Do airlines use passengers strategically?

Strategic Challenges for Passenger Airlines - Building Competitive Advantages in a Changed Market Environment

Table of Contents

List of figures

List of abbreviations

1 Introduction
1.1 Description of the market
1.2 The particular strategic situation of airlines
1.3 Creation of competitive advantages for airlines
1.4 Methodological approach

2 Structural analysis of the passenger airline industry
2.1 Strategic challenges posed by threats from potential competitors
2.1.1 Risks of market entry Barriers to entry Reactions from existing companies
2.1.2 Risks of market entry in the passenger airline industry Relevance of the barriers to market entry Opportunities to overcome market entry barriers
2.1.3 Market entries in the past
2.2 Strategic challenges due to customer needs
2.2.1 Bargaining power of customers
2.2.2 Bargaining power in the passenger flight business
2.2.3 New expectations of air travel Changed customer requirements for the air travel product Changed customer behavior
2.3 Strategic challenges due to battles for position with other airlines
2.3.1 Competitive situation in industries
2.3.2 Competitive situation among passenger airlines
2.3.3 Current developments between airlines in the German market
2.4 Strategic challenges from suppliers of intermediate services
2.4.1 Bargaining power of suppliers
2.4.2 Bargaining power of suppliers in the passenger flight business
2.5 Strategic challenges posed by the threat of substitutes
2.5.1 Competition between the substitutes
2.5.2 Air transport substitutes
2.5.3 Current developments in the defense against substitutes

3 Promising Strategies for Passenger Airlines
3.1 Develop a competitive strategy
3.2 Competitive strategy of the full-service carrier
3.3 Competitive strategy of the low-cost carriers
3.4 Use of competitive advantages in the respective business system

4 Two practical examples in comparison: How Lufthansa and Hapag-Lloyd Express are building competitive advantages
4.1 Business model of the full-service carrier Lufthansa
4.2 Business model of the low-cost carrier Hapag-Lloyd Express

5 Conclusion


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List of figures

Fig. 1: The five competitive forces, source: according to Porter (1999), p. 34.

Fig. 2: Competitive matrix, source: according to Porter (1999), p. 75.

List of abbreviations

Figure not included in this excerpt

1 Introduction

1.1 Description of the market

Intense competition began in the German airline market at the end of the 1990s. New airlines were founded and offered alternative competing products to the previous flights of traditional scheduled airlines, the full-service carriers (FSC). Service, quality, network connections and brands steeped in tradition did not have top priority for many start-ups, rather the product should only be a simple flight as a transport between two destinations. As a result, among other things, these new airlines were able to operate at significantly lower costs and thus compete on price. The concept of "low frills" has established itself under the name of Low-Cost-Carrier (LCC).

LCC are primarily characterized by the direct sale of tickets via the Internet or call centers, simple and low price structures, tight seating in the aircraft, the uniformity of the aircraft fleets, decentralized point-to-point connections and low personnel costs.

The reason for the competition was the liberalization of European air traffic, which was carried out in several stages, the last two in 1993 and 1997. Since then, there are no longer any restrictions on routes, capacities and cabotage within the European Union (EU). This means that every EU airline has free market access in every EU country and can fly any route within the international community.[1] The establishment of new airlines in particular has been simplified by deregulation.

The market development of the airlines in Germany is interesting: in 1998 the market share of the traditional scheduled airlines in the total civil air traffic was approx. 90% of the approx. 103 million passengers, approx. 10% of all travelers were carried by charter airlines, the market share of the LCC was approx almost 0%.[2] After a very strong growth phase, almost 10% flew in 2003[3] of around 120 million passengers in Germany[4] with a low-cost airline, approx. 11% with charter airlines and approx. 77%[5] with traditional lines[6].

With their concept, LCC are opening up new customer potential on the one hand, e.g. On the other hand, more and more customers are using this reduced product of air travel who previously flew with FSC. Not every customer needs the additional benefits that these airlines offer their travelers, such as: B. well-known brand name, global presence, full-service concept with two or three classes in the aircraft, connections in the network, alliances or bonus programs.

