New Entrants The biggest threats to incumbents are the new entrants. At least three groups are interested in eating incumbents' lunch. The first is the low-cost (discount) carrier such as AirAsia in Malaysia, IndiGo in India, and Virgin in Australia. They started by challenging full-service (legacy) airlines at home with short-haul, domestic flights. Salivating for the spoils of long-haul, international routes, they have now aggressively forayed overseas. A second group is three Middle East-based supercarriers: Emirates, Etihad, and Qatar. Positioning Dubai (for Emirates), Abu Dhabi (for Etihad), and Doha (for Qatar) as the only stop for passengers going from Asia to Africa or from Australasia to Europe, these three new entrants are "superconnecting" airlines. A vast majority of their passengers do not travel from or to these airlines' bases, but make a stop there. In fact, Chinese airlines' recent interest in luring connecting passengers is a page taken from the playbook of the three superconnecting airlines from the Middle East. A third group is three US giants, American, Delta, and United, which are eager to tap into the strong demand in the Asia Pacific. In the last decade, American launched nonstop daily services from its hub Dallas-Fort Worth to Beijing, Hong Kong, Shanghai, and Sydney. Before the recent expansion of international passengers from China, US airlines used to dominate the US-China routes. Because most American travelers fly on US airlines and most Chinese ones fly on Chinese airlines, now Chinese airlines dominate as far more Chinese travel to the United States than the number of Americans traveling to the other side. By 2021, Chinese would probably become the top visi- tors to the United States among visitors from all countries. To share in the bounty, US airlines have sought to strengthen ties with Chinese carriers, such as United's collaboration with Air China in the Star Alliance network. Going beyond their collaboration in the Sky Team network, Delta in 2015 made a $450 million investment in China Eastern for a 4% stake as a strategic investor. The Bright Future According to International Air Transport Association (IATA), a global industry association, the Asia Pacific will be the biggest driver of demand from 2015 to 2035, with more than half of the world's new passenger traffic coming from the region. By 2024, China will displace the United States to become the world's largest aviation market (de- fined by traffic to, from, and within the country). While the United States will become the second largest market, India will replace Britain for the third place in 2025, whereas Indonesia and Japan will be ranked fifth and seventh, re- spectively. Of the five fastest-growing markets in terms of additional passengers per year over the forecast period, four will be from Asia. These top-five markets (in descend- ing order) are China, the United States, India, Indonesia, and Vietnam. Coping with the Coronavirus While the prospects for the Asia Pacific airline industry in the long run are bright, the situation in the short run is bleak. The most relevant competitive forces do not seem to come from any of the five forces, but come from a "black swan" (low probability) event: the coronavirus. Thanks to the virus, starting in January 2020 air traffic plummeted first within China. Starting in February, air traffic world- wide essentially came to a standstill. The virus already claimed a major victim in the Asia Pacific airline industry. In February, Hainan Airlines, the fourth largest in China, collapsed. To keep flying, Hainan had to be bailed out by Hainan Provincial Government and China Development Bank. (Elsewhere, in March 2020, Alitalia was similarly taken over by the Italian government to keep flying, and Flybe, a regional airline in Britain, entered bankruptcy and ceased flying.) Based on a scenario of lifting severe travel restrictions after three months, IATA reported that passenger demand in 2020 in the Asia Pacific region to be reduced by 35% - 45%, with a combined revenue loss of $88 billion. Fighting for survival, airlines "would need financial relief urgently to sustain their businesses through this volatile situation, said Conrad Clifford, IATA's Regional Vice President, Asia-Pacific. Looking back in history, the airline industry has always bounced back from every crisis it has experienced. After the 2003 SARS outbreak, which caused Asia Pacific air- lines to lose $6 billion, travel returned to normal within nine months. One glimmer of hope in the midst of the coronavirus devastation was the oil price war between Saudi Arabia and Russia. In January 2020, crude hovered above $70 a barrel. By March, it fell to $30. This would Sss INTEGRATIVE CASE 2 The Asia Pacific Airline Industry' How do the five forces affect the international competition in the Asia Pacific airline industry? Can they survive the onslaught of the coronavirus? Mike W. Peng, University of Texas at Dallas From India to New Zealand, from Indonesia to Japan, the airline industry in the Asia Pacific region is vast. It carries 30% of the world's passenger traffic and 40% of the cargo traffic and is growing fast. In this industry, competition is tough, discounting often a must, and profit margin thin. With the exception of Hong Kong, Macau, and Singapore, where there is no domestic competition, in every country the industry can be broadly divided into a domestic segment and an international segment. How does international airline competition unfold in this region? This is the focus i of this case. Substitutes and