A Case Analysis On Arik Air Nigeria Commerce Essay

A Case Analysis On Arik Air Nigeria Commerce Essay This essay is a case analysis on Arik air Nigeria and will therefore seek to identify the major threats and opportunity in the environment, analyse the strength and weakness of the company, identify the strategic position of Arik air, and suggest a strategy to be adopted by the airline in an effort to sustain its competitive advantage. BACKGROUND Arik Air is Nigerias biggest indigenous commercial airline offering domestic flights to major cities in Nigeria and with an expanding network of regional and international flight operations to major cities in the world (Eze, 2010). Presently, Arik Air flies to 17 Domestic destinations in Nigeria and 8 International destinations (Arik air, 2010: Online). Arik Air Nigeria The companys corporate mission is: To be a safe and reliable airline by selecting and operating new, modern aircraft and by employing the most experienced and efficient staff. (Airkair, 2010: Online) Vision: To make Nigeria proud of its aviation industry (Arikair, 2010: Online) Strategic Intent: Ariks strategic intent is to be the preferred airline carrier of choice in West Africa. (Airk Air, 2010: Online) EXTERNAL ANALYSIS: The external analysis was conducted using PESTEL Framework and Porters five forces as the basic tools (Thompson, 1997; Luffman et al, 1996; Welsh, 2005; Johnson et al, 2009) in an effort to understand the effect of changing environment on Arik Airs operation. The findings based on pestel framework (See Appendix 1) and Posters five forces (See Appendix 2) are as follows: An analysis of the political environment revealed that governments around the world are tightening immigration regulations due to the surge in terrorism the implication of which is a reduction in the number of global traveller thus posing a threat to airline including Arik Air. (Stevermen, 2009; Cartar, 2010). However liberalization and Deregulation efforts are being made in several regions of the world with Asia setting a target for the full liberalization of its skies by the year 2015. This is projected to boost aviation industry performance by creating avenue for fair competition platform between more established airlines and the growing competitors like Arik Air(Bailey, 1986; Smith Cox, 2007; Ting, 2008). The rising fuel price is a matter of economic concern in the world, with Aviation fuel price estimated at $85 per barrel (IATA, 2010: online) the implication of which is an increase in running cost for airlines and this poses a high threat to Airlines. However, there is optimism that a global economic recovery is on the way with the world economy expected to grow 2.7% in 2010 (World Bank, 2010: Online) and the aviation industry is forecasted to reduce its loss from $5.8 Billion in 2009 to $2.8 Billion in 2010. (Financial Times, 2010). The World travel tourism council (2010) projects an increase in the number of holiday travellers in 2010 with further growth expected in 2011. The 2010 world cup is expected to boost travel to Africa in 2010 (Eberl, 2010). Percentage change vs. 05-Mar-10 Index* $/b cts/gal $/mt 1 week ago 1 month ago 1 year ago Jet Fuel Price 243.3 89.0 211.9 701.4 3.4% 4.1% 80.3% Source: IATA (2010: Online) source from Platts * 100 in 2000 (87 cts/gal) Impact on this years fuel bill of the global airline industry: New fuel price average for 2010 Impact on 2010 fuel bill $85.5/b +$13 billion Estimated by IATA Source: IATA (2010: Online) With heightened security checks and the introduction of the full body scan at airport, there are concerns over the privacy infringement due to the utilisation of the full body scan. (McDonough, 2010). Arik air is in the traditional full service airline industry offering pre-flight, in-flight, and post flight services to customers and its competitors in the industry include Virgin Atlantic, British Airways, Air France, Lufthansa, Emirate, Qatar Airline and South African Airways all of which are established airlines with good brand image. An industry analysis revealed as follows (See Appendix 2): there is high competitive rivalry within the industry; barrier to new entrant is high due to the enormous capital required to start an airline; buyers have a high bargaining power due to the various options of airlines available to them and suppliers have a medium bargaining power. INTERNAL ANALYSIS: The internal analysis was conducted through an evaluation of the resource based view of strategy (resources and competencies) (Mahoney Pandian, 1992; Johnson et al, 2009); as well as competitive advantage; value chain and VRIO (Johnson et al, 2009; Thompson, 1997; Luffman et al, 1996) to identify the strengths and weakness of the company. (See