was founded in Hong Kong on 24th September 1946 by American Roy C Farrell and Australian Sydney H de Kantzow. Initially based in Shanghai, the two men moved to Hong Kong and founded Cathay Pacific Airways. The new company began to operate passenger flights to Manila, Bangkok, Singapore and Shanghai. The 1960’s saw the company grow at an average of 20 percent per year and initiated international services to Osaka, Fukuoka, and Nagoya in Japan. Currently the airline offers passenger and cargo services to 116 destinations in 35 countries and territories. Cathay Pacific currently ranks as the world’s 3rd most profitable (net profit) and the 4th largest airline in world by operating profit. They rank 12th in the world in terms of revenue passenger kilometres and the 5th largest in freight tonne kilometres. According to a Credit Suisse report (2006) markets like Africa, Latin America and Asia are in the development stage, India and China are in the growth phase of the life cycle while the rest of world have reached point of slow and flattish growth.
4. KLM
Company Background:
Air France- KLM is one of Europe’s leaders in air transport and has the most extensive route network between Europe and the rest of the world, which is effectively coordinated and balanced around the Roissy-Charles de Gaule in Paris and Amsterdam-Schiphol hub. It has more than 71.4 million passengers and revenue of over €20.99 billion in 2009-2010. A total force of 105,000 employees helps to make it such a success and have contributed to the dynamics of the business of the group.
Air France-KLM group is also the founding member of the international airline alliance, Sky team, which has enabled it to extend and consolidate its reach to 169 countries in the airline sector. The group’s manages a strategy of profitability growth, which is achieved together with a sustainable development policy based on respect of its commitments to environmental advances and social progress.
5. SCANDINAVIAN AIRLINES (SAS)
Company Background:
Scandinavian Airlines was established in 1946 to serve as an international Norwegian, Swedish and Danish airline company. Abbreviated as SAS, it currently serves 176 destinations, 45 of which are in located in Norway. In the early years of the company, SAS distinguished itself with a reputation for excellence in innovation. Scandinavian Airlines operates a fleet of 181 aircraft and focuses on business and leisure travellers with offerings tailored to the needs of business travellers. For instance, it was the first airline to introduce reduced prices for coach class, a strategy that is now standard in most airlines. SAS Scandinavian Airlines which consists of the wholly subsidiaries; Denmark, Norway, Sweden and International is 100% owned by SAS AB. SAS-Group is registered at three different stock exchanges; Copenhagen, Oslo and Stockholm. 50% of the stocks are owned by the governments of these three countries and the rest is owned by private investors. EuroBonus, the SAS frequent flyer program launched in 1992, has become the world’s most awarded program. SAS Aviation Services, SAS Ground Services, SAS Tech and SAS Cargo make up the SAS Aviation Services business area. The companies offer check in, boarding, baggage handling and technical maintenance of aircraft services along with freight services for the SAS Group and other airlines.
* Principle of global business management(PGBM) use in the aviation sector
The objective of this subject consists of an in depth analysis of the strategic position and international transactions of these 5 companies in relation to its industry context and its competitors in the aviation industry. Our goal in this report is to analyze these 5 companies in terms of its competitive position in the aviation industry and the international operations in which it operates. Our research is purely based on the secondary information and the information available to me from the official company website. Through this research we come to know the different marketing strategies used in the world market in order to maximize its sales and its international operations.
We would be using the examples of 4 companies in order to analyze the international transactions –
1. THAI Airways – Thai Airways International Public Company Limited is the national carrier of the Kingdom of Thailand.
* 53.77% owned by the Ministry of Finance, the Thai Government
* Thai Airways International was founded in 1960 as a joint venture between Thailand’s domestic carrier, Thai Airways Company (TAC) and Scandinavian Airlines System (SAS)
* In 1960, flights were inaugurated from Bangkok to 9 overseas destinations all within the Asian region
* Intercontinental services were launched in 1971, to Australia
* followed by flights to Europe in 1972, and to North America in 1980.
* Thai Airways International growth was greatly accelerated on April 1, 1988 as a result of its merger with Thai Airways Company (TAC), the domestic airline
2. Finn Air – finnair ojy is a public limited compony with 55.8% shares of finnish government, finnair provides flights connecting Asia and Europe major destinations.
* Finnair began its first international operations to the regional capital of Liberalia in Bahia Esmeralda and continues to expand into the international market.
* Its international operations are in Bahia Esmeralda, Brutus, Fudker, New Sake, Nu Fudkenhiem, Pellston, Petosky, Serekan, Xi’an.