Suppliers Viewed from a five forces framework, as a majority of inter- national flights in this region fly over oceans, no viable sub- stitutes exist for aircraft. The pickings of suppliers are slim. The menu consists of either Airbus or Boeing. To minimize costs, most airlines prefer one of these two suppliers over the other. Larger airlines enjoy stronger bargaining power due to their larger quantities of purchase. If they refuse to support an aircraft model, that model cannot survive long. A recent example is the Airbus A380, the world's largest jetliner, which can carry 525 passengers. Launched in 2007 by Singapore Airlines, the A380 production would be stopped in 2021 due to a lack of customer demand. (In contrast, A380's archrival, Boeing 747, launched in 1970, is still in production.) Customers Customers are enjoying a great deal of bargaining power. With online price comparisons at their fingertips, they often reap the best deals. Since 2014, the average fare for Los Angles-Seoul flights dropped 20% and that for San Francisco-Beijing flights 40 %. In 2018, United offered $715 to fly from New York to Bangkok via Hong Kong. But China Eastern-making one stop in Shanghai-lured pas sengers away with $570, a 20% discount. Rivalry Among Incumbents The most relevant competitive force is the rivalry among incumbents. Competitive battles are typically waged among large, full-service carriers such as Air China, Air India, Japan Airlines, Korean Airlines, Malaysian Airlines, and Qantas. There are intense dogfights jockeying for po- sitions, usually with one or a few hub cities as their home base or sphere of influence. Sometimes, up to a dozen airlines compete on a single popular route such as Hong Kong-Shanghai. While China currently has the world's second largest aviation market (domestic + international), the Chinese are already the world's largest group of inter- national travelers. In 2016, the number of international routes from China jumped 35%, reaching 660. Air China, China Eastern, and China Southern-the Big Three-have captured a lion's share (about 60%-70%) of such expanding demand from international travelers from China. In addi- tion to traditional gateway cities such as Beijing, Shanghai, and Guangzhou, Chinese airlines have launched a series of international flights from lesser-known cities such as Chengdu and Wuhan to destinations throughout the Asia Pacific and beyond. Using low fares, they have also been increasingly attracting passengers not traveling from or going to China. For example, travelers between Europe and Australasia typically make a stop in Singapore or Dubai. Now many of them make a stop in Guangzhou thanks to China Southern, Asia's largest airline. 1. This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. Mike W. Peng, Reprinted with permission.

Understanding Business
12th Edition
ISBN:9781259929434
Author:William Nickels
Publisher:William Nickels
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
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Based on a scenario of lifting severe travel restrictions after three months, IATA reported that
passenger demand in 2020 in the Asia Pacific region to be reduced by 35%–45%, with a combined
revenue loss of $88 billion. Fighting for survival, airlines “would need financial relief urgently to
sustain their businesses through this volatile situation,” said Conrad Clifford, IATA’s Regional
Vice President, Asia-Pacific.
Looking back in history, the airline industry has always bounced back from every crisis it has
experienced. After the 2003 SARS outbreak, which caused Asia Pacific airlines to lose $6 billion,
travel returned to normal within nine months. One glimmer of hope in the midst of the coronavirus
devastation was the oil price war between Saudi Arabia and Russia. In January 2020, crude
hovered above $70 a barrel. By March, it fell to $30. This would be a tremendous lift for airlines,
because fuel burn was one of their biggest expenses. While the weak players were washed out by
the virus, would the rest of the industry regain altitude?


Case Study Questions: 
1. Pick a major Asia Pacific country such as Australia, China, India, Indonesia, Japan, or Korea.
Identify how incumbents fight new entrants. Do the incumbents make the right strategic
choices?
2. For the majority of the airlines mentioned in the case, do they use a cost leadership strategy
or a differentiation strategy? Why is such a strategy popular?
3. What airlines will be the winners and losers in the postcoronavirus environment?

New Entrants
The biggest threats to incumbents are the new entrants.
At least three groups are interested in eating incumbents'
lunch. The first is the low-cost (discount) carrier such
as AirAsia in Malaysia, IndiGo in India, and Virgin
in Australia. They started by challenging full-service
(legacy) airlines at home with short-haul, domestic flights.
Salivating for the spoils of long-haul, international routes,
they have now aggressively forayed overseas.
A second group is three Middle East-based supercarriers:
Emirates, Etihad, and Qatar. Positioning Dubai (for
Emirates), Abu Dhabi (for Etihad), and Doha (for Qatar)
as the only stop for passengers going from Asia to Africa
or from Australasia to Europe, these three new entrants are
"superconnecting" airlines. A vast majority of their passengers
do not travel from or to these airlines' bases, but make a
stop there. In fact, Chinese airlines' recent interest in luring
connecting passengers is a page taken from the playbook of
the three superconnecting airlines from the Middle East.