Customer needs have changed in the passenger market, this is clearly shown by the market development presented. A certain proportion of air travelers demand a certain service and additional benefit, but there is also an increasing trend in which customers place limited demands on the product of air travel.

A particular challenge for airlines is to find suitable strategies in the increasingly competitive market that meet new customer needs and ensure the long-term success of an airline.

In this thesis, only the two types of airline operations, the FSC and the LCC, are considered. Charter airlines are deliberately not examined because, on the one hand, they mainly serve the tourist clientele of package travelers, but on the other hand, because their market share has so far not changed significantly as a result of LCC's entry into the market. The basic conception of the business model of the charter airlines is similar to the form of the low-cost airlines, especially in the area of ​​fixed cost reduction through, for example, short dwell times of the aircraft on the ground, high occupancy rates and, if possible, all-day flight operations into the night.[7] Regional airlines and executive carriers are also not given any special attention here, as their market share in both European and Germany-wide business is negligible in the dimensions considered in this work.

The focus of the considerations in this thesis is on the LCC. The traditional scheduled airlines are viewed in relation to this new airline business concept. The reason for this is that the concept appears very promising in an economically tense situation, in times of both required and socially desired mobility and flexibility and modern customer behavior, where the price of a product or service is in the foreground.

1.2 The particular strategic situation of airlines

Compared to other industries, airlines are in a special strategic situation. In this industry, companies generally tend to have overcapacity. In addition, these overcapacities can occur cyclically, which in a macroeconomic recession can threaten the very existence of individual airlines. The aviation business therefore has a high systemic risk, which is fundamental for the strategic behavior of airlines[8] Systemic risk includes the strategic challenges of airlines.

Air traffic-specific properties that give rise to the system risk described are above all:[9]

- the non-materiality of the product air travel,
- the non-storability of the product,
- a high price elasticity of demand, since the products are comparatively homogeneous,
- the simple comparability of the product with products of the competition,
- low margins, since unit costs and unit yields are close to each other in air traffic,
- high fluctuations in demand, e.g. B. Seasonal or cyclical, and imbalance of traffic flows,
- a very high capital intensity and thus the indivisibility of capital goods, e.g. B. for aircraft, distribution channels or reservation systems,
- the dependence on capital markets, since airlines have high capital requirements and investors pay for the risk in the aviation business with high risk premiums,
- Long strategic lead times, so-called "time lags", which result from long delivery times for ordered aircraft, long training of specialist personnel and, if necessary, government approvals for product or process changes in the event of changed environmental conditions,
- the dependence on airports and intermediaries, e.g. B. travel agencies,
- The sensitivity to currency and fuel price fluctuations, since many fees and income are paid in US dollars or there is a high elasticity of prices, against which an airline can only hedge itself to a limited extent with financial derivatives.

The strategic challenges of an airline result from a strong dependency on external influencing factors such as potential competitors, customers, the competitive situation in the industry or suppliers and a limited own strategic scope.

1.3 Creation of competitive advantages for airlines

In general, competitive advantages arise from sources in the form of skills or resources, position or performance advantages, which are primarily achieved through superior benefits and lower relative costs, and market results, which are measured, for example, in customer satisfaction and loyalty or the market share of a company can be.

An airline must now react to the special strategic challenges, as presented in Chapter 1.2, by building up a competitive edge over the competition. In addition to the two general competitive strategies of differentiation and cost leadership[10] can, based on the link here, among other things. Trustworthiness, individualization, speed, convenience, learning ability, cost advantages and innovative ability represent possible competitive advantages,[11] that an airline can achieve over the competition.

1.4 Methodological approach

Porter's industry structure analysis is ideal for precisely identifying the strategic challenges and formulating the necessary competitive strategy for a company.

Figure not included in this excerpt

Fig. 1: The five competitive forces, source: according to Porter (1999), p. 34.

