The Partnership between Jet Airways and Etihad: Case Study

Introduction

The case study on the partnership between Jet Airways and Etihad will be analyzed in this paper. The two airlines have agreed to collaborate through joint operations in order to take advantage of their strengths in the aviation industry. Although the partnership presents important opportunities to the two firms, its approval has faced significant challenges due to regulatory requirements. The first part of the paper will present a situation analysis that will highlight the factors that are likely to influence the success of the partnership in terms of long-term growth in profits and revenue. The second part will propose the strategies and objectives that the two airlines can adopt to overcome the challenges in the market.

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Situation Analysis

Internal Analysis: SWOT

The internal environment of Jet-Etihad can be understood by analyzing its strengths, weaknesses, opportunities, and threats. Jet-Etihad has the following strengths. First, Jet controls nearly 29% of the Indian market, whereas Etihad has an extensive route network in Europe, Africa, and the Middle East. This will increase the sales of the two airlines through access to each other’s route network. Second, Etihad has access to huge financial capital. Thus, Jet-Etihad will have adequate resources to improve its value proposition. Third, the partnership will enable the two airlines to reduce costs through joint purchase of key supplies such as fuel and maintenance services. Finally, the partnership has access to Etihad’s advanced technologies and business practices.

The weaknesses of the partnership include the following. First, Jet has huge debts that will reduce total profits. Second, Jet-Etihad has not been able to comply with regulatory requirements. This will not only delay the approval of the partnership, but will also affect their share prices negatively.

The partnership will benefit from the following opportunities. First, passenger traffic is expected to grow by 4 to 6 percent in Indian and 10 to 12 percent in the global market. This will enable Jet-Etihad to increase sales. Second, deregulation of the purchase of fuel and aircraft in India will reduce Jet-Etihad’s operating costs. Third, increased investments in airport infrastructure by the Indian government will provide opportunities for expansion and cost reduction.

The threats include the lack of a clear policy framework to expand the aviation facilities in India to facilitate rapid growth. There is increased competition from international airlines. Moreover, the cost of fuel is very high. It accounts for up to 45% of Indian airlines’ operating costs. Declining economic growth in India and the global economy will reduce demand for flights.

Customer Analysis

The global and the Indian aviation markets consist of customers with varied needs. Thus, most airlines use psychographic and behavioral segmentation to identify their target markets (Baisya & Sarkar 2004, pp. 73-79). Psychographic segmentation involves identifying customers based on their interests, personality, activities, and lifestyles. Behavioral segmentation, on the other hand, involves identifying the target market by considering the customers’ knowledge, use, and attitude towards a product (Pride & Ferrell 2004, p. 87). Based on these segmentation strategies, there are three markets in the airline industry.

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These include the business class, economy class, and hybrid class. The business class market consists of customers who are interested in luxurious full-service flights. The economy class market consists of customers who are price sensitive. Thus, they are interested in low-cost flights. The hybrid class market consists of customers who are interested in high-quality, but low-cost flights.

Competitor Analysis

The Indian aviation industry has a large number of players. The main competitor of Jet-Etihad in the full-service flight market is Air India. Air India has an extensive route network in India and Asia. However, it has debts in excess of $8, which limits its ability to operate profitability. Moreover, the huge debt limits the airline’s ability to access additional capital for expansion. Air India is also inferior to Jet-Etihad in terms of capacity.

Specifically, Air India has only 112 aircraft, whereas Jet-Etihad has a fleet size of 182 aircraft. Apart from Air India, Jet-Etihad will compete with foreign airlines such as the Emirates and Qatar Airways. These airlines are well-funded and boast huge capacity and decades of experience. For instance, Emirates Airline operates over 250 aircraft and reported a net profit of $460 million in 2013 (Emirates 2014). They also have access to huge capital to expand operations.

In the low-cost market, the main competitors include Spice Jet, Indigo, and Go Air. Most of these firms are small and their financial performance is poor. For instance, Spice Jet has only 6 aircraft. Indigo was the only airline that reported a profit of $100 million in 2013. It also operates over 70 aircraft, which makes it a major competitor of Jet-Etihad.

