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Executive Summary
The Asian aviation market, albeit challenging, holds most of the potential for growth in the global aviation market. Comparatively, European airlines have been struggling to make a profit, even as they wade through the challenges of operating in a fragmented market and overcome the challenges brought by high operating costs and stagnating passenger numbers. This paper sought to find out the best market entry strategy for European low-cost airlines in the Asian aviation market. Three research questions, which sought to find out the factors that European low-cost airlines should consider when choosing a market entry strategy and explore the influence of trade agreements between Asia and Europe guided this review.
Through a mixed-method research study, and based on an investigation of the market entry strategies pursued by airlines around the world, this study reveals that there is no absolute answer to the best type of market entry strategy to use in Asia. However, we have found that firm-specific advantages and specific external success criteria influence the choice of market entry strategy for European low-cost airlines. Considering these dynamics, this paper proposes that the best market entry strategy to use in Asia is the strategic alliance option. Market limitations, strict regulations, and the lack of market uniformities in Asia are the main reasons for the selection of this strategy. The findings of this study will be instrumental in expanding the body of knowledge regarding global market entry strategies in the aviation sector.
Introduction
Background
The disappearance of Malaysian flight 370 and the recent crash of Metrojet flight 9268 highlight some of the challenges facing the global aviation sector. Coupled with financial turbulence and a rising cost of business, most airlines around the world are struggling to remain profitable (NDN, 2015). However, the Asian aviation sector is experiencing tremendous growth (Rimmer, 2014). Some observers believe it is among the only few markets in the world that have positive projections for growth, today (NDN, 2015). The positive economic growth in the Asian aviation sector is a product of market liberalization and a growing middle class (Rimmer, 2014). Low-cost airlines have driven this growth (NDN, 2015). Evidence of this trend has manifested in recurring pilot shortages and strained airport infrastructure in some Asian-Pacific countries (NDN, 2015).
Indeed, many Asian countries are struggling to upgrade their infrastructure to keep up with the growing demand for airline services (OAG Aviation, 2015). For example, big Southeast nations, such as Indonesia, Malaysia, and the Philippines, are grappling with this challenge (Belobaba, Odoni & Barnhart, 2015). Other countries are also grappling with shortcomings in air traffic systems because of the rising numbers of air traffic in the region (Price Waterhouse Coopers, 2015). Observers, experts, and commentators in this sector say the Asian aviation industry is in unchartered waters because of the explosive growth that has characterized the market (NDN, 2015). Relative to this fact, one aviation consultant (cited in OAG Aviation, 2015) says, I do not think the world has seen this sort of growth before (p. 1).
Projections from the International Society of Transport Aircraft Trading show that the Asian aviation market is the largest global passenger market (Gössling & Upham, 2009). It has an annual growth rate of 4.9% (Belobaba et al., 2015). The Chinese and Indian aviation markets are leaders in this sector because they have reported growth rates of 10% and 11% respectively (OAG Aviation, 2015). Concisely, the Chinese and Indian aviation markets have the first and third largest airline passenger numbers in the world (OAG Aviation, 2015). Comparatively, the American aviation market has a growth rate of 3% (Centre for Aviation, 2015). The European aviation market also has similar growth numbers (Centre for Aviation, 2015). These figures show that the Asian aviation market has outperformed many of its peers. Its growth numbers are three times more than the same numbers reported in Europe and America. In this regard, it stands out as the center for aviation growth. Therefore, the growth of global airlines exists in their potential to tap into this trend. This is why this paper proposes a study to find out the potential market entry strategies that European low-cost airlines could use to venture into the growing and lucrative Asian aviation market.
Problem Statement
In the last decade, the European aviation sector has lost its competitiveness in the global aviation market (Minkova, 2011). According to a comparative analysis of regional aviation markets, undertaken by the Centre for Aviation (2015), the financial performance of many European airlines is poorer than its peers are. Albeit the performance of legacy airlines is worse than the financial performance of low-cost airlines, the general poor financial performance of many European airlines stems from structural and market challenges of flying in the European Union (E.U) (Knorzer & Szodruch, 2012; Minkova, 2011). The relatively poor performance of European legacy and low-cost airlines explains why the European airline sector has produced the second-lowest earnings before interest and tax (EBIT) (Centre for Aviation, 2015). The graph below demonstrates this fact.
