Environmental analysis for Tiger Airlines of Singapore
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Environmental analysis is crucial as it identifies the issues and trends that have important implications for the future. The scanning includes analysis of the information about these issues and trends to assess their importance and determine their implications for planning and strategic decision making. There are several concepts which can be used to demonstrate environmental analysis with regards to the contemporary issues in Singapore today, and how they affect business industries, which will be discussed in the following parts of the essay.
Contemporary Issue 1: Recession
Singapore’s worst economic crisis since independence is even more severe than expected, with output now forecast to shrink by as much as 9% in 2009. The Ministry of Trade and Industry said GDP would fall by 6-9% this year, a stunning downgrade from the previous estimate of a 2-5% decline, and the fourth downgrade since November 2008 (Ministry of Transport 2009). Minister Mentor Mr Lee Kuan Yew had warned that the economy may shrink by 10% if exports continue to fall sharply. With the latest official report confirming Singapore’s GDP contracting by over 10% year-on-year, it is apparent that the economy has reached one of the two markers that would indicate an economic depression (Channel News Asia 2009).
Contemporary Issue 2: Decline in Foreign Direct Investment
The main reason for the worsening recession is the continued falling demand of its export products from the US and the Europe, mainly the consumer electronics and high tech manufacturing products. Singapore’s foreign direct investment fell the most in at least 22 years in January 2009, as the deepening global recession pared demand for electronics and other goods in all of the island’s 10 largest markets. Singapore NODX (non-oil domestic exports) dropped 34.8% from a year earlier, after contracting 20.8% in Dec 2008. Singapore’s economy is in its sharpest and deepest recession in the country’s history (Ministry of Trade and Industry 2009).
Contemporary Issue 3: Pandemic H1N1
Another major contemporary issue is the Influenza A (H1N1), swine flu virus. Singapore has confirmed 72 new cases of H1N1 today, bringing the total tally to 701 confirmed cases, with five fatal cases to date (Ministry of Health 2009).
Reuters (2009) reported earlier this year, when Singapore received its first H1N1 case, from a 22-year-old Singaporean who arrived from New York on a Singapore Airlines flight, Health Minister Khaw Boon Wan told reporters, “this won’t be the last case in Singapore unless we could stop people from travelling”. The government is continuing with screening at border checkpoints and asked people to stay at home if suffering flu symptoms. It also advised caution over travel to affected areas. Singapore financial markets shrugged off the news. Singapore’s central bank said in April 2009 that the global outbreak of flu has clouded the outlook for the economy. These external environment issues play a huge part, on affecting the airline industry.
Singapore’s Airline Industry
2008 was an exceptionally challenging year for the airline industry. Airlines were hit first by an unprecedented spike in oil prices and then by a precipitous drop in revenues caused by a collapse in world trade and the start of what are looking to be the deepest recession since the 1930s. Airlines have reacted with unusual speed to resize capacity in the face of slumping demand. This and the subsequent fall in oil prices back to 2004-5 levels may prevent what is expected to be the largest-ever decline in airline revenues, in 2008, from leading to a similarly record breaking net loss in 2009 (IATA 2009).
Low Cost Carriers (LCCs)
Air travel remains a large and growing industry. It facilitates economic growth, world trade, international investment and tourism; which is why business travel has also grown as companies become increasingly international in terms of their investment. The commercial aviation industry in Asia has grown dramatically, and has also witnessed additional turbulence with the entry of airlines adopting new business models variously referred to as low cost carriers, no frills airlines and budget carriers (Heracleaous, Wirtz & Pangarkar 2008).
The proliferation of budget carriers has been rapid enough that four out of every five airline markets, that is, areas served by a pair of airports, now feature a budget carrier. Prominent budget airlines include Ryanair and easyJet (Europe), VirginBlue (Australia), Skymark (Japan), Air Asia (Malaysia) and ValuAir, JetStar and Tiger Airways (Singapore) – which is the company this essay is focused on.
