An analysis on the Current Profitability and Competitive Position of Airline

Industry

College of Accountancy

TANAUAN INSTITUTE INC.,

Tanauan City, Batangas

In partial fulfillment of the requirement for the subject

Mgnt 4- Business Policy and Strategy

By

Gelyn R. Dimalibot

March 23,2018
I. INTRODUCTION

This research provides an overview description of the changes in the Philippine

airline industry over the next couple of years. The government liberalized the civil

aviation industry .The scale of aviation in the Philippines were to give focus on the

liberalization transformed the domestic industry into virtual duopolies in major airline

markets while minor routes remain virtual monopolies, suggesting that the

government’s goal to make the industry more competitive has not been realized.

Using the methods like Porter’s Five Forces and PESTLE analysis, the study

identifies the strategic market understanding and the competitive landscape for the

local scale of Philippine aviation.

II. INDUSTRY BACKGROUND

A. Introduction

Air transportation in the Philippines goes back to the early days of aviation prior

to World War II during the American colonial period of the Philippines. Currently, the

Philippines has several registered airline companies, but they are mostly chartered.

There are two main domestic airline groups doing business as Philippine Airlines and

Cebu Pacific, with Air Asia Philippines competing on some international routes. The

domestic market is dominated by the Cebu Pacific group which has a 61% market

share, followed by the Philippine Airlines group which has 29%, followed by Air Asia,

having a 9% share.

(Source: http://www.wccaviation.com)
B. History

Prior to the second liberalization of the Philippine airline industry in 1995,

state-owned Philippine Airlines enjoyed virtual monopoly with the country's adopted

policy of "one country, one airline" during the dictatorship of President Ferdinand

Marcos. The government's subsidy in the form of mail freight payments supported

the company's massive expansion program in the 1960s. In 1973, the government

ordered the absorption by Philippine Air Lines, Inc. of two other privately owned

airlines, Air Manila and Filipinas Orient Airways, to form Philippine Airlines as the

single flag carrier of the Republic of the Philippines.

(Source: https://en.wikipedia.org/wiki)

In 2013, Sky Jet Airlines, a new airline company, launched its domestic

commercial flights to leisure island destinations such as Balesin, Batanes, Boracay

and Busuanga. For the aforementioned island destinations, Sky Jet is competing

with another small airline, Island Transvoyager.

(Source: https://en.wikipedia.org/wiki)

In 2016, the Cebu Pacific group was the largest domestic airline with a market

share of 55% for its Cebu Pacific unit and 6% for its Tiger Air Philippines unit.

Philippine Airlines came second with 25% for its PAL Express unit and 4% for its

Philippine Airlines unit. Air Asia had 8% for its Zest Airways unit and 1% for its Air

Asia unit. Sky Jet and Island Transvoyager both had less than 1%.

(Source: https://en.wikipedia.org/wiki)
 C. Trends and Issues

White sand beaches, tall majestic buildings, and the constant need to meet

with foreign managers have made flying a usual activity for a lot of Filipinos.

According to the latest Nielsen Global Survey of Consumer Confidence and

Spending Intentions, Filipinos’ first priority in saving is intended for holidays and

vacations. In order to compliment this behavior, the airline industry has adapted

trends for better flight services. These trends include the following:

1. Developing in-flight entertainment

One of the features airlines compete and customers look out for is the in-flight

entertainment. Most airlines have offered movies, TV shows, and magazines to keep

passengers busy in long flights.

PAL has recently developed a new in-flight entertainment feature app. The

app had to be downloaded and passengers had to connect to their internal Wi-Fi

server in order to watch movies and TV shows, read magazines, and get real time

updates of the status of the flight

(Source: http://www.wccaviation.com.)

2. Increasing low cost carriers

Pricing is one concern when it comes to ticketing. With travel becoming more

frequent among Filipinos, competitive pricing became a trend.

