sae group - 20110109e
TRANSCRIPT
Strategy Analysis and Evaluation (SAE) AEGEAN AIRLINES CASE STUDY
Group 5 Chalkiadaki Marianna Dantis Panos Diolis Dimitris Liakopoulos Athanassios Spiliotopoulou Athanasia
(Word count: 2.559)
January, 2011
University of Strathclyde Business School IMS International Centre
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TABLE OF CONTENTS
Table of Contents ................................................................................................................ ii
Table of Figures ...................................................................................................................iii
Abbreviations ...................................................................................................................... iv
Scope of The Document ...................................................................................................... v
Executive Summary ............................................................................................................. vi
1 Introduction ............................................................................................................... 1
2 Aegean Strategic position and Market Segments ..................................................... 1
3 Aegean Competitive Advantage ................................................................................ 3
4 The Environment ....................................................................................................... 3
5 Strategic options & Capabilities ................................................................................ 5
6 Evaluation of Various Options ................................................................................... 7
7 The Business Idea & Recommendations ................................................................... 9
8 Conclusions .............................................................................................................. 11
9 References ............................................................................................................... 12
10 Annex: Market Analysis Notes ................................................................................ 14
11 Annex: Ansoff’s Product / Market Matrix Analysis Notes ...................................... 15
12 Annex: Exploring the Business Environment Analysis Notes .................................. 17
13 Annex: PESTEL Analysis Notes #1 ............................................................................ 18
14 Annex: PESTEL Analysis Notes #2 ............................................................................ 20
15 Annex: 5 Forces Porter’s Analysis Notes ................................................................. 25
16 ANNEX: SWOT Analysis Notes ................................................................................. 28
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TABLE OF FIGURES
FIGURE 1: AEGEAN’S STRATEGIC POSITION IN DOMESTIC AND INTERNATIONAL MARKET. ......................................................................... 2 FIGURE 2: CUSTOMER SATISFACTION PARAMETERS FOR AEGEAN FULL SERVICE OFFERING. ....................................................................... 2 FIGURE 3: AEGEAN (THRESHOLD AND CORE) RESOURCES & COMPETENCES. ........................................................................................ 3 FIGURE 4: EXPLORING THE BUSINESS ENVIRONMENT (CLIMATE CHANGE VS. SECURITY SCENARIO MATRIX). ............................................... 4 FIGURE 5: ANSOFF’S MARKET/PRODUCT MATRIX............................................................................................................................. 6 FIGURE 6: TWOS ANALYSIS. ...................................................................................................................................................... 7 FIGURE 7: SCENARIO EVALUATION. ............................................................................................................................................... 9 FIGURE 8: THE BUSINESS IDEA & POSITIVE FEEDBACK LOOPS. ........................................................................................................... 10 FIGURE 12: ANSOFF’S PRODUCT/MARKET MATRIX. ........................................................................................................................ 15 FIGURE 13: EXPLORING THE BUSINESS ENVIRONMENT. .................................................................................................................. 17 FIGURE 9: SWOT ANALYSIS ..................................................................................................................................................... 28
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ABBREVIATIONS
AIA Athens International Airport
ASA Athens Stock Exchange
IATA International Air Transport Association
LCC Low Cost Carrier/ Company
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SCOPE OF THE DOCUMENT
The scope of this document is to present the assessment of Aegean Airlines strategic position and
define strategic options for the following seven (7) years. The strategy proposed has been based on
extended analysis of available data (financial statements, company presentations, existing reports
on performance and comparative due diligence), of the contextual and transactional environment,
of market segments of Aegean core competences and recourses but also weaknesses and threats.
Several tools have used to facilitate such analysis such as PESTEL and 5‐forces, SWOT‐TOWS,
Ansoff’s matrix etc. The analysis is aimed to provide all necessary supportive material for those
that would wish to get deeper into the details of key factors that drive the proposed business idea.
The document is addressed directly to the CEO of the company but could be also studied by the
board of directors or other top management executives. The Executive summary is a complete
summary of the analysis presented and could be read separately of the main report.
