Tiger Airways is an ultra-low cost airline which commenced services on 25 March 2005. It is currently the largest low-cost airline operating out of Singapore in terms of passengers carried. In 2006, the airline flew 1.2 million passengers, a growth of 75% from the previous year. These days, the hottest news pops that Tiger Airways and Thai Airways International will form an airline based in Thailand, where Thai Airways International and Tiger Airways will own 51% and 49% respectively of the newly formed airline. Operations are expected to begin in the 1st quarter of 2011. This paper is based on this information with further discussion the business model and strategies with Tiger Airways and the whole low-cost airline industry.
Question 1
a) Discuss why Tiger Airways jointly launch a low-cost airline with Thai Airways. Provide 5 (five) reasons.
Tiger Airways and Thai Airways are both infusive airlines in Asia. Tiger Airways jointly launch a low-cost airline with Thai Airways can benefits both two companies to achieve a win-win situation.
Tiger Airways based on Singapore, choose to co-operate with Thai Airways could further develop the international market in Asia.
Thailand is one of the most famous tourist resorts in the world. Tourism is a major economic factor in Thailand, contributing an estimated 6.7% to Thailand’s GDP. No doubt, more and more people will choose Tiger Airways to Thailand as it price advantages. This strategic decision will attract more passengers to Tiger Airways.
Compare to Jet star, Air Asia and other low-cost airlines, Tiger Airways is still smaller than its rivals. This move could increase the overall strength of the market competitiveness in Asia.
Tiger Airways is all along with its low-cost airline business model from the day when it established. This is a superexcellent chance to advertise its business model and corporate image.
b) Evaluate whether Tiger Airways’ decision in the above strategy is considered as a strategic decision. Support with 6 (six) reasons.
The definition of a strategic decision is the decision that is concerned with whole environment in which the firm operates the entire resources and the people who form the company and the interface between the two.
There are some characteristics/features of a strategic decision
A strategic decision has a major resource proposition for an organization. The resource proposition of Tiger’s decision is to occupy Thailand’s international airlines which concerned possess a new market of Asia civil aviation.
A strategic decision deal with harmonizing organizational resource capabilities with the threats and opportunities. Thai Airways used to be Tiger’s competitor, this decision change the competitor to its partner contains with threats and opportunities.
A strategic decision deal with the range of organizational activities. Tiger Airways plans to increase its fleet to 68 by 2015 and has the same pan-Asian aspirations as its competitors through this co-operation.
A strategic decision involves a change of major kind since an organization operates in ever-changing environment. Both Tiger Airways and Thai Airways are low-cost airlines. This move signified that the two companies want to through this co-operation to change the environment of Asia civil aviation.
A strategic decision will involve a lot of risk. Thai Airways own 51% of the low cost airline that means they control the scales. If some contradictions between them, this decision will be a big risk for Tiger Airways.
A strategic decision is consider both administrative and operational decisions. Tiger’s decision aim to reduce cost which co-operate with Thai Airways to achieve the airline business in Thailand through its operational decision of cost-saving actions.
c) Discuss which 5 (five) macro-environment factors that will most likely affect the low-cost airline industry.
Political factors are how and to what degree a government intervenes in the economy. Specifically, political factors include areas such as tax policy, environmental law, trade restrictions, tariffs, and political stability. Eg, if the government wants to increase the airport construction fees, that must can be a big challenge for the low-cost airline industry. Because it will threaten the price advantage which is the biggest advantage for low-cost airline industry compare to others. Furthermore, governments have great influence on the airport infrastructure built, foreign affairs and many other factors that will most likely affect the low-cost airline industry.
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Economic factors include economic growth, exchange rates and the inflation rate. These factors have major impacts on how air tickets operate and make the price decisions to each low-cost airline industry company. As the low-cost airlines usually between country to country ,the exchange rates and other economic factors will direct influence the costs of goods and the supply and the price of tickets in the low-cost airline industry .