The end of the 2007 global financial crisis saw the North American and Asian Pacific markets emerge as the most lucrative global aviation centers (Centre for Aviation, 2015). Comparatively, European airlines have registered their worst global performance yet. The graph above demonstrates this fact. In this regard, they need to find new strategies for changing this trend. This paper proposes that they would do so by venturing into the Asian aviation market.
Justification for Study
For a long time, European airlines dominated the Euro-Asian route (Centre for Aviation, 2015). However, in the last decade, many Asian airlines, such as Emirates Airlines, Etihad Airways, and Qatar Airways have overtaken their European counterparts in this regard (OAG Aviation, 2015). This outcome has partly contributed to the dwindling fortunes of the European airline sector (Knorzer & Szodruch, 2012). To reverse this trend, European airlines have to tap into the potential that exists in expanding their outreach beyond their primary markets. However, doing so is a difficult task because not all market entry strategies could provide positive results (Erramilli & Krishna, 1992). Therefore, there is a need to investigate the best market entry strategy that these airlines could use to venture into the growing Asian market (Harrison, 2009).
Research Aim and Questions
Aim
To find out the best market entry strategy that European Low-cost airlines should adopt when venturing into the Asian aviation market
Research Questions
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Are there barriers to entry for low-cost European airlines that wish to enter the Asian aviation market?
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What factors should European airlines consider when choosing a market entry strategy in Asia?
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What trade agreements could influence the type of market entry strategy in Asia?
Purpose of the Study
The findings of this study will be instrumental in expanding the body of knowledge regarding global market entry strategies in the aviation sector. For example, they would highlight the challenges and opportunities that exist for western (European) airlines to expand their outreach beyond their primary markets. This information would be useful in improving the decision-making processes of western-based airline companies, as they strive to select the best market entry strategy to use in the foreign market. Furthermore, they would understand the factors to consider when choosing a market entry strategy, instead of the trade agreements and barriers to trade that would define their operations. To answer the research questions, this paper would follow the following structure
Literature Review
Introduction
According to chapter one, this paper seeks to find out the best market entry strategy for European Low-cost airlines to use when venturing into the lucrative Asian aviation market. Guiding this investigation are three research questions, which strive to find out if there are barriers to entry for low-cost European airlines that wish to enter the Asian aviation market and the factors that European airlines should consider when choosing a market entry strategy in Asia. The last research question seeks to investigate if any trade agreements could influence the type of market entry strategy that European low-cost airlines could adopt when entering the Asian aviation market. These research questions outline the context of this literature review is investigating the research issue. Particularly, this chapter reviews the literature on international market entry strategies and the contextual factors that would affect the choice of market entry strategy for European airlines in Asia. Generally, it highlights what other researchers have said about the research topic.
Discussion
Trends in the Global Aviation Market
The global aviation sector has reported tremendous growth in the last two decades (Price Waterhouse Coopers, 2015). This observation stems from increased revenues, which have doubled in the last decade (Centre for Aviation, 2015). Referring to this growth, OAG Aviation (2015) points out that revenue in the global aviation market has increased from $369 billion in 2004 to $746 billion in 2014. The International Air Transport Association (IATA) claims that much of this growth stems from the increased dominance of low-cost airlines in the global aviation market (Centre for Aviation, 2015). These airlines now command 25% of the worldwide market (OAG Aviation, 2015). Developing markets account for most of the LCCs growth. For example, low-cost airlines command 60% of Asias aviation market (OAG Aviation, 2015). Asian markets have shifted the global aviation landscape. Relative to this assertion, Price Waterhouse Coopers (2015) says, The rapid growth of air travel in developing markets, such as Latin America and especially Asia, is shifting the industrys centre of gravity to these regions (p. 4).
Many observers have cited different reasons for the rapid rate of growth in the Asian aviation sector (Leeham News, 2015). However, the emergence of the middle class in Asia stands out as the main reason for this growth (Knorzer & Szodruch, 2012). Particularly, the emergence of the middle class in China and India has driven this trend because, collectively, these two countries have a market of more than 2.7 billion people (Leeham News, 2015). This number is more than one-quarter of the global population.
