Industry by 18,2% of GDP. Foreign visitors

Industry
demand:  The level of industry demand is
a second determinant of the intensity of rivalry among established companies.
The economic crisis hit also the only sector of the economy that contributed
the most in its economics, by 18,2% of GDP. Foreign visitors arrivals to Greece
fell by 5,4% in 2010 highlighting continuing problems for the sector and the
tourism ministry stated that Greek tourism revenues fell by 7% during the first
eight months of 2010 (Business Monitor Intr/nal, p1). International passenger
numbers also fell by 2,3%, while domestic traffic declined a larger than 6,4%
reflecting the poor state of Greek economy (Business Monitor International, p1
). Declining demand in the airline industry constitutes a threat as it will
increase the extend of rivalry between the established  greek companies. There is a smaller scope for
the greek airlines to compete for customers and that increases rivalry since
companies will compete to take the market share from another, leading to
reduced profits.

c)         Cost conditions: In the airline
industry fixed costs-planes, equipment, premises, delivery trucks- are
extremely high and therefore profitability tends to be highly leveraged to
sales volume and, further, the desire to grow that volume can create intense rivalry.
In the Greek airline situation, due to economic disadvantages, established
companies may face decreases in demand, low sales volume and getting on a
process of cutting pricing and rising promotion spending in an attempt to cover
high fixed costs.  

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d)         Exit Barriers:   Exit barriers are economic, strategic and
emotional factors that prevent companies from leaving an industry (Jones &
Hills, p49). Exit barriers for an airline company as Aegean- OA are high
because: first, there are high costs of exiting the market ( for example: Olympic
engineering and handling premises, severance pays, health benefits at all its
employees and pensions etc) that have to be paid if the company ceases to
operate. Second, emotional attachments to the company are high for employees as
for all Greek passengers. Third, there is an expensive collection of assets
owned by Aegean and OA in order to participate effectively in the airline
industry. Finally, there is a huge investment in assets –planes, machines,
equipment, handling and engineering bases- and other operating facilities that
have no value for alternative uses and may not be easily sold. So, the exit
barriers for Aegean & OA are high and that leads to more intensive rivalry.

The Bargaining Power of Byers: LOW

        The third of the five competitive
forces is the bargaining power of buyers, the customers who ultimately consume
its products (end users) or the companies that distribute an industry’s
products to end users, such as retail travel agencies and tour operators/
wholesalers. The bargaining power of buyers is low for seven reasons: first,
because the economic structure in the Greek airline industry is an oligopoly,
therefore two main companies dominate the market of large in number buyers.
This circumstance doesn’t allow buyers to dominate supplying industries.
Secondly, because buyers do not purchase airline product in large quantities
and there is not a concentration of buyers. Thirdly, the supply of airline
industry does not depend on the buyers for a large percentage of its total
orders; for example fuel companies do not have only airlines as its main
buyers. Fourthly, switching costs are high; so buyers may not want to lose time
and money by flying at a indirect flight of another company; so byers cannot
play off the supplying companies against each other to force down prices.
Fifth, there is not economically feasible for buyers to purchase an airline
input from several companies at once –as there are fixed penalties for holding
an airline product for a period of time- and therefore buyers cannot play off
one company in the industry against another. Sixth, buyers cannot threaten to
enter the industry and produce the product themselves and thus supply their own
needs which would force down industry prices. Finally, the component or
material cost  (an airline seat) is not a
high percentage of the total cost. Low bargaining power of buyers has small
ability to bargain down prices or to raise the costs of companies in the
industry and further cannot squeeze profits out of the industry. Therefore,
weak bargaining power of buyers cannot be viewed as a threat(Jones & Hill,
p50).

The Bargaining Power of Suppliers:
LOW

          The fourth of the five competitive
forces is the bargaining power of suppliers (=the organization that provide
inputs to the industry, such as materials, services and labor, which made
individuals, organizations such as labor unions, or companies that supply
contract labor) (Jones & Hill, p52). In the case of Aegean & OA the
bargaining power of suppliers is low. For the following reasons: First, the
product that suppliers sell has enough substitutes –there are a lot of catering
services to choose, a lot of fuel providers and a lot of IT services companies;
there is no concentration of suppliers but rather there is now a fragmented
source of supply of airline service suppliers. Secondly, the profitability of
suppliers is significantly affected by the purchases that airline does and thus
the airline industry is important customer to its suppliers – Airbus, Boeing.
Thirdly, Olympic Air would not experience significant switching costs if it
moved to the product of a different supplier. Fourthly, the brand name of the
suppliers is not so powerful which means there are enough suppliers to be reached.
Fifth, suppliers cannot threaten to enter OA’s industry and use their inputs to
produce airline products that could compete directly with the established
company. Finally, Aegean & OA could threaten to enter in the supplier’s
industry as its possession of provision their own Airline Handling and
Engineering and Catering could support them to do without some of its suppliers
(Johnson & Scholes, p92). Therefore, there are not powerful suppliers to
squeeze profits out of an industry by raising input prices or raise the costs
of the company in the airline industry and thus they are not constitute a
threat (Jones & Hill,p52).

The Threat of Substitutes: LOW

           The final force in Porter’s model is
the threat of substitute products (= the products of different businesses or
industries that satisfy similar customer needs – an increase in the price of
airline ticket will increase the demand for a railway ticket). The key points
to be referred are: First that the close substitutes of airline products such like
railway, shipping, car do not possess a threat of obsolesce of the airline
product and does not provides a higher perceived benefit or value. Secondly, it
is not easy for buyers to switch to substitutes as the cost in time would be
high. Thirdly, the extend that the risk of substitution can be reduced is high;
by building in switching costs or perhaps through added producer’s  service benefits meeting buyer’s needs ( like
the travelair club visa, on time services). The low power of close substitutes
is not a threat as it cannot limit the prices that company in the industry can
charge for their products and thus cannot decrease profitability (Johnson &
Scholes, p93).

 

1.    
STRATEGIC ANALYSIS: