Strategy

Thames Valley University

Module:

Strategy for Organisations

Assessment:

Assignment 1 – Airport Industry Environment

Student:

Jeegar Merchant

Student No:

20446183

1

Contents Introduction

1

Key drivers of change

5

Porter’s Five Forces

8

Conclusion

9

Bibliography

10

Appendix 1

12

Appendix 2

12

Appendix 3

12

Appendix 4

13

Appendix 5

13

Appendix 6

14

Appendix 7

14

Appendix 8

15

Appendix 9

15

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Introduction: Management of an airport business has been argued to be equivalent of the management of a city. Airport like any city has many functions, facilities, systems, users, customers, employees, suppliers, rules and regulations, etc. Alike cities, airports thrive and prosper by the being in a strategic location and being a hub for many passengers and cargo. Airports necessarily do not benefit from acting on their own accord but as a part of the network systems of airports, depending on the size of a country (A.T. Wells, S.B. Young, 2004). Big countries like USA have a large number of airports in its network of airports thus providing vital transport links for the whole country, while smaller countries like the small Caribbean Islands are likely to have one airport due to the geographical size of the island. 1.1 Airport functions and activities: Commercial revenue and aviation revenue are two primary sources of income for airports. Commercial revenue constitutes of car parking, catering, property development, catering, transport operations and retail operations. Aviation revenue consists of aircraft runway movement charges and parking charges for aircrafts, which is regulated by the government regulations (See appendix 2). Daily operations of a complex business like an airport would also involve:

•

• • • •

Security Retail facilities Cargo Property management Fire services

(BAA CR Report 2008; Keynote, 2008) Airport companies have to work in close coordination and conjunction with many other organisations to ensure smooth and safe operations of the airports. These organisations could be listed as follows; •

Airline companies – These are responsible for delivering luggage and cargo, checking in passengers and providing on board catering services. • Civil Aviation Authority (CAA) – In charge of controlling all air traffic throughout UK and regulating National Air Traffic Services (NATS) • Commercial services - These are individual businesses which provide facilities and services like car parking, catering, shopping, banking, etc. at the airports. • Her Majesty Revenue & Customs (HMRC) – It is an UK governmental organisation which controls the import and export of goods and is responsible for prevention of illegal activities. • UK Immigration Services (UKIS) – It is in charge of passport control and managing the entry in the country for foreign nationals. • National Air Traffic Services (NATS) – Responsible for UK airspace air traffic control and management. • Public Transport Operators – These include many private companies providing transport facilities to and from the airport. • Police – This is the local law enforcement authority securing the airports. 3

(BAA CR Report, 2008; R. Doganis, 1992) 1.2 Size and scope of industry: UK airports industry has been a leader in the commercial development of airports. Total revenue generated by UK airports in 2007 was estimated to be £ 3.01bn; this was an increase of 3.1% compared to 2006 and was 23.4% since 2003. This increase was assisted by augmentation in the no. of passengers handled by the UK airports in 2007 and also constant increases in the number of freight aircraft movements and volumes. UK airports handled 240.7 million passengers in 2007 which is an increase of 2.3% on 2006. However growth has slowed over the period of 2003 to 2007. Also freight and mail cargo carried from UK airports increased by 0.4% to 2.3 million tonnes in 2007.However this volume has been reported to have stepped down in recent times. A new EU-US Open Skies Agreement has been put into effect since 30th March 2008, enabling any EU or US airline to operate between any point in the EU and the US. London’s Heathrow Airport has been affected by this agreement as now more EU based companies like Continental, Delta Air and Northwest are planning to begin services of their flights from Heathrow to US cities. Reports show, despite a historical increase the number of passengers handled by UK airports, the rate of growth has felled below 3% since 1997 (excluding the 11th September terrorist attacks on USA in 2001). Reasons cited for this are, increase in air-passenger duty rates in 2006, current economic environment, increasing competition from railway and passengers' outlook of the environment. Despite these, progressive growth is forecasted up to 2012. (Keynote 2008) 1.3 Components of the Industry Presently there are number of operators within the UK airport industry. BAA: Operating Heathrow, Gatwick, Stansted, Edinburgh, Glasgow, Aberdeen and Southampton airports. -

-

Birmingham International Airport Ltd: Operating Birmingham airport.