* Finnair passengers from Singapore can look forward to faster and more direct regional flights to countries in the Nordic and Baltic regions via Helsinki as British regional carrier Flybe is pressing forward with expansion plans and has teamed up with Finnair to buy Finnish Commuter Airlines (FCA).
* Finnair, which launched India operations in October last year, is stepping up India frequency from three to 12 flights per week by June this year. Mumbai will join Finnair’s international network with five direct flights from Helsinki from June
3. Scandinavian Airlines (SAS) – Scandinavian Airlines was established in 1946 to serve as an international Norwegian, Swedish and Danish airline company.
* SAS has four airlines in three countries
* In 2004, Scandinavian Airlines System, SAS, was divided into four SAS companies: SAS International, SAS Danmark, SAS Norge and SAS Sverige.
* 50% government owned and 50% publicly held. Government ownership: Denmark (14.3%), Norway (14.3%) and Sweden (21.4%).
* SAS International is responsible for all interconti- nental traffic and non-Scandinavian sales operations.
* SAS Danmark is responsible for European traffic to/ from Copenhagen and Danish domestic routes.
* SAS Norge is responsible for European traffic to/from Norway and Norwegian domestic routes.
* SAS Sverige is responsible for European traffic to Sweden and Swedish domestic routes.
4. Cathay Pacific – Cathay Pacific was founded in Hong Kong on 24th September 1946.
* Currently the airline offers passenger and cargo services to 116 destinations in 35 countries and territories.
* Cathay pacific is the world’s first to operate international services to Fukuoka, Nagoya and Osaka in Japan.
* Expansion continued into the 1980s, with nonstop service to Vancouver in 1983, with continuing service on to San Francisco in 1986 when an industry-wide boom encouraged route growth to many European and North American centres.
* Air China Limited and Cathay Pacific Airways Limited signed a Framework Agreement on 25th February 2010 in Beijing to establish a jointly owned cargo airline.
* The two companies use an existing cargo airline, Air China Cargo Co Ltd (ACC), a wholly owned subsidiary of Air China, as the platform for the joint venture.
* Upon completion of the transaction, ACC will continue to be a subsidiary of Air China. Air China will hold 51% equity in ACC while the Cathay Pacific Group will acquire a 25% equity interest directly in ACC and fund an offshore trust, in the form of a loan, to hold another 24% economic interest in ACC. The total value of the Cathay Pacific Group’s investment in the joint venture will be RMB 1,669 million.
* Use of financial analysis(AFM) in the aviation sector
The objective of this subject consist of the computation of the financial ratios of the above 5 companies in order to determine their analysis.
1. Finn air
The Analysis of the financial performance of Finnair is done by comparing the last 5 years financial statements and ratios.
* The gross profit margin% was at the peak in 2007, in the last 5 years it became the lowest in 2009 but has gain gained a momentum in 2010, which means the there is some amount of profitability as cost of sales are lower than the sales price.
* Net Income (in Euro million): From a peak in 2007, in 2009 was in extremely bad situation. But it has taken an upstream in 2010 which clearly means that their residual income is increasing which will benefit the company.
* Turnover, EBIT, EBITDAR – In the past 5 years due to several reasons there has been huge ups and downs in the company. The turnover was the maximum in 2008 which dropped in 2009 but again rose in 2010. But the company’s earnings are in a negative of 4.7%, however from 2009 the company has become in a far better position.
* Gearing ratio: The percentage of gearing ratio is very high indicating very high risk for Finnair. In the last5 years this is the highest which means the company is most vulnerable to downturns in the business cycle.
* Equity ratio: The trend reveals that it reached peaks in 2007 and has been diminishing in the consecutive two years, but in 2010 Finnair financed the assets of the company well using the equity.
* ROCE: The return on capital employed from 2008 to 2010 was a very peak down to an upward situation. This shows that from a very bad ROCE% in 2009, Finnair managed to utilize its capital effectively to generate more returns. Also, the company is expected to grow quickly now.
* ROE: The return on equity dripped more than 10% from 2007 in 2009. However, the company shows a positive trend in 2010. It is expected to become positive in the coming time.
* Current Ratio: A higher current ratio is good for the company because it is then able to pay the debt. From the previous year the current ratio has become higher which means the company is becoming more stable.
* Inventory Turnover: The inventory turnover in 2007 was low, hiked in 2008 and has been diminishing since then, the last 4 years trend show that Finnair’s trading intensity is bad. Moreover, it explains the inventory in warehouse is more than required.
