Strategies For Growth In The Airline Industry: An Analysis Of Aurum Air
Trends and Key Drivers in the Airline Industry
The airline industry is an unpredictable one and annually needs to invest a sumptuous amount to ensure that it is not losing customers to other rival firms. There are a number of factors that determine the growth and success rate of the aviation sector thereby promising it good returns. Industry analysts use a number of tools like VRIN, PESTEL and SWOT to devise strategies to enhance the growth of aviation sector. An understanding of the entire market is also crucial before implementing any strategy.
As the case study points, one of the key drivers of the sector are the steady growth in air travelling since the global economic recession that took shape around 2008. Ever since, the airline companies have striven to reduce operational costs and achieve best resource utilization. As analysts have pointed, some of the major outlooks that would re-shape the airline industry are rising number of passengers due to a globalized economy as well as revamping in cargo demand which will elevate the business to a secured level. The other factors are intensification in the entry of low-cost carriers which will therefore induce a change in the existing strategies of Aurum Air. These factors will also consequent the airline companies in venturing into new routes and new market acquisition. The industry will become more technology oriented in order to cater to customer expectations (Ciliberto, Murry and Tamer 2016).
Political factors– Aurum Air can be affected by the political scenario of the country, for instance terrorist attacks which can influence the number of passenger and their choice of transport. Consequently, Aurum Air has to shift the price of its tickets in order to sustain in the market, invest a significant amount in promotional to induce the passengers in boarding Aurum Air which ultimately falters their economic stability.
Economic Factors– the economic factors shed light on the nature and state of economy within with the industry is operating and includes factors like interest rates, gross national product, labor costs, fuel prices which have a massive impact on the economy of the airlines among others.
Fuel Costs- owing to the unpredictable nature, contract based fuel purchase or fuel hedging can help Airlines from swinging towards a decline in profit rate. It can also increase the competitive edge of Aurum Air by keeping it prepared to face periods of high fuel cost.
Technological Factors– Internet and online booking has paved the way for an increase in ticket sales. As far as Airlines is concerned, approximately 75 percent of its sale was sold by online booking. Airline has amassed profit due to the technological factors that has catered the customers with convenient booking of air-tickets, flight information. An ease in communication will help in the growth of air passengers and flight tickets. Airlines can further see a growth in their sales by a strategic planning and advertising like investing more on promotional activities, coupons and vouchers
Environmental Factors- The emissions of aircrafts are injurious to the quality of air that living beings respire in. Aurum Air should therefore adopt to friendlier measures like green flying and focus more on social responsibilities and CSR activities.
Legal Factors– There are number of regulatory laws that Aurum Air has to deal with for instance, the lease for owing planes, on which additional interests can surmount in case if the planes are borrowed on loans. Leasing creates debts in the long run and eventually can hit the net earnings and profit margins of Aurum Air. Aurum should check the financial data well before entering into sumptuous leases and incurring loss.
Social Factors– Aurum Air needs to invest in innovation sector since with the rapid shifts in the demand pattern of the consumers, they are ready to pay in order to avail competent services. Aurum Air can invest in advertising strategy and render improved services after a careful analysis of customer profile and their income pattern. Innovation should not be limited solely to seating accommodation, entertainment or other such features but also in the sector of planning new routes to make Aurum Air the most feasible options for passengers and maintain a competitive edge in the industry. CSR activities will make Aurum Air an appealing choice to the larger community within the context of which Aurum Air will be operating (Haimes 2015).
Rivalry Among Sellers- Rivalry among sellers is strong as per market analysis for Aurum Air and market has become saturated with different airlines competing to gain passengers. The rival competitors are adding up more number of flights and routes in order to stay competitive. The competition varies according to the type of market and coming up with inventive strategy is necessary to cope up with the same.
Potential New Entrants- the threat of new entrants is moderate to strong as because of deregulation there has been the entrance of a number of a number of commuter airlines. This has stiffened the market competition and spoilt the passengers for choice with best flight tickets and services. The scenario is accentuated by high operating costs. As a result the U.S market is populated by both regional and commuter airlines.