Flights are now offered at affordable prices and if a customer is lucky enough

and knows where to look, they can even manage to get fares as low as P1. This is

all made possible because airlines have been getting low cost carriers.
3. Going digital with majority of the transactions

From booking a flight, paying, to checking-in, everything can be done digitally.

This isn’t just for the convenience of the passengers; it is also to regulate the traffic

of people inside the airport. Even the tickets are electronic.

(Source: http://www.wccaviation.com)

4. Hosting travel expos

Travel expos held in the country in 2016 all contributed to the improvement in

sales in the airline industry.

For instance, the world travel 2016 expo was hosted by Ad Asia Conventions and

Exhibitions International Corp. It aimed to be a means for global and national travel

communities to be connected, according to Business Mirror. It was just one of the

many travel expose held this year.

(Source: http://www.wccaviation.com)

More trends are set to come out next year as the airline industry in the

Philippines continues to grow. In line with this growth, aviation schools are not just

growing in numbers, but improving their facilities and training equipment as well.

Whether for commercial of private purposes, flying is a fulfilling activity. If you’re

interested in learning how to pilot a plane and explore the skies, enroll in a flying

school with top notch trainers and the latest amenities. WCC offers one of the best

flight school experiences in the country.

(Source: http://www.wccaviation.com)
III. INDUSTRY ANALYSIS

A. Pestle Analysis

Pestle Analysis Current Trends & Issues Strategy

Political Airline industry has To be able to handle

adversely affected by larger number of air

increased security travelers they are

measures especially after investing heavily on

9/11 incidence.The making new airports and

number of people expanding the existing

travelling to other ones.These investments

countries is decreased are an effort to make their

due to fear of their safety country as preferred

and security.Furthermore destination for not only

the Strict visa policy and passengers but also

border control as an effort airlines to stopover.

to combat terrorisms has

caused inconvenience and

has resulted in decreased

number of people

travelling to other

destinations.

Economical Many airlines gone The economic down turn

through difficult times due and increased fuel prices

to effects of 2009 down has taught many valuable

 turn. The economic lessons to airline industry

instability has resulted in like to ways to survive in

increased demand of low tough economic

cost airline. conditions, becoming

more productive and

reducing costs.

Socio-Cultural The growing income of Globalization has resulted

middle class in different increased travel of CEOs

part of the world with and business managers.

decreased costs of air That means there will be

travel with the time that growing number of older

has increased affordability passengers who will prefer

of people. As result air travel for shorter

tourism is becoming larger distances for increased

and more diverse comfort.

customer market.

Technological Technology has huge The aeroplanes are

impact on airline becoming more fuel

industry.Increased use of efficient day by day

internet has made it helping airlines to reduce

possible to customers to travelling costs while new

purchased ticker for their technology has also

homes.The ability and enabled airlines to

access of airlines has introduce more safety

increased aspassengers measures.

 can get latest information

about airfare and

information.

Legal There are different The different types af law

rules,regulations,and suits against airlines has

quality standards for increased in last few years

airlines in border to ensure that means customers has

the safety and security of very higher expectations

the passengers. and law is becoming

The compliance of the more strict against these

rules and regulations is airlines.

compulsory for any airline

travelling to and from

these country.

Environmental Airline industry is Airlines are developing

responsible of 3.5% of corporate social

weather change that may responsibility programs to

grow up in 15% in future. address this issue.Air

travellers and

environmental

organizations are keeping

an eye on the ways

airlines are dealing with

this issue.They are trying

to bring environmentally
 friendly aeroplanes in the

market.

