Legal Factors
- The Public Service Obligation routes and subsidies received restrict Aer Arann’s control of these routes as they are legally bound to operate these routes until 2005, regardless of their profitability.
Environmental Factors
- Aer Arann’s aircraft fleet is continuously expanding to service newly introduced routes. To accommodate the servicing and storage of new aircraft, Aer Arann may require new premises such as aircraft hangers or maintenance buildings. As Aer Arann operate from regional airports in rural regions, e.g. Knock or Kerry Airport, planning permission for construction may be difficult to obtain.
Competitive External Environment
Diagram 1 illustrates AerArann's competitive external environment.
5 Forces for Aer Arann In The Competitive Environment
(Diagram 1: Adapted from Porter’s 5 forces model)
New Entrants: The EU's open skies policy has dramatically loosened the barriers to entry into the European airline industry. However, the capital requirement, brand loyalty and the scale of the market would be the barriers for new entrants. In Ireland, the scale of the market is small, Aer Arann is already experiencing very strong performance, therefore, it is unlikely to have new entrants to compete in the domestic market in the short-term. In the long-term, the national airlines such as Aer Lingus or Ryanair may operate enhanced UK routes as they are not currently serving some of the niches operated by Aer Arann, e.g. Cork – Southampton.
Power of Suppliers: The September 11th attack impeded on the airline industry, resulting in reduced buyer demand for aircraft, minimising the power of the supplier and allowing airlines to attain competitive prices.
Substitutes: The new technology, such as, ‘Net-conference’ can be a substitute for the actual physical meeting. This may reduce the number of business passengers who fly with Aer Arann. The strength of this force is reasonably high because the Net-conference is cost efficient, and low cost management is the practice for business strategy in the current economic downturn.
Power of Customers: The current economic climate may be serving to weaken the power of Aer Arann’s customers. But in the long term, when the economy is recovering and upon completion of upgrading the road network proposed under the National Development Plan, the power of the customer could increase, because they would have enhanced travel options.
Competitive Rivalry
Aer Arann's competitive rivalry can be analysed from 2 dimensions: competing airlines and domestic transport.
1. Competing Airlines: There are three main national airlines in Ireland, Aer Lingus, Ryanair and Aer Arann. As Diagram 2 below illustrates, Aer Arann is a regional airline which is focusing on the less lucrative national and international routes that Aer Lingus/Ryanair vacated. It is evident from Table 1 that Aer Lingus do not operate Aer Arann's domestic/UK routes, and there are only two routes, Cork-Birmingham and Cork-Bristol that Aer Arann and Ryanair are both operating.
Diagram 2: Routes of Aer Arann
Source:
Table 1: Overlapping Routes Between Aer Arann & Its Competitors
AerArann Ryanair Aer Lingus Bus Eireann/Eurolines Iarnrod Eireann
For the short-term, Aer Arann are not competing with the other two national airlines, therefore the level of competition is relatively low. In the longer term, Aer Lingus/Ryanair are unlikely to compete on the domestic routes as it is already a serviced niche market, but they may enter the UK routes provided by Aer Arann.
2. Doemstic transport: As Table1 outlines, the main domestic competition is bus and rail . These include Bus Eireann and Iarnrod Eireann.
Bus Eireann provides an inter-urban service between the major centres of
population, rural stage carriage, urban commuter services, and local city
services. The European routes are served by Bus Eireann/ Eurolines.
In general terms, there is a frequent scheduling of bus service between Dublin and the major urban centres. However, urban centres in the northwest are poorly served. Sligo and Letterkenny for example have only 4 or 5 daily services from Dublin respectively. The bus offers a much lower quality of service than airline in terms of journey times and comfort. However, with the proposed improvements in the road network, it is likely that journey times will reduce. In addition, the government plan for privatising state-owned public transport will encourage private operators to enter this market. These factors will create further challenges to Aer Arann’s service provision.
Iarnrod Eireann serves most of the major cities in Ireland. The increase in car ownership may have a negative effect on rail use. The rail system's infrastructure is constrained, thus their competitive position is poor. However, through the National Development Plan an investment of over €50 billion has been allocated for the development of road and rail infrastructure. The NDP will result in reducing journey times, which may lead to Aer Arann passengers switching from air to other modes of transport. This poses a future threat for Aer Arann in the longer term. In this regard, there is now a need to develop a long-term plan for Aer Arann, which would identify its future role and consider the level of capacity and service that it should provide.