Threat of New Substitutes- Threat of new substitutes is strong in the market especially with the advancement of technology and cheaper modes of transportation.
Supplier Bargaining Power- Supplier bargaining power is low because of the substantial number of manufactures sprouting in the U.S market which has furthermore sped up the process of buying and replacing an old aircraft. In this context, Aurum Air has the liberty to choose from a variety of manufacturers to get the best quality equipments.
Buyer Bargaining Power- Bargaining power of buyer is high because of an ever-increasing number of regional carriers, easy availability of flight tickets through online or agent services. These come equipped with easier cancellation options sometimes with maximum or full refund.
In order to systematically analyze the industry attractiveness of Aurum Air, Porter 5- Forces tool has been used. The airline industry is neutrally attractive, as Aurum has a number of rival competitors in that had come up with inventive strategies to attract new customers (Ciliberto, Murry and Tamer 2016). Bargaining power of buyers is high due to which Aurum has to continuously lower its ticket prices which often times fails to accommodate the rising operational costs of the aircrafts. Furthermore, Aurum Air needs to expand and invest more in promotional activities to gain prospective customers in the market. The power of suppliers is weak as Auburn Air has a number of fixed assets in possession ranging from de-icing equipment to computers. However, there is a high consumption rate of Aurum Air and therefore there is a huge scope of expansion for Aurum Air. Aurum should invest in scheduling more number of flights and better service to cater to the growing number of customers. The airline market is filled with well-renowned competitors but with innovation and CSR activities Aurum Air can cater to the tourists and take ample benefits from the tourist sector that is believed to grow exponentially with each passing year (Sengupta and Wiggins 2014). Aurum also is a an advantageous position of devising innovative marketing campaign, compare from other companies how much investment will be successful in bringing the highest yield and gradually proceed to deal with new entrants in the market.
It is established that certain resources are particularly fundamental in strategically making providing the business with a competitive edge. These resources can be identified by a VRIN analysis-VRIN Analysis of the mentioned organization is done to determine if the resources of the Airline have the ability to be the source of sustainable competitive advantage (Schroeder and Kotlarsky 2015). In order to be the source of sustainable advantage, the resource must be
Valuable: which means the resources should have greater value in terms of benefits and costs than the competitor organization.
Rare: This factor finds out whether the resource of the Airline is unique and has high demand compared to the resources of the competitors.
Inimitable: This factor judges whether the resource is difficult to imitate or not.
Non substitutable: This factor finds out whether the resources can be substituted or not.
In spite of the fact that AURUM AIR Company is a small airline organization, it is earning a better amount of revenue than other small airline organization. The company has a good number of fixed assets that includes airplanes, ground equipments, office facilities computers and maintenance hangers.
The available aircraft of the mentioned company ranges from 19 passenger propjets to 50 passenger fanjets. In spite of the fact that the company still use some of its old equipments, brand new aircrafts that includes fuel efficiency, nonflammable cabin materials and noise abatement are also owned by AURUM AIR company. Considering the fact that the company owned a lots of equipments like larger and more profitable airline organizations, AURUM AIR Airlines has a large number of choices to choose from if they decide to expand their business.
Considering the fact that Aurum Air Airline I a small firm, last year the company had spent 2,500 dollar for promotional purpose and 2,500 dollar for advertising purposes. In spite of the fact that the amount invested by the mentioned airline is minimal compared to its competitors, the management of Aurum Air is expected to spent more on promotional purpose only after the company starts to expands its business. Apart from that, Aurum Air does note have any sales force due to its small size. However, it is really crucial for the company to invest on sale force since it ensures the possibility of direct sales in a large volume to tour promoters and corporations, in addition to increased sales. The performance of Aurum air needs to develop since the company is not enjoying good amount of revenue. The Airline is using Beechcraft 1900s and as a result is unable to attract consumer since there are better aircrafts from the competitor airlines in the market.