Highlands and Islands Airports Ltd: Operating Barra, Benbecula, Campbeltown, Inverness, Islay, Kirkwall, Stornoway, Sumburgh, Tiree, Wick and Dundee airports. -

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London City Airport Ltd: Operating the London City airport.

Manchester Airport group Plc: Bournemouth and Humberside airports. -

-

Operates

Manchester,

East

Midlands,

Newcastle International Airport Ltd: Operates Newcastle international airport.

Peel Holding (Airports) Ltd: Operates and owns Liverpool John Lennon Airport, City Airport Manchester and Robin Hood Airport Doncaster-Sheffield and joint owner of Durham Tees Valley Airport -

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South West Airports Ltd: Operating Bristol International Airport. 4

TBI Plc: Operates Cardiff International, Belfast International and London Luton airports. (Key Note, 2008) -

1.4 Key drivers of change and influences for the UK airport industry: The key drivers of change and factors that influence the UK airport industry have been identified by conducting a PESTEL analysis of the industry. 1.4.1 Opportunities UK Air Travellers Keynote reports that the amount of residents of GB who travelled by air in 2007 reached 50.8%, the highest number encompassing half the adult population of GB (Key Note, 2008). Half the population at least flies once a year (AOA report, 2005). Recent figures also show that the number of people taking flights from smaller / local airports is on rise due to lesser congestion thus playing in favour of low cost airlines who mostly from these and ultimately benefitting the growth of these airports (BBC, 2007). Population UK is one of the main attractors of EU nationals for employment and this explains steadily rising population figures. In 2007 estimated growth reached 61 million, which is 0.6% increase from 2006. This population growth profits the airport industry by enlarging the number of travellers. (Key Note, 2008) Govt Policies The “Open Skies” agreement between the US and the EU is expected to end the restrictions on airlines authorised to fly between Europe and US, thus giving more and more EU and US companies a chance in the market share. It is likely to lead to a large rise in the number of different carriers flying across the Atlantic. The White Paper (2003), “The Future of Air Transport” gives development of the industry in UK. Leading airport strategic plans encompassing these. The plans investments in terminal refurbishments, infrastructure building of new runways for airports (Key Note, Investment, 2008)

a sketch for the future operators design their include considerable developments and the 2008; UK Trade and

Mr. Gordon Brown, PM, has pledged to deliver a range of measures to transport industries in order to spark the UK economy (Bloomberg UK, 2008 cited Sky News, 2008). Market growth

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The continuing growth of the routes serviced by the low-cost airlines provides a strong foundation for corresponding growth in the airports market (See appendix 4, 2008). The airport market is highly concentrated in both the passenger and freight sectors (See appendix 5) Inflation UK government official figures show that inflation in the UK has dropped in the month of October, despite the downturn in the economy. This is due to the decrease in prices of oil, transport and food (BBC, 2008). Technology New technologies are developing constantly in areas like luggage tagging, security etc. which would aide boost image of airports. European Union (EU) Benefits: The formation of EU benefits the companies operating within the region with EU policies (European Commission Enlargement, 2008; Reuters, 2008) 1.4.2 Threats Passenger Traffic CAA has reported an increase in passenger traffic at UK airports at annual rate of around 6% since the mid-1970s. This is more than twice the rate of economic growth in the UK, however, since 2005; growth rate has been reported to fall to approximately 2%. This downfall affects all the airports in UK (Key Note, 2008). Competition from Rail Growing idolization of travel by railways has aided in slowing the growth rate in air travel. Keynotes has noted, Eurostar transporting record number of passengers in 2007, which continued to advance in the first 3 months of 2008. During these months the number rose to add 20% in comparison to the same period in 2007 (Key Note, 2008). Security Challenges Airports are always a favourable target for terrorists thus providing an ever looming and unpredictable threat for the industry. Beefing up of security measures causes delays at the airports making the journey for passengers unpleasant and thus driving them to alternative transport methods. (Key Note, 2008; BBC, 2008; Guardian, 2008) UK Airport Capacity Two runways at the Heathrow currently operate at 99% of permitted capacity. In contrast to this fact Frankfurt airport (Flughafen Frankfurt am Main) has three runways and a fourth scheduled to open in 2011, Paris (Charles De Gaulle) has four, Madrid (Madrid Barajas Airport) has four and Amsterdam (Amsterdam Airport Schiphol) has 6

five. The new terminal at Heathrow provides extra terminal capacity, but does not enable to increase the number of flights that are handled at the airport. BAA plans to construct a third runway which is facing a lot of criticism and opposition (Key Note, 2008).