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EXECUTIVE SUMMARY
Aegean faces a steadily increasing competition in both domestic and international market. Despite the economical crisis and industry turbulence, Aegean was able to maintain its course in the previous years by stabilising earnings and becoming an industry leader in domestic market while strengthening its position in European market. Aegean strong liquidity and financial profile gives a clear competitive advantage as it ensures that business opportunities may be exploited despite the economic crisis. In addition, the fleet renewal programme facilitates the expansion of the network and creates opportunities for significant service quality upgrades and operational costs reduction. However, the competition by low cost carriers and the increase of fuel prices may minimise the operational profits.
The challenges in the current business environment are twofold; a) maintain the current market position and long term sustainability, and b) achieve operational efficiency and cost reduction.
Aegean has to exploit major opportunities; the increasing flow of tourist passengers in Greece, the termination of the Olympic Air flights in long haul destinations with large Greek communities and the geo‐location of Greece relative to major touristic Mediterranean destination.
Aegean could adapt various strategic courses of action:
• significantly reduce the operational costs and become a low cost carrier in order to address economic recession and fierce competition,
• consume the available financial resources to expand in Europe and aggressively try to seize the market share from competitors facing financial difficulties,
• differentiate from competitors and without significant investments to focus on the tourist market segment
Aegean is suggested to follow an integrated approach for maximizing differentiation by focusing on the tourism market segment and on targeted expansion to specific destinations where it has a competitive advantage. Specifically, Aegean should transform to a corporate organisation by integrating tourism related activities of its major shareholders, such as hotel resorts, cruiser services, car rental services, etc. In this way,
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Aegean will strengthen its negotiation position towards the major international travel operators and increase its market share in the air transportation and supplementary services. In addition, Aegean will target expansion to specific overseas destinations, where Greek communities may guarantee a continuous demand.
The proposed strategy will strengthen the current position of the company by creating a sustainable advantage in the tourism market segment which is expected to evolve in the following years in Greece. As no capital intensive investments are necessary, the current financial resources of the company may be used to overcome current economic recession. This is aligned with shareholders expectations as there is no requirement for major expenditures. It is also favourable for workforce positions. Company objective should be an increase of its market share by approximately 3% annually in both the domestic and international market in the next 5 consecutive years.
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1 INTRODUCTION
Aegean Airlines (“Aegean”) is a full service carrier offering premium quality to short and medium haul services. Aegean has expanded its domestic and international network [4] and built a strong brand name over the last five years. It currently occupies the largest market share in the domestic and international flights from AIA [9]. Aegean has recently been accepted as full member of Star Alliance [8] that proves the high company standards in customer service, security and technical infrastructure.
Aegean has registered a 10% growth in passage traffic last year, experiencing a significant increase in the last five consecutive years. In addition, the company managed to increase its fleet, reduced its average age, and achieved homogeneity and operational efficiency.
The financial results in 2009 revealed a decline in the operational profits for the fifth consecutive year [4] [10]. In addition, the stock market price has declined to the lowest level since the listing of the company in the ASA [2].
2 AEGEAN STRATEGIC POSITION AND MARKET SEGMENTS
Aegean competes for the largest market share1 of air transportation in Greece. The company provides services to the top‐10 domestic and top‐5 international destinations from AIA that contribute to 54% and 75% of the total passengers’ traffic, respectively. Apart from local and western European destinations, Aegean also provides service to Cyprus, Israel, Serbia, Albania and Egypt2. Aegean current position in terms of the services offered and its competitors in Greek and European market is depicted in Figure 1.
1 The vast majority of passengers, i.e. 89% of passengers in AIA, choose a full service carriers to travel [5]. 2 Aegean does not provide services to USA, Canada and Australia, in which there is significant demand from tourist passengers and Greek local communities. USA is the country with the highest demand for tourist passengers, a share of approximately 8%.
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Figure 1: Aegean’s Strategic Position in domestic and international market.
It should be noted that according to AIA, the majority of passengers (68%) travelled for personal reasons, of which 67% for tourism purposes. This is a strong indication that air transportation demand is related with the domestic tourism industry. On the contrary, the percentage of business passengers declined over the year but the absolute number of them remained constant3. Finally, the customer satisfaction parameters for an average passengers is provided in Figure 2.