In the structural analysis of an industry, Porter recognizes five competitive forces to which a company is exposed. It is the threat from new competitors, the bargaining power of customers, the competitive situation in the industry, the bargaining power of suppliers and the threat from replacement products and services. The purpose of a competitive strategy is for a company to find a position in which it can protect itself from the competitive forces or influence them in its own favor. This works best when the company is aware of the cause of the individual competitive forces and then develops its own strategy.[12]

In the following chapters, the competitive forces that affect passenger airlines are examined. Then a possible strategy for the two considered business concepts of airlines is derived and the main competitive advantages are explained. Two practical examples from companies Lufthansa and Hapag-Lloyd Express (HLX) then show exemplarily how airlines position themselves strategically due to the changed market environment in order to successfully counter the emerging competitive forces. Finally, there is a summary of the key findings that the reader can draw from this work, combined with an outlook on how the passenger airline industry could continue to change in the coming years.

2 Structural analysis of the passenger airline industry

2.1 Strategic challenges posed by threats from potential competitors

2.1.1 Risks of market entry Barriers to entry

The risk of potential competitors entering the market can be reduced by means of artificially erected entry barriers that state institutions or companies that are already active in the market consciously set up, as well as natural barriers that result from the entrepreneurial evolution of an industry. Established companies have a particular interest in not encountering new competitors in their own industry, because new market participants bring new capacities, profit claims and ambitions to a market share with them. This can change the position, especially the profit situation, of the companies already active in the industry.[13]

a) Artificial barriers to entry

An entry barrier for a new competitor in an industry is initially the conversion costs. These arise for a customer of another provider when he changes to the new competitor. Conversion costs can be of a physical nature, i.e. incurred directly when a customer changes provider, e.g. B. Costs from adapting business processes to new circumstances. But they can also be of a psychological nature and result from the end of a business relationship. These then have an impact on employees, for example, as informal relationships have to be rebuilt or familiar work processes have to be changed. If business partners have closely coordinated their business processes, the entry barrier for new competitors is correspondingly high.

Another artificial entry barrier for new competitors is the access to sales channels. The new company in the market has to look for suitable sales channels, in certain cases even get sales partners of the established companies to sell the new products. Considerable financial resources are often required for this.

Established companies can have cost advantages regardless of size that a new company in the market cannot achieve. In particular, these are the presence at strategically important locations, production processes that cannot be imitated, contacts with business partners and politics that have been established over a longer period of time, from which certain conditions or even subsidies arise, as well as the routine and the interaction in the work processes of teams in the company.

Ultimately, state politics can also create artificial barriers to entry. It is conceivable for new companies to acquire the necessary licenses and comply with legal requirements.

b) Natural barriers to entry

An essential natural entry barrier for new competitors is the size savings of the established companies. This is a reduction in unit costs, which occurs when the output volume increases. On the one hand, this has static causes, since existing fixed costs are converted to a higher output, and, on the other hand, dynamic reasons, because if a product is created for a longer period of time, technical progress, rationalization and standardization effects are achieved.[14]

Product differentiation is another natural barrier to entry. Porter understands it to mean a lead over established companies, which consists of brand awareness and buyer loyalty. The advantage is achieved through market cultivation with earlier advertising, well-known service, a broad product range or the fact that you were the first company in the market. A new company in the industry would have to have plenty of liquid funds to make up for this lead.[15]

In industries with a high capital requirement, covering this represents a particularly high challenge and thus a natural entry barrier for a new competitor. The business concept must convince lenders that they also invest, for example, if the requirement is an irretrievable entry-level investment, which may not yield any residual value in the “worst case”. Reactions from existing companies

The second threat a company faces prior to entering the market is expected retaliation in the form of a response to the entry plan by existing competitors. The risk is particularly high when the market is in a phase of stagnation, when the companies operating in the segment have extensive liquid funds or when the companies are firmly connected to the industry. The established companies are then, if necessary by necessity, in order to secure their own existence, in a position to ward off market entry.

2.1.2 Risks of market entry in the passenger airline industry Relevance of the barriers to market entry

The barriers to market entry have different degrees of importance depending on the industry. In principle, in the passenger airline market segment, new market participants are faced with all of the above-mentioned barriers, which reduce the risk of new competitors entering the market for existing airlines.

New airlines in a market do not necessarily have to be start-ups. Rather, they can already be used in another market, e.g. B. abroad, or have been active in another segment, such as a charter airline.

