The first trend is observed in the macro environment and revolves around the possibility of digitization of the airline industry. According to the data from related industries, the direction is expected to increase the profitability of the segment by capitalizing on the seamless user-centered experience1. Another important aspect of a switch towards modern digital technologies is the reduction of operational costs and, possibly, increased safety and security of the processes2. Admittedly, in its current state, the identified driving force is mostly feasible in the long term and is expected to be implemented in full-service airlines. Nevertheless, considering the rapidly decreasing cost of commercially available equipment as well as the recent increase in web connectivity and bandwidth, it is possible to assume that eventually, such equipment will become commonplace throughout the industry, including the low-cost segment.
The identified driving force is expected to have the most impact on the bargaining power of suppliers. The introduction of digitized products and services requires a certain degree of proficiency characteristic of highly specialized companies. Assuming that the current leaders in digital services, such as China and India, can comply with the quality and safety requirements, it would be reasonable to expect an influx of a number of new manufacturers and service providers3. These new suppliers will find it easier to enter the segment and can offer relatively low prices in order to sustain competitive advantage. Since both the variety and quality is heavily regulated, it is possible to expect only a minor disruption associated with the force in question.
However, it is also necessary to mention that the digitization is expected to decrease the threat of substitutes. Currently, the most viable substitutes for long-range travel are offered by naval and automotive industries. The latter has benefitted significantly from the introduction of online digital services by offering its customers a more seamless and convenient experience4. On the other hand, the direct distribution channels in the airline industry are almost obsolete in terms of attractiveness and convenience5. Thus, with the introduction of seamless, personalized service, the customers will be less likely to switch to other means of transportation.
The second major driving force is the gradual blurring of the line between the full-service and low-cost airlines. While the low-cost carriers still offer the possibility of traveling with minimal expenses, they gradually incorporate a flexible model where optional, experience-enhancing services are offered to the customers for additional payment. Combined with an overall increase in market share of the low-cost segment, this driver constitutes a major disruptive force. In fact, some of the full-service companies in the U.S. have already responded by introducing the basic options that mimic those provided by the low-cost airlines6. Other companies have introduced separate airlines, clearly aimed at the growing low-cost market segment7.
The driving force has a direct effect primarily on the bargaining power of buyers. With the diversification of offers in the industry, the price-sensitive customers will exhibit greater attention in the process of choosing services. The issue is further amplified by the negligible switching cost. Another apparent impact is the increased threat of substitutes – in this case, in favor of the low-cost segment. Finally, the rivalry among the existing players is most likely being made more intense due to the increased pressure from full-service brands that are able to introduce independent low-cost counterparts much easier than new entrants.
Footnotes
Lauren Horowitz, “Technology trends in 2018: AI, IoT and conversational interfaces will redefine customer experience”. Web.
Robert Zippel, “Digital technology for the airlines”. Web.
Pew Research Center, “China vs. India: When it comes to digital, one has the clear advantage”. 2017.
Oliver Wyman, Digital revolution: New customer experiences, new business models, new transformations”. 2014.
Alessandro Borgogna, Stefan Stroh, Andreas Hilz, Aditya Agarwalla, & Ivan Jakovljevic, “Connecting with the customer: How airlines must adapt their distribution business model”. 2016. Web.
United Airlines, “Basic economy”. Web.
Manabu Ito, “Indonesian budget carrier projects first full-year profit in FY2015”. 2015. Web.