Considering the fact the AURUM AIR Airlines serves five of the seven different types of market, and the number of competitor in each of the market is 2, except market D, indicates that the current service provided by Aurum Air Airline is not able to meet the requirements of the consumers in these markets. However, the mentioned company has the opportunity to grow in the five markets if it provides better service, more convenient flight and more convenient price. This marketing strategy is important for Aurum Air since the risk of the markets getting saturated with the entrance of more competitors is there.
Apart from serving the mentioned five markets, Aurum air Airline has the opportunity to serve two new markets namely, foreign market and resort market. The foreign market will provide the mentioned airline with the opportunity to compete in an international market and become an international carrier. The route will go from mini-hub to a foreign city. There is a major probability that the foreign city will have tourist trade as well as diversified industry and hence Aurum Air needs to have cabin class aircrafts. Considering the fact that the company currently deals with a large number of Beech crafts which contains only 19 seats, these beech crafts needs to be replaced by cabin class aircrafts by Aurum Air, since the daily demand of seat in foreign market is expected to be between 30 to 40 seats per day.
The resort market can be defined as recreational areas that are popular with people residing in a specific region (Hussain, Al Nasser and Hussain 2015). In spite of the fact that currently resorts are served by charter flights, but Aurum Air can grab the market if they provide service at a reasonable amount of fare. In addition, like the foreign consumers, resort consumers also prefers cabin class aircrafts so here also the mentioned Airline will not be able to use beech craft airlines since the daily demand of seat will be between 40 to 50 seats.
Well-planned maintenance program- a planned maintenance by government agencies can maximise aircraft performance and reduce the chances of unplanned high investments (Bazargan 2016). Furthermore, a through maintenance of the equipments has the potential to maintain the perceived quality thereby increasing customer reliability on the service.
High Operational Costs- labor costs that include the capital invested in training and grooming sessions of the employees drain a lot of wealth from Aurum Air. Therefore, the amount should be regulated and invested in a careful manner so as to obtain highest level of efficiency from the employees after their training period. Fuel costs account for a major part of Aurum Air’s operational costs and sudden fluctuations in fuel costs can make the firm lose a huge sum of money.
Foreign Markets- serving in foreign markets will make the firm an international carrier and increase its popularity (Rothaermel 2016). Aurum Air will get the chance to create new routes across the globe, attract foreign travellers. With new routes, innovative services Aurum Air can forge new partnerships with international peers for cost-efficiency.
Scope of Innovation- Aurum Air is at an advantageous position to amplify its innovative sector because of the availability of second-hand materials and equipments, the choice of expansion is easier. Innovation will help Airlines to cater the customers, finest airline experience and in the process develop a strong customer loyalty base.
Deregulation- this can be a potential source of threat and can decline the rate of profit for the industry (Tribe 2015). With the removal of economic regulations the airline sector can plunge into a tough scenario with an increase in rival competition, frequent flyer programs, change in fares and lack of product or service differentiation.
Cost Leadership Strategy
The aim should be to become a low cost producer when Aurum Air should implement steps like low fare with complementary services can keep a consistent flow of passengers, travel agents for a better sell of air tickets, fleet upgrade and maintaining a low cost fleet would prove advantageous even when customer flow shrinks. Other strategies can be adding fuel efficient aircrafts to the fleet in order to maintain cost advantage (Rothaermel N2016). The ultimate goal of Aurum Air should be to create more economic value in the market and operate in the market efficiently and provide the best to the customers without plunging into debt.
A firm needs to make its product unique and well distinctive from its rival competitors. Understanding consumer psychology and profile is an important aspect to meet consumer demands. A well-planned differential strategy can help Aurum Air in two ways by increasing market share and create an effective entry barrier. Creating new flight routes after a careful analysis of market can increase sale in tickets. Other methods in differentiation strategies are strategic marketing and advertising, innovative services at a moderate fair price and creating quality training programs for employees.