Figure 2: Customer satisfaction parameters for Aegean full service offering.
3 The percentage of business travelers reduced from 37% to 32% in the period 2005‐2009 [6][7]. However, the number
of passengers remained constant to 5.3m.
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3 AEGEAN COMPETITIVE ADVANTAGE
Aegean has concentrated the necessary tangible resources and developed the necessary competencies to successfully compete in the domestic and European market Europe (Figure 3). The strong brand name, the homogeneity of airplanes, the operational efficiency and the customer oriented culture are the key competitive advantages of the company. In addition, the supplementary auxiliary services provided by corporate partners in the tourist industry as well as the company profile (corporate responsibility) further add to competitive advantages of the company in the leisure / travel market segments but also in business travelling. These unique resources and core competences could be further exploited so as to boost company’s performance. However attention must be paid on the cost efficiency.
Figure 3: Aegean (Threshold and Core) Resources & Competences.
4 THE ENVIRONMENT
The market competition is steadily increasing in both domestic and international flights[24]. Furthermore, the sharp increase of cost of fuels is expected to continue in the following years following the increased global demand oil. Moreover, technological trends for larger and efficient
Threshold Ca
pabilities
Capa
bilities for Co
mpe
titive
Advan
tage
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aircrafts become an advantage for airliners that operate super jets4. Furthermore, the adaption of advanced technologies, such as teleconference [20], negatively affected the air travel demand [21]. Finally, the increased social pressure for reduction of CO2 emissions is going to increase the cost of travel fares [3].
The number of passengers and freight is steadily increasing over the last decade by 1,5% annually [1]. Especially the business travellers, which are approximately 30% of the market, seem to create an inelastic need for high quality and reliable air transportation5.
Figure 4: Exploring the Business Environment (Climate Change vs. Security scenario matrix).
The fast technological improvements in security systems will enhance citizens’ security feeling and reduce time and costs for travelling. Moreover, the airline deregulation driven by IATA will have a positive influence on inter‐European travel rates. However, security compliance with international regulations is becoming more complicated and requires significant administration resources. In the short term, this trend causes an increase to the air fare cost. In the long term, these changes will strengthen the confidence of EU citizens to the air transportation.
4 As the new Airbus 380 cannot land in AIA due to infrastructure limitations, any long haul services from Athens are more expensive compared to similar services from other European airports. 5 The economic relations of the EU with eastern European countries (e.g. Russia, Turkey, Croatia, Ukraine, Serbia, etc) will further increase the market size in terms of passenger volumes, number of destinations, etc.
Non Secure Transportation ‐No Climatic Change
‐Multiple terrorism incidents‐ Lack of trust in air transportation ‐ Reduction in demand ‐ Tourism impact‐ Invest in new security systems‐ Increased costs of insurance‐ Operational overheads ‐ Inefficiency‐ Lower airport capacity – Delays‐ Expansion difficulties to markets
Highly Secure Transportation under Controlled Climate Change
Highly Secure Trasnportation‐Uncontrolled Climate Change
Non Secure Transportation‐Uncontrolled Climate Change
‐ General economic recession‐ Sharp decrease in demand‐ High cost of jet fuels & taxes‐ High competition – Price war‐ Prevalence of low cost airliners‐ Extreme losses to air transportation‐ No investment in industry
‐ Safe & reliable flights ‐ Convinience‐ Low costs for air transportation‐ Long term investments in green technologies‐ Higher profit margin‐Market diversification is necessary for success
‐ High cost of jet fuel & taxes‐ Deduced demand for air transportation due to social behaviour – Prefer other means‐ Increase of percentage of business travelers – Need for full services‐ High investments in green technologies
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The climate change and security (or terrorism) threats are two factors that could significantly impact the business environment, as shown in Figure 4.
Two major competitors6 have emerged in the in the domestic market [12][13]. For the international flights, Aegean has to compete intensively with well established airliners that decide to exploit the tourist passengers in Greece. Only in 2009, eleven ‐in general terms‐ small airliners were introduced to AIA [6]. As Aegean has acquired prime time slots in AIA, it is difficult for new entrants to compete. Also, the capital investment, the learning curve and the difficulty of liquefying the assets are three of the major barriers for new entrants.
