Dry. Peter Baker and Gail Caricaturist for proof reading the finished work; finally to the friends in Perry House and the school for moral support and understanding. . 0 Introduction Since the introduction of the low-cost airline in Thailand in 20031, there has been a new evolutionary perspective to the concept of flying. The industry has allowed people to only pay for what they need and choose specific extra services that are cost suitable for them. By doing so this creates affordable fares for everyone to fly.
Middle class and low-income earners are now able to fly to domestic destinations, thanks to the affordable ticket fares of the low-cost airlines industry.
Shortly after the introduction of the first low-cost airline, many other low-cost airlines Joined the operation and created a domestic low-cost airlines industry of Thailand. Due to the low-cost nature of the industry, high level of competition followed, creating a tough environment for all corporations taking part. The industry surely competes through rice competition, however would the industry adopt non-price strategy to be successful in a highly competitive price market.
In this essay the domestic low-cost airlines industry of Thailand is the main focus.
The essay is written given that, all firms in the industry is a non-collusive oligopoly rather than collusive, as the collusive information is hard to prove and research. Also this essay is written given that the demand side of the industry is the same throughout the whole low-cost airlines industry. This means that all airlines have the same-targeted consumer and they eave to compete for the same group of consumer. There are three major suppliers of the low-airline in the industry; all of the firms are competing through price competition.
However, the price competition may come to an end, as the firms may not be able to lower price any further. Therefore, I have created two hypotheses, which through them, I could find out which hypothesis fits the future situation of the industry. Providing the fact that all low-cost airlines are seeking after the same target-customer, perceived equally on safety and there are no profitable monopolistic outs, I could from two hypothesis, which I will investigate: 1. 1 Hypothesis 1: Lowest price is the only key success factor in the domestic low-cost airlines industry of Thailand.
There is always more room to cut costs with new technology and make room for further cost cut. Lowest pricing strategy is a sustainable business success platform. 1. 2 Hypothesis 2: Low-cost airlines need to adopt non-pricing competition (quality and traveling experiences) to compete and be successful. Cost and price competition can be competed only till a certain point. No airline can use price to differentiate and attract customers, neither can they gain profit from only pricing strategies.
Overall by testing these hypotheses, I will focus on how domestic low-cost airlines industry of Thailand is operating and competing within the industry. I am able to form the research question: To what extent does the competition in the domestic low-cost airlines industry of Thailand reflect price versus non-price factors? 2. 0 Methodology The fundamental of the methodology is to understand how low-cost airlines compete? I will investigate for the most suitable hypothesis and also investigate the economic hero of monopoly, oligopolies competition and monopolistic competition throughout the investigation.
The theory also touches on the collusive and none- collusive oligopoly (co-operation failure) and also price and none-price competition. Primary and secondary resources: Annual reports, 5 years P&L income statement from revenue department, market-share figure from Airport authority of Thailand including marketing communication and advertising analysis: TV, print ads, on-line and off line materials are used to verified each company’s strengths and weakness strategy, and its performance result. What works effectively, what doesn’t?
Concentration ratio, both Heralding index and Cry index, assisted to identify stage of competition, and then formed a hypothesis question for executive interview of the two of leading airlines (Thai Air Asia and Nook Air); seeking for clarification of how strategically low-cost airlines industry is competed to conclude our hypothesis. 3. 0 Background of the Industry Three initiated companies, started in December 2003, have operated the domestic low-cost airlines in Thailand. One-Two Go (hold by Orient Thai Airline,) was the first airline serving Bangkok to Aching Maim route.
In February 2004, the second airline was founded; Thai Air Asia, a Joint venture of Malaysian Air Asia and Shin Corp. (Thailand)2. Lastly, Nook Air, subsidiary of national airline Thai Airways International, was launched and Joined the intense competition. Since the introduction of low-cost airlines, more than one million passengers of full-cost airlines switched to low-cost airlines in 20053. The low-cost airline focuses on the middle and low-income fliers who benefit from the low airfare. The industry expanded and grew rapidly as more airlines entered, and soon later turning the industry into a higher price competitive industry.
In order to achieve such high productive capability, the airlines need full control of their budget and overheads; their planes spend maximum time in the air with minimum ground time whilst maintaining the standard safety requirement. They have to reach most of the popular destinations with only adequate service, streamline distribution, customer booking and ground services. Pricing competition, cost control, drives high volume with lowest operational margin or in other words: price competitive, cost control, drives high volume and lowest operational margin. 4. 0 Industry Analysis
As the domestic low-cost airlines industry in Thailand consist of only 3 major firms (Thai Air Asia, Nook Air and Orient Thai/One Two Go). In 2005 they (three airlines) occupied one third of total market, which grew 47% form the previous year. This threatens the full service airline, where their market share declined by -12% in the same year due to market price sensitivity during recession in 2006 (Global Economic Crisis). Ever since then the industries always out-performed the country GAP growth. However the customer loyalty among the industry is low due to lack of product fermentation in conjunction with price sensitivity.