Social factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for the low-cost airlines’ products and how that company operates. For example, Tiger Airways not only supply the airline services but also supply hotel booking, sightseeing tour and other services. But all these should take different social factors into account.
Technological factors include technological aspects such as aerosatsystem, technology incentives and the rate of technological change in this industry. They can determine barriers to entry, minimum efficient service level and influence strategic decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation in the low-cost airline industry.
Law factors include the relevant laws affect low-cost airlines. Eg. Tiger Airway Australian only provide domestic service in Australian, because the legal rule of Australian to limit.
Question 2
Based on the case study and information on the webpage (www.tigerairways.com/sg), analyze 3 (three) levels of strategy that you can identify at Tiger airways. Corporate and Business level strategy. Operational strategy.
Porter’s Competitive Strategy Model
Porter (1980) has described a category scheme consisting of three general types of strategies that are commonly used by businesses. These three generic strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demand side dimension and looks at the size and composition of the market you intend to target. Strategic strength is a supply-side dimension and looks at the strength or core competency of the firm. In particular he identified two competencies that he felt were most important: product differentiation and product cost
Competitive Strategies for Tiger airways
In view of the above challenges, low-cost airlines must do three things to ensure their long-term survival.
- Cost Leadership.
Tiger airways maintained a sustainable low-cost advantage over their full-service competitors. Tiger airways ensured that their costs per passenger-km continue to be 50 per cent or more below those of full-service airlines and continuing to reduce their own costs too.
- Differentiation Strategy.
Tiger airways focused on differentiation of their product, that mean they must also offer a product with some frills, which is very highly rated by passengers in terms of value for money. They have draw lessons from the successful model by their competitors like Virgin Blue in Australia and JetBlue in the USA. Virgin Blue was the first carrier outside North America to introduce multi-channel real-time satellite TV to its flights called Live2Air. The strategies of Tiger airways are twofold to take on the legacy carriers and attract higher-yield passengers, and to add points of difference from other low-cost airlines
Market Share and Market Segmentation Strategy
Tiger airways ensured that on most of their routes they become the number one or number two carriers in terms of market share in Asia. This dominance, combined with their low fares, gives them a very powerful defensive position should new competitors attempt to enter, while also ensuring a strong cash-flow base on which to mount further expansion. Tiger Airways’ survival and success is due in no small measure to its growth strategy, which has focused on becoming dominant in most of its markets.
Operational strategy
As mentioned earlier, the chief difference between low cost carriers and traditional airlines fall into three groups: service savings, operational savings and overhead savings. Tiger Airways tend to focus on short haul route. To achieve the low operating costs per passenger, this type of carriers need to have as many seats on board its aircraft as possible, to fill them as much as possible, and to fly the aircraft as often as possible. Tiger Airways want to through its low cost airline affect the traditional airline hub-and-spoke networks poses interesting questions for the airlines industry and policy makers. It means choosing to perform a system of activities differently from that of traditional rivals and providing a coherent set of key activities that reinforce each other to achieve such position in a sustainable manner.
Despite the challenges faced, Tiger’s low-cost model appears to be sustainable in Asia as it has been in the Singapore, Thailand, China and elsewhere. It has a different and substantially lower cost structure than the conventional network model, because the latter imposes higher costs on those who operate network systems. While Tiger’s network airlines can reduce their unit costs further, they can match those on short-haul routes.
Tiger Airways competed for a part of their own traditional markets with low-cost carriers and it will increasingly generate most of their business from the denser, short-haul, inclusive tour markets and from long-haul routes. Within Asia, in South-east Asia and even in Australia, Tiger Airways cleared that low-cost airlines will become the dominant carriers in domestic and short-haul markets. It is not a passing phase. Tiger Airways was here to stay and it will dominate most of the markets they enter. Tiger Airways jointly launch a low-cost airline with Thai Airways was a example to prove.
Question 3
a) Using Porter’s 5 (five) forces model, analyse all the forces in the low-cost airline industry.
