Economics of Competitive Advantage 1

SYDNEY TOURISM
AND
AUSTRALIA AIRLINE INDUSTRY
Economics of Competitive Advantage 2

INTRODUCTION

This paper deals on the economics of competitive advantage for three hypothetical scenarios

about two of the most significant and dynamic interrelated industries in Australia: the Sydney

tourism and Australia’s commercial airline industries.

People, especially foreigners, have their perception of Australia as a beautiful country full of

greens, wild animals, great seas and beaches, and other wonderful endowments of nature. This

image provides a competitive advantage for the Sydney tourism industry, attracting many

tourists all over the world. Sydney’s tourism industry, not only boosts GDP through tourism

revenues, but also creates jobs, trade, businesses and opportunities for related industries to

flourish, like hotels, foods and beverages industries, transport, package tours, among others.

These are further strengthened through the support of Australia’s aviation and commercial airline

industry that enable tourists from around the globe to fly to far Sydney in hours.

Recent challenges in these industries inspired thinkers about this paper. Since the playing field of

these two industries is the global landscape any changes in the condition of the global

community, especially the economy has an impact on the industries concern. The economic

downturns in the Americas, Europe, Middle East, and Asia have brought instability to Sydney

tourism and the airline industry in Australia.

The Australian government recognizes the very significant roles these two industries play for the

country. Thus it is fully supportive of all efforts geared towards the continuous improvement of

these industries. Support infrastructure, logistics, and interrelated industries are developed to

ensure the quality of services for the satisfaction and convenience of tourists.

These two important industries will be discussed in some detail below.

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IMPACT OF ECONOMIC DOWNTURN IN ASIA ON SYDNEY TOURISM INDUSTRY

Tourism spending has been associated with travel for recreation and pleasure, and therefore is

not part of the basic necessities of the customers. With the unstable condition of the global

economy it is not unusual to have pessimism among tourism operators in Sydney. When

disposable income of customers shrinks they’re forced to prioritize on the most basic needs, and

perhaps if there’s something left in their budgets that may be spent on enjoyment, such as travel

either solo, in a group or with the whole family.

In order to assess the impact of the current economic downturn in the Asian economy on the

performance of Sydney tourism industry, one has to gather pertinent information about Asia’s

present and future prospect contributions to Sydney’s tourism industry. First, is to dissect the

industry’s market structure. One must obtain hard facts and data about Sydney’s tourism market,

such as:

 Tourist arrivals on record

 Mode of transportation

 Reason for coming

 Origin and purpose

 Tally of expenditures per origin and purpose

 Current and future tourism infrastructures in interrelated industries (hotels, transport,

resorts, dive sites, etc.)

 Emerging Asian economies

 Softening major markets

 Current and future events, media campaign, endorsements

 Security, environmental, health, and related issues

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 Legal, political, and economic issues

There is a wide amalgamation of data to be analyzed in assessing a complex industry such as

tourism. Fortunately, there are special providers of these types of data and forecasts, so access to

such is done by contacting these providers.

Plotting this data and forecasts on the drawing board on per region basis provides one with a

bird’s eye view of the bottom line impact of an Asian tourist slump to Sydney’s tourism.

Analysis

Analyzing the impact of an Asian economic downturn on Sydney tourism involves charting

quantitative and qualitative data, as well as, current situations and future forecasts. While the

quantitative data and present condition is obtainable, the subjectivity of qualitative data and

uncertainty of future events make this analysis partly a guess work. The reliability of the sources

of data is therefore very important in order to provide executives with quality information.

Situational analysis

The quantifiable current situation can be simply evaluated using actual data. Isolating Asian pie

share is no challenge using simple tools like spreadsheets and graphs. But unquantifiable data,

such as political, economic, demographic and legal factors affecting the industry are hard to

attribute. There are management tools to aid in effectively analyzing these data, such as Porter’s

diamond and SWOT analysis.

Industry analysis with Porter’s 5 Forces

The use of Porter’s 5 Forces diagram enables one to analyze Sydney’s tourism industry’s risks

and potentials:

 Threats of new entrants in the tourism industry

 Threats of substitute recreation, like zoos, movies, concerts, casinos, etc.

Economics of Competitive Advantage 5

 Suppliers’ power, especially fuel suppliers that are highly concentrated

 Customers’ power which gains strength with many available options to choose from

 Barriers to entry or stumbling blocks for new entrants.

Strategy Analysis

This examines Sydney’s effective competitive strategy at the business unit level; is it a leader in

low cost or in product differentiation? It also looks into other important aspects, such as, its core

tangible and intangible resource competencies; capabilities to add value to its tourism industry

on operation, marketing, staffing, and logistics, among others; and performance in

monetary/dollar figures.

SWOT Analysis

Chart the major strengths, weaknesses, opportunities, and threats of this industry, such as:

 Strength – government’s and financial institution’s support for tourism investors, natural

and cultural diversity which attracts tourists

 Weaknesses – perhaps its far location

 Opportunities – rising income in neighboring regions

 Threats – global economic slowdown, terrorism, health issues like the SARS

 Opportunities or threats (should be carefully evaluated) - Industry trends, new or planned

tourism infrastructure projects, regulatory changes, major new investments, forecasts on

fuel costs, global economy, exchange rates, employment, and tourist expenditures,

among others.

Strategy formulation and implementation

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With these data and analysis the Sydney tourism industry can formulate the appropriate

strategies to compensate for revenue losses resulting from the economic downturn in major

markets in Asia, such as Japan and Korea, and take a shot at new emerging Asian markets.

