Significantly Contributed Business Model Essay

Question:

Discuss About The Significantly Contributed Business Model?

Answer

Introduction

The Asian airline industry can be characterised through the immense competition along with the high price pressure which in turn continuously thrust over increasing the efficiency. On the other hand, the industry grows continuously with more passengers who travel more often. Since the emergence of the continuous air traffic the airline industry have demarcated a rigorously high level of growth in comparison with the GNP trend and increase the productivity (Wang, Tsui,, Liang, & Fu, 2017). There is gradual liberalisation in the industry which in turn has significantly contributed in its business model. The Asian airlines and their continuously increasing passengers act as the driving force in the global airline's industry. The analysts predict economics Asia Pacific airlines will contribute to the half of the total air traffic increase by the year 2020.

Thai Air Asia X is identified as a low cost, long haul airline company which is based at Don Meuang International Airport, Bangkok. The company was founded in the year 2014 and since then it is operating quite effectively and efficiently. The airline mainly serves for the scheduled destinations of Thailand, Japan, China and South Korea(Graham, 2013). As a manager of the airlines, a business development plan has been developed. In this report, three key management issues in relation to the airline industry have been discussed and the recommendations for coping up the issues have been provided. It is expected that this will help Thai Air Asia X to operate sustainably and successfully.

Problems faced by the industry

Despite the extensive growth, the airline industry faces a number of challenges. These challenges affect the business adversely which in turn reduces the revenue and profit levels of the organisations. Here in this report, three key issues will be discussed which is the competitiveness, fuel price volatility and the environmental and financial sustainability of the business.

Competitiveness

In the era of globalization and continuous economic development, the airline's industry is facing excessive competition from almost every aspect of the business. Thai Air Asia X is not an exception it is also facing tremendous competition specifically in the context of pricing. Moreover, the strategic frameworks or expansion of the competitive airlines also imposes significant threat before the organization as well. Due to this competitive nature, the airline companies are required to focus more on their pricing mechanism, service quality and consumer's satisfaction(Solnet, Baum, Kralj, Robinson, Ritchie, & Olsen, 2014).

The Asian airline industry is distinguished by the feature of being extremely competitive and highly capital intensive. This capital intensive nature of the industry is the key underlying reason for the higher fixed costs and high barriers to exit. The level of competition in the airline industry is very intense as there are no such barriers to entry (Yee Liau & Pei Tan, 2014). The liberalization of market access due to globalization can be held responsible for this lower level of barriers to entry. As per the data provided by the IATA (International Air Transport Association) during the last 40 years nearly 1300 new airlines have been established. The nature of the competitiveness in airlines industry can be summarized as follows,

The level of competition rises when a new airline with a new set of strategies enters into the market or the existing airlines try to expand their area of operation by introducing new service range. However, the strategy of expansion of the existing airlines seems to be beneficial for them as they can enjoy the benefits of economies of scale and rights over the airport slots. Therefore it can be stated that the expansion into the new market possesses low barriers to entry for the existing airlines compared to the newly entered airline(Robinson, Ritchie, Kralj, Solnet, Baum, & Ford, 2014).

In order to acquire a new aircraft ample accounting of capital is required which may sometimes discourage the new airlines from entering the market(Tretheway & Markhvida, 2014). However, as presently there is an ease of leasing option and external finance scheme both of these taken together have me it easier for the new airlines to enter the market.

Moreover, as the switching cost on the part of the consumers is very low, it also imposes a significant competitive threat before any airline (Pratt & Harrison, 2015). This sometimes makes it difficult to retain the customers and thereby increasing their loyalty.

The Fuel Factor

The price of fuel is considered to be among the most important issues faced by the airline industry. As the airlines start incurring higher costs they tend to impose the fuel surcharges on the customers. Specialists in the industry stated that the constantly increasing price of fuels will impact the bottom line of any airline (Hapsari, Clemes, & Dean, 2016). The situation worsens when the economies suffer from a recession. Data projects the fact that the airline industry had suffered all time low during the recession of 2010. It is a matter of fact that the government owned airlines do not face the challenges which are faced by the privately owned airlines, although they also find it difficult to manage the fuel price(Suki, 2014). The volatility in the price of crude oil affects the airline industry in several ways. Primarily the price of crude oil largely affects the cost incurred by the airline and hence it affects the price of the air tickets as well. Recently the significant downfall in the fuel prices has affected the profitability of the airline industry.

As pointed out by the U.S Energy Information Administration, during the year 2015 the price of per gallon of jet fuel was $1.45less than half of what it was in the year 2012. As per another report of PwC, the airlines globally were projected to spend $70 billion over fuel prices in 2015 compared to that of in 2014. It is a matter of fact the total impact of the reduction or fluctuation in the prices will be unknown until and unless the hedging contracts held by the airline companies are not finished (Heracleous & Wirtz, 2014). In the short run, the fuel price volatility may have allowed the airlines to rebuild their balance sheet and again reinvest after various financial losses. That is more specifically investing on modernising the aircraft or implementing improvements in the aircraft.

However, in the long term, this price volatility has induced the airlines to redesign their strategies so as to successfully accrue revenue and increase profits. The strategic reform will also include the strategies of fuel purchasing and hedging.

Sustainability

The future of the airline industry cannot be guaranteed until and unless it can establish sustainability. Sustainability is an important issue before Thai Air Asia X because, the modern day consumers are quite aware of the impact of the business on the environment(Homsombat, Lei, & Fu, 2014). If they find that other airlines are conducting flight service which causes low pollution, for the sake of environmental sustainability they may switch to that airline. in this context, it is also necessary to mention that the switching cost is also very low in the airline industry. The sustainability in this context may arise from two perspectives which are namely environmental sustainability and financial sustainability.

Environmental Sustainability

In the modern day environment, each and every industry is required to be sustainable. However, it is quite difficult for the airline industry because it makes use of the fuel to keep its aircraft flying (Lin & Yeoh, 2016). Presently, not only the airline industry but also the value chain has set some ambitious goals. These are from the year 2020, airlines will cap their emissions and growth of the industry will be carbon neutral. Afterwards, by the year 2050, they are planning to cut their emission level to half of what they have emitted during 2005.

Financial Sustainability

Another important pillar of the sustainability is the financial profitability. During the past few years, the industry has remained at a break-even point. Irrespective of the values the industry has brought forward in the world, in turn, it has also destroyed a huge amount of capital(Belobaba, Odoni, & Barnhart, 2015). The airline industry is volatile in nature, for instance when there was outburst of Ebola people were rushing from one place to the other. At that point of time, the price of the air tickets increased considerably.

Recommendations

Recommendation 1: In order to cope with the extremely competitive environment of the airline industry horizontal agreements can be made. Horizontal agreements or alliances are the cooperation agreements carried out horizontally not much like mergers and it poses increased scope and strengths.

Due to the increased level of competition in the airline industry alliances have emerged as a key trend. These range from light alliances that incorporate basic interlining and code sharing to the high-level alliance and agreements of integration that incorporates coordination over the parameters of competition like prices and capacity, sharing of profits and costs and thereby acquiring an interest of minority in the allied airlines. Moreover, it can also be stated that the benefits of economies of scale and the globalized economies are far behind the strategies of an alliance. The airline that possesses a vast network and a presence worldwide always enjoys a competitive and comparative advantage over those airlines which do not have these. However, it can be stated that for one airline possessing these advantages is unsustainable and alliance allows the airlines to widen and deepen their network and thereby sustain in the competitive market. Integration also increases the barriers to entry and thereby harms the level of competition by increasing the price level (Delbari, Ng, Aziz, & Ho, 2016). This integration strategy may benefit Thai Air Asia X.

Recommendation 2: Regarding the volatility in the fuel price it can be recommended that beyond hedging the airlines may also try to increase their fuel efficiency which will, in turn, become an efficient method of saving in the long run. As the fuel price is increasing during the past few years airlines have started putting thrust in this area to cope with the problem.

The emergence of the fuel efficient aircraft has given rise to the introduction of Airbus's A320 Neo and A330 neo and Boeing 737 Max. Extensions in the wing tip or the introduction of winglets along with the unusual "split scimitar" version which was adopted by the United in 2014 had helped to save billions of dollars during the year 2014. With an expense of $1 million for one installation, the devices reduced the aircraft drag and enhanced wing lift. Winglets are efficient enough to help the airlines to save fuel up to 6 percent per year depending on the model(15. Arjomandi & Seufert, 2014).

On the manufacturing side, it is also necessary for Boeing, Airbus and other key players to conduct rigorous research on how the new technologies can be used to develop a more fuel efficient aircraft, which will help the airlines to reduce their cost of flying an aircraft.