Buyer power
Low-cost Airlines generally have a large number of buyers. Many of these are individual consumers purchasing flights directly from the airline, although there are B2B sales to charter companies, discounters, and similar buyers. In the low-cost carrier market, airlines are competing for the same market segment. The bargaining power of the consumers is increasing as the supply exceeds the demands. Price sensitivity is high; a result of factors such as the growth of online price comparison sites, corporate travel expense policies for business flyers such as Jetstar and Virgin Blue. The consumers are price sensitive. One of the challenges that all the low-cost Airline must face is the lack of customer loyalty in the low-cost carrier arena where passengers easily switch to airlines that offer lower fares. Buyers have no loyalty in low cost airlines such as Tiger Airways as the trip is purchased according to price.
Supplier power
Low-cost Airlines must enter into contracts when buying or leasing aircraft from suppliers. Breaking hose contracts can often imply a heavy financial cost. Furthermore, Boeing and Airbus effectively form a duopoly of suppliers of new jetliners, not only in the large jetliner category, with planes such as the 747 and A380 but also in small jetliner category with planes such as the 737 and A320. In the market for lower-capacity regional jets and propeller-driven aircraft, companies such as Embraer, ATR, and Bombadier are significant suppliers. The relative lack of alternative manufacturers or substitute inputs increases supplier power. Air India’s passenger fleet consists of 46 Boeing, 78 Airbus, seven ATR, and seven Bombadier planes. Southwest Airlines is the world’s largest low-cost carrier. Southwest’s successful business model involves not only flying multiple short, quick trips into the secondary airports of major markets but also using only one aircraft type, the Boeing 737.
Suppliers offer fuel, labor, airport and security services – all with changing prices. Aviation fuel is another vital input. Number of fuel suppliers is still relatively few. However, it is difficult for suppliers to forward integrate. Strategic alliance among airlines for economies size such as code sharing and economies scale such as purchase of fuel and aircraft could reduce the supplier power in some level.
New entrants
The economic entrance barriers to the not only low-cost airlines but also all the airlines industry is relatively high. For an entirely new company, they include the considerable up-front outlay needed to obtain planes, although this may not be an issue for an existing airline beginning to offer flights to a new country or region. Distribution is not particularly easy, as new players need to establish an online booking system, and relationships with travel agents and other sales intermediaries. It is also vital to obtain airport ‘slots’ for take-off and landing.
There has been a growth in air traffic over recent years which mean that congestion at airports in many countries is expected, especially the major hubs. The time slot given to an low-cost airline is important, and is something all airlines negotiate with airports. Established airlines will already hold the monopoly over slots at certain airports, making it harder for new low-cost airlines to infiltrate. This creates difficulties for a new low-cost airline aiming to negotiate prime slots at busy airports and can result in it being restricted to offering flights only at off-peak times, or having to fly to airports further away from popular destinations. This can be a deterrent to new airlines, as customers may seek more convenient alternatives.
For example, in Singapore infrastructure constraints pose as a formidable entry barrier. Because of the intense price war, a new entrant will find it almost impossible to offer rates that are lower than Tiger Airways’. The airline industry is highly capital intensive. New entrants are challenged by expensive aircrafts, high cost of operation and war for talents. New entrants also find it very hard to look for suitable airport as airport slots are reserved for established airlines.
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Substitutes
Other forms of transport such as road, rail and marine travel are considered as substitutes to airline travel. Buyers take into account not only the cost of travel but also how long the journey will take on corresponding forms of transportation. In some countries, air travel makes it easier to overcome long distances and has certain benefits such as shorter travel time than rail travel, even including the time to check in. However based on the price advantages of low-cost airlines, rail and road transportation will not becomes more attractive alternatives for a majority of buyers. Furthermore, many consumers are now aware of the environmental impact of air travel, and are turning to rail travel instead. It is possible to travel around much of the world by long-distance bus or train, although levels of service vary and some border crossings may present a difficulty.
