Running head: Airline Industry in Australia

Student name and ID number Managerial Economics ECON90015 Tutor and tutorial times Word count

Airline Industry in Australia The objective of this research is to perform the industry analysis using Michael Porters Five Forces framework as the basis. In particular, the airline industry in Australia will be the subject to the analysis. Following the general information on the industry and the Porters Five Forces model will be applied. However, industry analysis will be undertaken from two different perspectives. Firstly, the conventional Porters approach, described by Basenko et al. (2007), exploring the economic factors that affect the industry will be applied. Secondly, basic strategic analysis accounting the cooperation and competition, contributed by Brandenburger & Nalebuff (1998), will be undertaken. First of all, it is essential to provide the detailed definition to the subject of market analysis and the geographical area which will be considered in the research. Airline industry is commonly defined as a set of companies providing air transportation services for travelling passengers and freight. In particular, civil aviation will be analyzed in this research. With the reference to the geographical area, the primary focus will be on the domestic air transportation with Australia. Australian Transport Safety Bureau and Civil Aviation Safety Authority are government organization responsible for safety control and the investigation of the safety deficiencies and accidents. At 31 December 2008 four major domestic airlines operated in Australia - Qantas, Virgin Blue, Jetstar and Tiger Airways1. Local companies such as Regional Express Airlines (REX), Brindabella Airlines, Northwest Regional Airlines and others provided connecting services to regional airports. There were 188 security regulated airports in Australia at the end of 2007. Australian Bureau, 130.1 Year Book Australia, 2009-2010, Transport 1Activity, Retrieved from http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/321136439E3661E8CA25773700169 CE4
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Airline Industry in Australia In 2009 airline industry in Australia had to face declining demand (Creedy S., 2010). High fuel prices and strong competition on domestic market keep profits grounded, but experts predict the development of the airline industry in next five years. The approximate annual revenue of airline industry in Australia is estimated around $16bn with the average growth of 0.5% annually (IBIS World, 2012). Diagram 1 Porters Five Forces Framework applied to the Australian airline industry Potential Entrants [A subject to government regulation, e.g. Civil Aviation Safety Authority and Australian Transport Safety Bureau, high development costs create significant barriers to entry ] Suppliers [High fuel prices keep profits low, quality education facilities are available, Airbus, Boeing, and Bombardier are the main models used in the region ] Internal rivalry [4 major domestic airline operators and several regional airline carriers, about 50 international operators, intense price competition] Substitutes and Complements [Rising popularity of domestic tourism and the development of entertainment services complement to the airline industry, rail and car means are the main alternatives to substitute airline services] Buyers [Rising disposable incomes, low unemployment and tourism promotion indicate stable future demand]

Airline Industry in Australia As of the traditional Porters approach, the diagram 1 defines the five market forces for the airline industry in Australia. Generally, the bargaining power of buyers is assessed through the ability of individual buyers to influence the pricing and extract money from the sellers. In this case, the bargaining power of buyers is relatively high. Flying is not a necessity so consumers are willing to shop for better prices. Additionally, a number of the airline operators contribute to the price competition at the market. Basically, airline operators compete with the substitutes for the share at the Australian transportation market. Rail and car are still popular means of transport so the decision of switching to costly airline services should be stimulated. So the main objective for the airline service providers is to convince customers to choose air transportation. Understanding the target audience plays crucial role in determining the bargaining power of buyers. The frequency of using the service, the type of flight (domestic or international), the level of income, the purpose and motivation of using airline transportation these are the factors influencing buyers decision. While 90% of the visitors come to Australia by air, buyers have relatively high bargaining power when choosing the internal means of transportation. Speaking of the bargaining power of suppliers, fuel suppliers are highly influential at the airline market as there are no substitutes to fuel so far. Today, airlines try to eliminate the bargaining power of fuel supplier by using fuel-effective and saving planes. As of the labor suppliers, the labor market is stable and sufficient. There are educational facilities in major Australian universities and the labor unions cooperate as well. At the example of strikes at Lufthansa, we can see the destructive power of labor suppliers. As of the airlines manufacturers, the development of technologies enables the increase in the quality of airline service.

Airline Industry in Australia According to Brandenburger & Nalebuff (1998), customers and supplier play symmetric roles. While the traditional approach to Porters Five Forces shows threats to the revenues of airline industry, high fuel prices set by suppliers and the As of the forces posing a threat to the airline industry in particular, the unconventional approach calls us to see the opportunities to increase profitability in cooperation with competitors. In other words, Brandenburger & Nalebuff pay more attention to the complementors and believe that the development of common markets is far more efficient than undercutting the competitors as it often undercuts the whole market. The bigger is the market, the bigger market share the company can get. From my opinion, the development of domestic tourism in Australia will increase the revenues of air carriers. Complements may influence the profits either. The development of freight transportation as well as entertainment facilities across the country will encourage more frequent use of airlines in whole.