A third group is three US giants, American, Delta, and
United, which are eager to tap into the strong demand in
the Asia Pacific. In the last decade, American launched
nonstop daily services from its hub Dallas-Fort Worth
to Beijing, Hong Kong, Shanghai, and Sydney. Before the
recent expansion of international passengers from China,
US airlines used to dominate the US-China routes.
Because most American travelers fly on US airlines and
most Chinese ones fly on Chinese airlines, now Chinese
airlines dominate as far more Chinese travel to the United
States than the number of Americans traveling to the other
side. By 2021, Chinese would probably become the top visi-
tors to the United States among visitors from all countries.
To share in the bounty, US airlines have sought to strengthen
ties with Chinese carriers, such as United's collaboration
with Air China in the Star Alliance network. Going beyond
their collaboration in the Sky Team network, Delta in 2015
made a $450 million investment in China Eastern for a 4%
stake as a strategic investor.
The Bright Future
According to International Air Transport Association
(IATA), a global industry association, the Asia Pacific will
be the biggest driver of demand from 2015 to 2035, with
more than half of the world's new passenger traffic coming
from the region. By 2024, China will displace the United
States to become the world's largest aviation market (de-
fined by traffic to, from, and within the country). While
the United States will become the second largest market,
India will replace Britain for the third place in 2025, whereas
Indonesia and Japan will be ranked fifth and seventh, re-
spectively. Of the five fastest-growing markets in terms of
additional passengers per year over the forecast period,
four will be from Asia. These top-five markets (in descend-
ing order) are China, the United States, India, Indonesia,
and Vietnam.
Coping with the Coronavirus
While the prospects for the Asia Pacific airline industry
in the long run are bright, the situation in the short run is
bleak. The most relevant competitive forces do not seem to
come from any of the five forces, but come from a "black
swan" (low probability) event: the coronavirus. Thanks to
the virus, starting in January 2020 air traffic plummeted
first within China. Starting in February, air traffic world-
wide essentially came to a standstill. The virus already
claimed a major victim in the Asia Pacific airline industry.
In February, Hainan Airlines, the fourth largest in China,
collapsed. To keep flying, Hainan had to be bailed out by
Hainan Provincial Government and China Development
Bank. (Elsewhere, in March 2020, Alitalia was similarly
taken over by the Italian government to keep flying, and
Flybe, a regional airline in Britain, entered bankruptcy and
ceased flying.)
Based on a scenario of lifting severe travel restrictions
after three months, IATA reported that passenger demand
in 2020 in the Asia Pacific region to be reduced by 35% -
45%, with a combined revenue loss of $88 billion. Fighting
for survival, airlines "would need financial relief urgently
to sustain their businesses through this volatile situation,
said Conrad Clifford, IATA's Regional Vice President,
Asia-Pacific.
Looking back in history, the airline industry has always
bounced back from every crisis it has experienced. After
the 2003 SARS outbreak, which caused Asia Pacific air-
lines to lose $6 billion, travel returned to normal within
nine months. One glimmer of hope in the midst of the
coronavirus devastation was the oil price war between
Saudi Arabia and Russia. In January 2020, crude hovered
above $70 a barrel. By March, it fell to $30. This would
Transcribed Image Text:New Entrants The biggest threats to incumbents are the new entrants. At least three groups are interested in eating incumbents' lunch. The first is the low-cost (discount) carrier such as AirAsia in Malaysia, IndiGo in India, and Virgin in Australia. They started by challenging full-service (legacy) airlines at home with short-haul, domestic flights. Salivating for the spoils of long-haul, international routes, they have now aggressively forayed overseas. A second group is three Middle East-based supercarriers: Emirates, Etihad, and Qatar. Positioning Dubai (for Emirates), Abu Dhabi (for Etihad), and Doha (for Qatar) as the only stop for passengers going from Asia to Africa or from Australasia to Europe, these three new entrants are "superconnecting" airlines. A vast majority of their passengers do not travel from or to these airlines' bases, but make a stop there. In fact, Chinese airlines' recent interest in luring connecting passengers is a page taken from the playbook of the three superconnecting airlines from the Middle East. A third group is three US giants, American, Delta, and United, which are eager to tap into the strong demand in the Asia Pacific. In the last decade, American launched nonstop daily services from its hub Dallas-Fort Worth to Beijing, Hong Kong, Shanghai, and Sydney. Before the recent expansion of international passengers from China, US airlines used to dominate the US-China routes. Because most American travelers fly on US airlines and most Chinese ones fly on Chinese airlines, now Chinese airlines dominate as far