Australian Airline Tiger Airways Was Case Study
- Length: 10 pages
- Sources: 8
- Subject: Business
- Type: Case Study
- Paper: #87622344
Excerpt from Case Study :
Another contributing factor is the industry's high fixed costs. These costs increase the exit costs, which is another factor that increases the intensity of rivalry. The third major factor is the degree of consolidation within the industry. Aside from the minor carriers, there are essentially only three major discount airlines operating in the Australian market. Prior to the entrance of Tiger, the two players operated as a duopoly. Tiger increased the level of competition in the market, such that the industry is now characterized by vicious price wars. Corporate stakes can also increase the intensity of rivalry. Qantas owns Jetstar, and as the national carrier must be a major competitive force. Virgin has staked a substantial portion of its business on Virgin Blue. These two companies are highly entrenched in the market with high corporate stakes. The intensity of rivalry in the industry, therefore, is very high.
The SWOT analysis focuses on the internal strengths and weaknesses of Tiger Airways and the opportunities and threats it faces in its external environment. In terms of strengths, the most important is its partnership with RyanAir. As a significant minority shareholder, RyanAir provides a high degree of knowledge with regards to the success implementation of a low-cost strategy for airlines. This has allowed Tiger Airways to enter the Australian market and immediately engage in price competition. Because the margin for error in the discount airline industry is slim, it requires a high degree of knowledge and execution in order to succeed, and RyanAir provides just that. The second strength that Tiger Airways has is its first-mover advantage. The company was the first discount airline to enter not only the Southeast Asian market but the Australian market as well. As such, it was able to bring a new level of low pricing to the market and quickly establish the concept to a degree that Virgin Blue and Jetstar never had before. The first-mover advantage gets landing rights at the best of the secondary airports, and is able to establish market share via the price competition route, which cannot be done easily by any subsequent new entrants to the discount market. It is upon these two strengths that Tiger Airways has built its domestic Australian business.
To this point, Tiger has demonstrated that it is a strong firm with few weaknesses. However, its business model relies on razor-thin margins. This gives the firm little in the way of operational flexibility. Moreover, this is a structural weakness for a small airline competing in the discount sector, since such an operation relies on heavy traffic volumes for success. Another weakness is that Tiger Airways is relatively new to the market. Its market share percentage gains belie the fact that the baseline for those gains is relatively small. In a volume-driven business, Tiger still has a small market share compared to Virgin Blue and Jetstar/Qantas. The company's newness to the market also means that it has no established reputation on which it can trade. Ideally, a discount airline would have a strong reputation that can help it drive traffic to its heavily discounted service. For a consumer to sacrifice all frills and comfort requires a degree of confidence in the airline and its ability to deliver the desired service.
There are several opportunities in the market at present for Tiger. The first is that the company can continue to open up new routes and airports. With a secondary Australian hub now established in Adelaide, there is room for a significant expansion of routes around the country. Moreover, there is further room for domestic expansion to a tertiary hub, perhaps in Perth, Canberra or Queensland. Furthermore, there is another strong opportunity in building out the company's international routes. As a young firm, Tiger is still establishing its route network. They are making strides into the Indian subcontinent, for example. By expanding its network around Asia, Tiger Airways can forge greater linkages between that continent and Australia, via its Singapore hub. In doing this, it can capture a greater share of the long-distance market.
There are many threats, however, to Tiger's business. The first is increased competition. Tiger gained a relatively early entry into the Australian discount market. They were able to break an oligopoly and introduce an element of competition to the business. However, the natural progression of this deregulated entry is further new entrants, brining the industry into overcapacity and placing increasing price pressure on existing competitors. Since Tiger entered, the Indonesia-based airline Lion has entered the business (Wastnage, 2008). There have been many other groups that have attempted to establish themselves in the Australian market as well. As more competitors enter the market, the more intense the competition will become because of the high fixed costs and the need for competitors to win high passenger loads.
Another threat to Tiger's business is the economy, which can impact on the overall market for airlines. The company already dropped plans to enter the Korean market due to that nation's sluggish economy (World Airline Report, 2009). In Australian, the intense level of competition and slim margins dictate that a steep dropoff in the economy could cut passenger levels to the point where many runs become unprofitable. Lastly, fuel prices are a significant threat. It is feasible for Tiger to hedge prices, but volatility in fuel prices has been substantial over the past few years, as evidenced by the wild swings in 2008. Indeed, the volatility was so great in 2008 that many airlines have reduced their hedging activities (Hannon, 2009). Volatility squeezes already tight margins and prolonged volatility or high prices can threaten the long-term viability of the airline.
Critical Analysis of Business Level Strategies
Tiger Airways outlines their business-level strategies on their website (Tiger Airways, 2009). The first strategy is to focus primarily on Internet sales. This is congruent with the low-cost provider strategy that they have adopted and with the general industry trends. Internet sales is more cost-effective than sales through travel agents, and the trend in the airline industry is towards use of the Internet as a means to generate sales. By cutting out travel agents, Tiger can offer a reduced margin to consumers, thereby driving more business and reducing their costs. Paperless ticketing is a related business-level strategy that serves a similar cost-reduction function and again is congruent with the low-cost strategy and the trends in the social environment.
The no frills model is another core business level strategy for Tiger. This is congruent with the social trends in Australia, as evidenced by the strong growth in all discount airlines in the nation ("Low-cost Traffic Rankings," 2009). The no frills model also reduces the number of key inputs, which is congruent with the volatile economic environment. The intense nature of the competitive environment and the perishability of the core product has lead the industry into a model built around price competition and driving high volumes, which combined with the social desirability of no-frills air travel makes the Tiger strategy congruent with the business, social and economic environment.
The use of new aircraft is a strategy that functions on several levels. These aircraft have lower maintenance costs, which is again congruent with the need to compete on price in this industry. However, the new planes also provide a level of differentiation from their competitors, in particular Jetstar and Virgin Blue, both of which started with older model planes. Not only does Tiger derive a cost advantage from their new planes but they also win competitive advantage in the marketplace, since consumers prefer the comfort of new planes over the older models flown by Tiger's two main competitors.
Short aircraft turnaround is congruent with the low-cost strategy. However, it also makes the airline more attractive to airports and therefore can help it find good secondary airports from which to operate. Adelaide, for example, was excited to partner with Tiger because the multitude of flights into the city would add to the tourism base (Government of South Australia, 2009). Outsourcing of aircraft maintenance also allows the airline to hedge the cost of one of its key inputs by encouraging competition for maintenance contracts.
Overall, Tiger Airways operates the classic low-cost provider model for the airline industry, the same model as RyanAir that has been proven successful for a number of discount airlines. The firm's business level strategies are largely designed to reduce costs, which is essential given that the airline business is becoming commoditized. This shift in the industry is resulting in a business where margins are very slim and where it is essential to fill capacity in order to succeed. These changes are being driven by the increasing intensity of competition in the industry, a function of new entrants and the high exit costs for the existing players.
Furthermore, the firm's strategy is congruent with the current economic environment. In sluggish economic times, discount products and services often succeed while mainstream ones struggle. The strategy, however,…