There are conversion costs in the passenger airline industry. These are naturally not very high in the private customer business, but can be artificially built up through certain marketing measures. In the business customer segment, however, airlines often conclude long-term contracts with travel-related companies. Often the booking and billing processes of the back office area are coordinated so that there is close customer loyalty. In order to break the ties and ties between an airline and its business customers and to poach customers, a new market entrant requires particularly large marketing efforts. These can include the direct identification of cost advantages, the granting of discounts or the prospect of long-term cooperation. Furthermore, a business customer who is sensitive to punctuality, availability and frequency does not want to be worse off than the previous carrier.[16]

For a long time, the distribution channels represented another artificial barrier to entry. The close ties between travel agents and airlines and tourism groups were a key success factor for airlines. Special online-based computer reservation systems (CRS) for the sale of flight tickets in travel agencies are supported by certain airlines, which have either bought into the system at a high price or have supported the development of the CRS. New airlines can only integrate into the system with a high financial outlay, whereby it is not ensured that the visual positioning is equivalent to the established airlines. In addition, for a long time a commission model with average remuneration from large corporations of 10% per trip sold made the inclusion of new products with, in some cases, lower commissions largely unattractive, especially since the model often provided that the travel agent slipped into a higher commission class when a defined turnover was reached.[17]

Decentralized airports are becoming more and more important in national and European international air traffic. Air traffic in this area is also increasing at so-called secondary airports. Numerous developments at regional airports and smaller international airports show this impressively. An example here is the increase in passenger volumes at Cologne / Bonn Airports with 43%[18] and Stuttgart with 4%[19] referenced in 2003. The primary market for domestic and continental air travel operated from airports of this category is nowadays defined within a one-hour drive by car.[20] There are already lucrative flight routes within this circle of a Carrier of a Operated from the airport, it is often only possible for new competitors to offer the same flight route with great effort. The dependency, especially from smaller airports to airlines, can be so intense that airlines already operating there are in a position to threaten the airport with the termination of business relationships in the event of cooperation with a new competitor. The successful prevention of the entry of flights by the competitor serves as an example here Easyjet of HLX at Hanover Airport.[21]

The situation at large international airports has to be considered separately. Since airports, such as Frankfurt Rhein / Main, have capacity bottlenecks, airlines are allocated landing rights within a time window, so-called slots, by airport coordinators and via slot conferences every six months in advance.[22] New competitors apply for slots, but are given no or only a limited number because the demand exceeds the supply. The increasing decentralization of the continental air traffic of new competitors is also understandable from this aspect.

Since the complete liberalization of the flight markets in the EU, state regulations no longer represent a direct market entry barrier for potential airlines. Since the third stage of the EU air transport liberalization package from 1993, there has been free market access for all EU airlines within the EU. Only the national regulations applicable in the respective EU countries are restrictive for airlines. B. Aviation or Competition Laws.[23]

Furthermore, cost advantages in the aviation market represent a significant entry barrier. Cost advantages arise for passenger airlines through a series of strategic and operational corporate decisions. Existing cost advantages act as entry barriers for new airlines, since ultimately the ticket price to be paid by the customer for a flight also depends on them. In the case of comparable products such as air travel, the customer focuses primarily on the price as a differentiating feature. For a passenger airline to successfully enter a market, the ticket price must be competitive with a comparable level of service.

With product differentiation, established airlines are trying to create customer loyalty in order to counteract the migration of their own customers to another or a new provider. This is done by means of an action plan, which is presented in detail in Chapter 3.2. The customer loyalty manifested by these measures must be overcome by new competitors in the market with the help of a higher-quality or completely new offer in order to be able to win or poach customers.