Low-cost airlines have reported the highest growth numbers in Asias expansive airline market (Knorzer & Szodruch, 2012). Airlines that operate in emerging economies, with the highest numbers of first-time fliers, have reported the highest growth numbers (Leeham News, 2015). However, Belobaba et al. (2015) say these airlines have also experienced significant challenges that stem from changing customer expectations and increased pressure to reduce operating costs and maximize efficiency. Most of them are in mature markets, such as Europe (Knorzer & Szodruch, 2012).
This is why some of the main airlines in the continent have reported dismal performance compared to their counterparts around the world. However, Minkova (2011) says the poor performance of European airlines stems from overcapacity in some markets and excessive market fragmentation. Compared to their counterparts in the United States (U.S), American airlines have reported better economic performance because of bankruptcy restructuring and successful mergers and acquisitions (NDN, 2015). The redemption of European airlines stems from their quest to tap into the growing potential of the Asian airline market. Low-cost airlines are in a better place to exploit the market opportunities that exist in this market. However, before delving into details surrounding why these airlines are in a good position to do so, it is, first, important to understand the low-cost business model.
The Low-Cost Business Model
As shown in earlier sections of this study, the low-cost business model is emerging as a dominant force in the global airline market. According to conventional wisdom, low-cost airlines derive their competitive advantage from three interdependent sources- lower input costs, simplified products and services, and cheaper products and process designs (Hemphill, 2000). The success of the low-cost business model mainly depends on staff competency (Knorzer & Szodruch, 2012). The employees do not necessarily have to be on-board staff because the ground and administrative personnel are also instrumental in making sure that the low-cost business model works (Doganis, 2001). Using cheap aircraft and servicing processes is also part of the low-cost strategy because they help to create cost savings for the airlines. Although such savings may accrue in different ways, they mostly emerge from lower nominal wages for employees, the acquisition of cheaper and older aircraft, and using underutilized or secondary airports (Clougherty, 2000).
While the low-cost business model has worked for many airlines in Asia and Europe, Bissessur and Alamdari (2008) fault its application because of its dependence on the availability of skilled personnel and the perennial reliance on idle and cheaper second-hand aircraft. The researchers believe that these factors are difficult to realize because of the constant volatility of the global airline market (Bissessur & Alamdari, 2008). They also believe that the supply of underutilized airport facilities may decrease as low-cost airlines become more dominant in the global aviation market (Bissessur & Alamdari, 2008). Also, Clougherty (2000) fails to buy into the idea that using older aircraft results in cost savings because these aircraft are less efficient than modern aircraft. For example, they use more fuel than modern aircraft do (Clougherty, 2000). Despite these conflicting views about the low-cost airline model, it still stands out as a dominant business model in the global airline market.
Low-cost Airlines in Asia
Few studies compare the operating model of low-cost airlines in Asia and Europe. However, many researchers agree that there are few differences between the low-cost-business model adopted in both regions (Knorzer & Szodruch, 2012; Bissessur & Alamdari, 2008). In Asia, low-cost carriers are mostly operational in large markets where passenger numbers are high. The table below shows the main low-cost carriers in specific Asian markets
Table 1: Low-Cost Airlines in Asia.
Low-cost Airlines in Europe
The low-cost airline industry in Europe started from the charter and tourism markets (Minkova, 2011). Albers and Heuermann (2009) say that more than one-fifth of low-cost airlines in Europe started before 1985. Again, most of the early adopters of the low-cost strategy emerged from the charter plane industry. For example, Air Berlin started this way (Albers & Heuermann, 2009). In the last two decades, Ryanair and Easyjet have carved a name for themselves as the two dominant low-cost airlines in the region (International Air Transport Association, 2009). From 2000 to 2006, there has been an increase in the number of low-cost airlines in Europe.
Flybe, Thomsonfly, and Sterling are some airlines that have rebranded during this period and created a name for them in the same way as Ryanair and Easyjet have (Albers & Heuermann, 2009). The proliferation of new low-cost carriers increased competition in the market and created the need for an internationalization strategy among existing airlines. This is why most of the dominant carriers started establishing foreign operation bases (Albers & Heuermann, 2009). Ryanair and Easyjet have been leaders in this regard. Following this trend, there has been an increase in the number of partnerships among these airlines, which have further increased the pressure to start new foreign bases (Minkova, 2011). Following this trend, in 2007, there were more than 13 alliances among low-cost airlines in Europe (Albers & Heuermann, 2009).