Appendix) UNIQUE RESOURCE(S) AND CORE COMPETENCIES (See appendix 3 for the list of tangible and intangible resources of the company) Arik Airs unique resource is its chairman who is an elder statesman in Nigeria with an easy access to finance while its core competencies are its excellent customer relations skill and reliability COMPETITIVE ADVANTAGE Arik air derives its competitive advantage from a unique merge of low price and quality service. This is based on its vast research and unique understanding of the West African market need for quality service at affordable prices and the support it receives from the Nigerian government and some other West African countries through concession and subsidies which thus reduces its operational cost and affords it a lower price than competitors (William, 2010; Russell, 2008; Abioye Ezeobi, 2008). THE VALUE CHAIN (See appendix 4) An evaluation of Arik Airs value chain activity revels as follows: The Inbound logistics which involve the delivery of fuel for the aircraft, in-flight meals, cleaning of the aircraft in preparation for a flight is outsourced (procurement) through an effective human resource management practice in an effort to reduce amount of people employed by the airline and reduce fixed operational costs. Arik with its strong finance base utilises an integrated ICT technology (Infrastructure/technology) to manage and support its operation by enabling online bookings, ticket purchase and flight check-in in an effort to reduce operational cost of employment. To ensure safety/reliability, a strict maintenance of its fleets is outsourced and an effective human resource management policy is put in place (training and reward) to promote employee commitment and performance (Arik, 2010: Online; Banfield Kay, 2008). Outbound logistics with regard to customers luggage is coordinated and monitored with a technological coding and is outsourced to Sachol to ensure the safety of customers property and to sustain Arik Airs reliability (Airkair, 2010: Online, Sachol, 2010: Online) while an extensive marketing is implemented through the media to promote sales. This enables Arik air to achieve its competitive advantage through a systemic integration of technology (speedy services and reduced operational cost), human resource management (ensures quality delivery of services by employees) and a firm infrastructure to support its primary activities thus enabling the airline to deliver quality services at reduced prices in comparison to competitors. VRIO: The VRIO examines the sustainability of a firms competitive advantage (Johnson et al, 2008); Arik Air offers its low priced fares with excellent in-flight services unparallel to none offered by any Nigerian airline (Eze, 2010) which implies that its services are valuable and rear. However this can be imitated by other airline thus Arik air enjoys a Temporary competitive advantage (Khanna, 2010) In the airline industry the critical success factors are: a good brand image; good quality service; good customer relations; cost effectiveness; Reliability; safety. (Svein Vidar, 2004; Bijan Kenneth, 2005). Judging by the critical success factors in the airline industry, Arik Airs performance is standard in the industry since the airlines services are affordable, safety is given high priority, it offers good customer service, and is reliable. However, theres need to develop the Arik brand beyond West Africa. SWOT ANALYSIS (Kotler et al, 2009) See Appendix 4 Arik airs strengths are its highly skilled workforce with excellent ethical conduct and customer relations (Some of the Best in the industry), the easy access to finance or funding, the airlines fleets of aircraft (mostly new), speed in service delivery and low operational cost while the weaknesses are the brand image (still unrecognised outside west Africa), flights offering to only 8 international destination (Williams, 2010). In consideration of Ariks strengths and weaknesses, the external environment provides opportunities as well as threats for Arik air. The identified opportunities are an increase in earnings due to a projected increase in the numbers of global travellers (World travel tourism council, 2010); expanding the network of flight destination due to the expected liberalisation of skies in Asia and the African continent (Bailey, 1986; Smith Cox, 2007; Ting, 2008) However, the threats in the environment include the unstable global fuel price, increased terrorism scare s, continued government subsidy for competitors airlines which reduces the open market competition and the expected mergers in the airline industry which might result in the dominance of a few big airline. Arik Airs plans to increase its market share in Nigeria