Market Analysis: Porters’ Five Forces

The suppliers in the aviation industry have a high bargaining power due to the following reasons. First, their products (aircraft and fuel) are highly differentiated and lack substitutes (Singh & Sushil 2013, pp. 250-275). Second, there are more airlines than manufacturers of aircraft. Second, suppliers of jet fuel have low switching costs since they can easily shift from one customer to another. Finally, the products of the suppliers determine the quality of the services offered by the airlines. For instance, modern wide-bodied aircraft enable airlines to offer luxurious low-cost flights since their fuel efficiency is very high. The high bargaining power of the suppliers means that they can exploit airlines through high prices for their products.

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The threat of substitutes is low in India’s aviation industry. At the domestic level, the main substitutes are trains, buses, and personal cars. These substitutes cannot compete with airlines in long-distance transportation due to their low speeds. At the international level, there are no substitutes for airlines. The low threat of substitutes means that airlines have the opportunity to increase their revenues by providing excellent long-distance transportation services.

The buyers (passengers) have high bargaining power because they have a wide range of flight services to purchase. In addition, their switching costs are low. Most customers in India are price sensitive. Thus, they easily shift their loyalty to airlines that charge low prices. Brand identity also increases buyers’ bargaining power since they identify with airlines that provide excellent services. The high bargaining power of the buyers means that airlines have to price their services aggressively and maintain high-quality standards in order to succeed (Kotler & Keller 2012, p. 56).

The threat of new entrants is moderate. One of the main factors that prevent entry is the high cost of capital. Furthermore, the incumbents have huge capacities and resources to implement aggressive marketing strategies. This prevents entry by limiting new firms’ ability to penetrate the market. The factors that facilitate entry include deregulation of the industry. The government of India has allowed foreign firms to acquire up to 49% stake in local firms. The low threat of new entrants is an opportunity for the incumbents to defend their market shares.

The threat of competitive rivalry is very high due to the following reasons. First, product differentiation is very high. Second, the incumbents are competing on the basis of price. Third, the operating costs are very high since the industry is labor-intensive and fuel prices keep rising. Fourth, there are several companies in the market that are competing for customers. Finally, the slow growth of the market limits airlines’ ability to increase revenues without implementing aggressive marketing tactics. The main implication of the high competitive rivalry is that firms that are not able to maintain their competitiveness will run out of business or make huge losses in the long run (Kazmi 2007, p. 132).

Environmental Analysis: PESTEL

The main political factors that influence the performance of airlines in India include regulation and the development policies adopted by the government. Specifically, high taxation by state governments has led to increased cost of jet fuel, thereby reducing the competitiveness of local airlines. By contrast, allowing airlines to import jet fuel directly provides opportunities for cost reduction. Allowing foreign firms to invest in Indian airlines has resulted in high competition. However, it also enables the debt-ridden Indian airlines to access external capital to boost their competitiveness. The lack of a clear policy framework hinders the country’s access to foreign direct investments to expand airport facilities. Thus, airlines will have to pay high parking fees in the future due to limited airport capacity.

The main economic factors that determine growth in India’s aviation industry include inflation rate, exchange rate, and GDP growth. The prices of fuel and flights have a positive relationship with the inflation rate. Thus, an increase in inflation will negatively affect the competitiveness of airlines through high fuel prices and low demand for flights. Currently, India’s inflation rate is 8% and is likely to increase as the economy grows (World Bank 2014).

In 2013, India’s GDP expanded by 4.5% and is expected to increase by 4.7% in 2014 (World Bank 2014). Strong GDP growth will improve the demand for flights in India. However, economic difficulties in major markets such as Europe will reduce demand for international flights. The exchange rate is important because the price of fuel and international flights are denominated in US dollars. Thus, a depreciation of India’s currency against the dollar will make jet fuel to be more expensive. However, it will improve the earnings from international flights. The reverse effect will occur if India’s currency strengthens against the dollar.

A high population and frugality are the main social factors that affect expenditure in India. With a population of approximately 1.3 billion people, India presents a huge market for airlines to increase sales. However, most Indians are price sensitive and prefer to save rather than to spend. This will prevent an increase in demand (Baisya & Sarkar 2004, pp. 73-79).