more Chinese travel to the United States than the number of Americans traveling to the other side. By 2021, Chinese would probably become the top visi- tors to the United States among visitors from all countries. To share in the bounty, US airlines have sought to strengthen ties with Chinese carriers, such as United's collaboration with Air China in the Star Alliance network. Going beyond their collaboration in the Sky Team network, Delta in 2015 made a $450 million investment in China Eastern for a 4% stake as a strategic investor. The Bright Future According to International Air Transport Association (IATA), a global industry association, the Asia Pacific will be the biggest driver of demand from 2015 to 2035, with more than half of the world's new passenger traffic coming from the region. By 2024, China will displace the United States to become the world's largest aviation market (de- fined by traffic to, from, and within the country). While the United States will become the second largest market, India will replace Britain for the third place in 2025, whereas Indonesia and Japan will be ranked fifth and seventh, re- spectively. Of the five fastest-growing markets in terms of additional passengers per year over the forecast period, four will be from Asia. These top-five markets (in descend- ing order) are China, the United States, India, Indonesia, and Vietnam. Coping with the Coronavirus While the prospects for the Asia Pacific airline industry in the long run are bright, the situation in the short run is bleak. The most relevant competitive forces do not seem to come from any of the five forces, but come from a "black swan" (low probability) event: the coronavirus. Thanks to the virus, starting in January 2020 air traffic plummeted first within China. Starting in February, air traffic world- wide essentially came to a standstill. The virus already claimed a major victim in the Asia Pacific airline industry. In February, Hainan Airlines, the fourth largest in China, collapsed. To keep flying, Hainan had to be bailed out by Hainan Provincial Government and China Development Bank. (Elsewhere, in March 2020, Alitalia was similarly taken over by the Italian government to keep flying, and Flybe, a regional airline in Britain, entered bankruptcy and ceased flying.) Based on a scenario of lifting severe travel restrictions after three months, IATA reported that passenger demand in 2020 in the Asia Pacific region to be reduced by 35% - 45%, with a combined revenue loss of $88 billion. Fighting for survival, airlines "would need financial relief urgently to sustain their businesses through this volatile situation, said Conrad Clifford, IATA's Regional Vice President, Asia-Pacific. Looking back in history, the airline industry has always bounced back from every crisis it has experienced. After the 2003 SARS outbreak, which caused Asia Pacific air- lines to lose $6 billion, travel returned to normal within nine months. One glimmer of hope in the midst of the coronavirus devastation was the oil price war between Saudi Arabia and Russia. In January 2020, crude hovered above $70 a barrel. By March, it fell to $30. This would
Sss
INTEGRATIVE
CASE
2
The Asia Pacific Airline Industry'
How do the five forces affect the international competition in the Asia Pacific airline industry? Can they survive
the onslaught of the coronavirus?
Mike W. Peng, University of Texas at Dallas
From India to New Zealand, from Indonesia to Japan, the
airline industry in the Asia Pacific region is vast. It carries
30% of the world's passenger traffic and 40% of the cargo
traffic and is growing fast. In this industry, competition is
tough, discounting often a must, and profit margin thin.
With the exception of Hong Kong, Macau, and Singapore,
where there is no domestic competition, in every country
the industry can be broadly divided into a domestic segment
and an international segment. How does international
airline competition unfold in this region? This is the focus i
of this case.
Substitutes and Suppliers
Viewed from a five forces framework, as a majority of inter-
national flights in this region fly over oceans, no viable sub-
stitutes exist for aircraft. The pickings of suppliers are slim.
The menu consists of either Airbus or Boeing. To minimize
costs, most airlines prefer one of these two suppliers over the
other. Larger airlines enjoy stronger bargaining power due to
their larger quantities of purchase. If they refuse to support
an aircraft model, that model cannot survive long. A recent
example is the Airbus A380, the world's largest jetliner, which
can carry 525 passengers. Launched in 2007 by Singapore
Airlines, the A380 production would be stopped in 2021 due
to a lack of customer demand. (In contrast, A380's archrival,
Boeing 747, launched in 1970, is still in production.)
Customers
Customers are enjoying a great deal of bargaining power.
With online price comparisons at their fingertips, they
often reap the best deals. Since 2014, the average fare for
Los Angles-Seoul flights dropped 20% and that for San
Francisco-Beijing flights 40 %. In 2018, United offered
$715 to fly from New York to Bangkok via Hong Kong. But
China Eastern-making one stop in Shanghai-lured pas
sengers away with $570, a 20% discount.