There are eight local airlines that operate in domestic route in Thailand Thai Airways international, Bangkok Airways, Thai Air Asia, Nook Air, Orient Thai Airline, One Two Go Airlines, BP Air and Siam GA. However, only 7 are qualified as low-cost airlines and 6 separate companies, as Orient Thai and One Two Go are later merging their business in a bid to survive. From the information in the TOT, Air Traffic Report 2009, I have calculated the domestic market share of the domestic low-cost airlines industry of Thailand. Figure 1: The 20095 market share
Low-cost Airlines Number of Passengers Percentage (%) Market Share Thai Air Asia 2760,699 66. 52% BP Air 18,945 0. 36% star GA 3,304 0. 06% Nook Air 22. 30% one Two GO 456,693 8. 74% Orient Thai 104,576 2. 00% Erotica 755 0. 01% 5. 0 Income statement and rating Figure 2 (That Baht (TUB)) Figure 4 (That Baht (TUB)) 5. 1 Analysis of Income Statement Ratio From the income statement ratio above, we could see that all companies through 2005 to 2009 in the latest income statement, are cutting their costs to the lowest possible, We could see that airlines have similar cost to profit ratio. However, Thai Air
Asia in 2007 and 2008 cut price below-cost, we could assume that it is a strategy to gain market share and drive other competition out of the market. Thai Air Asia is the only airline, which is able to operate under a loss, as the airline is possibly funded by an overseas company (Malaysian Air Asia). Many airlines attempt to compete with Thai Air Asia and its aggressive cost cut, for example, in 2009 Nook Air and Orient Thai decreased the difference between cost and revenue and gained nearly nothing for the operation. Nook Air also cut their operation cost from 5. 98 Baht in 2008 to 1,803,246,487. Baht in one year; this shows the domination and the effect of Thai Air Asia on other airlines. This suggests that the domestic low-cost airlines industry of Thailand is a highly price competitive market and therefore airlines is likely to adopt non-price strategies to differentiate and gain market share 6. 0 Industry Competition Analysis 6. 1 Monopoly This occurs when one firm dominates the industry output. Where only one firm is producing the product in the market. There are barriers to entry, which stops other firm from Joining the industry. The firm in the industry may be able to make abnormal profit in the long run.
Whether or not the firm is said to be a monopoly is to what extent is a firm able to set their own price, without worrying about other firm. Also to what extent does the firm is able to keep people out from entering the industry. In the Domestic low-cost airlines industry of Thailand, no firm is able to set their own price and also keep competitors out of the industry. 6. 2 Monopolistic structure The domestic low-cost airlines industry of Thailand could be based upon the monopolistic competition, where each firm has a little bit of market power and the rim has the ability to set their own prices. Professor Robert L. Curry, Jar. Suggests this in his reports that the domestic low-cost airlines industry of Thailand is operating as a monopolistic competition. The demand curve of firms facing a unapologetically competitive market is shown below: Figure 5 The companies or airlines in the monopolistic competition will face a downward sloping demand curve with a marginal revenue (MR.) curve that is below the demand (D=AR) and the firm produced so that it is maximizing profit is where marginal cost (MAC) is equal to marginal revenue (MR.). This means that the firms in the monopolistic competition will produce an output of (q) and sell those output at price (P). . 3 Oligopolies Structure The domestic low-cost airlines industry of Thailand could be also based upon the oligopolies competition, where few firms dominate the industry output. We could say that the low-cost airlines industry of Thailand fits the Kinked Demand Curve, which is shown below: Figure 6: Kinked Demand Curve The situation of the non-exclusiveness oligopoly could be explained through the Kinked Demand Curve. Started of by making an assumption that, in reality, as firm only knows one point on the demand curve, the one that it holds at the present, this is shown at point “a”.
If the firm increases its price, then it is unlikely that the competitors will raise theirs and so large amount of demand would be lost to the other firm. This implies that the demand of the product is elastic above point “a”, since small increase in price would create a large change in the quantity demanded. If the firm lower its price then it is likely that the competitors will follow. It is likely that they would undercut the price of the first firm in order to regain lost sales. This implies that demand would be less elastic below point “a”, since a decrease in price is unlikely to create a noticeable increase in quantity demanded.