One of the biggest barriers to entry for new airlines is capital intensity. On the one hand, the costs of purchasing the aircraft play an important role, on the other hand, the operating costs for airlines are capital-intensive, especially fuel costs, training costs for cockpit and escort personnel, personnel costs and maintenance costs.[24]

At this point, I would like to briefly point out the retaliatory measures to be expected, which threaten a new airline in the market as a further risk of entry. The following are conceivable:

- Targeted price reductions on the competing routes in question,
- more intensive cooperation with the airports that the new competitor wants to fly to in order to induce them to turn away from their potential customers,
- Expansion of the company's own offer to routes where the potential competitor is already present. Opportunities to overcome market entry barriers

Defining the market is one of the first tasks for a new airline. On the one hand, ambitions can be cherished to play a role in the national air traffic market; on the other hand, the penetration of a regional market can also represent the challenge for a new carrier. It is important that there is a need, be it manifest or latent, for the potential competitor's new product. The clear delimitation of the market makes various barriers to market entry visible, which the new airline must overcome.

In addition to the option of buying aircraft, airlines have three leasing options that reduce the very high capital commitment that is otherwise necessary. In aviation, there is a distinction between operate-lease contracts, which have a short duration and primarily serve to bridge temporary capacity bottlenecks, finance-lease contracts, which are long-term and do not provide for the possibility of termination during the basic rental period, and sale-and-purchase. A distinction is made between lease-back contracts, in which an airline sells its own aircraft to a leasing company and then leases it back again.[25]

In addition to fuel costs, high items in operating costs include training costs for cockpit and accompanying personnel, personnel costs and maintenance costs. Smaller airlines offer the option of outsourcing the latter. Certain services that are not part of the core competency of an airline can also be purchased from a competitor. This reduces deployment costs, costs from the provision and training of specialist personnel and ultimately also the total capital commitment.

Established airlines try to build up and maintain barriers to market entry through product differentiation. But a differentiation of offers can also be implemented and applied by a new airline in the market.[26] Perhaps she is in the position to enforce differentiations because there are not yet any rigid structures in the production process of air travel. In some cases, however, it can also be seen that new competitors deliberately refrain from differentiation measures such as bonus programs for customer loyalty and instead strive for an “always cheap” image.

The problem of distribution via travel agents has eased in recent years with new competitors. Often the solution was to turn away from the CRS system and, associated with it, from the travel agencies. Thanks to the spread of the Internet and the acceptance of call centers by customers, it was possible to set up own structures relatively inexpensively. In the meantime, the Internet is increasingly becoming the platform on which customers can buy flight tickets directly from the companies independently of travel agents and thus the artificial entry barrier. In addition, there is an increasing financial need for travel agencies, as established contractual partners are reducing or canceling their commissions,[27] so that the willingness to sell flight tickets with low or fixed commission increases. In the future, sales channels will only represent a market entry barrier to a limited extent.

The choice of destinations has a particular influence on the market success of a new airline. When entering the market, it is often advisable to operate from decentralized or less busy airports, as the fees and landing rights payable there are lower. However, the catchment area or the region around the possible departure airport must be correspondingly attractive in order to achieve a high utilization of the aircraft.

2.1.3 Market entries in the past

Various environmental factors contributed to the fact that between 1999 and 2004 more than twelve LCCs started their flight operations in the German market.[28] Large FSCs were not founded in Germany during this period.

Above all, the lowering of state barriers to market entry within all EU states through the liberalization of traffic rights made it considerably easier for new competitors to gain access to the market. Not only were four new German passenger airlines successfully founded, but airlines from other EU countries also positioned themselves in the German market.

Only some of the new German carriers took up domestic German connections, the LCC mainly focused on European destinations that had not yet been served by established airlines. Initially, the airlines only started from a few decentralized German airports, their catchment area was well over an hour's drive to the airport. The more departure airports were added to the route network, the more the primary regional market shrank.

Furthermore, barriers to market entry could be bypassed, as the LCC primarily addressed a new target group with their business concept. Initially, they did not focus on business travelers, who knew how to appreciate the advantages of the established carriers, but above all on individual travelers.[29] The sales system with call center and direct internet sales was also developed to suit the target group. Thanks to a cost-saving model that was revolutionary by German standards, the cost advantages of the established airlines did not represent a major entry barrier for LCC.

However, high initial losses had to be taken into account, because the LCC model is based on heavily used aircraft capacities. The conscious need for air travel of this kind had to be awakened in many customers, even if the mentality of looking for cheap offers was already in place.