and West Africa and equally targets an expansion its operation across Europe, North America and Asia but Arik Air is faced with immense industry competition on international destinations from the established airline (Virgin, Bristish Airways, Emirate) and The threats global economic recession which has slowed the expected growth of the airline. The competitive strategy adopted by Arik is the Hybrid strategy (see appendix 4). This strategy allows the airline to maintain its low cost base thus enabling it to compete on low price relative to competitors with sustainable differentiation. However, the low price might impede the airline ability to obtain the maximum returns possible. (Johnson et al, 2009) STRATEGIC OPTIONS: Arik air is experiencing a decline in its projected market growth caused by the increase competition in airline industries; the various strategic options available to Arik Air are evaluated simultaneously below with the aid of TOWS and Ansoff Matrix (Khanna, 2010; Johnson et al, 2009). (See Appendix 5: Tables 3 4): Strategy 1 Strength-Opportunity/Market Development Arik Airs key strengths of easy access to finance and excellent customer service practices can be explored based on the identified opportunity in the macro environment (politics) stemming from the planned liberalisation of skies in Asia and Africa (Bailey, 1986; Smith Cox, 2007; Ting, 2008). The strategy option this provides Arik Air is Market Development. The Airline can increase its fleets of aircraft by purchasing additional aircrafts, employing and training additional workforce, and increasing the route options of the airlines to more destinations in Asia and Africa Strategy 2 Strength-Weakness/ Market Penetration Market penetration is another strategic option available to Arik air. By utilising this strategy, Arik air can utilise its strong financial capability to bankroll an extensive marketing exploit to improve the brand image of the airline. This will create awareness for the Arik brand thus, enabling the airline to gain a greater market share in its present markets. However, the heightened competition in the industry poses a genuine threat to this strategy. Strategy 3 Strength-Threat/Diversification The on-going merger in the industry which may result in a few dominant airlines is a threat to Arik air. Arik with its easy access to finance can adopt a related diversification into the budget airline industry (horizontal integration) with the option of acquiring Virgin Nigeria (low cost low frills airline) (Attitude travel, 2010: Online) This will enable Arik air to optimally minimize the threat posed by merger of the more established operators by spreading its risk and making it a formidable competitor. Strategy 4 Weakness -Opportunity/Product Development The weak brand identity of Arik Air outside West Africa is one of the airlines weaknesses. Arik can overcome this weakness by ensuring that the flight experience of its customers remains memorable with an excellence in customer service at all time. The company can equally offer new products such as travel miles accumulation/flyers club membership for its customers as a Product Development Strategy. Strategy 5 Weakness -threat/Consolidation The proposed merger in the airline industry which might result in a few dominant airlines is a major threat to a growing airline like Arik airs weak brand identity; Arik can adopt any option of consolidation (Johnson et a, 2009) to defend its market share by merging with some established airline like Qatar Air or Emirate in order to ensure the sustainability of the business. The problem however is the possible loss of Ariks brand identity sue to such consolidation (Johnson et al, 2009) SELECTED STRATEGY After a thorough evaluation of the strategic options available to Arik air, the most viable option for the airline to adopt is a related diversification of the companys operations into the no-frills airline industry (a form of concentric diversification) (Mintzberg et al, 2003; Johnson et al, 2009). As suggested by Johnson et al (2009), related diversification allows a company to expand by utilising its existing infrastructure, resources, competencies and strengths in a new trade of similar capacity or intricacies. Therefore by this strategy, Arik air can capitalise on its strong financial strength in acquiring Virgin Nigeria (a no frill airline in Nigeria) (Attitude travel, 2010) or may purchase additional aircrafts to its fleets to cater exclusively for the no frills service operations while still utilising some of the companys existing technological infrastructure to cater for online bookings and check-ins (without incurring additional cost of employment). This is because there is evident potential