Rivalry
In the airline industry where the market is highly saturated, the rivalry between existing airlines is one of the strongest forces. Rivalry is increased by the presence of low-cost carriers in the market, as these companies can compete more intensely on price. Switching costs for buyers are low. Besides, existing airlines such as SIA will sometimes marketed big promotions which almost has the same price as low-cost airline’s, it means that it is easy for them to change to a competitor.
In terms of intra-industry competition is also high. Eg. In Asia, Tiger Airways as a new entrant poses as a threat to established low-cost carriers such as Jetstar and Virgin Blue. The competition in the budget sector is very high as all airlines has the same ‘no frills’ philosophy. Price is the major differentiating factor in the low-cost carrier market, an area where Tiger Airways lead.
b) Provide a conclusion and reason on the attractiveness of the low-cost airline industry.
No doubt, the biggest attractiveness of low-cost airline industry is based on its great price advantage as it saves money compare to the ticket price of the traditional airways. Besides, it promotes great vacations. For example, Tiger Airways also supply Airways hotels, Travel insurance, Budget accommodation, Car hire etc. With Tiger Airways you would be thrilled because you get to have a great holiday. At the same price compare to other transports ,you do not need to worry anymore about long and tiresome journeys by bus, train or car. This would invariably involve countless days on road, living out of a suitcase and staying in uncomfortable hotels. The flight does away with all this inconvenience.
Question 4
Explain value chain analysis. Based on the case and research done through the company’s website, analyse the value chain of Tiger Airways.
Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings:
(1) Primary Activities – those that are directly concerned with creating and delivering a product (e.g. component assembly);
(2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.
Primary Activities
Primary value chain activities of Tiger Airways include:
Primary Activity
Description
Inbound logistics
Tiger Airways based on Singapore, Tiger Airways can attempt to co-operate with Airbus to lower the cost of the airplanes. It can also co-operate with food suppliers to get cheaper and more delicious.
Operations
Tiger Airways now operates a fleet of 19 Airbus A320-family aircraft and is committed to increasing its fleet size to 68 by December 2015. The airline operates flights to 33 destinations across 11 countries and territories in Asia and Australia from its aircraft bases in three locations – Singapore’s Changi Airport Budget Terminal, Tullamarine Airport in Melbourne and Adelaide Airport in South Australia. Besides it has detail duties, responsibilities and specifications for every position include Flight Dispatchers, Operations Controllers, Flight Safety Manager, Pilots and Cabin Crew.
Outbound logistics
Tiger Airways of Singapore has agreed to open their operations in various countries. It is also stepping forward to associate with a Global Distribution System company to strengthen its ticketing system to enable travelers to access to more passengers.
Marketing and sales
The Company recorded an operating profit of $28.0 million and a profit for the year attributable to shareholders of the Company of $28.2 million for the financial year ended 31 March 2010. Revenues grew 28.6% to $486.2 million while operating costs grew only 7.7%, despite the 53.8% increase in
passengers compared to the preceding 12 months. Growth in revenues was supported by the combination of passenger seat revenue increasing 19.6% and ancillary revenue growth of 87.4%. Ancillary revenues currently comprise 19.4% of our revenue base, an increase from 13.3% in FY2009. Management continues to be focused on optimising ancillary revenues, with initiatives such as the carriage of cargo being introduced in FY2011. During the last 12 months from 2009 to 2010 the number of passengers reached at 4,872,000
Service
Besides online sales and flying services ，Tiger Airways also supply Tiger Airways hotels, Travel insurance , Budget accommodation, Car hire etc.
Support Activities
Support activities include:
Secondary Activity
Description
Procurement
The procurement of Tiger Airways was a low-cost carrier operates a fleet of Airbus A320s. Now Tiger Airways has a fleet of 19 Airbus A320 aircraft and it aim to increasing its fleet size to 68 by December 2015.
Human Resource Management
The human resource management was organized by its special department in details. Processing of Employment Pass, Airport Pass and Staff Pass Administer Staff intranet database Administer procedures for new hires and resigned employees Compiling of information for surveys requested by its special agencies.