Tiger Airways was founded in September 2004 and is one of Southeast Asia’s leading budget carriers. According to TigerAirways.com (2009), Tiger Airways is the result of a joint venture – Singapore Airlines holds a 49% stake in the company, Indigo Partners LLC (24%), Irelandia Investments Limited (16%), and Temasek Holdings (11%). Tiger Airways was established at a time when the airline market was tumble, due to increasing fuel cost and an unstable financial market. As a result, some budget airlines were bankrupted, such as Skybus, Frontlier and ATA. Tiger Airways experienced loss from 2005 until 2007; during the first year of the company’s history, a slow development in both the number of passengers, flights and destinations were observed. However, Tiger Airways has shown steady improvements during the last few years.
Tiger Airways aims to be the top travel website in Singapore and took the next step to achieving this by being the number one airline website in Singapore in 2008 (Hitwise 2009). The airline garnered almost a quarter (22.5%) of all website traffic to airline websites in Singapore.
Tiger’s popularity with travellers stems from its adherence to the true low cost model to deliver low fares. Tiger Airways, Singapore’s only nominee in the worldwide category for Best Low Cost Airline at the upcoming World Low Cost Airlines Congress (Low Cost Airlines World 2009), remains focused on what matters and continues to offer the best fares across its route network every day through disciplined cost control. Its aggressive application of the true low cost model includes selling the majority of its seats online with more than 90% of all tickets sold online.
External Environment: Macro
In analysing the macro environment, it is important to identify the factors that might in turn affect a number of vital variables that are likely to influence the whole economy and the airline industry’s supply and demand levels and its costs. The radical and ongoing changes occurring in society create an uncertain environment and have an impact on the function of the entire organisation (Grant 2005). The PEST analysis is a framework which categorises environmental influences such as political, economic, social and technological forces.
The political factor refers to the government’s policy such as the degree of intervention in the economy (Grant 2005). Airlines are not only regulated very heavily for safety’s sake but also in areas related directly or indirectly to the economy, control and ownership, mergers and acquisitions, alliances, passenger rights, protection of the environment, competition such as predatory pricing; and in the case of many international operations, capacity and frequency. Following the pandemic H1N1, the Singapore government had previously issued travel warnings about visiting Victoria, Australia, sparking unhappiness from the Australian government.
In terms of economic factors, Singapore’s economy is mature, where air travel demand is growing fast, the profitability of the airline industry is weak or negative; the reasons will become clearer when Porter’s Five Forces model is applied in the micro analysis of the external environment.
Airline losses worldwide may total $9 billion in 2009; nearly double a previous forecast, as an outbreak of swine flu compounds the effects of the recession, according to the industry’s main trade group. Sales may fall 15% to $448 billion this year from $528 billion in 2008, the International Air Transport Association (IATA 2009) said in a statement distributed at its annual meeting in Kuala Lumpur in June this year. Singapore Airlines, the world’s largest airline by market value, posted a 43% drop in quarterly profit, hurt by hedging losses and slowing demand for travel and cargo amid a global economic downturn. “This is the most difficult situation that the industry has faced”, IATA Chief Executive Officer Giovanni Bisignani said.
With reference to social factors, there is a higher level of multi-culturalism and demand for learning about and understanding new cultures, which fuels demand for air travel. At the same time, though, environmental concerns led to severe criticism of the industry and its effects on carbon monoxide (COï¿½) emissions. Even though the airline industry is estimated to account for around 2 – 4 % of emissions compared to power stations which account for about 20%, it receives a disproportionate amount of criticism and attention from activists. Another key negative influence has been the effect of terrorist activities, leading a tightening up of aviation security procedures, making air travel more arduous and time-consuming than it should be.
In terms of technological factors, the impact of the internet has been tremendous. One of its greatest effects is to offer transparency of options to passengers and to reduce search costs. Given that price is a key attribute to the purchase decision, combined with the transparency of information, these two factors lead to pricing pressure for airlines with a consequent reduction in yields. At the same time, however, effective use of the Internet for individual airlines is also an opportunity to improve the quality of their service and at the same time reduce costs – online ticket sales and Internet check-in.
