Industry by 18,2% of GDP. Foreign visitors
Industrydemand: The level of industry demand isa second determinant of the intensity of rivalry among established companies.The economic crisis hit also the only sector of the economy that contributedthe most in its economics, by 18,2% of GDP. Foreign visitors arrivals to Greecefell by 5,4% in 2010 highlighting continuing problems for the sector and thetourism ministry stated that Greek tourism revenues fell by 7% during the firsteight months of 2010 (Business Monitor Intr/nal, p1). International passengernumbers 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 willincrease the extend of rivalry between the established greek companies. There is a smaller scope forthe greek airlines to compete for customers and that increases rivalry sincecompanies will compete to take the market share from another, leading toreduced profits.c) Cost conditions: In the airlineindustry fixed costs-planes, equipment, premises, delivery trucks- areextremely high and therefore profitability tends to be highly leveraged tosales volume and, further, the desire to grow that volume can create intense rivalry.In the Greek airline situation, due to economic disadvantages, establishedcompanies may face decreases in demand, low sales volume and getting on aprocess of cutting pricing and rising promotion spending in an attempt to coverhigh fixed costs.
d) Exit Barriers: Exit barriers are economic, strategic andemotional factors that prevent companies from leaving an industry (Jones &Hills, p49). Exit barriers for an airline company as Aegean- OA are highbecause: first, there are high costs of exiting the market ( for example: Olympicengineering and handling premises, severance pays, health benefits at all itsemployees and pensions etc) that have to be paid if the company ceases tooperate. Second, emotional attachments to the company are high for employees asfor all Greek passengers. Third, there is an expensive collection of assetsowned by Aegean and OA in order to participate effectively in the airlineindustry. Finally, there is a huge investment in assets –planes, machines,equipment, handling and engineering bases- and other operating facilities thathave no value for alternative uses and may not be easily sold. So, the exitbarriers for Aegean & OA are high and that leads to more intensive rivalry.The Bargaining Power of Byers: LOW The third of the five competitiveforces is the bargaining power of buyers, the customers who ultimately consumeits products (end users) or the companies that distribute an industry’sproducts 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 quantitiesand there is not a concentration of buyers. Thirdly, the supply of airlineindustry does not depend on the buyers for a large percentage of its totalorders; for example fuel companies do not have only airlines as its mainbuyers. Fourthly, switching costs are high; so buyers may not want to lose timeand money by flying at a indirect flight of another company; so byers cannotplay off the supplying companies against each other to force down prices.Fifth, there is not economically feasible for buyers to purchase an airlineinput from several companies at once –as there are fixed penalties for holdingan airline product for a period of time- and therefore buyers cannot play offone company in the industry against another.
Sixth, buyers cannot threaten toenter the industry and produce the product themselves and thus supply their ownneeds which would force down industry prices. Finally, the component ormaterial cost (an airline seat) is not ahigh percentage of the total cost. Low bargaining power of buyers has smallability to bargain down prices or to raise the costs of companies in theindustry 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 competitiveforces is the bargaining power of suppliers (=the organization that provideinputs to the industry, such as materials, services and labor, which madeindividuals, organizations such as labor unions, or companies that supplycontract labor) (Jones & Hill, p52).
In the case of Aegean & OA thebargaining power of suppliers is low. For the following reasons: First, theproduct that suppliers sell has enough substitutes –there are a lot of cateringservices 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 fragmentedsource of supply of airline service suppliers. Secondly, the profitability ofsuppliers is significantly affected by the purchases that airline does and thusthe airline industry is important customer to its suppliers – Airbus, Boeing.Thirdly, Olympic Air would not experience significant switching costs if itmoved to the product of a different supplier.
Fourthly, the brand name of thesuppliers 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 toproduce airline products that could compete directly with the establishedcompany. Finally, Aegean & OA could threaten to enter in the supplier’sindustry as its possession of provision their own Airline Handling andEngineering and Catering could support them to do without some of its suppliers(Johnson & Scholes, p92). Therefore, there are not powerful suppliers tosqueeze profits out of an industry by raising input prices or raise the costsof the company in the airline industry and thus they are not constitute athreat (Jones & Hill,p52). The Threat of Substitutes: LOW The final force in Porter’s model isthe threat of substitute products (= the products of different businesses orindustries that satisfy similar customer needs – an increase in the price ofairline ticket will increase the demand for a railway ticket).
The key pointsto be referred are: First that the close substitutes of airline products such likerailway, shipping, car do not possess a threat of obsolesce of the airlineproduct and does not provides a higher perceived benefit or value. Secondly, itis not easy for buyers to switch to substitutes as the cost in time would behigh. 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 ( likethe travelair club visa, on time services). The low power of close substitutesis not a threat as it cannot limit the prices that company in the industry cancharge for their products and thus cannot decrease profitability (Johnson , p93). 1.