Aegean cooperates with two global aircrafts manufactures without experiencing a significant pressure. Company’s needs are often satisfied using third‐party suppliers that lease or sell second‐handed airplanes. The technical base of Aegean can support multiple types of airplanes and, thus, switching costs between airline manufacturers, if required, is moderate.
The relative (geo)location of Greece with the rest western European countries and the geomorphology of the country make extremely difficult for other transportation industries to compete the speed and convenience of air transportation. The use of Internet and advanced communication technologies reduce the need for business transportation and partially explain the zero increase of business passengers.
Key buyers for Aegean are individual tourist travellers and the business passengers as well as the international travel agents and tour operators. The latter have contributed by 10% in the Aegean revenues last year. All the buyers in the industry are price sensitive while the switching costs are negligible for them.
5 STRATEGIC OPTIONS & CAPABILITIES
As shown in Figure 5, Aegean could focus on current market and try to get larger market share, offer new services in the existing market (e.g. cargo services), expand to new markets (e.g. US, Africa, etc) or finally diversify by expanding in new markets offering ‐at the same time‐ new services (i.e. diversified tourist services).
6 In the last five years, the Athens Airways [12] and Sky Express [13] emerged in the domestic market, each of them seizing a portion of the market share.
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Figure 5: Ansoff’s market/product matrix.
According to TOWS analysis (Figure 6), a plausible scenario for Aegean is to expand to new markets in North America or Africa. Combined international and domestic tickets may also be considered to attract leisure travellers during the summer period. However, expansion opportunities could be hindered by the decline of operational margin and increased competition from LCC, which may lead the company to consolidate activities and focus in the most profitable destinations.
Potential competition by Olympic Air in the domestic and European market, the fluctuations in the fuel prices and the currency risks may impact the operational margins of Aegean. Consequently, the company could focus on operational efficiency as a measure of reducing costs and financial liquidity problems. It remains challenging, though, for Aegean to sustain its profitability if economic recession in Greece and Europe continues. Such development could lead the company to become a LCC focusing on the local market.
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Figure 6: TWOS Analysis.
Company could also focus on leisure passengers by offering augmented tourist services to individual travellers or international travel agents in middle haul destinations in Europe and specific destinations overseas. Under this perspective, Aegean future strategy may be better aligned with the corporate strategy of major shareholders that have developed versatile activities in the tourist industry, e.g. luxury hotel resorts [16], car rental services [17].
6 EVALUATION OF VARIOUS OPTIONS
Alternative scenarios were clustered and their rationale is summarised herein:
1. Become LCC in domestic and European market Such choice is driven by the fact of declining operating margins and high competition by LCC7 but also of the current financial situation of Aegean, i.e. declining profits and increasing debt. Additionally recession created more price‐sensitive customers while the business travellers refrain from demanding premium services. Aegean also has the required
7 The competition of “no-frills” companies is not considered significant. For example,EasyJet does not fully cover the Greek market.
Strengths
S1: Significant Market shareS2: Strong Financial PerformanceS3: Strong LiquidityS4: High Operational Efficiency
Weaknesses
W1: Increased DebtW2: Declining Operating MarginW3: Reducing Capacity
Opportunities
O1: Network ExpansionO2: Increase in Air Travel Passengers (Leisure and Business)O3: Possible downsizing of Olympic Air
SO
Expansion in US, Africa and & Middle East (O1S3S4)
Attract the majority of international leisure travellers to Greece by combining domestic destinations to islands (O2O3S1)
WO
Increase of Passengers alleviates Low Operating Profit margin (O2W2)
Decrease debt by capturing market share of Olympic Air (O3W1)
Threats
T1: Increased Competition due to LCCT2: Expansion of Olympic AirT3: Increase of Oil Prices & USD/EURT4: High risk due to Expansion
TS
High Operational Efficiency mitigates impact of competition of LCC and increasing Oil Prices (T1T3S4)
Significant Market Share and Strong Liquidity provide the credit ability to finance high risk expansion (T4S1S3)
TW
Reduce capacity and focus on most profitable destination to compete LCC (T1W3)
Increase Operating Margin by becoming a LCC to face Olympic Air Expansion (T1T2W2)
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resources and competences since the renewal and homogeneity of its fleet supports cost efficiency. Therefore a turn to LCC could be proven beneficial for Aegean.