synergy between the new business (a no-frills flight operation) and the core one, based on a common facility, asset, channel, skill, even opportunity. (Mintzberg et al, 2003:124) CONCLUSION To conclude, the introduction/inclusion of the no-frills airline options will afford Arik air no increased workforce requirement (due to the low service requirement of no-frill operations thus resulting in reduced operational cost); spread its market risk; enable greater efficiency, and will give commuters a greater variety to choose from among the Arik brand thus increasing the potential customer base of the airline. The adoption of diversification strategy by Arik air is a sustainable option for the airline due to the fact that there is presently only one no-frills airline in West Africa (Virgin Nigeria) (Attitude travel, 2010) which Arik air has the option of acquiring in order to build its business and booster its market share. However should the option of acquiring Virgin Nigeria not be chosen, Ariks reliability and brand identity in West Africa is sufficient to sustain the success of the diversification exercise thus ensuring Arik airs market growth. APPENDIXES (Appendix 1) PESTEL Analysis Political: Government subsidies for flag carriers: Flag carriers benefit from subsidies and cash injection from the government, relaxed accessed to loans, reduction in airport service and landing fees, subsidies on fuel and fiscal privileges. (The international chambers of commerce, 1995) Employment regulations: Countries differing employment regulations and trade union laws which Scholars have identified to a considerable affect the operational activities of organisations. (Harris et al, 2003; Deirdre, 2005) Immigration: The increasing global terrorism threats is resulting in governments around the world tightening immigration regulations which in turn might result in a reduction in the number of traveller around the world (Stevermen, 2009; Cartar, 2010) Deregulation: The deregulation of the aviation industry will provide an avenue for improved market conditions that will promote growth in the industry and remove the barriers to entry for new airlines thus allowing for effective market competition. (Bailey, 1986; Smith Cox, 2007) Liberalization of skies: Asia hopes to achieve a full liberalization of its airspace by 2015 and has put up a round map to achieve that. (Ting, 2008) Economic: Unstable Fuel price: The rising fuel price is estimated to result in a $13billion increase in 2010 oil bill with fuel prices put at $85/barrel. See appendix 1 (IATA, 2010: Online) Global economy recovery: The World Bank projects that a global economy recovery is on the way with a 2.7% growth expected in 2010 (World Bank, 2010: online) the aviation industry is projected to make a loss of $2.8billion in 2010 down from $5.8 billion made in 2009 (Financial Times, 2010) Mergers in the industry: The airline industry is undergoing transformation as airlines are announcing merger plans (Leung, 2010; Clark, 2010) Social: The World travel tourism council (2010) projects an increase in the number of holiday travellers in 2010 with further growth expected in 2011. Furthermore the 2010 world cup is expected to boost travel to Africa in 2010 (Eberl, 2010). There are concerns over the introduction of the full body scan at airport over the privacy infringement (McDonough, 2010). Technology: Terrorism threats, has prompted an increase in security screening in many airports with the introduction of the Full body scan (McDonough, 2010). New Air Traffic Control (ATC) technologies have been developed for commercial airlines one of which is ADS-B. (Karp, 2010) Environmental: In an effort for airlines to go green the International Air Transport Association (IATA) plans to cut CO2 emission by 1.5Million tonnes in 2010. (IATA, 2010: Online) Legal: The international air transport association (IATA) is to sign a data sharing agreement with the EU, US and ICAO (IATA, 2010: online). Furthermore, there are restrictions on mergers and acquisitions in the airline industry. (Appendix 2) Porters 5 Forces Threat of Entry: There is relatively low threat of entry to the industry based on the high capital requirement of starting an airline. Furthermore the airline industry is presently making a loss (IATA, 2010) which makes it unattractive to many investors thus reducing the numbers of possible entrant. Threat of substitute: Substitutes to airline are Trains, Automobiles and Ship. The threat posed by these is relative to the intended destination, time and cost analysis by the customers (Givoni, 2009). For National and Regional travels, these substitutes pose an increased threat to the airline industry due to the cheaper prices they offer with particular