A Company Analysis Report

The Airline Industry in Europe and Asia-Pacific

Portfolio Task 3: Industry Analysis

MSc Finance
University of the West of England, Date 20xx
Student Name and Student Number
Mentor’s Name
 Table of Contents

Industry Analysis ..................................................................................................................................... x

3.1 Economic Performance of the Airline Industry ............................................................................. x
3.2 Geographical Segmentation and Market Value of the Airline Industry........................................ x
3.2.1 Geographical Segmentation................................................................................................... x
3.2.3 Europe: Market Value Forecast ............................................................................................. x
3.2.4 Asia-Pacific: Market Value Forecast ....................................................................................... x
3.3 An Application of the Porter’s 5 Forces Model to the Airline Industry ........................................ x
3.3.1 Threat of New Entrants - Medium ......................................................................................... x
3.3.2 Threat of Substitutes - Low .................................................................................................... x
3.3.3 Bargaining power of Customers – High ................................................................................. x
3.3.4 Bargaining power of suppliers - High ..................................................................................... x
3.3.5 Industry Rivalry - High ............................................................................................................ x

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3.1 Introduction

The aviation industry is an extensive contributor to global economic growth and

prosperity. This suggests the airlines industry is highly dependent on the economic

conditions of a country (Market Line, 2018). Airline industry stocks are therefore cyclical, and

rise during the growth phase of an economic cycle and fall when the economy slows down or

experiences negative growth, which is recession. These stocks are seasonal due to leisure

travellers and businesses cutting back on travel plans when there is economic uncertainty,

and more likely to travel when the economy is showing signs of confidence.

3.2 Geographical Segmentation and Market Value of the Airline

Industry

3.2.1 Geographical Segmentation

The European airlines industry grew by 4.9% in 2017 to reach a market value of

$149.9bn. On the other hand, the Asia-Pacific airlines industry grew by 8.3% in 2017

reaching a market value of $243.3bn (Market Line, 2018). In 2017, the largest share in the

European Airlines Industry was Germany, followed by the United Kingdom (Figure 19). The

largest share in the Asia-Pacific Airlines Industry was China, followed by South Korea

(Figure 20).

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 Figure 20. Asia-Pacific Airlines Industry Geography
Segmentation: % share value in 2017

37.90%
31.90%

13.60%
6.60%
10.20%
China South Korea Japan India Rest of Asia-Pacific
Source: Market Line, 2017

Air transport has doubled in size every fifteen years and is expected to grow

exponentially. As a result, the increasing demand for travel has led to more demand in flights

and destinations. The European Airlines Industry grew by 3.7% in 2017 attaining a volume of

1,019.4m passengers. As to the Asia-Pacific Airlines Industry, it grew by 6.4% in 2017, to

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achieve a volume of 1.4bn passengers (Market Line, 2018). However, a major concern for

many airlines principally located in South East Asia is the health and provision of suitable

infrastructure (KPMG, 2018). Additionally, the International Air Transport Association (2018)

suggests inefficient airspace management will cost the industry more than $3bn in 2019,

together with unnecessary CO2 emissions.

3.2.3 Europe: Market Value Forecast

The European Airlines Industry is forecasted to have a value of $199.5bn in 2022,

which represents an increase of 33.1% since 2017, together with a CAGR of 5.90% (Table

21).

3.2.4 Asia-Pacific: Market Value Forecast

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 The Asia-Pacific Airlines Industry is expected to increase by 49.8%, with a value of

$373.5bn in 2022. This represents an increase of 49.8% since 2017. Further, the CAGR of in

the industry in the period 2017-22 is predicted to be 8.4% (Table 22).

3.3 An Application of the Porter’s 5 Forces Model to the Airline

Industry

Porter’s five forces of Competitive Position Analysis is based on the theory that five

forces determine the competitive intensity and attractiveness of the market, analysing the

external environment in which an industry operates (Porter, 1979). The Airline Industry, as

such, has been hit repeatedly by several external factors in recent times. Growing costs and

strong competition are the two most frequent challenges highlighted by airline executives

(KPMG, 2018). Strong competition from low cost carriers has critically affected the industry

as a whole due to a significant cut-throat price war (Ison and Budd, 2016). The model will

thus help to assess the attractiveness of the Airline Industry and evaluate its current position.