Rivalry Among Incumbents
The most relevant competitive force is the rivalry among
incumbents. Competitive battles are typically waged
among large, full-service carriers such as Air China, Air
India, Japan Airlines, Korean Airlines, Malaysian Airlines,
and Qantas. There are intense dogfights jockeying for po-
sitions, usually with one or a few hub cities as their home
base or sphere of influence. Sometimes, up to a dozen
airlines compete on a single popular route such as Hong
Kong-Shanghai. While China currently has the world's
second largest aviation market (domestic + international),
the Chinese are already the world's largest group of inter-
national travelers. In 2016, the number of international
routes from China jumped 35%, reaching 660. Air China,
China Eastern, and China Southern-the Big Three-have
captured a lion's share (about 60%-70%) of such expanding
demand from international travelers from China. In addi-
tion to traditional gateway cities such as Beijing, Shanghai,
and Guangzhou, Chinese airlines have launched a series
of international flights from lesser-known cities such as
Chengdu and Wuhan to destinations throughout the Asia
Pacific and beyond. Using low fares, they have also been
increasingly attracting passengers not traveling from or
going to China. For example, travelers between Europe and
Australasia typically make a stop in Singapore or Dubai.
Now many of them make a stop in Guangzhou thanks to
China Southern, Asia's largest airline.
1. This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the
author. Mike W. Peng, Reprinted with permission.
Transcribed Image Text:Sss INTEGRATIVE CASE 2 The Asia Pacific Airline Industry' How do the five forces affect the international competition in the Asia Pacific airline industry? Can they survive the onslaught of the coronavirus? Mike W. Peng, University of Texas at Dallas From India to New Zealand, from Indonesia to Japan, the airline industry in the Asia Pacific region is vast. It carries 30% of the world's passenger traffic and 40% of the cargo traffic and is growing fast. In this industry, competition is tough, discounting often a must, and profit margin thin. With the exception of Hong Kong, Macau, and Singapore, where there is no domestic competition, in every country the industry can be broadly divided into a domestic segment and an international segment. How does international airline competition unfold in this region? This is the focus i of this case. Substitutes and Suppliers Viewed from a five forces framework, as a majority of inter- national flights in this region fly over oceans, no viable sub- stitutes exist for aircraft. The pickings of suppliers are slim. The menu consists of either Airbus or Boeing. To minimize costs, most airlines prefer one of these two suppliers over the other. Larger airlines enjoy stronger bargaining power due to their larger quantities of purchase. If they refuse to support an aircraft model, that model cannot survive long. A recent example is the Airbus A380, the world's largest jetliner, which can carry 525 passengers. Launched in 2007 by Singapore Airlines, the A380 production would be stopped in 2021 due to a lack of customer demand. (In contrast, A380's archrival, Boeing 747, launched in 1970, is still in production.) Customers Customers are enjoying a great deal of bargaining power. With online price comparisons at their fingertips, they often reap the best deals. Since 2014, the average fare for Los Angles-Seoul flights dropped 20% and that for San Francisco-Beijing flights 40 %. In 2018, United offered $715 to fly from New York to Bangkok via Hong Kong. But China Eastern-making one stop in Shanghai-lured pas sengers away with $570, a 20% discount. Rivalry Among Incumbents The most relevant competitive force is the rivalry among incumbents. Competitive battles are typically waged among large, full-service carriers such as Air China, Air India, Japan Airlines, Korean Airlines, Malaysian Airlines, and Qantas. There are intense dogfights jockeying for po- sitions, usually with one or a few hub cities as their home base or sphere of influence. Sometimes, up to a dozen airlines compete on a single popular route such as Hong Kong-Shanghai. While China currently has the world's second largest aviation market (domestic + international), the Chinese are already the world's largest group of inter- national travelers. In 2016, the number of international routes from China jumped 35%, reaching 660. Air China, China Eastern, and China Southern-the Big Three-have captured a lion's share (about 60%-70%) of such expanding demand from international travelers from China. In addi- tion to traditional gateway cities such as Beijing, Shanghai, and Guangzhou, Chinese airlines have launched a series of international flights from lesser-known cities such as Chengdu and Wuhan to destinations throughout the Asia Pacific and beyond. Using low fares, they have also been increasingly attracting passengers not traveling from or going to China. For example, travelers between Europe and Australasia typically make a stop in Singapore or Dubai. Now many of them make a stop in Guangzhou thanks to China Southern, Asia's largest airline. 1. This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. Mike W. Peng, Reprinted with permission.
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