Other technological advances include new plane designs which enable longer range travel, as well as higher capacity in terms of passenger numbers and efficiency in terms of fuel consumption for instance. In addition, bio-metric check-in, customer relationship management (CRM) software and traffic management technologies for airports to relate their customer base more effectively.
External Environment: Micro
Externally, the industry analysis has a direct effect on a company’s strategic competitiveness and above-average returns. While Tiger Airways cannot directly control the elements of the general environment, it can influence and will be influenced by factors in the airline industry and competitor environments.
Porter’s Five Forces
The intensity of competition in the airline industry and its profit potential are a function of Michael Porter’s ‘five forces’ model of competition: the threats posed by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors (Porter 2008). Studying these forces allows Tiger Airways to find a position in the airline industry where it can buffer itself from the power of the forces in order to increase its ability to earn above-average returns.
New entrants to an industry can raise the level of intensity of the competitiveness among companies, thereby reducing its attractiveness. The threat of new entrants (medium) largely depends on the barriers to entry – obstructions that make it difficult for a company to enter an industry (Porter 2008). Customers’ brand loyalty is crucial, if consumers of Tiger Airways do not have brand loyalty, then the strength of the threat of new entrants is very high. The high numbers of competitors in the industry also decrease Tiger’s customer loyalty. New competitors which want to come in the industry have to spend little to compete with Tiger.
There is a level of low switching costs, with the economy still on its way to recovery; travellers are still reluctant to spend. The low carrier model works best in short-haul point-to-point market where price is extremely important and the deciding factor is price. Customers do not need to spend more on switching to another airline. The price would not be very significant in differences, which it depends on the availability of competitor’s services and suitability of the flight time that prompts them to switch.
The advantage of the low-cost model is that it fits well with current consumer demand as budget flights are cheap and offer more attractive deals to such travellers. One important factor for the emerging budget airline is that travellers’ main concern is to reach a destination. There is always a group of travellers with just this simple need to be satisfied. Those travellers have no need for in-flight or ground-level service, which is what Tiger Airways is, a no-frills carrier.
There are many airline companies in the industry. As a result, intense rivalries (high) are common. Thus, the higher the number of competitors, the stronger the level of rivalry intensity. The companies are generally aware of competitors’ actions, often choosing to respond to them. Due to the pandemic H1N1, the airline industry has been experiencing slow growth which makes rivalry even more intense as companies battle to increase their market shares by attracting competitors’ customers. Some airline companies are viewed as having few differentiated features or capabilities. Rivalry intensifies when a number of airline companies offer the same level of service. In view of this, travellers will then make the decision based on price.
The exit cost for airlines is hard for an airline company to exit the industry. It is because the cost is high in paying the loans, staff retrenchment and flight cancellation refunds. Even making losses, the companies have to get running to cope with fixed costs. This makes the industry very competitive.
The main purpose of using airline services is to reach the destination. Every airline provides similar services to customers. Though Tiger provides other added services like hotel booking, and tour packages, it is subjected to the customer’s choice. An industry with similar products offered is highly competitive.
The airline industry incurs high fixed cost which consists of finance cost, hire purchase, and staff costs. The airline companies have to gain more market share to cover the fixed costs. In doing that, constant price reduction is done by them to compete with others. Thus, the rivalry is strong.
The nature of airline industry is that customer’s priority is to look at price and flight schedule that suits them the best when buying air tickets. The main purpose of using the airline services is to get to the destination intended. Customers can switch to other airline easily which makes the industry so competitive.
In many industries, companies are in close competition with producers of substitute products (low) in other industries. According to Porter (1998), “substitutes limit the potential returns of an industry by placing a ceiling on the prices companies in the industry can profitably charge”. In other words, it means that the presence of substitutes put a ceiling on the price to be charged before the consumers will switch to the substitute product. The presence of substitute products lowers the industry attractiveness and profitability because of the limited price levels. The competitive strength of substitutes is best measured by the market share those products obtain and those companies’ plans for increased capacity and market penetration.