* Asset Turnover: Finnair from a good figure of turnover in 2007 showed a declining trend in 2009 but the company has again elevated in 2010. This signifies that with time Finnair is becoming more efficient in using its assets to generate revenue.
* EPS AND DPS: The earnings per share has been consistently declining since 2008 because of the global economic downturn negatively affecting the net income of the firm.EPS followed the similar trend. But improved drastically towards the end of 2010 mainly because of increasing the network in Asia.
2. Cathay pacific
Cathay Pacific Airways Limited together with its subsidiaries operates as an international airline that offers scheduled passenger and cargo services. The company conducts airline operations principally to and from Hong Kong. It also provides property investment travel tour operator, financial services, aircraft acquisition facilitator, airline catering, dry cleaning, ground handling and equipment handling services.
Hong Kong Dragon Airlines Ltd (Dragonair) is a wholly owned subsidiary of Cathay Pacific. Cathay own 19.2 of Air China Limited, the national flag carrier and a leading provider of passenger, cargo and other airline services in mainland China and is the major shareholder in Air Hong Kong Limited, an all cargo carrier offering scheduled services in the Asian region.
The Cathay Pacific stock price over the last five years has grown substantially. The stock rose from levels of HKD 13.90 in 2006 to its current price of HKD 18.78 as per April 1, 2011. The stock hit a high of HKD 24.10 and a low of HKD 7.03 during the last five years.
Return on Capital Employed (ROCE)
The ROCE employed by Cathay Pacific has seen a growth from 8.9% to 22% over the last five years. There was at negative return on capital during the year 2008. This can attributed to the economic slowdown during this period. The best year has been FY 2010 where the company had a growth of 22%, this again be attributed to the global sector improving and aviation sector growing again post the recession period of 2008-09.
Group Turnover
The Cathay Pacific grew at almost 12-20% during the 2005-2007 period. The company saw a decline of 29.41 % in 2008 in its turnover. However post 2009, the company recovered and grew substantially in 2009 and 2010.
Profit margin
The profit margin of the airline Cathay Pacific grew steadily over the last five years, growing from 7.4% to 11.2% in 2007. However there was loss to the company in FY 2008. The negative profit margin in FY 2008 can also be attributed to the losses incurred in the fuel derivatives market and the speculation in the currentcy and intrest rate dervatives. Turnover was affected by weak currenies. Cathay Pacific stated though the price of fuel was lower the company didnt get the full benifit. The company made MTM or Market to Market losses at HKD 1.9 bn during 2008-2009.The company recovered back in 2009 and showed double digit of 15.7 % growth in FY 2010.
EBITDA margins
Cathay Pacific’s EBITDA margins grew from 15.8 % to 17.9% during the FY 2006 and FY 2007 respectively. The company EBITDA’s margin went into the red falling 4.4 % during FY 2008. The company recovered in the next two years with EBITDA margins of 17.2% and 26.6% during FY 2009 and FY 2010.
Operating Margin
Cathay Pacific’s operating margins grew steadily from 9 % to 9.5 % during the period of 2006-2007. However the company’s operating margins suffered in 2008 and fell 9% during the 2008 FY. This can be attributed to the recession which affected the airline industry. During the 2009 period the operating margins grew at 2.6%. The FY 2010 saw the operating margins hit a high of 12%. The global scenario recovered by this period.
Current Ratio
Cathay Pacific’s current ratio has been just above 1 during FY 2006 and 2007. The current ratio fell to 0.8 during 2008. This means the company had a large debt and might have not been able to meet its financial obligations during this year. FY 2009 and 2010 saw the current ratio improving slightly. There has been a constant average of the current ratio being 1:1 besides the FY2008.
Net Margin
Cathay’s net margins grew steadily during the beginning of FY 2006 and FY 2007. The company’s net margin fell 10% during the 2008 global meltdown. FY 2009 saw the company’s net margins back in the green and grew 7%. The FY 2010 saw a growth of 16.5%.
Gearing Ratio
The company has had a flattish gearing ratio which was roughly about 0.4 in the FY 2006. The company had a high gearing ratio during the FY 2008. This meant the company had a large degree of leverage.
3. KLM
ROCE %
Over the last five years it can be seen that the ROCE% for Air France-KLM has been in declining and has been the worst during the years 2009 and 2010. During the course of 2009, the H1N1 epidemic affected the air transport to a great extent and during the year 2010 the snowfall which shut down many airports in Europe and also the Volcanic ash which
affected air timetables majorly.