reference to travel by automobiles and/or trains. However, this threat is low on transatlantic travels. Bargaining Power of Suppliers: Scholars have argued that the present global market condition is tending towards buyers market (Kotler et al, 2009). This is also made evident by aircraft manufacturers seeking the greater participation of airlines in the design of their aircrafts customising. However due to high switching cost in the airline industry, the bargaining power of the supplier is medium. (Kotler et al, 2009) Bargaining Power of Buyer: Consumers have a high degree of options to choose from and this allows them a great bargaining power. (Kotler et al, 2010) Competitive Rivalry: The airline industry is highly competitive and there is prevalent merger going on in the industry in an effort to cut cost and improve efficiency. (Leung, 2010; Clark, 2010) and there is a high exist barrier Fig 3 Porters five forces: Source: Johnson et al (2009: 31) adapted from Porter (1984) (Appendix 3) Table 1 Arik Airs Resources Tangible Resources Intangible Resources Fleets of Aircraft (Physical resources) Buildings (Physical resources) Capital, Shareholders, Bankers (Financial resources) Highly skilled Employees (Human resource) Brand Customer database Business system Source: adapted from Slack et al, 2009 The aircraft fleets are as follows (Arik Air, 2010: Online) Two (2) Airbus A340-542, manufacture date: 2008-2009 with a Seat capacity of 237; Three (3) Boeing 737-800NG, Manufacture date: 2009 has a seat capacity of 148; Six (6) Boeing 737-700NG, Manufacture date: 2007-2008, has a seat capacity of 131-149; Three (3) Boeing 737-700, Manufacture date: 2001, has seat capacity of 124; Two (2) Boeing 737-300, Manufacture date: 1989, has seat capacity of 126; Four (4) Bombardier CRJ-900, Manufacture date: 2005-2007, seat capacity of 74; Two (2) Bombardier Dash 8 Q400, Manufacture date: 2009, has seat capacity of 72; Three (3) Bombardier Dash 8 Q300, Manufacture: 2001-2002, with seat capacity of 50; Four (4) Fokker 50, Manufacture date: 1990, seat capacity of 51; Two (2) Hawker HS 125-800XP, Manufacture date: 2004, seat capacity of 8. (Appendix 4) Table 2 SWOT Internal Origin Strengths highly skilled workforce with excellent ethical conduct and customer relations the easy access to finance or funding, the airlines fleets of aircraft (mostly new), -speed in service delivery and -low operational cost Weakness the brand image (still widely unrecognised outside west Africa) -Limited flight offering to 17 local and only 8 international destination External Origin Opportunities -increase in the numbers of global travellers expanding the network of flight destination due to the expected liberalisation of skies in Asia and the African continent Threats -unstable global fuel price, -increased terrorism scares, government subsidy for competitors -dominance of a few big players due to merger. Source: Adapted from Kotler et al (2009:101) Fig 4 Source: Marketing teacher (2010: Online) adapted from Bowman (1995) (Appendix 5) Table 3 TOWS analysis of Arik Air Nigeria. SW Strategy that use strength to overcome weakness Strategy 2- Market Penetration Opportunity -Increase in the numbers of global travellers expanding the network of flight destination due to the expected liberalisation of skies in Asia and the African continent Threats unstable global fuel price, -increased terrorism scares, government subsidy for competitors -dominance of a few big players due to merger. Strengths -Easy access to finance -excellent customer services -low operational cost Highly skilled workforce SO Strategy that use strength to maximize opportunity: Strategy 1 Market Development ST Strategy that use strength to minimize threats. Strategy 3- Related Diversification (Horizontal Integration) Weakness -weak brand identity -Few flight destination offering WO Strategy that minimize weakness by taking advantage of opportunity Strategy 4- Product Development WT Strategy that minimize and avoid threat Strategy 5 Consolidation Table 4 Ansoff Matrix Existing Product New Product Existing Market -Market Penetration -Consolidation -Product Development New Market -Market Development -Diversification Source: Johnson et al (2009:174) REFERENCES Abioye, O. Ezeobi, O (2008) YarAdua, governors pledge support for Arik [Online] Available from: http://www.punchng.com/Articl.aspx?theartic=Art2008120422503246 [Accessed; 2nd April, 2010] Attitude travel (2010) African low cost no frills airlines [Online] Available from: http://www.attitudetravel.com/lowcostairlines/africa/ [Accessed: 23rd March, 2010] Bailey, E. (1986) Price and Productivity Change following Deregulation: the US experience. 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