European low-cost carriers fall into three distinct categories, defined by their choice of market entry. Export is a common strategy in all the carriers (Albers & Heuermann, 2009). Stated differently all the carriers service markets outside of their home countries. A foreign direct investment (FDI) strategy is a rare market entry choice for most of these airlines (International Air Transport Association, 2009). These airlines also rarely establish new subsidiaries in foreign markets. The graph below shows the number of partnerships and FDIs pursued by these airlines in the last few years.
According to the diagram above, the volume of FDIs and partnerships among low-cost airlines in Europe only increased from 1995 (Albers & Heuermann, 2009). Before this year, there were few (or no) internationalization activities in the industry. Since 2001, the numbers of airlines that have set up operational bases in other parts of the world have increased (Albers & Heuermann, 2009). Therefore, FDI is the most common internationalization strategy in the market.
Modes of International Market Entry
Klug (2007) says the main motivation for international companies to enter foreign markets is to make profits cost-effectively. This section of the literature review shows the different types of strategies that these companies can use to achieve this goal. Numerous pieces of literature have shown that there are not less than five types and subtypes of market entry strategies. They include export, contractual agreements, joint ventures, and wholly-owned subsidiaries (Knorzer & Szodruch, 2012; Albers & Heuermann, 2009; OAG Aviation, 2015). While these entry strategies cut across the product and service sectors, they differ based on their capital needs, control mechanisms, and their potential impacts on target foreign markets. Before delving into the details surrounding each market entry strategy, and how they apply to the context of this study, Klug (2007) says it is important to establish if an investor wants to invest equity in the target market before choosing an appropriate market entry strategy.
Equity investments refer to instances when an investor buys a companys stock and controlling shares, while a non-equity stock refers to when an investor does not have a controlling stake (Knorzer & Szodruch, 2012). This analysis is part of a hierarchical structure of analysis that should inform the decision concerning the best market entry strategy to choose. For non-equity modes of market entry, researchers agree that the best strategies to use are exports and contractual agreements (Peinado & Jose, 2006). Investors use joint ventures and wholly-owned subsidiaries in instances when investors want to buy equity in foreign market entries (Klug, 2007). Earlier sections of this literature review have shown that many European airlines use the export strategy to internationalize. This is a form of non-contractual agreement and it appears below
Non-Contractual Agreements
Export Strategy
Many researchers analyze the export strategy in terms of the production of goods and services from one location and transporting them to foreign markets (Peinado & Jose, 2006; Knorzer & Szodruch, 2012). This way, they imply that this strategy is mostly applicable to the manufacturing sector. However, airlines have used the same strategy in the service sector as well (International Air Transport Association, 2009). Its application in this field follows the same format as investors adopt in the manufacturing sector. Stated differently, an airline flies to multiple locations but maintains one operation base (usually in its home country). Therefore, it does not invest in the development of service centers in foreign markets. This advantage limits operation costs for investors. The strategy is most common in short-haul flights and commonly adopted by airlines that do not have a wide geographical outreach (International Air Transport Association, 2009).
Contractual Agreements
Albeit differing in terms of equity capital, investors often consider contractual agreements and joint ventures as cooperative forms of market entry in the airline sector (Bissessur & Alamdari, 2008). Through mergers and acquisitions, these types of market entry strategies commonly emerge through partnerships in the airline sector. Companies that want to have more possibilities of control over their operations mostly use contractual agreements as the main market entry mode (Slack, 2010). There are different types of contractual agreements that could apply in the aviation sector. They include licensing, franchising, and alliances
Licensing
Following a definition by Hillstron (2015), a licensing agreement occurs when a licensor gives something of value to the licensee in exchange for certain performance standards or payments from the agreement. Depending on the nature of the licensing agreement, a company may be limited to implementing a contract in specific countries (Zekiri & Biljana, 2011). In return for the license agreement, the licensee may be required to market the licensed product, or service, in selected markets (Hillstron, 2015). Many researchers, such as Michael Porter (cited in Nielsen & Sabina, 2011), agree that a license agreement is most applicable when an international firm is unable to exploit a specific technology, or if it cannot adequately exploit a market if left to operate alone.