Segmentation strategy should be focused on markets where Aurum Air should operate and cater to the specific needs and demand pattern of the customers. A change in the business model after strategic analysis of market needs is also essential to stay competitive advantage. Providing direct service to a hub city can be more convenient for passengers and this can stimulate demand of Aurum Air. Based on the market and route, there should be more number of scheduled flights to increase passenger loyalty. Apart from this improving the fleet which includes pilots, cabin crew and management staff is a necessary attribute to position itself uniquely in the market (Fine and Menictas 2015).
Market Development- According to Ansoff existing products should be sold to new markets in order to expand the business (Eyvrigh 2016). Aurum operates in seven different markets with different characteristic trait of each market. Aurum Air has the opportunity of immense growth in a diversified market with shifting demand patterns of the tourists. A swift collaboration with hotels and tour operators can help Aurum to create promotion and deals for the customers thereby increasing its sales. Extending new routes to the customers is one of the aspects of market development.
Product Development- Involves the utilization of judicious measures to introduce new product features in the market for instance incorporation of updated instruments, entertainment sources, equipments fostering better communications and providing free wi-fi. Aurum Air should invest in buying and branding to achieve market growth (Eyvrigh 2016).
Market Penetration- Any kind of firm strives to expand its market making use of its existing products and services to create a niche for itself in the market. Aurum Air can easily achieve this by introducing low ticket fares, investing in promotion and make the products looks distinct and viable, protect the existing market share of Aurum Air and meeting competition by restructuring the mature market.
Diversification- Aurum can gain potential markets and new customers by introducing new products and services, which will also keep at bay new entrants and prevent market saturation. Aurum Air can dominate the market being a low cost carrier and the routes should be high in demand among the customers. Low cost airline strategy should be at par with meeting operational demands otherwise it may lead to a drop in profit rate. Acquiring spacious aircrafts for specific aircrafts can appeal to those customers who are planning for a vacation.
The model is based upon the notion that if the firm is providing the customers with services and products that satiate their necessities and wants better than its competitor, the firm gains a competitive advantage on the market (Suki 2014). The strategy clock has eight options in total, the first two options concern low price which will help Aurum Air sell no frills products to cut operational costs, expansion in fleets. Low price strategy can only compete with its competitors by keeping the pries low margin. Aurum Air can become a prospective low-cost carrier, a trend that will slowly begin to dominate the U.S market. In position 3, there is an intermediary strategy between low cost and product differentiation, in this case the goal of Aurum should be to convince the customers of the innovativeness of Aurum’s services making them an obvious choice over rival competitors. The differentiation strategy in position 4 strives to provide customers with the highest level of added value (Bazargan 2016). Aurum Air can achieve this by improving its brand image, hiring an efficient sales personnel, offering discounts on packaged vacations to the customers, packages to travel agents for circulating air tickets (Belobaba, Odoni and Barnhart 2015). Aurum Air furthermore needs to invest in print media and advertising to offer added value to customers.
Porter Five Forces
Focused Differentiation, in point 5 of Bowman’s Clock, Aurum Air should think beyond the traditional marketing ideas and come up with inventive ideas like providing packaged freight services and ski resorts will provide them with an opportunity to maintain a good relation with its customers. Personalisation should be on the agenda of Aurum Air to maintain its competitive edge in the market. In point 6 with increased price Aurum can create a different class of customers simply by increasing the price of different services without adding value to it. However, Aurum has great scope in this avenue especially in foreign market, where it can cater to a more diversified taste as well as providing luxurious accommodations for vacationers.
Aurum Air provides luxurious services to its customers and plans to incorporate spacious aircraft that can cater to the customers with innovative services. Aurum furthermore has plans to develop its cargo business in the upcoming years.
Fare per mile tickets which are usually used to offer discounts and fare packages to keep the customers hooked to flights and services of Aurum Air. This strategy has provided immense opportunity to offer attractive coupons and travel packages at frequent intervals of time. The quality of service is consistent with the price of tickets and therefore, in this regard Aurum has strategic advantage in the market over others, for maintaining consistency and efficient crew.