The evaluation is conducted using a world perspective, due to the airline industry being

affected at international levels. As a result, this will support the final decision of whether the

industry has the capacity to compete in the market.

3.3.1 Threat of New Entrants - Medium

Entry barriers are high in the Airline Industry therefore this aspect is a medium threat.

Nonetheless, very low switching costs and the lack of proprietary products or services can

be an additional potential threat for the Airline Industry. High capital investments are required

in order to enter the market ie. Aircraft and Workforce costs. Therefore, existing Airlines

have a significant cost advantage (Carter, Rogers, and Simkins, 2008). Due to large capital

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investments in order to enter the market and a lack of customer base, losses may arise in

the first few years. As a result, existing Airlines may wish to utilise their high capital in order

to respond to the potential threat by lower costs or taking on a small loss. As opposed to

many industries, entering the airline industry also requires particular expertise in the field,

which makes it difficult for new entrants (Zins, 2001). Further, consumers tend to lean toward

well-known airlines, which makes it difficult for new entrants in regards to safety procedures

(Ison and Budd, 2016).

3.3.2 Threat of Substitutes - Low

As a general rule, the threat of substitutes for the Airline Industry is fairly minimal, especially

in developed countries where consumers predominantly use airlines for short and long-

distance travel (ATAG, 2014). However, in less developed countries, other forms of

transportation such as trains may be a threat to the airline industry. Although consumers

may choose another form of transportation, most of them cannot be a direct airplane

substitute (Deloitte, 2018). This implies that unless a new technology is created that can

replace air travel as the fastest form of transportation, the Airline Industry is not facing a

great threat from substitutes. Further, many consumers are aware that choosing air

transportation can reduce costs (especially in the low-cost sector) and time. Thus, there is

only a threat of substitutes within the industry, where low-cost airlines appear more attractive

to consumers.

3.3.3 Bargaining power of Customers – High

Price fluctuations in the Airline Industry have not impacted customers. Customers have a

significant bargaining power over Airlines due to the cost and effort required to switch from

one Airline to another. Consequently, the airline industry has become highly price sensitive

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(Iatrou and Oretti, 2016). The rise of third-party booking websites worsens this particular

issue for Airlines. In fact, there low switching costs for consumers as a result of comparison

websites. Thus, airlines are forced to maintain a price similar to those of its competitors

(IATA, 2017). This could be the cause for a decline in profits in the airline industry.

3.3.4 Bargaining power of suppliers - High

The bargaining power of suppliers is significant because main suppliers required for Airlines

such as Fuel, Aircraft and Labour are influenced by the external environment. The

fluctuations in the price of oil in the global market are reflected in the price of aviation fuel

thus these can fluctuate a fair amount due to economic or geopolitical factors. Further, the

Airline Industry as a whole need aircrafts from the same airplane manufacturers such as

Airbus or Boeing. This is due to aircrafts being purchased either outright or on a lease basis

on long-term contracts (Deloitte, 2018). Therefore, credit terms are more favourable if

Airlines stick with the same suppliers. As discussed previously, it is very complicated to enter

the Airline Industry due to the high amount of capital investments (IATA, 2017). Thus, there

are very few aircraft suppliers and airlines are the only source of income for Aircraft suppliers

(Zins, 2001). Therefore, it is highly unlikely for the suppliers to find similar clients which have

the same sales volume.

3.3.5 Industry Rivalry - High

The Airline Industry is highly competitive principally because it is in the mature stage

of its business cycle, due to its slow-moving condition (Zins, 2001). Because of the barriers

of entry in the Airline Industry, the number of competitors relatively stay the same. Moreover,

leaving the industry is difficult, as mentioned above, due to long-term credit agreements.

However, the emergence of low-cost carriers in the last twenty years have largely

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contributed to industry rivalry amongst Airlines (Carter, Rogers, and Simkins, 2008). The

market in the Airline Industry appears to be equally distributed because of brand identity.

This is due to different Airlines offering different amenities, such as comfort or low price

tickets. Further, switching costs in the Airline Industry are very low thus making it difficult to

reach large percentages in the market.

5. References

A list of references should be provided here.

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