Because it is expected that that demand curve will be kinked at point “a”, it will also posses an MR. curve that has the vertical section “b” to “c”, since each part of the MR. curve will be twice as steeply sloping as the two parts of the demand curve. This suggests that the price of goods and services in the industry is sticky. This means that the firms in the industry will be likely to adopt non-pricing strategies, because the price strategy is no monger valid, as it is as low as possible suggested by the income statement ratio. There are three reasons why prices are rigid in the industry. 1 .
Firms are afraid to raise prices above the current market price, because other firms will not follow and so they will lose trade, sales, and probably profit. 2. Firms are afraid to lower their prices below the current market price, because other firms will follow, undercutting them, and so creating a price war that may harm all the firms involved. 6. 4 Concentration Ratios 6. 4. 1 CRY Index (CRY) We could use the Cry index (concentration ratio). The Cry of Thailand low-cost airlines is: There are 7 low-cost airlines in the domestic low-cost airlines industry of Thailand. CRY = 99. 56, CRY = 97. 6, CRY = 88. 82 and CRIB = 66. 52 However, a small number of firms dominate most of the industry output. We could say that the low-cost airlines industry of Thailand is an oligopolies industry; further more CRY of 99. 56 also suggests that the industry has a high level of concentration. The concentration ratio also suggests that the industry is ranged from oligopoly to monopoly. The low-cost airlines industry of Thailand has a highly dominant firm, which is Thai Air Asia, with the market share of 66. 2%. Firms in the oligopolies competition are large enough to be able to influence the market.
The calculation of the concentration ratio does not include all the market share of all firms in the industry and does not provide the distribution of firm size. It also does not provide a lot of detail about competitiveness of the industry. However the concentration ratios only Just provide an indication of the oligopolies nature and indicate the degree of competition in the industry. 6. 4. 2 Heralding Index The Heralding index (HI) also a concentration ratio, also known as the concentration index, it measures industry concentration through the method of summing the squared market shares of the firms in the industry.
The Heralding index provides a more comprehensive view of the industry concentration than the concentration ratio. It is frequently used to support antitrust claims. The index can be large or small, but decreases are indicative of a loss in pricing power or increased competition whilst increase suggests the opposite. It has the formula of: According to the DOC-FTC 2010 Horizontal Merger Guidelines, the economist will regard a market with HI of 0. 5 as an “unconsecrated,” market and HI between 0. 5 and 0. 25 as “moderately concentrated,” and above 0. 25 as “highly concentrated. ” If the merging of companies potentially raises “significant competitive concerns” if it produces an increase in the HI of more than 0. 02 points in a moderately concentrated market or more than 0. 01 points in a highly concentrated market. The Merging of companies is presumed that it is “likely to enhance market power” if it produces an increase in the HI of more than 0. 02 points in a highly concentrated market.
The Heralding index of the domestic low-cost airlines industry of Thailand loud be calculated below (Given that Orient Thai and One Two Go are separate companies) HI index = HI index = (All airlines) 2 HI = 010-4)2 HI = 0. 503 From the Heralding index above, we could say that the domestic low-cost airlines industry of Thailand has a firm, which dominates the industry and in this case we could see clearly that it is Thai Air Asia with the market share of 66. 52%. The Heralding index of 1 shows monopolistic competition, and as the Heralding index of the domestic low-cost airlines industry of Thailand is 0. 03, also suggests that the competition in the industry is highly concentrated. 6. Industry Competition Type Through the information suggested, the domestic low-cost airlines industry of Thailand could be viewed as both monopolistic and oligopolies. However, through the concentration ratio, we could say that the industry is currently operating with an oligopolies structure with domination from one airline or there is a strong dominant from the largest firm Thai Air Asia with the market share of 66. 2%. CRY of 99. 56 and HI of 0. 503 is a highly concentrated market. The data from the university of Aching Main’s paper, suggested that at the end of 2005 the 3 airlines only dominate one third f the total industry output, however the latest data in 2009 from the Airport Authority of Thailand, suggested that the 3 major airlines (Thai Air Asia, Nook Air and Orient Thai [One Two Go), have a market share of 99. 6%. This indicates that the industry moves from monopolistic competition, where there is no urge to compete through non-price means, to currently an oligopolies with one dominant firm and closer to a monopoly in the future if Thai Air Asia, the airline with the leading market share is able to have more control of the price of the industry and create entry barriers.
It is suggested by the Kinked Demand Curve that the price for goods and services in the industry is sticky 1 and therefore firms are likely to adopt non-pricing strategies, because the price strategy is no longer valid, as it is as low as possible suggested by the income statement ratio. This also suggests that the domestic low- cost airlines industry of Thailand is a highly price competitive market and therefore airlines is also likely to adopt non-price strategies to differentiate and gain market share.
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