Gross Domestic Product (GDP) UK's GDP expanded by 11.6% between 2003 and 2007 and reached £1,033.69bn in the first three quarters of 2007 in stark comparison to £969.9bn to that in 2006, which is 6.6% increase. Strong and growing economy is favourable for the industry by contributing to increase in the disposable income of the consumers. However due to the recent Credit crunch / crisis situation in UK the public sector borrowing s are set to 8% of the GDP for the year 2009-2010. The latest figures quoted by chancellor A. Darling show that the UK’s GDP has contracted by 3% within three months till September ’08. (Key Note, 2008; Financial Times, 2008; BBC UK, 2008) Inflation Although the inflation in the UK has stayed fairly stable it has recently increased from 4.7% to 5.2% (2008). The larger rates of inflation push up aviation charges at the leading airports, like Heathrow and Gatwick, in particular because these are directly linked to the retail price index (RPI). (Key Note, 2008; BBC UK, 2008) Employment / Unemployment Office of national Statistics (ONS) has stated that the total unemployment rate in UK has risen to 5.5% by September ’08, meaning 1.72 million people are out of work throughout UK (See appendix 3). The unemployment levels retard the air travel industry thus affecting airport industry in turn. (BBC UK, 2008) Household Disposable Income Household disposable income, per-capita, was seen to increase by 10.8% from2003 to 2006, to £13,773, later reaching £10,636 in 2007. Rise in such income assists consumer expenditure for travel and tourism. The outstanding debt on a UK household has increased to 135% of household income (Key Note, 2008; BBC UK, 2008). Environmental concern The invent of high speed rail and the growing popularity of the train travel due to growing awareness among masses about the environmental preservation has given rise to train travel within the country (G. Pepy, FT, 2008)

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2. Application of Porter’s Five Forces Model: Applying Porter’s Five Force Model to the UK airport industry we can identify the following:

2.1 Competitive rivalry within the industry The UK airport industry is proving to be an attractive investment option for many investors and investing companies due to its promising market growth rates. The history of the ownership of the UK airports would demonstrate the competitiveness of the market. The Concentration Ratio (CR), of operators, may well be noted to be relatively higher than in many other countries. Further, the amount of airports owned by a single company is regulated by CAA to ensure fair competition and prevention of monopoly. Presently there are nine companies owning and operating the various UK airports. BAA is the most supreme among these (Key Note, 2008; Quick MBA, 2007). The airport business if better managed churns out huge returns therefore the competition in the business is suggested to be relatively high. 2.2 Suppliers The industry due to its sheer size has numerous suppliers. Understanding the functions and the daily activities at the airports helps one understand the suppliers that exist for UK airport industry. Scientists and information technology (IT) experts from many companies enable airport companies to constantly upgrade and better their services by providing assistance in expansion plans, advance systems for security measures, Greenfield projects, etc. Other suppliers include companies supplying / providing furniture, catering services, car parking, banks / money exchange companies operating at the terminals, manpower companies, heavy machinery and equipment companies, power companies, IT / computer companies, oil / fuel companies, maintenance / cleaning companies, retail companies, security companies, air traffic control companies, transport companies and many more (UK Trade & Investment, 2008) An airport seems more like a facilitator where many businesses converge to provide one product / service. Also it is a very attractive business option for many businesses. Hence the power of suppliers is considered to be moderate depending on the product / service they supply. 2.2 Buyers / Customers The obvious customers for the UK airports are the passengers arriving and departing the country. Other customers include airline companies, cargo companies, etc. (UK Trade & Investment, 2008; key Note, 2008). Some of the suppliers are also the customers of these airport companies. E.g. Banks, Retail companies. Since airport do not function as sole entities of a business and over a period of time the airports developments and the developments around the airport keep encompassing the image of a particular airport. Hence the power of buyers is suggested to be relatively low. 8