In the long term, Aer Arann should focus on the routes that rail/bus are inadequately serving, e.g. the route in northwest Ireland, and provide a low cost, efficient service, offering high passenger satisfaction. In the short term, Aer Arann should continue focusing on the niche markets and consolidate its market share by improving its brand awareness, widen its distribution channel and provide a low-cost but high quality of services.
Internal Analysis
Human Resources
Aer Arann Express currently employs 260 staff. This follows the creation of 35 new jobs as a result of setting up its own passenger handling division at Dublin Airport. Aer Arann possess a superb workforce. According to Pádraig O’Ceidigh, “they would spill blood for the team. Aer Arann people have a sense of integrity and trust and believe in our shared objectives”. On one occasion an engine blow-out resulted in a spending requirement of £20,000. Two members of staff were aware that the money was not available and subsequently approached their boss offering to provide the finance. This is testament to the remarkable commitment and loyalty at Aer Arann. Their recruitment process strives to select people who are happy to push the limits of their comfort and stretch themselves to contribute to the success of the company.
Financial Resources
In recent times, Aer Arann has experienced a transformation of its financial position. Eight years ago the airline recorded an annual turnover of €250,000 by flying 10,000 people to the Aran Islands. Aer Arann is now one of the fastest growing regional airlines in Europe with a turnover in excess of €60 million and projected passenger numbers of 650,000 for 2003. Like Ryanair, Aer Arann looks to the Southwest Airlines in the US as their low-cost inspiration. They have a ratio of 87 staff per plane while Aer Arann’s ratio is only 20. Clearly smaller planes are involved but it demonstrates their desire to keep it simple. Although the company receives financial support from Bord Failte because its activities aid tourism, the ability to raise finance is limited as the airline is 100% owned by Pádraig O’Ceidigh. The company has been approached by various investors keen to buy into the business but the owner believes the carrier can grow without external investment in the short-term. Revenue is projected to increase through achieving a target of carrying 750,000 passengers a year by the middle of 2004.
Intellectual Resources
Athough confessing that when he purchased Aer Arann he knew ‘nothing about the airline business’, O’Ceidigh has assembled a reliable team around him who he can trust and secure advise and assistance. He has been an accountant, teacher, solicitor and marketer in previous roles and has drawn from all four of these disciplines in order to run Aer Arann. To encourage an entrepreneurial culture within the organisation, cross functional groups have been established so that technicians can input to marketing and vice versa. This has created a very committed team and a successful airline. These groups have been responsible for key initiatives, such as the introduction of an in-flight magazine, “Express it” to satisfy the needs of the target markets.
Physical Resources
Aer Arann have recently invested €3 million in establishing its own passenger handling division at Dublin Airport, resulting in the creation of 35 new jobs. The new passenger handling division began operations from 1 June 2003 and manages the airlines check-in, boarding, dispatch and baggage handling functions.
The company has also introduced a new reservations, online booking and check-in system representing an investment of €8 million over five years. As well as ensuring a speedier booking and check in process for passengers, the Open Skies system will enable the airline to offer enhanced services such as ticketless travel, each way pricing and online booking for corporate and travel agency customers.
Reputational Resources
Aer Arann adopted a different corporate image in 2000, becoming Aer Arann Express. While still emphasising its strong Irish roots, the new branding aimed to reflect the dynamic and vibrant aims of the expanding company. This has proved to be a successful move for the company and in the interim period the brand name has rapidly become a household name. The company has built a reputation for providing quality competitive air travel for business and leisure passengers in the various regions, through its expanding portfolio of air routes.
Quality of service and operation is highly important to Aer Arann. The company were the first European airline to receive the ISO 9000 award. The award promotes the recognition of their quality, safety and reliability – important attributes to any passenger.