The airlines may also look after for reducing the operating cost by implementing new routes or expanding the capacity of the aircraft (Graham, 2013). Through this as the fuel prices dropped it has benefitted those carriers with the low cost of operation, as the non-fuel cost of those aircraft increased. This may enable the efficient operators to accrue higher revenue by maintaining the marginal routes, the introduction of new routes and increasing the capacity of the existing routes.

Recommendation 3: Introducing modern aircraft are more fuel efficient and they are committed to reducing the level of emission by 20% to 30% compared to their predecessors. More precisely the introduction of technology and incorporating the technological aspects in the airline industry will also help the airline to establish sustainability. That is the use of biofuels will ensure sustainable operations (Homsombat, Lei, & Fu, 2014). However, the problem with biofuels is that they are very short in supply as well as expensive. Secondly, it has been observed that almost all the aircraft have to circle before the air corridor is clear for landing. If the air traffic control system can be improved it could lead to a reduction in the fuel consumption as well as emission.

Conclusion

Throughout the report, it has been observed that airline industry is facing different issues and the most important among them are the competitiveness, fuel price and environmental sustainability. Therefore, in order to run the airline profitably, it is necessary for Thai Air Asia X to cope up with these issues. The issue of competitiveness can be mitigated through horizontal integration or associations which will in turn help to the company enhance the service quality. On the other hand, the issue regarding fuel price can be eliminated if more fuel efficient aircraft are used. Finally, in the context of environmental sustainability infrastructural development is required which will enable the Thai Air Asia X to satisfy the environmentally conscious customers in a way that their business is environmentally sustainable.

References

Belobaba, P., Odoni, A., & Barnhart, C. (2015). The global airline industry. John Wiley & Sons.

Delbari, S. A., Ng, S. I., Aziz, Y. A., & Ho, J. A. (2016). An investigation of key competitiveness indicators and drivers of full-service airlines using Delphi and AHP techniques. Journal of Air Transport Management, 52(1), 23-34.

Graham, A. (2013). Understanding the low cost carrier and airport relationship: A critical analysis of the salient issues. Tourism Management, 36(1), 66-76.

Hapsari, R., Clemes, M., & Dean, D. (2016). The mediating role of perceived value on the relationship between service quality and customer satisfaction: Evidence from Indonesian airline passengers. Procedia Economics and Finance, 35(1), 388-395.

Heracleous, L., & Wirtz, J. (2014). Singapore Airlines: Achieving sustainable advantage through mastering paradox. The Journal of Applied Behavioral Science, 50(2), 150-170.

Homsombat, W., Lei, Z., & Fu, X. (2014). Competitive effects of the airlines-within-airlines strategy–Pricing and route entry patterns. Transportation Research Part E: Logistics and Transportation Review, 63(1), 1-16.

Lin, W., & Yeoh, B. S. (2016). Moving in relations to Asia: The politics and practices of mobility. Environment and Planning A, 48(6), 1004-1011.

Pratt, S., & Harrison, D. (2015). Tourism in Pacific Islands: Current Issues and Future Challenges. London: Routledge.

Robinson, R. N., Ritchie, B. W., Kralj, A., Solnet, D. J., Baum, T., & Ford, R. C. (2014). An Asia-Pacific core–periphery futures paradox: Divergent worker and tourist mobilities. Journal of Travel Research, 53(6), 805-818.

Solnet, D. J., Baum, T., Kralj, A., Robinson, R. N., Ritchie, B. W., & Olsen, M. (2014). The Asia-Pacific tourism workforce of the future: Using Delphi techniques to identify possible scenarios. Journal of Travel Research, 53(6), 693-704.

Suki, N. M. (2014). Passenger satisfaction with airline service quality in Malaysia: A structural equation modeling approach. Research in transportation business & management, 10(1), 26-32.

Tretheway, M. W., & Markhvida, K. (2014). The aviation value chain: Economic returns and policy issues. Journal of Air Transport Management, 41(1), 3-16.

Wang, K., T. K., Liang, L., & Fu, X. (2017). Entry patterns of low-cost carriers in Hong Kong and implications to the regional market. Journal of Air Transport Management, 64(1), 101-112.

Yee Liau, B., & Pei Tan, P. (2014). Gaining customer knowledge in low cost airlines through text mining. Industrial Management & Data Systems, 114(9), 1344-1359.

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