IMPACT OF AN AIR DEREGULATION IN AUSTRALIA

A deregulation of the airline market in Australia can create major acquisitions and mergers

among the incumbent players prior to the actual effective date, drawing an analogy of events

from the actual experience of the deregulation in the US. A vigorous competition will be

expected after the deregulation so that these players will have to fortify their positions through

corporate unions and alliances.

An open sky policy will trigger a nasty competition among the incumbents and new entrants, and

airline companies in Australia will be posting big operating losses in the early years of

implementation of the policy. Like what transpired in the US, each company will try different

strategies, mostly temporary cost leadership, in an attempt to capture the bigger pie. Each new

discount or bargain by one will be matched or even surpassed by others to the benefits of the

flying travelers, but the detriment of airline investors. Survival of the fittest and the ones with the

deeper pockets, and death of the unfit and shallow pockets will be the name of the game. New

entrants with lesser experience in the industry which will fight head to head with the more

solidly entrenched incumbents will be less likely to survive.

The recommended strategies for the company’s airline operation should be those that proved

effective under the rigorous tests of deregulation in the global scenario, which include the

following:

 Pre-deregulation mergers and takeovers. Such moves creates a network of consolidated

airlines in which there will be common city hubs and various regional links designed to
Economics of Competitive Advantage 7

capture travelers both coming from the city hubs to the regional destinations and vice

versa. At the business level, it will be an integrated cost leadership and product

differentiation strategy. The larger aircrafts should not fly to regional destinations. Short

routes will be served by smaller allied aircrafts. In that way operating costs will be

minimized by employing assets that fit their needs, while providing different variety of

services to the customers. Other airlines may start resorting to branding, such as holiday

airline, etc.

 The major incumbent regional airlines can concentrate themselves and form a strong

barrier of entry to new regional entrants. Government is responsible in leveling the

playing field in the industry; such moves of the incumbents must not be viewed as anti-

competitive policy which is unlawful.

 The incumbents also can form a strategic alliance with related industries and distribution

channels. They can offer attractive commissions to leading travel agents, hotels, car

rental agencies, tour packages, etc. They can also cooperate with international, regional,

and commuter airlines.

 They should make use of internet online ticketing and reservation system that facilitates

bookings and reservations real time. Vacant seats can be viewed from remote monitors

and will likely be sold to the customers.

SINGLE STANDARD AIRLINE SERVICE AND TICKET PRICE

The low cost airline business model that offers a single standard service and ticket price has been

successful in capturing a large chunk of the airline market worldwide owing to its advantage in

terms of cost efficiency over the standard airlines. These budget carriers or LCC (low cost

carriers) airlines have been able to offer lower tickets, thus attracted many budget conscious
Economics of Competitive Advantage 8

travelers. Quickly losing market share, the standard airlines have reconfigured their operations

and increasingly narrowed the gap of LCCs’ advantage. The standard airlines have taken the

game to the LCCs’ courts by eliminating certain standard services and conveniences such as

food, pillows, etc like what LCCs’ do to catch up on cost efficiency. In fact the standard airlines

have strongly been gaining market share due to the implementation of cost reductions, the once

exclusive forte of the LCCs’.

In order for LCCs’ to maintain a strong leadership in low cost strategy, thereby keeping their

edge versus the standard airlines, executives should continue to find ways to lower their costs

versus the standard airlines. There are tested successful approaches for LCCs’ that the company

may implement:

 Minimize aircraft ground times by fielding the right aircrafts for the particular routes.

Use smaller aircrafts for shorter routes to ensure faster turn around. Use only larger

and long range aircrafts for long haul routes and international flights.

 Cost of information regarding product quality should be carefully managed. Quality

elasticity of demand in airline industry is high; information about an airline is very

sensitive in terms of its effect on the customers. Negative feedbacks and complaints

not addressed, such ad lost baggage, delayed flights, safety violations, etc., can have a

serious impact on the company.

 Implement proper yield management. Seat sales are common in LCCs’, but if not

done properly could provoke a suicidal price competition among rivals and losses for

all. Discounts are advisable on: 1) advanced bookings, 2) last minute vacant seats that

would have been empty, 3) replacements for no shows, among others.

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 Implement product differentiation through alliances with tour operators, holiday

destinations, and create a package or bundle flights with such tour offers. These

additional benefits are good basis for advertising the product.

 Implement fuel hedging strategy with suppliers to control the fluctuations in fuel

prices.

 Implement labor cost optimization; reduce head count through lean staffing to

improve labor productivity, outsource applicable services, like aircraft repairs and

maintenance, procurement, customer service, ticketing/booking, and other services, to

take advantage of cost savings from such arrangements.

 Improve sales by alliance with major sales agents, and make intensive use of internet

online ticket distribution and web check in.

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BIBLIOGRAPHY

1. “Airlines and Strategic Management”, Available at:

http://www.freeonlineresearchpapers.com/airline-strategic-management,

2. Creedy, Steve, Aviation Writer (October 28, 2008 12:00AM), “Travel News: Global downturn to hit

Australian tourism industry”, The Australian.

3. Cunningham Lawrence J. and Douglas, Evan, J (6-1-1992), “Competitive strategies in

Australia's airline deregulation experience”, School of Business Discussion Papers School of

Business, Bond University ePublications@bond.

4. “GLOBAL AIRLINE INDUSTRY PROGRAM”, Available at:

http://web.mit.edu/airlines/analysis/analysis_airline_industry.html

5. “Porter’s Five Forces: A MODEL FOR INDUSTRY ANALYSIS”, Strategic Management,

QuickMBA: Knowledge to Power Your Business, Available at:

www.quickmba.com/strategy/porter.shtml

6. Updated January 19, 2011 11:42:00, “Concern over air deregulation in regional WA”, ABC NEWS,

Available at: http:// www.abc.net.au/news/stories/2011/01/19/3116297.htm