PROFIT MARGIN %
The profit margins have decreased in the last 5 years due to the economic downfall that the European economy has faced during the year 2008 and 2009 of severe recession. The year 2010 proved to be severe because of the natural calamities.
GROSS MARGIN %
The Gross margin over the last five years has been fluctuating, from 53.52% in 2006, it has fallen to 45.06% which has been the stable percentile for 2 years; 2009 and 2010. During the year 2009 the group faced a tragic loss of Air France flight AF447 which led to its losses aswell and the volcanic eruption in 2010 resulted in short falls and significant operating losses. Reduced air traffic was another reason for the fall of financials.
EBITDA MARGIN %
During the year 2008-2009 the recession led to a major drop in the GDP of the European economy, which has led to the decline in the EBITDA Margin % over the years.
GEARING RATIO
In the year 2009 and 2010 the Gearing Ratio is high due to the loans taken during the economic downturn in 2008 in the European economy. The fall in oil prices made fuel hedges inefficient, increasing rather than reducing fuel bills and requiring the group to recognize significant operational and financial charges in the financial statement.
LIQUIDITY RATIO
The decline in liquidity ratio is due to the economic recession during the year 2008 in which the main concern of the group was to reduce the sharp rise in the fuel bill which was leading to reduction in staff and inventory of the company.
CURRENT RATIO
Due to the recession of 2008-2009 the current ratio has been declining showing that cost cutting was the main concern of the group.
COLLECTION PERIOD DAYS
The collection period days have reduced in 2008 and 2009 due to the economic disturbances and this is because the group needed the finance borrowed from them quicker than during the good times. It has increased in 2010 as the economy has also seen a growth.
CREDIT PERIOD DAYS
The credit period days was very low in 2009 when the creditors were giving less time to pay off the debts, The fluctuation in the economy led to this.
4. Scandinavian ailines (SAS)
There has been a decline in the Gross Margin from 2006 to 2009 but it has gradually increased in 2010.
The profit margin also experienced a huge decline in 2007 and 2009 but gradually increased in 2010. The reason for the decline was majorly due to the economic downturn and increase in operating expenses.
A major decline in the earnings can be seen which was majorly due to the increase in operating expenses and the effect of the volcanic ash cloud.
The ROCE turned out to be negative in 2008, 2009 and 2010 which shows a poor profitability of the company’s capital investments.
There has been a continuous rise in the gearing ratio till 2009 but then a sudden decline in 2010 which shows that the company is in a good financial position and the current degree of leverage is low.
The liquidity and current ratio has reached its peak in 2010 which shows that it has a strong short term debt paying capacity which is an advantage to the company.
The debt collection period has reduced down drastically which shows that there has been a quick recovery of debts in 2010.
A very low credit payment period shows that the company’s liquidity position is good.
* Use of Human Resource in our report
To explain the use of human Resources we are taking the example of KLM and showing the various practises it uses in its HR policy.
The success of the Air France-KLM Group’s strategy rests on each and every employee. Air France-KLM intends to develop leadership and empowerment through a series of clear, relevant objectives focusing on customer satisfaction. The Group also wants to promote employability through training, mobility and flexibility.
Air France and the KLM group after the merger coordinated many principles for integration and have many joint training sessions and have invested €200 million in staff training every year. Air France-KLM strive to share best practices to ensure that the staff is responsible and well informed on issues that concern the group as a. There are a total of 4272 pilots who are trained to their full responsibilities of dealing with flight telecommunications, navigations and mechanical monitoring procedures. Career Development is huge for a pilot working with the group as they in four years time having served as first officer can proceed to a long-haul aircraft, the Airbus A330/340, Boeing B747-400, Boeing B777 or the Airbus. They have a cabin crew of 15,081 flight attendants and 41,333 ground staff, they have regular training to maintain and enhance professional skills. They also cover the technical aspect of the job along with the commercial aspect during training. Safety regulations and rescue training courses on emergency situations and joint exercises with pilots are regularly practiced
EMPLOYEE BENEFITS
Employees working at Air France-KLM enjoy attractive benefits like excellent pension schemes, fixed monthly salary, 8% holiday allowance and year-end bonus. They also follow a40 hours a week policy, provide a lease car for employees of a higher salary levels and a healthy working environment. The other benefits include health insurance, life course savings schemes, salary saving schemes and cafeteria schemes along with worldwide flight discounts and incentive programs for selected positions.