Substitutes to aircrafts include sea and land transports which are much cheaper alternatives. However, they pose no serious threats to the airline company because air transport is still considered as the faster and most effective way to reach a destination. Nevertheless, with rapid advancements in technology, new and better modes of transport may gradually emerge as better alternatives to aircrafts.
It is easy to switch to substitutes. There are about other low cost airlines competing in the industry. The airlines serve over one hundred cities and islands across the sub-continental regions of South Asia, Southeast Asia and Northeast Asia. Although some of the budget carriers only fly domestic routes within the country of origin, while only a few operates international routes connecting nearby countries, customers will always look for alternatives.
The performance of other airlines are quite similar, given there is no obvious product differentiation. Performance of airlines normally consists of the accuracy of take off time, aircraft performance and staff services.
The price of substitutes is about the same with Tiger’s. Some of the airlines offers cheaper price to achieve profitable passenger loads. The price offered depends on the time gap between the booking date and flight date. The longer the date, the cheaper will be the price.
Buyers are the people or organisations that create demand in an industry. When the buyers are concentrated or large, or buy in big volume, their bargaining power represents a force affecting the intensity of competition in an industry. Buyers affect an industry through their ability to force down prices, bargain for higher quality or more services, and play competitors against each other. The bargaining power of buyers (high) is higher when the products being purchased are standard or undifferentiated. Whenever the bargaining power of buyer is substantial, rival companies may offer extended warranties or special services to gain customers loyalty.
Air travellers and transportation companies purchase a large portion of the airline industry’s total service. The sale of tickets to air travellers and cargo space to transportation companies account for a significant portion of the airline company’s annual revenues. Buyer groups experience low switching costs as they can choose one airline company over another, depending on which offers better deals. When there are low switching costs, competitors can attract travellers through pricing and service offerings.
As such, buyer groups have high buying bargaining power – companies in the airline industry have to be more focused on the needs and desires of their customers in order to better serve and satisfy them.
The portion of buyers’ expenditure on airline is moderate. This factor depends on portions of income an individual earns. The higher the portion, the more the customer look for cheaper price and thus, the stronger the bargaining power of buyers.
These days, customers have easy access to market information. Many big and success companies in the world utilises e-commerce to operate. Without IT, the business had boundaries and international business will be prohibited. With worldwide web, information can be gathered on one click. Customer’s access to the current airline market information is easy and available all the time. The airline companies have less room for negotiation. Thus, customers had strong bargaining power.
Buyer’s power concentration lies in many hands. Most of the airline company customers are individual travellers, only some travel in groups. So the air tickets are purchased individually. The airline companies are not relying on a few groups of customers only. Thus, the bargaining power of buyer is strong.
Cost of switching to other airlines is low, so bargaining power of buyers is strong. Tiger Airways is not the only airlines operating in Singapore. Other than that the price offered by other competitors are not much different. The customer choice is subject to their convenience and flight schedule that fit them best.
Suppliers are the businesses that supply materials & other products into the industry. Suppliers can affect an industry through their ability to raise prices or reduce quantity of supply. The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company’s profitability. The bargaining power of suppliers (high) affects the intensity of competition in an industry especially when there are a large numbers of suppliers, when there are only a few good substitute raw materials, or when the cost of switching raw materials is costly. If suppliers have high bargaining power over a company, then in theory the company’s industry is less attractive.
Companies should pursue backward vertical integration to gain control or ownership of suppliers. This strategy is effective when suppliers are unreliable, too costly, or not capable of meeting a company’s needs on consistent basis. Companies can negotiate more favourably with suppliers when backward vertical integration is a commonly used strategy among rival companies in an industry.
Boeing and Airbus dominate the whole airline industry because they are the two major suppliers of aircrafts. There are no satisfactory substitute products available to airline companies as aircrafts are the only form of commercial air transport. Airlines are not a significant customer group for the two suppliers because they can supply aircrafts to governments/military as well. Boeing’s and Airbus’s aircrafts are critical to the airline company’s marketplace success because aircrafts are the most important resource in the airline industry. This in turn leads to high bargaining power of Boeing and Airbus – they can increase prices and reduce the quality of their aircrafts, without any retaliation by any airlines including Tiger Airways.