Conclusions & Recommendations
It is widely acknowledged that Aer Arann have remarkably transformed their operations from its humble origins to having now flown in excess of one million passengers. 2001 was the toughest year in aviation history, but it was a period when Aer Arann met the immense challenges posed by its external environment and the company grew dramatically. At the present time, the main deterrent to domestic commuters choosing air travel is the service cost compared to the cheaper method of road and rail. Aer Arann’s target markets are business commuters and tourist/leisure commuters. Although the business passenger, constrained to time, is willing to use the more expensive mode of transport for convenience, tourists and other commuters will continue to favour the cheaper options. Currently a return flight from Dublin to Cork with Aer Arann ranges in price from € 130 to € 190 depending on the time of travel. A return ticket with Irish Rail for the same journey costs € 51.50, which represents a significant difference. There are three million passengers a year moving between Dublin and Belfast – two million by bus and one million by train and Aer Arann are attempting to secure 450,000 of these passengers. It is recommended that to allow Aer Arann to be more competitive when targeting existing rail users, and promote the popularity of flying when travelling within Ireland, the company will need to consider lowering its fares to a more competitive figure. This could involve a cost minimisation programme similar to that successfully undertaken by Aer Lingus recently. The significant difference between the fares is clear to commuters and although it is not feasible for Aer Arann to match rail fares, they need to substantially minimise the difference in price. By reducing their fares, rail commuters may now favour paying a slightly increased fare to travel by air and benefit from time savings. With an effective marketing campaign promoting reduced fares, Aer Arann can achieve a measurable increase in domestic commuters availing of their service.
As Aer Arann is competing with major players, such as Aer Lingus and Ryanair, there is a requirement for increased emphasis on the marketing function within the organisation. Up to now most of its advertising spend has gone to local newspapers and radio stations in Ireland and Britain. Heavy investment in an advertising campaign could serve to promote brand recognition, making use of TV, radio and newspaper mediums. When aimed at the business market, the main focus should be concentrated on informing customers of the benefits to be derived from air travel. Taking a domestic flight to attend a business meeting is cost-effective because it can reduce commuting time by up to 75%. In particular when compared to travel expenses incurred through a company car, taking Aer Arann’s ‘Skyroad’ is a very cost efficient mode of transport for companies. Similarly, for the leisure market, Aer Arann provide an array of novel services, including flying GAA supporters from the regions to Croke Park for All-Ireland championship games, Santa trips to Lapland and ‘Christmas Cracker’ shopping excursions. Knowledge of these activities is inadequately communicated to the target markets. The company could gain huge benefits through an advertising campaign aimed at informing customers of the various services on offer. Along with TV, radio and newspaper adverts, GAA match programmes and books could also provide a medium. There are now increased number of games played annually in Croke Park and Aer Arann should fully exploit the current opportunity of flying both players and supporters to matches, by making direct contact with this section of the market.
The provision of an in-flight magazine and the investment in electronic booking and check-in facilities suggest that the company is striving to add value to a customers experience with the airline. However, negative publicity recently surrounded the company whereby a complaint was received regarding an alleged incident, involving inappropriate remarks made by a crew member to a senior government official. In order to maintain a high level of service, it would seem necessary to develop more customer-oriented practices, to ensure incidents like these do not emerge to threaten Aer Arann’s reputable status in the marketplace. For example, the company could make use of interviews or questionnaires with passengers to simplify complaint procedures and to encourage passenger feedback. This feedback is valuable information for the company as it allows them to assess current operations and make necessary improvements to customer service. Word-of-mouth and testimonial recommendations can prove a very effective form of advertising for the company. The quality of the service offered is a source of competitive advantage and it is critical to maintain consumer confidence in an industry that has suffered somewhat in the aftermath of terrorist attacks.
Bibliography
Aer Lingus Group PLC (1998) Consolidated Accounts for the Year Ended 31
December 1998.
Barret, S. (1991) Transport Policy in Ireland in the 1990s, Gill and Macmillan:
Dublin.
Barret, S. (1996) The Outlook for European Aviation, Department of Economics,
/Trinity College Dublin: Dublin.
Davy Equity Research (1998) Ryanair Report, Davy’s Stockbrokers.
Travers, John J. (2001) Driving the Tiger, Gill and Macmillan, Dublin.
Webliography
References
The Economist (November 1999)
Barrett, S. (8/1/99) in The Irish Times.