* Use of Marketing in our report
In order to explain the use of marketing in our report of the aviation scetor wewould be taking Scandanivian airlines marketing stratergy as an example.
It is important to target the right market segment in order to successfully implement the current marketing strategies. This can be done by analyzing Demographic, Socio-cultural, psychographic, and behavioural differences among the buyers.
On priority basis, the target markets for the SAS Group are:
Business travelers- 55-60%
Leisure travelers- 35-40%
Charter travelers- 5%
Key Distribution Channels- In today’s competitive world distribution has become the primary area to seek competitive advantage in both cost reduction and service improvement. SAS has chosen the advanced shopping, pricing, availability and booking functionality of the Datalex Travel Distribution platform to ensure greater choice, accuracy and flexibility to the consumer shopping experience. Today SAS processes millions of shopping requests and bookings directly against its CRS (Central Reservation System) though the Travel Distribution Platform. This negates the need for shopping against the GDS and thus provides for enormous cost saving. They also distribute their inventory through the internet as they have a website of their own and through various tour operators.
Loyalty Schemes- EuroBonus is the frequent flyer program of the SAS Group divided into basic, silver and gold. It was launched by Scandinavian Airlines System in 1992. With this card the cardholder gets a lot of discounts on a board range of hotels, car rentals and more. As a EuroBonus card-holder you can use the card as an electronic ticket on SAS flights, get an SMS if your flight is delayed, earn points to use later on a free ticket, faster check-in, lounge access and greater baggage allowance. One can earn Basic points on the start of flying with SAS and more than 30 Star Alliance airlines.
Marketing Communication
Advertising – The SAS Group share their financials with the general public by using newspapers like Dagbladet, VG and their company website.
Sales Promotion – The airline is offering special seasonal prices on their tickets and tour packages to their customers through their website and other third party websites.
Public Relations – The group keeps on updating the news section with the latest press and market releases on their website which acts as PR.
Personal Selling – The SAS Group sales team is responsible for getting corporate contacts fixed with companies.
Growth Methods
Using the Ansoff’s matrix a company can identify its growth strategies. It consists of four strategic options which can be used to bridge the gaps a company has:
Market Penetration Strategies:
Loyalty Schemes- Since there are many international leisure travellers who visit all the luxury segment hotels, therefore SAS should have a tie up with the major hotel chains in the Nordic region and provide frequent flier points to its passengers on staying in these hotels.
Brand Image- As the customer awareness is increasing about the environmental practices. Thus, they should follow and market environmental practices more seriously, as its competitors are extensively into eco-friendly practices. SAS will further enhance its customer offering by making the travel experience smoother, while at the same time maximizing value for the individual customer which will in turn strengthen their brand promise ‘Service and Simplicity’.
Advertisement- The group should also focus on advertising through Direct Mail, Radio and Television. This will not only reach to a mass audience but can also remind the ex-customers about the company and increase the popularity of the airline.
New Product Development Strategies:
* SAS offers a premium product with a higher service level and larger product content and also has the largest network. SAS plans to offer onboard Internet on both short and long haul routes.
* SAS offers smart electronic solutions such as boarding passes, seat selection and check-in via mobile phone. SAS Lounges offer the possibility to quickly and easily connect to wireless Internet for free.
* Travel Pass Individual is a prepaid personal card good for two selected destinations or within a specific zone. SAS Travel Pass Multiple is a flexible multi-trip pass for everyone in a company. SAS Travel Pass Corporate offers discounts on Economy Extra and Business tickets to many destinations.
Market Extension Strategies:
* SAS Airline is Lufthansa’s most important partner in Europe, after that the European Commission approved a joint venture agreement between Scandinavia and Germany extending the SAS market into Europe. They both are members of Star Alliance. Air France could become a partner of SAS Airline because it would provide it access to markets they do not have so far.
*
* SAS Airline has also other airline partners in Europe, such as Iceland Air, Maersk Air or Estonian Air. SAS has a code sharing agreement with these airlines. The Group has been able to extend its market to Finland through its subsidiary airline Blue1.
*
* In addition, SAS Airline has a strategic interest in the Baltic airline market, so it has partnerships with a couple of regional airlines in Scandinavia. This strategy enables SAS to extent its regional route in Scandinavia, Finland and other Baltic countries. These partners are for instance AirBaltic, Cimber Air, Skyways Holding, Air Botnia and Widerøe.