The key determinants of competitive advantage of an organisation, its core competencies and value chain creation is analysed through a competency value model, it encompass organisations the knowledge of the strategic competitiveness they possessed that can be ‘exploited’ (Ormanidhi & Stringa 2008). Significant resources and capabilities help Tiger Airway in building its core competencies.
The internal analysis of any corporation is exhibited through two main aspects; tangible and intangible (Ormanidhi & Stringa 2008). Tiger Airways currently operates a uniform fleet of around nine Airbus A319s and A320s and obtains the gate rights to a substantial amount of airports in Asia Pacific. Gate rights are an essential tangibility to the success of their operation because it their strategic gates in cities with moderate climates directly contributes to the one of their core competencies; punctuality. The uniform fleet also contributes to the efficiency of production based on the maintenance aspect alone. Mechanics and services are standardized, thus making it easier for potential problems to be identified and fixed in a timely fashion.
Tiger Airways also obtains a very strong culture that adds a tremendous amount of asset to the company. In several ways the company reaps benefits from the unique culture. Quality and customer perception is directly correlated with the culture. Corporate culture also adds to the bottom-line in terms of operating expense because happy people operate more efficiently.
The infrastructure of Tiger Airways is the reason why they are the number one leading LCC in the Asia. The decentralized, cross-functional organization continues to produce a profit margin as well as quality.
These are the product of Tiger’s employees’ creativity. All the capability that Tiger possesses requires high skill from its conductor. Without sufficient knowledge, it will benefit Tiger minimally.
Tiger Airways has a quick turnaround time. The longer aircraft on the ground means that the less productive it will be. By shortening the turnaround time, Tiger is able to gain more profits. It was gained by removing frills service and removing chair booking and extensive crew drilling on performing quick turnaround.
A low-cost short haul came from management who conferred with mechanics on how to coddle spare parts so they can last longer. For example: to extend the landing gear usage time, mechanics advise pilots to take a shallow approach on landing. By doing so, Tiger is able to lower the cost on short haul. It was because fewer parts would need replacements.
Due to the above practices; Tiger is able to utilize its aircrafts at higher rate, resulting in higher rate of aircraft utilization, which signifies that higher profit will be gained by Tiger and also be able to lower the cost as the distributed fixed cost get smaller.
There has been a longstanding approach to the core competencies offered at Tiger Airways. The competencies include their quick turn-around time operating process and their unique corporate culture. Because the company operates as a LCC, the idea is to limit the amount of costs incurred in operation and pass the savings on to the customer; who will thereby be inclined to purchase from Tiger.
Tiger’s model of low-budget airline which passes its costs directly to its customers in order to maximize profit had leaded them to the profitable route of success. It is the integrated business strategies which combines resources-based view and positioning view that added value to Tiger Airways and help them to achieve the significant result in the cheap-flight industry by leveraging its competitive advantages and competitive position (Ketels 2006).
The unique corporate culture has been a great selling point for Tiger in terms of customer quality as well as employee productivity. Given the economic circumstances, Tiger Airways culture will also be tested. The corporate culture is a contributing factor to the extremely loyal customers Tiger has obtained through incentive programs and friendly service. As the industry competitors increase financial pressure, Tiger will begin to discover whether there is merit between atmosphere and customer loyalty.
Value Chain Analysis
Value Chain analysis allows an organisation to identify which part of the operation of the organisation is creating value and vice-versa it allows an organisation realise which part of the operations are destroying value or non-value creating (Porter 1985). Activities that add value are divided into two categories. They are primary and support.
Referring to Appendix 1: Tiger Airways’ Value Chain, the primary activities are primarily concerned with the creation or delivery of a product or service. And each primary activity is linked to support activities, which help to improve their effectiveness or efficiency (Snowdon & Stonehouse 2006).