B. Porter’s Five Forces

Five Forces Factors Affecting the Strategy

Industry

Bargaining Power of The power of suppliers in , the airline industry needs

Suppliers (High) the airline industry is aircraft either on outright

immense because of the sale or wet lease basis

fact that the three inputs which means that the

that airlines have in terms airlines have to depend on

of fuel, aircraft, and labor the two biggies, Airbus,

are all affected by the and Boeing for their

external environment. For aircraft needs.

instance, the price of

aviation fuel is subject to

the fluctuations in the

global market for oil, which

can gyrate wildly because

of geopolitical and other

factors. Similarly, labor is

subject to the power of the

unions who often bargain

and get unreasonable and

 costly concessions from

the airlines

Bargaining Power of The bargaining power of To analyze this

Customers (Moderate to buyer in airline industry is organization can take this

Low) relatively low because the opportunity to provide

number of buyers for this excellent service and

service is enormous and charge premium price.

keeps increasing (IATA,

2010). Additionally, due to

different specialty of

countries, customers tend

to go overseas for

particular purpose that the

destination country is good

at (i.e. Singapore good at

Medication), subsequently,

going overseas somehow

is becoming part of the

lifestyle today. Hence, this

can also be seen as the

service is essential for

particular customers which

further down the

bargaining power of buyer.

Looking at another factor

 which is internet, it allows

customers to easily make

a comparison through

information and price

transparency and switch to

other airline service.

Overall, the bargaining

power of buyer is still

moderate to low, so

organization can take this

opportunity to provide

excellent service and

charge premium price.

Threat of New Entrants The airline industry With the availability of a

(Low) requires large initial huge line of credit and a

investment and has a long marketable brand name

learning curve. Apart from via other businesses,

acquiring high-cost assets companies venture into

such as planes and skilled the airline industry. Planes

staff, the company also are available on lease and

needs to gather the bought second-hand as

necessary permissions, well. Starting out in a

obtain parking and specific region is permitted

docking space at various and is usually used as a

airports, market the strategy by entrants,

 service extensively to reducing initial cost and

ensure consumers are complication.

willing to travel by a new,

unknown airline. Also,

there are significant exit

barriers in the industry due

to stringent government

regulations. The highly

fluctuating nature of

profitability acts as a

deterrent as well.

Threat of Substitute Product that able to In regards to the threats,

Products (Low) represent other product Airline Company should

function can be defined as keep innovate their service

substitute product. to prevent a perfect

Currently, there are no substitute.

perfect substitutes for

airline service, as airline

service has the best range

of destination, time-

efficient and convenience.

However, the fact that

trains and air-transports

are substitute is true, but

 the threat will only be high

if it’s applied in domestic

travel. Currently, the threat

of substitutes for airline

industry is low. In regards

to the threats, Airline

Company should keep

innovate their service to

prevent a perfect

substitute.

Competitive Rivalry The airline industry is There is very little

within an Industry (High) extremely competitive in differentiation between the

its nature due to time-to- available choices and

time entry of low cost loyalty programs such as

carriers and tight flyer miles and benefits

regulation due to the are rarely a preference

concern of safety which over factors such as

increases operational available flight times,

expenses. The presence prices and routes.

of low-cost carriers has

brought down prices by a

large extent, consequently

driving down margins. The

number of competitors

remains stagnant in the

 market due to high fixed

costs.

IV. COMPETITIVE ADVANTAGE

Cost Leadership Differentiation

They minimize the time that their planes Automated technologies can offer

spend on the tarmac in order to keep information and analytics. Tablets are used

them flying and to keep profits up. to accept payments for snacks and

services.

Disparity in pricing helps airlines Taking advantage of the captive customer

maximize their revenues given the supply base to make retailer one of their biggest

and demand at the moment in time. revenues centers.

V. CONCLUSION

From the Porter’s Five Forces and PESTLE Analysis presented above, it can be

seen that there is no doubt that liberalization and deregulation have brought

genuine competition in the domestic air transport industry, this has shown that the

degree of competition has been increasingly intensified, particularly in the major

routes, resulting to lower airfare improvement in the quality of service and

efficiency in the industry in general. The government needs to act quickly to

promote competition in the industry, the Philippines to its old restrictive policies

and practices, the government needs to deepen its liberalization efforts by

adopting a more flexible approach to its liberalization efforts.

VI. BIBLIOGRAPHY

http://www.wccaviation.com/latest-trends-philippine-airline-industry/

https://en.wikipedia.org/wiki/Air_transportation_in_the_Philippines

http://sites.google.com/