Competitive Strategies and Entry Strategies of Low Cost Airline Incumbent 1Time Airline
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Competitive Strategies and Entry Strategies of Low Cost Airline Incumbent 1time Airline A dissertation submitted in partial fulfilment of the requirements for the degree of Masters in Business Administration of Rhodes University by Diane Potgieter January 2007 Abstract This dissertation reports on the factors that contributed to the successful entry strategy of 1time Airline, a low cost carrier, into the South African airline industry as well as its competitive strategies within this context. Research interviews were conducted in November 2005 and research material gathered until end January 2006. Key issues include an evaluation of 1time's business model in relation to other low cost entrants as well as against material sourced through interviews with 1time Airline management, employees and consumers of the airline's product. Porter's Generic Strategies and Five Forces model are used as a framework in evaluating the airline. It is found that Nohria, Joyce and Robertson's "4+2 Formula" is effectively implemented at the airline, but that further implementation of Game Theory in terms of alliances should be investigated for continued success and sustainability. " \ I Contents Chapter 1 Context ...... ... ....................... ............................. ... .. .................................. 1 1.1 Introduction ................................................. .. .... .................. .. ................ .............. .. ... 1 1.2 The global airline industry ......................................... .. .. ...... .. .. .. .................... .... .. ....... 1 1.2. 1 Traditional, full service carriers .. .. ............................ .......................... .. ...................... 3 1.2.2 Low cost carriers .. .............. .... ........... .. .... .. .......................................... ... ........ .. ......... 3 1.2.3 Regional/niche airlines .. .. ............................................... .. ................................... .. .. 3 1.2.4 Charter airlines ............... .. .............. .. .................. .. ..................................................... 3 1.3 The low cost phenomenon internationally .. .... ..................................................... ....... 3 1.3.1 Southwest Airlines ..................................................................................................... 4 1.3.2 Ryanair ... .. .... ......... .. ........ .. .. ... ........... ................... ... ... .... ... ............. ... ... .... ....... .......... 5 1.3.3 Virgin Blue .......................... .. ...... ............. .. ................... ............... ......... .. ..... .... ... ....... 7 1.3.3.1 Airports and routes .. .... .............. .. .... ..................... .... .. ............ ........ .. ................... 7 1.3.3.2 Fares and marketing ................................ ..... ........ .. ............ ...... .................... ....... 8 1.3.3.3 Costs, finance and ownership .............. .... .. .. ............................. .......... .... .. .. ... ...... 8 1.4 The African and South African Airline Context.. .. ............ .. .................................. .. .... 9 1.5 Conclusion .... .............. .. ............................................. .. .. ...... .. ........ ................. .. ...... 10 Chapter 2 Competitive Strategies ................................... .. ... .......... , .. .................... 12 2.1 Introduction ............................................... ................................................ ... .. .. ..... .. 12 2.2 Industry and Competitive Analysis ........................................................... ................ 12 2.2.1 Question 1: What are the Industry's Dominant Economic Features ......... .. ... .... .. .... 14 2.2.2 Question 2: What is competition like and how strong is each of the competitive Forces? .. ... .. .... ... ................................. .. .... ...................................... .. ............. ... ...... 15 2.2.2.1 IntenSity of rivalry between competing firms ....................... ........... .. .......... .... ..... 16 2.2.2.2 Threat of new entrants ........ .. ... .. ........ .. .................................................... .. ... .. ... 17 Barriers to entry .................................................................... ... .. ...... .. ..... .. .......... .. .......... ... 18 Expected retaliation ....... .. .................................................................................................. 21 2.2.2.3 Power of suppliers .... .. ................................................................ .............. ..... .. .. 22 2.2.2.4 Power of buyers ......... .. ............................ .............. .... .. ...................................... 23 2.2.2.5 Threat of substitute products ............................................................................. 24 2.2.3 Question 3: What is causing the industry's competitive structure and business environment to change? ... .. ....... .. .. .... ..... ................................................................. 24 2.2.3.1 Legislation and regulations .......... .. .................................................................... 25 2.2.3.2 Societal Values and lifestyles ........................... ................................ ....... .. ........ 25 2.2.3.3 Commission Cuts & Technology .................................... .................................... 26 2.2.4 Question 4: Which companies are in the strongest / weakest positions? ................. 26 2.2.4.1 South African Airways .. .................. .. .... ... ... ... ... ...... ............................................ 26 2.2.4.2 BA Comair / Kulula .com .. .. .... .. .. ....... .. ..... ... ........... ... .... .. .... ..... ....................... .. .. 31 2.2.4.3 Nationwide Airlines .... .. .................................................... .................. .... .. ... ... .... 33 2.2.4.4 Summary .................................................. .................. .. ............. ........ .. .............. 34 ii 2.2.5 Question 5: What strategic moves are rivals likely to make next? ............................ 34 2.2.5.1 Players ................................................................................................. ............. 36 2.2.5.2 Added Values .............. ...... .. ........... ...... ............ ...... ..... ............ .. .. ...................... 37 2.2.5.3 Rules .... ................ ........................ .. ..... .. ............... ........................................... .. 37 2.2.5.4 Tactics ............ ...................... .... .. ....................... ........ ............ .. .... ... .. ................. 37 2.2.5.5 Scope ........... .. ... .. .... .... ... ..... ..... .. ..... .... .. ..... ... .... .... ..... .......... ... .......................... 37 2.2.5.6 Similarity and parallels between Five Forces Analysis and the Value Net... .. ..... 39 2.2.6 Question 6: What are the key factors for competitive success? ............................... 39 2.2.6.1 Strategy .................................. ............. ............. ................................................. 40 2.2.6.2 Execution ................. ............ ................ .............. ... ... .... ............. .... .. ... ..... .. ... ...... 40 2.2.6.3 Culture ... ................................. .. .... .. ............ ....... .. ........ .......... ....... ..................... 40 2.2.6.4 Structure ....... .... ... ....... ............ .. .. ............... ............ .. .. .. ...................................... 41 2.2.6.5 Talent ................ ... ..... ..................... ........................... ................ .. ............... ....... 41 2.2.6.6 Innovation ........................................... ............. .............. ........... ......................... 41 2.2.6.7 Leadership ... .. ... .... ............ ... .. ... ..... .. ................... ......... .... ... ........ ............ .. .. ... .. .. 42 2.2.6.8 Mergers and Partnerships ........ ..... ... .... ... .. .... ........... ................................. ........ 42 2.2.7 Question 7: Is the industry attractive and what are the prospects for above-average profitability? .. ... ... ........ ..... ... ..... .. .. ... ......... ......... ............. .... ......... .. ........................... 42 2.3 Generic strategies .................................................. ................ .. ...... ......................... 43 2.3.1 Overall Cost Leadership .......................................................................................... 44 2.3.2 Differentiation ....... .. ... .. ...................... ................. ........... .. .. .... .. .. ................... .. ... ... ... 45 2.3.3 Focus .................. ... ........... ..... .. .. ... ... .. .... .... .. .. .. ..... ... .. ... .. ........................................ 46 2.3.4 Linking the Five Forces Model to generic strategies ....................... ..................... ... 46 2.4 Summary .................................................................................... .... .. .... .................. 48 2.5 Conclusion .... .. .... ........ ......... ... ... .. .... .. ............ .. ............ .. ... ......... .. ...... .. ........ ........ .. 48 Chapter 3 Research Methodology ... ..................................................................... 50 3.1 Introduction .................................. .... .. .. ...........