Licensing is a common strategy in the manufacturing sector, as opposed to the service sector. Although manufacturers find this strategy useful to their business, service-centered businesses also enjoy the same advantages, depending on the types of businesses they engage in (Nielsen & Sabina, 2011; Beyho, 2005). Based on its history of application in the airline sector, researchers agree that licensing is mostly applicable when airlines want to adopt new technologies (Zekiri & Biljana, 2011). They also agree that it is useful when airlines want to expand a brand franchise globally (Denton & Dennis, 2000). Similarly, it is applicable when airlines want to mold a global market image. In this regard, Klug (2007) says, instead of airlines entering new markets alone, they need to pursue licensing agreements to help them grow their markets quickly and to increase their dominance in the same regard.
Observers agree that this market entry strategy also allows companies to increase the popularity of their unlicensed products (Lai, 2012; Beyho, 2005). However, of importance is the understanding that licensing agreements need not necessarily be stand-alone strategies. They could merge with other approaches, such as strategic alliances, which are common in the airline industry (Beyho, 2005). Companies that choose to pursue this strategy stand the benefit of safeguarding their operational knowledge in-house (between associated firms), as opposed to diversifying the message to external firms (Zekiri & Biljana, 2011). Generally, licensing agreements contain provisions that make it difficult for companies to cancel their agreements in a short time (Zekiri & Biljana, 2011). By licensing other companies to produce their products or services, they need to make sure that they can trust their partners. Of concern is brand awareness because if the license agreement fails to achieve its goals, it may cause reputational damage to associated firms (Elango, 2005). Mostly, the licensor would suffer the highest risks because the public usually attributes such failures to them (Hillstron, 2015).
Franchising
Franchising shares a close relationship with licensing because they both include licensing business processes to a third party (Elango, 2005). However, this strategy differs from the licensing agreement because the franchisor has stronger control over the arrangement than a licensor who has little control over foreign operations (Ahmed, 2010). In this trade agreement, a franchisor runs an agreement under a franchisors trade name. In return, a franchisor benefits from such an agreement through fees and royalties. The most common types of franchise agreements are Coca-Cola and McDonalds. This type of trade agreement is mainly common in the US market, which is the leading franchise market, globally (Denton & Dennis, 2000). Franchising has become a common strategy in some aviation markets. For example, European airlines have commonly used it in their primary markets to safeguard their positions in the deregulated marketplace (Caves, 2007).
In Europe, British Airways is perhaps one of the earliest adopters of the franchising business model (Ahmed 2010). It adopted it in the early 1990s (Centre for Aviation, 2015). Since then, other major carriers have adopted it as well. Americans adopted this market entry strategy earlier than their European counterparts did because evidence shows that the earliest franchise agreements in the North American nation started in 1984 (Centre for Aviation, 2015). In Europe, franchising started because it was common for small airlines to operate on behalf of the national carrier (Caves, 2007). Therefore, the national carrier was the franchisor, while the smaller airlines were the franchise. Using the same arrangement, in the 1980s, British Caledonian had established a fleet of small airlines that operated under one banner (Klug, 2007). However, developments in the European airline market have changed the business model to adopt a complete type of franchising model (OAG Aviation, 2015). The adoption of the complete franchising model was a response by both small and large airlines to deregulation in the airline market (Graham, 1997).
Airline franchising, as is commonly practiced in Europe, involves one airline taking ownership of the public face of another airline (franchisor) (International Air Transport Association, 2009). The larger airline also takes ownership of intellectual property and know-how of small airlines (International Air Transport Association, 2009).
Commonly, airlines pursue the franchise strategy to improve their brand presence and free up slots at congested airports (a strategy for diversifying resources to more lucrative airline markets). In 1997, British Airways did so by stopping its services to London (Heathrow) -Inverness (OAG Aviation, 2015). The company benefitted from this action because it freed up three slot pairs daily for use in other activities.
Some possible risks of undertaking the franchise strategy include the risk of brand damage if the franchise fails (International Air Transport Association, 2009). The risk of accidents and excessive dependency are also real because researchers have found out that smaller aircraft, which participate in franchise agreements are highly prone to accidents and excessive dependency from large airlines that operate larger aircraft (Caves, 2007; Elango, 2005). Collectively, these insights show that it is important for airlines to evaluate their market needs and capabilities before using the franchise strategy as a market entry strategy.
Strategic Alliances
Strategic alliances are perhaps the most
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