2.4 Potential entrants The entry into the business environment is relatively easy due to the favourable legislations in the UK (UK Trade & Investment, 2008). However the sheer size of the capital required and laws to fulfil to own an airport business does not invite many entrants into the market. However at the same time airport business being very attractive business and investment option many large organisations and investment companies are always on the look to take over which makes the entry threat into this market is relatively very high. 2.5 Substitutes Identification of substitutes for airport industry needs very careful analysis. The substitutes for airports are none; however the mode of transport for the goods and people would affect the business. i.e. If the train transport is preferred over the air transport then the railway stations become a substitute for the airports. The substitutes of the airport industry are very closely related to its main customers. Hence sustenance and growth in these key customers business is in the interest of the airports. Looking at the above information of environmental concern it may seem that the growth may tend to diminish for the local market, however the international travel / transport (urgent) is more likely to be on air transport. Therefore the threat of substitutes is relatively lower for UK airport industry. 3. Conclusion Analysis of the external environment in which the UK airport industry operates, using the PESTEL model, explains the importance of the industry and its vulnerability. Further on applying Porter’s Five Forces model to this industry various growth and threat aspects of the industry were identified. The five forces identified above affect the profitability of the airports to a great extent. Evaluating the relative influences of each of the five forces it can be noted the profitability of in his industry is greatly driven by efficiently and effectively managing the customers and suppliers, at the same time keeping the competitors (competitors and entrants) at bay and keeping a watchful eye on the trends in the travel modes. All the companies in the industry may need to formulate new strategies aligning to the present recession scenario. The airport industry is set to grow following the demise of this recession. The dominant operators in the market would benefit from this trend and may strategically use it to benefit themselves. (See appendix 2, 4, 5, 6, 7, 8 & 9)

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Bibliography: AOA, 2008 Speaking for Airports [Online] Available at: [Accessed on 26.11.08] Ashford N., Martin Stanton H. P., Moore (1997) Airport Operations McGraw-Hill Professional, New York BAA publications 2008 [Online] Available at: [Accessed on 20.11.08] BBC News, 2006 Airlines attack security delays [Online] Available at: [Accessed on 21.11.08] BBC News, 2008 At-a-glance: Pre-Budget Report [Online] Available at: [Accessed on 26.11.08] BBC News, 2004 Bank warns about household debt [Online] Available at: [Accessed on 27.11.08] BBC News, 2008 Consumer inflation falls to 4.5% [Online] Available at: [Accessed on 27.11.08] BBC News, 2007 Regional airports cleared for take-off [Online] Available at: [Accessed on 21.11.08] BBC News, 2008 UK unemployment total rises again [Online] Available at: [Accessed on 22.11.08] BBC News, 2008 Where now for UK inflation? [Online] Available at: [Accessed on 27.11.08] Copybook Solutions, 2008 Airport International [Online] Available at: [Accessed on 20.11.08] Doganis, R. (1992) The airport business, Routledge, 1992 Eco Travelling, 2008 The benefits of Rail Travel [Online] Available at: [Accessed on 26.11.08] European Commission, 2008 Enlargement [Online] Available [Accessed on 22.11.08] Financial Times, 2008 UK Public Finances [Online] Available at: [Accessed on 26.11.08]

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G. Johnson, K. Scholes, R. Whittington (2008) Exploring Corporate Strategy 8th Ed. Pearson Education Ltd. England G. Pepy, 2008 Trend is in favour of high-speed rail [Online] Available at: [Accessed on 27.11.08] Key Note, 2008 Market Sectors – Airports [Online] Available at: [Accessed on 21.11.08]

Quick MBA, 2008 Porter’s Five Forces [Online] Available at: [Accessed on 20.11.08] Reuters, 2008 EU Commission to urge two-year dash for growth [Online] Available at: [Accessed on 27.11.08] UK Trade & Investment, 2008 The short cut to setting up [Online] Available at: [Accessed 27.11.08]

on

UK Trade & Investment, 2008 The UK Airport sector: Helping the world’s airports in the 21st century [Online] Available at: [Accessed on 27.11.08] UK Trade & Investment, 2008 UK Aerospace sector welcomes manufacturing strategy [Online] Available at: [Accessed on 25.11.08] UK Airport News, 2008 UK Airport News Stories [Online] Available at: [Accessed on 27.11.08] Wells. A. T., Yong S. B., (2004) Airport Planning & Management McGraw-Hill Professional, New York