Aircraft technology and information and communication technologies determine the competitiveness of airlines. New aircraft with large capacities tend to be safer and fuel-efficient than small and old aircraft. In addition, information and communication technologies help in reducing costs through the online provision of services such as ticketing and answering customers’ queries.

Air pollution is the main environmental factor that affects airlines in India and other parts of the world (Gautam, Sharma & Sehgal 2013, pp. 244-255). Airlines are charged high fees for their emission of greenhouse gases. The charges are very high in overseas markets such as Europe and the US.

The main legal factor that affects airlines in India is corporate law. The law restricts ownership of local firms by foreign companies to only 49%. However, the country has a stable legal system that enables airlines to operate effectively.

Strategic Options

Marketing Objectives

Jet-Etihad should consider the following objectives to succeed. In the first year, the company should focus on increasing its sales by 10%. Additionally, it should increase its market share by 5%. In the second year, the first objective should be to increase revenue by 15%. The second objective should be to increase domestic and international route networks by 10%. The final objective should be to increase market share by 6%. These objectives will enable the two companies to increase their profits and competitiveness in the long run. Given the dominant position of Jet-Etihad and the resources at their disposal, these objectives are likely to be achieved.

Targeting and Positioning

Jet-Etihad should be positioned as an airline that provides high-quality flights at affordable prices. In this context, they should combine the features of a low-cost carrier and a full-service network airline. This strategy is likely to succeed because Etihad has business experience and financial resources to offer full-service flights. On the other hand, Jet Airways has experience in both full-service and low-cost services. This positioning strategy will enable the companies to compete effectively with large international airlines such as the Emirates who are able to offer high-quality services at low costs.

The company should segment its market based on psychographic and behavioral variables (Kazmi 2007, p. 152). These include customers’ perception of service quality and pricing, as well as, their lifestyle and frequency of travel. Thus, it should target customers in the business and economy class markets.

Growth Strategies: TOWS Matrix

The growth strategies that should be adopted to achieve the marketing objectives are summarized in table 1.

Table 1: TOWS Matrix.

Opportunities Threats
The expected increase in demand High competition
deregulation of fuel importation Lack of policy to expand airports
Expected airport expansion High fuel prices
Declining economic growth
Strengths S-O Strategies S-T Strategies
Large market share and route network Introduce loyalty programs to retain customers Implement marketing communication activities to overcome competition
Huge financial resources Expand fleet size and route network to serve more customers Introduce large fuel-efficient aircraft to reduce expenditure on fuel
Ability to conduct joint purchases to reduce costs Joint importation of jet fuel to reduce costs Share parking slots to reduce the costs associated with limited airport facilities
Access to advanced technologies and business practices Improve service quality to increase sales Reduce operating costs to charge low prices
Weaknesses W-O Strategies W-T Strategies
Huge debts Take advantage of high demand to increase revenue and reduce debts Sell more equity to Etihad to reduce debts and access funds to overcome competition
Inability to overcome regulatory hurdles Take advantage of the deregulation of partnerships to ensure compliance Fast track compliance to prevent discontinuation of operations and loss of customers

Selection of Competitive Advantage

The TOWS matrix indicates that Jet-Etihad has a cost advantage. Specifically, it can provide the same service quality or benefits as its competitors at a lower cost. In order to achieve and sustain this competitive advantage, Jet-Etihad should pursue a cost leadership strategy. This involves being the lowest cost producer in the airline industry to improve competitiveness (Kotler & Keller 2012, p. 156). Jet-Etihad can successfully pursue a cost leadership strategy due to its capabilities. These include access to adequate financial capital, technologies, and effective business practices to lower the cost of providing flights without compromising quality. Since Jet-Etihad already has a significant market share through joint operations, reducing costs will enable it to realize high profits.

Ansoft Matrix Analysis

According to the Ansoft matrix, Jet-Etihad can pursue four growth strategies namely, “market penetration, market development, product development, and diversification” (Kotler & Keller 2012, p. 234). Based on the internal, environmental, and market analyses, Jet-Etihad should pursue a market development growth strategy. This will involve serving new market segments in different locations using the existing products. This strategy is suitable because the partnership provides the two airlines with adequate capacity to access and serve new destinations within India and overseas. In addition, it will lead to increased revenue and profits.