The inbound logistics of Tiger Airways produces a fast reliable service, with friendly faces along the way. The inbound activities include ticketing, maintenance, baggage transfer, operating systems. Tiger Airways has always operated as a no frills airline, which reduces the amount of inbound logistics dramatically. For example, there are no seat assignments when flying on Tiger Airways.
Operations have been the emphasis of praise over recent years regarding Tiger Airways. The idea of LCC is that operations are so lean that if in turn allows the company to obtain the management strategy of price leadership. As Tiger Airways continues to thrive, increasing efficiency will be essential to sustain such success.
When Tiger Airways Airlines markets their ability to fly to on-time, its not lie. The outbound logistics of the company is exemplary within industry practice. The amount of business generated from word-of-mouth regarding simple punctuality is tremendous based on this particular characteristic.
The marketing aspect of Tiger Airways, like the corporate culture, is very fun. Commercials and other advertisements emphasize the lighter side of life. The marketing tools utilize humour, which embraces the attraction to the popular LCC.
Tiger Airways Airlines is currently operating in the service sector. Service is the cornerstone of LCC because customer loyalty is crucial for sustainable profit margins. Tiger Airways has operated as a standardized airline that focuses on the experience of flying comfortably from point-to-point at a low cost.
Procurement of goods and materials is important within the airline industry; especially concerning LCC. Companies operating LCC find every way possible to cut costs. For example, “Tiger Airways said it has contracts covering more 95% of its expected fuel needs for the second quarter at the equivalent price of $50 per barrel for oil”. What this suggests, is that Tiger Airways pre-purchases fuel quarterly to reduce the impact of elasticity concerning fuel prices.
The technological development of Tiger Airways also plays a role in the process turnover from flight to flight. Because the intricate electronic ticketing system allows customers to choose their seats based on when they checked in, the company is able to save an immense amount of time with the boarding process. In addition to the ticket system, Tiger Airways also obtains great incentive program data base for frequent flyers. As technological advances continue to saturate the market, the company needs to continue to update systems to comply with updated systems within the industry.
The basis behind the whole Tiger Airways Airlines process is initiated through the Human Resource department. Hiring and training are very important to the process of putting together an efficiently operating crew. Fortunately for Tiger Airways, recruiting is unnecessary. Choosing the right people to work for the company is crucial to the success of the LCC.
Tiger Airways also withholds a very unique firm infrastructure. The idea behind the unique business plan is to utilize the full potential of an employee while enjoying the work load. The corporate culture adds an enormous about of intangible assets to the company and is superior to that of the competition.
Hence, the low-cost airlines which utilize the cost-leadership strategy to create a competitive position, as well as strengthening its core competences and capacities to increase performance had help Tiger to achieve its significant achievement. Thus, by looking at the core competence and competitive advantages of the organization, Tiger remain its competitive position in the cheap-flight industry and have optimist future for expanding further.
Tiger Airlines is one of the leading low cost carriers in the region. And after analysing its external environment factors, it is proven that Tiger has some major barriers in international political and economical sectors. As we are familiar that fuel prices is sensitive, making it really unstable.
As can be seen from the above industry analysis, with threats posed by other budget airlines; high bargaining power of Boeing and Airbus; high bargaining power of air travellers and transportation companies; and lastly, intense rivalry among competitors in the airline industry; Tiger Airways has to continuously improve itself in order to stay competitive in the airline industry. In fact, the company is doing that very well. It has been fast in reacting to the changes in the industry environment, as evident from their current strategies of promotions and cutting costs.
Tiger Airways has exposed us an insightful example in showing how a keen and critical strategic movement may drive a company that was has been making losses, to making profits. While Tiger Airways’ management is providing a suitable business environment, its employees demonstrates a highly productive and efficient performance in running the business and reducing cost. Tiger Airway’s decision on using uniform aircraft is also put into account. It emphasises the principle of economies of scale and also it will eventually reduce learning curve.
However, Tiger Airways actual main strength was based in its innovative ways to keep the cost low which is hard to imitate. With those entire factors combined together, Tiger Airways has shown how synergies between management, employee and its environment can develop a competitive advantage that brought Tiger Airways to be the contender as one of the market leader in the competition.