Technology Development
Around 75% of Tiger Airways seat sales come from the internet, both from the public and agents, while the balance 25% comes from call centers and airport outlets. By these years ,Tiger Airways continue to develop its web’s power by co-operate with Facebook, Twiter, Youtube and other media agencies . It also emphasis on advising. For example in 2005, it had an increase of more than 60% in revenue and website visits since it launched its new advertising campaign: “What’s New Pussycat?”
Infrastructure
By 16 June 2010, the biggest shareholder of Tiger Airways is Singapore Airline Limited which holds 33.55% of the company shares. Approximately, 31.8% of the company’s shares are held in the hands of public.
Question 5
a) Analyse at least 5 (five) common cost-cutting strategies adopted by low-cost carriers that directly affect the passengers.
1. Develop creativity. A good example to support this strategy is the invention of Boeing 737. The Boeing 737 is a short-term and lower-cost twin-engine airliner developed by U.S. which influenced the whole low cost airline in the world. With this aircraft, it can save the gas but also narrow the costing of supplier to gain the biggest benefit of airline. Southwest Airline is the biggest low-cost airline in the world which using only this aircraft type to add a batch management to get the cost-cutting.
2. Rational use of resources. The low-cost airlines usual have limit resources, however use it rational become the key to success. After 911 the airline industry in U.S. was decreased. But Southwest Airline remodeled its Boeing 737 , added six more seats to every plane and guarantee will not effect the comfortable of the passengers, which help Southwest gain the profit even the past-911 time.
3. Efficient chick in service. The low-cost airways usually provide short-term service. The fly travel time will not over 2 hours. All the passengers concerned how fast they can chick in and how long they can arrive. The same successful example of Southwest Airline proved that they only need 10-15 minutes from chick in to take off, which usually take 1 hour to do that. This action not only gains the trust of passengers but also save the time. As time is money in business, they gain the efficient cost-cutting.
4. “0” strategy. Every low-cost airline should have a self- orientation of their company. For the low-cost airlines “0” means no luxury fitment, no free-service of food, no provide of TV and ear phone ect. to make a cost-cutting.
5. Effective and efficient operation. The low-cost airlines operate many planes. The key is how to operate them efficient. The biggest successful factor of Southwest Airline is the number ’11’ in its cost-cutting culture as 11 means they guarantee every Boeing 737 of their airline fly 11 times per day. It gains both the passengers’ benefit and the max operation of their airplanes.
b) Recommend at least 3 (three) future strategies that Tiger Airways could implement to maintain its low-cost strategies.
Break-even. A useful method for making expense comparisons is break-even analysis. Break-even is the point at which gross profit equals expenses. In a business year, it is the time at which your sales volume has become sufficient to enable your over-all operation to start showing a profit. It is important for low-cost airlines to remember that once sales pass the break-even point, the fixed expenses percentage goes down as the sales volume goes up.
Locating Reducible Expenses. The airline’s profit and loss statement provides a summary of expense information and is the focal point in locating expenses that can be cut.
Taking cost cutting Action. When the airlines have located a problem expense area, the next step obviously is to reduce that cost so as to increase the profit. A key to the effectiveness of your cost-cutting action is the worth of the various expenditures. As long as you know the worth of your expenditures, you can profit by making small improvements in expenses. Keep an open eye and an open mind. It is better to do a spot analysis once a month than to wait several months and then do a detailed study. Take action as soon as possible. You can refine your cost-cutting action as you go along.
Conclusion
The low-cost airline revolution has injected a dose of democracy into the travel world. Low-cost airlines have succeeded in taking over a large part of the market. Tiger Airways jointly launch a low-cost airline with Thai Airways provide a new opportunity, a new market and a new business model based on its successful business strategies. Moreover, Tiger Airways get ready to take off more quickly; enabling it as competitive airline to schedule more flights and provide more attractive schedules for passengers. No doubt, there is a bright future for Tiger Airway!
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