Diversification Strategies:
This strategy focuses solely on creating new products and services for the new target market. This strategy is the most risky growth strategy since the company is targeting a completely different market segment. (Bowie & Buttle, 2004)
* Introduction of a Low Cost Carrier (LCC) into the market by the group for new target market customers
* Entering the Hospitality sector by merging or acquiring a successful hotel chain in the Nordic region.
SWOT Analysis
Strengths
* Stable Financial Platform
* Strong brands – SAS, Widerøe and Blue1
* Unit cost on par with competitors
* Positive trend in payroll expenses
* Decisions to modernize the fleet
* Core SAS focus strategy
* Largest number of frequencies.
* Alternative service classes.
* Expanded network with Star Alliance.
* Attractive landing and departure times at hub airports
* Smart and effective services such as e-mail check-in, Fast
* Track and lounges for business passengers.
* The Nordic Region’s foremost loyalty program.
* Punctuality and minimized travel time.
Weaknesses
* Fluctuating profits and margins
* Weak turnover ratios
* Low R&D
* Low market share
* Not innovative
* Not diversified
* Poor supply chain
* Weak management team
Competitive Strategies
According to Porter, competitive strategy is “the search for a favourable competitive position in an industry” which aims to “establish a profitable and sustainable position against the forces that determine industry competition”. In order to achieve a performance above average in an industry, a firm should develop a sustainable position in the long run, which means to have a sustainable competitive advantage.
Bowman’s Strategic Options: The Strategy Clock
SAS
Each position in the strategy clock represent a different generic strategy and also different positions the firm can assume in the market, focusing on customer’s two types of requirements – perceived product/service benefits and price.
Porter’s Generic Strategies
SAS
After the value chain analysis it shows that Scandinavian Airlines (SAS) uses the differentiation strategy in its market. In this strategy a firm seeks to offer a different product or service in the industry, with the aim of creating something that is perceived as unique in the industry and highly valued by the buyers.
SAS seeks to offer a different service in the industry, with the aim of creating something that is perceived as unique and highly valued by its customers. SAS applies several approaches by differentiating its brand image (SAS wants to be recognized as a safe, punctual and high service quality airline), its technology (SAS is use to having investment programs to renew its aircraft fleet with the most advanced aircraft), its customer service etc. SAS pursues its differentiation strategy on several dimensions. It focuses a lot of offering the best service quality to its customers.
In order to differentiate with its competitors in Europe, SAS Airline invests a lot of money on aircraft maintenance. SAS airline improves also its quality by adjusting staffs according the size of the airport. The new pricing policy of SAS airline was decided in order to develop a sustainable position in the long run, which means to have a sustainable competitive advantage. The new fares will attract people who used to travel by coach or train within Sweden or people who did not want to travel by plane because of the former expensive prices.
* Use of Information Technology in the aviation sector
In this analysis we would be taking the example of Thai airways international in order to analyse the use use of information technology.
* THAI recognizes the important role Information Technology as a strategic tool to drive and ensure success in achieving the various corporate strategic plans building a strong financial base for sustained growth through enhanced customer satisfaction and improve operational efficiency. The Company has drafted for IT Transformation Management plan, Application Development and Infrastructure Implementation plan to modernize the backbone system that enables fl exibility for additional modules to provide a comprehensive solution for the Company enhancing quality and efficiency in business processes thai is highly secure. Therefore, strategic initiatives to be undertaken to provide the Company with the necessary flexibility, efficiency and effectiveness in providing unsurpassed quality service is among the more pressing areas the Company stands ready to invest in.
* In 2010, e-Services improvements continue to be made to better serve customers by providing self – service accessibility from anywhere and anytime via all mobile devices e.g. mobile phone, smart phone and tablet through mobile browser m.thaiairways.com website i.e. Flight Information, Flight Scheduling, View Flight Booking, Booking tickets, informations on Royal Orchid Holidays packages, Royal Orchid Plus Statement of the 5 most recent activities and remaining mileage for ROP members, including Cargo Flight Schedule information. Cargo e-Tracking and Cargo Handling Charges. THAI customers can also inquire such particular information via SMS (SMS Broadcasting & Query) by calling 02-451-4455 as well. In addition, the Book and Pay service was improved to support online fl ight reservation and e-ticketing issuance via mobile service, expand e-ticketing payment service through ATMs of different banks, and implement self-check-in capability for international flights at Suvarnabhumi Airport. Going forward into 2011, customers can easily inquire about fl ight Information, flight schedules and Cargo e-Tracking via speech recognition with Thai language and SMS service via phone number 02-400-4000. This is another step forward for THAI in using modern technology to provide customers convenience and enhance overall customer satisfaction.
