Case Study on "Australian Airline Tiger Airways"

Case Study 10 pages (3459 words) Sources: 8 Style: Harvard

[EXCERPT] . . . .

Australian Airline

Tiger Airways was the third major entrant into the Australian discount airline industry. The airline, a joint venture of Singapore Airlines, RyanAir and investor's groups, entered the market with the intent to undercut the existing competition. Tiger uses as a business-level strategy the low-cost model of RyanAir, which gives them several competitive advantages over Jetstar and Virgin Blue, including more efficient and comfortable planes and better positioning for the current social and economic climate. The trend in the Australian domestic airline industry is towards discount carriers, and the ability to succeed depends largely on the ability to control costs, something Tiger does well.

The company's cost-reduction model is a key strength, as are its two hubs in Melbourne and Adelaide. Weaknesses include the reliance in slim margins to succeed and the relative lack of brand recognition. There are opportunities for Tiger to continue to expand its domestic operations, but also to leverage its Singapore hub to build out international service. The deregulated market is a threat, however, as new entrants are attracted by the industry's strong growth figures. The economy is also a threat, as evidenced by the Tiger group's withdrawal from the Korean market as a result of the downturn.

Tiger's business-level strategies are largely congruent with its economic, social and competitive environment. The airline is focused on leveraging its cost competitive advantages and this has allowed it to build its market share rapidly over the past few years. There is risk in its dependence on slim margins, in particular given the high degree off volatility in jet fuel prices. On balance, however, Tiger has been highly successful.

Introduction

Singapore-based Tiger Airways first flew in September 2004, and by 2007 had expanded into the Australian domestic market. The firm is based out of Singapore, with secondary hubs in Melbourne and Adelaide. The firm was founded by a consortium of airlines, including Singapore Airlines, RyanAsia and a pair of holding companies. In terms of corporate structure, Tiger Airways Australia is a separate group within the Tiger Aviation Group.

At the time Tiger entered the Australian market, CEO Tony Davis outlined his plans as entering the Australian market "with continually lower fares than" Jetstar and Virgin Blue (Hadley, 2007). Tiger's strategy is essentially a low cost strategy, and they seek to emulate the model of co-parent RyanAir in this respect. The company attempts to find ways to stimulate demand in the market, thereby increasing its load factors. Cost controls are essential to the discount airline business model, and Tiger utilizes many of the same techniques as RyanAir. The third component of their strategy to attain their mission is capacity utilization.

Since it's entry into the domestic Australian market, Tiger Airways has steadily built out its route structure and in 2009 added the Adelaide secondary hub. When the company launched, it expected to be profitable in its first year, and to grow 20-25% in the first five years, a period which is just coming to an end now (Delfmann, 2005). The next five years will see increased expansion out of Adelaide and throughout the Australian network. The airline is also in the process of expanding into India as well (Tiger Airways, 2009).

The company's primary strategic goal is to reduce costs in order to offer the lowest-cost ticket prices in the Australian market. The airline has several business level tactics that support this strategy. Among them are a focus on Internet sales and ticketless travel, removing frills, use of new aircraft, usage of budget terminals and secondary airports, short aircraft turnaround times, and outsourcing aircraft maintenance (Tiger Airways, 2009).

The secondary strategic goal of increasing capacity utilization and driving higher demand is done through promotions, including price wars with the more established discount players in the Australian market. The company feels that Jetstsar (Qantas) and Virgin Blue were operating a "cozy duopoly" that was keeping airfares higher than equilibrium and seeks to drive higher traffic volumes by exploiting this overpricing (Hadley, 2007).

Lastly, given that for Tiger Airways forward bookings have increased despite the economic downturn, and the company is expanding its fleet from 10 to 16 in the next two years, with a goal of 60 planes total by 2016 (World Airline Report, 2009).

General and Task Environmental Analysis

The general environment for Tiger Airways is moderately favourable. The economic environment is relatively poor. Although the global recession has not hit Australia as hard as many other Western nations due to a stronger banking sector and corresponding lack of credit crunch, the country has seen some business slowdown. This has not had a substantial impact on the majority of Tiger Airways' existing business, but the strength of the downturn in Korea convinced the airline to scrap a planned joint venture based out of Incheon (World Airline Report, 2009). Overall, however negative impact of the economic downturn has likely been overstated, at least for the discount airline industry. Some other discount businesses have actually benefited from the economic downturn as customers trade down, and there is reason to believe that has been the case for Tiger Airways as well.

However, there are significant concerns with respect the economic environment. Fuel prices, the major input for discount airlines, are volatile and generally high based on historical levels. Capital is harder to come by and for many such airlines growth prospects are limited. Moreover, for a multinational airline such as Tiger there are currency risks -- razor thin margins can be eviscerated with even a slight shift in exchange rates, and this risk cannot be entirely hedged (Bell & Lindenau, 2009).

The political/legal environment is generally favourable. This environment impacts the discount airline business in a couple of key ways. The first is with respect to gaining airport access rights. The discount airline business depends largely on the use of secondary airports, for which rights are generally easy and low cost to acquire. For example, Tiger has been able to build a hub out of Adelaide with strong support from the local and state governments, who are enticed by the prospect of increased tourism dollars (Government of South Australia, 2009). Even the failed Incheon initiative was a collaborative effort with the South Korean government, failing not because of lack of political support but because of an unfavourable economic environment.

The social environment is generally positive. The market for discount airline services is generally growing. In particular, consumers are becoming tired of subsidizing the high fixed costs of legacy carriers. To paraphrase Tony Davis, the average Australian consumer is tired of paying full-service prices for discount quality flights. The top 75 low-cost airlines recorded 9% traffic growth in 2008, despite the downturn. Tiger's passengers carried grew by 50%; Virgin Blue's by 9.2%; and Jetstar's by 20.1% ("Low-cost traffic rankings," 2009). These Australia-specific numbers make it clear that the social environment for discount airlines is very positive at present.

The task environment for discount airlines in Australia, however, is becoming increasingly difficult. Since the Australian market was opened to competition, Qantas was first joined by Virgin Blue and then in recent years a slew of competitors have entered the domestic industry. Tiger Airways was the first of these, but since then Australia has seen the entry of Indonesia-based Lion (Wastnage, 2008) and other, smaller operators gaining access to routes in the Australian domestic market.

Porter's five forces analysis can be used to determine the state of the task environment (Porter, 1980). The suppliers have a moderate to high level of power, depending on the input. Jet fuel suppliers are price setters, but the airlines often have a healthy amount of power with respect to labour, the other key input. The buyers have a high level of power. Competition within the industry dictates that the typical buyer has the choice between a variety of different airlines on any given route and therefore is a price setter.

The threat of substitutes is relatively low. On some routes, typically those six hours or less, there is some risk of substitution with cars or trains, but for many Australian routes, the distances are so vast there is little risk of substitution. Today, there are few barriers to entry. The government has few barriers and the number of secondary and tertiary airports available puts no constraints on the growth of discount airlines. While on the surface the high fixed costs and steep learning curve may prevent mass entry into the discount airline business, this has not been borne out in practice. There are many airlines around the world capable of operating a discount arm and with a surplus of airplanes, there are many craft available for purchase or lease at a fair price. Thus, the barriers to entry for the airline industry are sometimes overstated.

Lastly, the degree of rivalry is high. The main reason is that the service offered is perfectly perishable. Once a flight has flown, the empty seats can no longer be filled and represent lost potential revenue to the airline. This perishability instills in industry… READ MORE

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