Aurum Air sells its tickets through online sites, travel agents and other advertising personnel who are responsible for the selling of 75 percent of air tickets. Aurum is massively successful in selling their tickets due to the promotional plans and travel packages they offer to the agents. Aurum also will expand its pre-existing routes to make the service available to a large number of people who look for quality flying experience.
Aurum Air invests on promotions and advertising to influence the way their customers perceive and accept their services. However, Aurum Air needs to invest more in billboards or print media, internet advertising, generate more traffic in its homepage to reinforce its brand image. Participation on social media platforms like Facebook, LinkedIn and Twitter will help the brand reach to the wider section of people who rely vastly on social media for reviews and shopping (Borenstein and Rose 2014). In order to expand its market and gain prospective customers, Aurum plans to invest more by hiring salesperson
Sustainability- Aurum Air operates in a highly competitive environment, however, it can increase its competitiveness by focusing more on product innovation and development, advertising, taking advantage of the market that is yet unoccupied, leasing new luxurious aircrafts. Aurum Air can implement these plans into real life with the help of huge capital investment that they can attain through loans on short-term credit. Acquiring new aircrafts will help them to cater in new markets and provide services to a growing number of passengers along with their tastes. Getting access to new markets will only pave their way for business expansion.
Attractiveness of Industry
Feasibility- Acquiring loans will help Aurum Air in borrowing luxurious aircrafts without any hurdles. As it is the market will provide Aurum with the potential to grow and become renowned among its rival firms only when Aurum’s strategic planning will be able to accommodate the market trends. Since Aurum Air has a substantial amount of cash flow implementing innovation will not affect their profit margin but will aid them in operating in a diversified market.
Acceptability- Customers have high probability to invest in luxurious services in order to enjoy pleasant flying experience (Borenstein and Rose 2014). Aurum Air can build a strong customer base if it maintains a healthy relationship with its customers through frequent discount, travel packages, promotional activities and advertising it can also have high returns on proper implementation of growth strategy.
Convenient Substitutes- From the case study it is apparent that technological aspects like videoconferencing are slowly replacing costlier alternatives like air travelling (Zou et al. 2014). Therefore the aviation industry is being forced to come up with cheaper tickets and better customer-oriented policies.
Economic Growth- economic growth will accelerate the average passenger traffic with a 5.3 percent growth which will give the airline companies an advantageous point (Anderson et al. 2017).
Increase in Fuel Prices- increase in fuel prices will increase the operational cost and therefore Aurum needs to adopt methods like fuel hedging and high ticket process with good services.
Rising Environmental Concerns- nowadays, there are a number of bans and restriction from NGOs and corporate responsibility and therefore Aurum Air has to adopt friendlier measures like buying latest engines that are designed to produce lesser carbon emissions.
Increasing Number of Rival Competitors- primarily is the result of deregulation and this will stiffen the competitive edge of aviation sector. Product innovation and implementing new security technologies can keep the flow of customers steady without major operational hindrances.
Aurum Air should refrain from risky acquisition of a number of luxurious aircraft without due market analysis as it can put it into massive debt. It should start with second hand leasing in order to operate the aircrafts in newer markets (D. Banker, Mashruwala and Tripathy 2014).
The airline sector invests a lot in publicity and marketing and Aurum Air needs more investment in this sector (Choi, Lee and Olson 2015). This is especially since deregulation creates the chance of free entry of number of low-costs regional carriers. Aurum Air needs product differentiation to respond effectively to market segmentation and maintain a strong customer loyalty base.
Proper networking and management to maintain connectivity between hub points, adjustments of schedules and production planning on a daily basis, crew planning and maintaining punctuality.
Aurum Air should be careful with price setting as a higher rate can repulse the leisure travellers and can propel them to choose other modes of transport or airline company. The ticket price range should appeal to the passengers’ willingness to pay and equal the quality of services that the crew is providing the passengers with.
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