* Besides the tour package information currently provided through THAI’s website, THAI’s has already launched the Royal Orchid Holidays website for customers to make tour reservations, make e-Payment and issue tour order vouchers (e-Vouchers) via the www.thaiairways.com website. The Royal Orchid Plus Member Profi le Expansion system has been developed to store information about customers’ lifestyles for marketing analysis, enabling Customer Relations Management (CRM) to better cater to customers’ needs and ultimately retain customer loyalty to THAI while broadening the opportunity to generate additional revenue. THAI is also developing an Air Award website a worldwide system that is a value added service for ROP members living abroad to redeem rewards, make flight reservations and make payment in an array of currencies via credit card.
* For Cargo and Mail services at www.thaicargo.com website, the e-Import Service has been enhanced for e-Payment and e-Manifest Tracking. E-Payment is another channel for freight forwarders or shipping companies to pay for terminal and storage charge of imported goods at the THAI Cargo Terminal which enables an automatic debit of such charges from bank accounts instead of making cash payment. While the e-Manifest Tracking system is to enhance the manifest process checked by a freight forwarder or a shipping company before all relevant import documents are submitted to the Customs Department. It expedites the customs clearance process and adds value to the Cargo Services Department. For flight crews in the Flight Operations Department, the Air Crew system enables electronic management of pilot and cabin attendant schedules. The use of the electronic flight scheduling system (e-schedule) reduces the use of paper, saves cost and is more efficient by electronically notifying cockpit and cabin crew schedules which also supports the Travel Green concept. The Cabin Attendant Pre-Flight Study and Brief n System have enhanced to facilitate flight attendants in preparation for flights by providing important flight and passenger information via different mobile devices and enhancing the preparedness of the crew in providing unsurpassed in-flight quality services. Flight information can be accessed through the web on mobile and response to inquiries is distributed to cabin crews instantly through a secure and efficient process.
* THAI recognizes the importance of Corporate Social Responsibility (CSR) and is the fi rst airline in the Asia Pacifi c to offer customers the opportunity to offset carbon emissions through the THAI Voluntary Carbon Offset Program. After booking and completing payment for a THAI fl ight at www.thaiairways.com website, information about the amount of carbon emitted for the particular fl ight chosen will be displayed along with the cost to offset the carbon generated. Customers can contribute by making payment with credit card to offset this particular carbon footprint. The entire amount contributed by the customer will go into funding 3 offi cially approved renewable energy projects.
* To improve cost identifi cation and allocation in the IT Department, the IT Financial Management System (ITFM) was implemented to calculate the actual costs and expenses of IT services rendered to the various operating units within the Company and such expense is charged back to all functions within the organization. This is to facilitate THAI in establishing an effective IT fi nancial management practice and to realize full value of IT investments and to be able to visualize the actual cost of IT services rendered to business units.
* In 2010, THAI’s Disaster Recovery Site (the Company’s data back-up and recovery center) served to mitigate risks of a disruptions to operations by storing a large number of important applications necessary for normal operations, made revisions to the instruction manual and contingency plans and held an annual IT rehearsal of all data and application system recovery and archiving system to ensure continuous and uninterrupted operations or at least minimize overall disruption to the Company’s operations. THAI also realizes that security of information technology is critical to ensuring undisrupted operations therefore security is constantly being improved and updated. After the Corporate IT Security Working Group (CIS) drafted policies and security measures to protect its database in 2009, CIS issued standards and manual related to information technology security to serve as guidelines to ensure the safety of its database which is an invaluable asset to the Company.
* Dramatic changes are expected to take place from 2011 onwards, with the plan to modernize the core IT system to support applications and other infrastructure systems. The Company will migrate from a mainframe-based core systems to a new and more effi cient distributed system platform system to enable greater fl exibility and be more adaptive to rapidly changing business needs and also to enhance customer satisfaction:
1. Passenger Services System – THAI plans to transfer the Reservation, Inventory Control, Ticketing and Departure Control systems to the new and modernized platform. It is to support competitive business requirements, be responsive to customer needs with seamless services and ultimately increase THAI’s operating efficiency.