2.2 Strategic challenges due to customer needs

2.2.1 Bargaining power of customers

Buyers of products have a special power in an industry. Ideally, they choose a product to buy that, from their subjective point of view, offers the cheapest price, the highest quality and the best performance.[30] Conversely, this means that the competitor who manufactures his products at too high a price, too low a quality or with poor performance characteristics cannot sell them successfully in the long term. The strength of several important customers, i.e. a customer group, depends not only on the actual purchase decision but also on the market situation and the market share it represents. Porter has established several conditions that characterize a strong customer group, which are presented below.[31]

If a customer group has a high share of the total turnover of a company, its existence is strongly related to that of the company. The dependency on the provider is even more intense if a certain customer generates a significant proportion of total sales.

Conversely, if the purchases of products represent a high proportion of costs for customers, this increases the willingness to look more intensively for cheaper alternatives. Even then, customers are in a position of power. This could be strengthened if the products are standard products, where the conversion costs for customers are correspondingly low. Corporate customers, for example, become particularly resourceful when their profits do not meet the expectations of various stakeholders. They are almost forced by them, among other things. also reduce their purchasing costs.

Another strength of the customers can be expressed through the threat of backward integration. If the seller of the product is unable to deliver a product of a defined quality, an agreed price or specified properties, an important customer can negotiate various kinds of concessions. These are mainly granted if the customer credibly intends to manufacture the product himself.

The price sensitivity of customers can fluctuate widely. In some cases the quality and certain properties of a product are more in the focus of customer interest. This is especially the case when the product or its use has an elementary or at least very high value for a customer. In other cases, the price has a particular influence on the decision to purchase a product, namely whether the manufactured product is bought by the customer at all or, as already described above, a competitor is given preference. The price sensitivity of the customer is certainly increased if their subjective assessment of the economic situation is not positive at the moment or in the future.

Last but not least, the bargaining power of customers also depends on the completeness of the information available to them. The more the customers have knowledge of the entire market demand, current market prices of the competition and perhaps even the costs of the supplier, the stronger their negotiating position.

A distinction can be made between business customers (B2B) and private customers (B2C) as customer groups. The reasons for the emergence of consumer power apply equally to both groups. However, the B2B area is characterized by long-term business relationships,[32] In the B2C area there are also customers who make spontaneous purchases or who allow various marketing measures to influence their purchase decision at short notice. Furthermore, the state appears as a consumer of products; its behavior is similar to that of business customers, especially when it comes to air travel.


[1] See Maurer (2003), p. 16.

[2] See Federal Statistical Office (1998).

[3] See Reinhard-Lehmann (2004), p. 140.

[4] See Federal Statistical Office (2004a).

[5] See Reinhardt-Lehmann (2004), pp. 140 f.

[6] Including regional and executive carriers.

[7] See Maurer (2003), p. 32 f.

[8] See Joppien (2003), p. 111.

[9] See Joppien (2003), pp. 112-117.

[10] See Porter (1992), p. 31.

[11] See Link (1996), p. 40.

[12] See Porter (1999), p. 34.

[13] See also in the following, especially Porter (1999), pp. 41-45.

[14] See Link et al. (2000), p. 96.

[15] See Porter (1999), p. 40.

[16] See Pompl (2002), p. 189.

[17] See Jürs / Lanz (2004), p. 32.

[18] See Cologne / Bonn Airport (2004).

[19] See Stuttgart Airport (2004), p. 25.

[20] See Federal Ministry of Transport, Building and Housing (2000), p. 31.

[21] See o. V. (2004a), p. 5.

[22] See Maurer (2003), p. 275.

[23] See Stoetzer (1988), p. 7, transl. II.1.

[24] See Maurer (2003), p. 163.

[25] See Pompl (2002), p. 185 f.

[26] See Sterzenbach (1996), p. 219.

[27] See o. V. (2004b), p. 4.

[28] See.Reinhardt-Lehmann (2004), p. 140.

[29] See also chapter

[30] See Porter (1999), p. 58.

[31] See, also below, Porter (1999), pp. 58-61.

[32] See Anderson / Narus (1998), p. 296.

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