Marketing Mix Program: Recommendations

Jet-Etihad’s product strategy should focus on the provision of high-quality flights at affordable prices. Jet Airways and Etihad are in a strategic group because they serve the same market segments. In particular, both airlines provide full-service flights in domestic and international markets. They also serve customers in regions where they do not have operations through partnerships with other airlines. The partnership enables the two airlines to maintain this business model at a lower cost. Thus, they should use the savings to improve the quality of their services and to charge affordable prices.

Jet-Etihad should adopt a competition-based pricing strategy to maintain competitiveness. This strategy involves setting prices that are comparable to those of the competitors (Kazmi 2007, p. 78). The competition-based pricing strategy will enable Jet-Etihad to avoid a vicious price war in the market. Since Jet-Etihad is a major player in the market, if it reduces its prices other firms will follow suit in order to gain or retain their market shares. This will increase the pressure for further price reductions, thereby reducing profit margins significantly. As a cost leader, Jet-Etihad will still make high profits by selling its services at the average industry price.

In order to increase sales, Jet-Etihad should use both direct and indirect distribution channels to reach customers. The direct channels will include their sales offices, sales website, and direct sales force. These should be the main distribution channels since they will enable Jet-Etihad’s employees to serve customers directly. Direct interaction with customers often provides opportunities to offer excellent customer service (Kotler & Keller 2012, p. 271). Jet-Etihad should also use a three-level channel that consists of three intermediaries to distribute its services. The intermediaries include independent travel agents, inter-airline sales, and Global Distribution Systems (GDS). The indirect distribution channels will enable the airline to reach a large number of customers, thereby increasing sales and profits.

The sales promotional activities that Jet-Etihad should implement include advertising, exhibitions, loyalty programs, and public relations. Jet-Etihad should advertise its products in print and electronic media in order to improve its brand awareness (Kotler & Keller 2012, p. 271). The main message of the adverts should be the quality or benefits provided by Jet-Etihad’s services. Jet-Etihad’s sales team should also participate in major trade exhibitions such as the Dubai Air show to create awareness about their services. Similarly, public relations will enable the company to create awareness about its services and to build positive relationships with its customers. The loyalty programs should reward customers for traveling with Jet-Etihad in order to promote repeat purchases.

In sum, the proposed strategic choices will enable Jet-Etihad to exploit the opportunities and to overcome the threats identified in the situation analysis in the following ways. First, making joint purchases will enable Jet-Etihad to reduce the cost of jet fuel. Second, pursuing a cost leadership strategy and implementing marketing communication activities such as advertising will enable Jet-Etihad to overcome high competition. Finally, pursuing the market development strategy will enable Jet-Etihad to take advantage of the expected increase in passenger volumes to improve its earnings.

Conclusion

The partnership between Jet Airways and Etihad presents growth opportunities that will benefit both firms. In order to succeed in the Indian and global aviation markets, Jet-Etihad should focus on cost reduction in order to maintain profitability. Additionally, they should focus on market expansion in order to increase sales. In order to realize these benefits, the two airlines must overcome the regulatory hurdles that they are facing in order to obtain approval to launch joint operations.

References

Baisya, R & Sarkar, R 2004, Customer Satisfaction in the Service Sector: A Case Study of the Airline Industry, Journal of Advances in Management Research, vol. 1 no. 2, pp. 73-79.

Emirates 2014, Annual Financial Report. Web.

Gautam, S Sharma, V & Sehgal, M 2013, Indoor Air Quality in Rural India, Management of Environment Quality: An International Journal, vol. 24 no. 2, pp. 244-255.

Kazmi, S 2007, Marketing Management, Sage, London.

Kotler, P & Keller, K 2012, Marketing Management, McGraw-Hill, New York.

Pride, W & Ferrell, O 2004, Marketing, John Wiley and Sons, New York.

Singh, A & Sushil S 2013, Modeling Enablers of TQM to Improve Airline Performance, International Journal of Productivity and Performance Management, vol. 62 no. 3, pp. 250-275.

World Bank 2014, World Bank Data: India. Web.

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