2. New Loyalty System – a new frequent fl yer program under Royal Orchid Plus (ROP) is being considered to provide ROP members with quality services and also support the Company’s marketing and sales efforts.,
3. The most important being the program to more effi ciently manage campaigns is acquired.
4. Global Tour Management System – a new Royal Orchid Holidays system (ROH) with fl exibility to quickly create and customize a variety of attractive tour and hotel packages worldwide (ROH products) to suit travelers’ preference. . The new system, it will increase value to THAI’s products and services and leverage ROH direct sales targeting customers via internet channel and increasing overall revenue THAI.
5. Commercial Data Warehouse – is to capture all relevant data – passenger reservation, fl ight information, fares etc. With the customer database, THAI will be able to improve the depth of analysis and in multiple dimensions to effectively support planning and decision making in areas of sales and marketing, fl ight planning as well as focus on personalized customer services.
6. New Cargo IT System – to replace the current cargo system namely ORCHIDS, to support the cargo and mail operations, cargo reservation & sales, cargo revenue management & accounting. THAI expects the system to increase the cargo revenue, improve operating effi ciency and competitiveness including assuring customer satisfaction.
7. Corporate SAP is the new Finance & Accounting system – being developed as the core system to enable faster and more accurate fi nancial reporting which is also linked to human resource management. It will integrate SAP to other current and future systems and data as part of the integrated Enterprise Resource Planning system (ERP) as well as improve on the Corporate Management System (MIS) to support the management planning and decision making.
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* To achieve the projects as described above, THAI needs to overhaul its IT infrastructure, improve IT process management and introduce new but relevant technology information such as :
(i) Application Integration Platform (ESB & ODS) – allows the interface with different applications/platforms by using standard and reusable technical architecture and structure. The fi rst application to use this feature was the Passenger Services System.
(ii) Cloud Computing – THAI is implementing the ability to support customer accessibility via internet with the variety of IT devices including new methodology in application development by enhancing Server Virtualization that is already implemented by THAI. The benefi t is for quick response to business needs effi ciently and securely while providing a greater range of channels for customers to access Company information.
(iii) e-Collaboration systems – are support systems for staff communication, cooperation and knowledge management sharing within the Company to enhance effi ciency, reduce cost and support Green IT environment i.e. e-Document Management system, Corporate Unifi ed Communication and Collaboration- implementation of infrastructure and software application tools to support all the above.
* Furthermore, THAI is developing many projects to in compliance with standard rules, regulations & security protocol to ensure the highest level of security and reliability to support internal and external users. For instance, the Public Key Infrastructure (PKI) System is designed to support digital signature for e-business transactions/processes. The Web Service Security is also to ensure secured accessibility from authorized users -staff, customers, and alliance partners through any network service provider.
Conclusion
The airline industry today operates in an environment where firms set prices and domestic routes given market conditions, but where access to some key inputs, such as airport boarding gates, are determined by non-market mechanisms. While profits have fluctuated a great deal, the industry in the U.S. has been characterized by steady growth, falling prices, and moderate concentration, suggesting a positive impact of deregulation. Policies to allocate some key inputs on a market basis may yield even more efficient outcomes.
* The airline industry is a network-based industry that lives from the interaction among the various parts of the system: aircrafts, airports, passengers, aviation policy
* The airline industry and an airline are complex systems that require proper management concepts, tools and practices
* The aircraft is the result of understanding the dynamics of a system of air fluids and of designing and implementing a machine capable of taking advantage of that dynamic behavior to fulfill a purpose: transport people
* The airline industry has set structures to analyze its behavior, particularly accidents, and retrofits that information into the design of the system and its components
* The airline industry takes into account the interactions to other industries, and particularly, to the environment, thus becoming part of a larger system
* R&D moved from military focused (World Wars), to space (Cold Ward) and then to commercial transportation (1990s)
Bibliography
* Introduction to the Airline sector, http://www.icao.int/ngapconf/ , cited on 10th April, 2011.
* Scandinavian Airlines (SAS), http://www.sasgroup.net/SASGroup/default.asp, cited on 12th April, 2011.
* Cathay Pacific (2010). Background. Available: http://www.cathaypacific.com/cpa/en_INTL/aboutus/cxbackground/history
* http://www.iata.org/whatwedo/Documents/economics/traffic_forecast_2007_2011.pdf
* http://www.iata.org/whatwedo/Documents/economics/traffic_forecast_2007_2011.pdf
* http://www.iata.org/whatwedo/Documents/economics/BCS_Jan_11.pdf
* Finnair. (2010) Annual Report, Finnair Oyj
* (http://www.gaelquality.com/Resources/Success-Stories/Finnair/)
* www.google.com
* www.wikipedia.com