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Appendix 1: PESTEL Analysis: Political – “Open skies” agreement boosts competition and performance within the industry. The government of the UK supports the sustenance of such industries by favourable strategies and policies. Airport industry is regulated by the CAA. Economic – The economy and market segment has been seen to be booming until the recent upstage of the recession. Social – The focus for greener alternatives to air transport is the voice of the day and is observed to affect the airport industry. However the international logistics (for certain goods) and passengers airport industry is vital. Technological – with the advent and aide of new technology the airport industry can work out greener alternatives reducing their carbon footprint and boosting their trade and commerce. Environmental – One of the main customers of the airport industry, the airlines have been accused of the creating most pollution on earth. This has given rise to many green organisations to come together against the airport and airline industry. Legal – The UK legislation allows for open trade within this industry while in many countries around the world the airport industry is protected and run by the government. Appendix 2: UK Airport Revenues by Type (£m and %), 2003Revenue (£m) Commercial revenues Aviation revenues

1, 1,

1, 1,

1, 1,

1, 1,

1, 1,

Total

2,

2,

2,

2,

3,

% of Total Commercial revenues Aviation revenues

52. 47.

52. 47.

52. 47.

52. 47.

51. 49.

Total

100. 100. 100. 100. 100.

Source: Key Notes, 2008 Appendix 3: UK Airport Revenues by Type (%),

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Source: Key Note, 2008 Appendix 4:

Appendix 5: Total UK Airports Revenue (£m), 2003- 2007

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Source: Key Note, 2008 Appendix 6: Concentration Levels in the Commercial Airports Industry by Share of Terminal Passengers (%), 20032007

Largest airport 31. 31. 29. 28. 28. Top four airports 65. 65. 63. 62. 61. Top ten airports 85. 84. 83. 82. 81. Source: UK Airport Statistics, Civil Aviation Authority/Key Note, 2008 Concentration Levels in the Commercial Airports Industry by Share of Freight Volumes (%), 2003- 2007

Largest airport 55. 55. 55. 54. 56. Top four airports 84. 85. 86. 85. 84. Top ten airports 95. 96. 97. 97. 98. Source: UK Airport Statistics, Civil Aviation Authority/Key Note, 2008 Appendix 7: The UK’s 20 large airports and fast-expanding regional airport network is an impressive showcase of the sector’s scale and skills. • • •

London is the busiest aviation centre in the world, handling a total of almost 120 million passengers annually if Stansted, Luton and London City are combined with Heathrow. UK airports generate US$5.6 billion in revenue a year. One fifth of all international air passengers in the world are on flights to or from a UK airport. 14

• • • •

The number of passengers travelling through UK airports has risen 31 per cent to 235 million in the past five years. The UK’s no-frills service sector served eight million passengers in 1998 but by 2003 the number had risen to 47 million. It is predicted that the number of passengers travelling through UK airports will rise to 500 million by 2030. Cargo handled by UK airports increased from 1.8 million tonnes in 1996 to 2.3 million tonnes in 2006 – an increase of 28 per cent.

Source: UK Trade & Investment, 2008 Appendix 8: Terminal Passengers, Aircraft Movements and Freight Moved at UK Airports (million, 000 and 000 tonnes), 2003Terminal passengers (million) 200. % change yearon-year

215.

228.

235.

240.

7.

5.

3.

2.

Aircraft movements (000) 3,463. 3,527. 3,655. 3,638. 3,651. % change year1. 3. -0. 0. on-year Freight moved (000 tonnes) 2,208. 2,371. 2,363. 2,315. 2,325. % change year7. -0. -2. 0. on-year Source: UK Airport Statistics, Civil Aviation Authority; Key Notes 2008 Appendix 9: Worldwide Air Cargo by Region by Volume (000 tonnes), †Cargo % Change (000 tonnes) 2006Region North America 31, -1. Asia/Pacific 28, 3. Europe 17, 4. Latin America/Caribbean 4, 3. Middle East 4, 9. Africa 1, 11. Total

87,

2. 15

† — loaded and unloaded freight and mail Source: Airports Council International, Key Notes, 2008

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