Porter Five Force

PORTER'S FIVE FORCES

Essential in examining the "external environment" is applying the framework of Michael E. Porter, ‘Porter's five forces' in understanding the different competitive forces that determine market attractiveness of an industry.

Porter's Five Forces

Figure 5; Source: Porter, Harvard Business Review

Rivalry Among Existing Competitors

With the increasing affluence of the APAC region, in particular China causing an ever-increasing amount of business interests and competition. There is fierce competition with existing airline carriers in capturing revenue through market from local carriers like Cathay Pacific with often price cutting.

Carriers have also improved on products and services offered to compete such as customer service, ease of use and flexible options of website, food and beverage options and quality, aircraft interior quality and features, frequent flyer schemes; all of which consumers see in terms of value which they will be willing to pay for.

Carriers also form alliances such as "OneWorld" which Cathay Pacific belongs, offering more destinations as well as better pricing when customers fly within the same alliance group. This increases loyalty and raises switching costs, especially amongst business travellers. This can be an effective defensive strategy, raising barriers to entry for others.

Overall competitor rivalry will be high and trend will increase as new carriers fight for market share.

Threat of New Entrants

The threat of new entrants into this industry is relatively low as there are relatively high barriers to entry as it's an extremely capital intensive industry with very high start-up costs, incredibly complex regulation in most markets (despite deregulation), heavy and often expensive challenges pertaining to supply and distribution channels and the relative power of existing players.

Switching costs are low, adding to the potential of competition. If well capitalised airlines are able to navigate the very difficult terrain, and enter in the right sector, they can be successful. The region has seen this with the success in recent years of AirAsia.

Bargaining Power of Buyers

As there are vast amount of corporate customers then the power is quite dispersed and pertains to the individual company contract with the agent or airline, however leisure travellers are price sensitive and makes up a large proportion of the market.

Further, technology provides greater flexibility with the use of internet tools in travel bookings either directly to airline or agent websites such as "Cathaypacific.com" and "Zuji.com". This basically accommodates for the already low switching costs, thereby in totality, both business and leisure travellers together make up a sizeable volume which affords them strong bargaining power. However, because they are dispersed and in many ways separate then overall the bargaining power of buyers demonstrates a medium strength for this force in competitive attractiveness.

Threat of Substitutes

In terms of substitutes we can think of private car, rail to ship for sea travel depending on the ‘terrain', however it is an impractical substitute to air travel for anyone who needs to get anywhere quickly.

But even so, high-speed trains travelling at 300kph between Beijing and Shanghai provide a real alternative to air travel on that route. This new competition has reportedly lead to airlines significantly reducing prices to remain competitive on this lucrative route, sometimes called the ‘golden passage'.

(http://www.chinadaily.com.cn/business/2011-07/07/content_12856850.htm)

Certainly an emerging threat to airlines, for the business traveller market at least, is the emergence and rapid advancement in videoconferencing technologies, in particular high-definition solutions such as Cisco's ‘Telepresence'. During the financial crisis in 2008-09, take up of corporate video conferencing increased exponentially as corporate travel budgets were slashed. Gartner have predicted that such technology will replace 2.1 million airline seats annually, costing the travel industry US$3.5 billion per year into 2012. http://www.gartner.com/it/page.jsp?id=876512.

Bargaining Power of Suppliers

Due to large capital and complex regulations, the "powers of suppliers" are very strong since the "portions" that make up a carrier also requires heavy capital and expense to operate accordingly. This limits the amount of vendors that can supply to an airline.

There are many suppliers of aircraft but there is only a small number that manufactures commercial aircraft. Boeing and Airbus followed by smaller Embraer, Bombardier, and Comac. Within APAC market Comac is growing with over 1000 orders already for their new C919 aircraft whilst China is estimated to require 4,330 new commercial airplanes in the next two years.

Similarly with commercial airplane engines, the main manufacturers are Rolls Royce, General Electric (GE), and Pratt & Whitney. Fuel being the highest cost to an airline rising from USD96 to USD110 a barrel in 2011, caused a serious adverse effect on the profitability of the whole industry. Incorrect fuel hedging by airlines has also led to unpredicted variations in profits. All factors considered, the power of suppliers are high and will remain high due to the highly skilled human aspect and specialised "products".

SWOT

Cathay Pacific is an international airline based in Hong Kong which has built a exceptional reputation with providing excellent quality service to customers. In 2003, 2005 and 2009, Cathay Pacific Airways won the award of Skytrax "The World's Best Airline". However it has missed the 2010 & 2011 to competitors due to frequent strike actions and aircraft accidents. http://www.worldairlineawards.com.

In examining the internal aspects of Cathay Pacific, we best conceptually look at their SWOT analysis as shown below.

Strengths

• High reputation among customers

• Staff training program

• Strong global network to cover the world's major airports

• Provide advanced technology

• Acquisition Dragon Air to expand flight network on Chinese mainland Weaknesses

• Lack of internal communication

• Frequent strike actions lead by labor Unions

• Negative news of several aircraft accidents due to outsourced maintenance

• Multi-layer management

• Unable to control terrorist attacks due to its inefficient security

Opportunities

• Introduced loyalty scheme as a customer relationship approach, they created "Marco Polo Club"which is for the frequent flyers and also joined the airline alliance scheme"Asia Miles".

• Service and quality expansion Threats

• Strong labor unions affect management decision

• Limited suppliers of Jet fuel

• Many competitors join in aviation industry

• Low price competition

• Uncertain oil price

PORTER'S FIVE FORCES

Essential in examining the "external environment" is applying the framework of Michael E. Porter, ‘Porter's five forces' in understanding the different competitive forces that determine market attractiveness of an industry.

Porter's Five Forces

Figure 5; Source: Porter, Harvard Business Review

Rivalry Among Existing Competitors

With the increasing affluence of the APAC region, in particular China causing an ever-increasing amount of business interests and competition. There is fierce competition with existing airline carriers in capturing revenue through market from local carriers like Cathay Pacific with often price cutting.

Carriers have also improved on products and services offered to compete such as customer service, ease of use and flexible options of website, food and beverage options and quality, aircraft interior quality and features, frequent flyer schemes;