2. Launch a low cost secondary brand in Greece & Expand in European and overseas destinations In order to take advantage of the well established brand name and at the same time become more cost effective and competitive in domestic market where the pressure from Olympic Air8 may become severe, Aegean could launch a subsidiary (secondary brand) to serve domestic destinations at low cost. This would be accepted by the price sensitive customers Aegean could easily adapt its operations to LCC for domestic flights competing also substitutes (e.g. sea transportation) and at the same time continue its expansion program without damaging the high quality profile to other European and overseas destinations.
3. Remain a full service carrier & Expand selectively Aegean could remain full service carrier and expand selectively in US, Canada and Australia targeting to the specific market segment of Greek communities. Consequently, it would preserve the well established position and increase revenue from expansion. Aegean could adopt such strategic plan since both its resources and operational structure could support this expansion.
4. Focus on tourism market segment – Provide augmented services Due the forthcoming price deflation, Greece will become an attractive touristic destination. Greek airports have the potential to become hubs for tourist travellers in eastern Mediterranean. Aegean could take advantage of this opportunity to combine air services with other tourism products that are already provided by its shareholders (e.g. car rental services). It would then develop into a Group of companies offering integrated leisure services to Greek and European markets. This plan would be well accepted by its Shareholders being aligned with their expectations and business strategies. However the tourism industry is seasonal and could affect the financial performance of Aegean.
Several issues could hinder the adaption of such options, as shown in Figure 79.
8 Olympic Air is still the main competitor in the domestic market and one of the major competitors in the international flights.
9 The table is a summary of the evaluation of the four strategic options based on the most critical issues indentified. The issues are assumed to be equally weighted and a scale of -3 to +3 has been considered (ie highly positive interaction is scored +3).
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Figure 7: Scenario evaluation.
7 THE BUSINESS IDEA & RECOMMENDATIONS
Aegean is suggested to exploit two business potentials; (a) the expected tourist flow increase10 in Greece combined with the complementary services of companies owned by its major shareholders, and (b) the company brand awareness in a niche market segment of Greek communities in USA, Canada and Australia.
Aegean, in cooperation with affiliated companies offering tourism related services, may provide attractive augmented products to individual tourists and international tourist operators, consisting the vast majority of international passengers to Greece. The key advantage of this proposal is that competitors cannot easily or effectively imitate such offerings since Aegean with affiliate companies could achieve higher customer value by offering a diverse portfolio of services in competitive price, e.g. due to economies of scope, better alignment of companies objectives and strategies, etc. This could add to the Aegean reputation as a premium provider. A corporate organization ‐comprising of the respective companies‐ could better facilitate the application of such plan by aligning available resources and, thus, achieving cost efficiency and high performance.
10 Tourism flow in Greece is expected to increase due to deflation and anticipated investments in tourism industry.
Options
vs.
Issues
Become LCC in dom
estic
and Eu
rope
an m
arket
LCC second
ary bran
d for
domestic market a
nd
expa
nsion in Europ
ean
and overseas
destinations
Remain full service:
expa
nd in
US, Can
ada &
Australia
Prov
ide au
gmen
ted
leisure services und
er
corporate structure
Increased Debt +2 ‐2 ‐1 ‐1
Declining Operating Margin
+2 ‐2 ‐1 +1
Increased competition by LCC
‐2 +2 +3 +1
Totals ‐2 ‐2 +1 +1
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Aegean should also target to the demand of the Greek communities in USA, Canada and Australia. This market segment is currently exploited by foreign competitors after Olympic Airlines privatization. However Aegean could benefit from its Greek origin and reputation as a high quality and safe airline. Competitive prices though are a prerequisite for such market expansion .
Figure 8: The business idea & positive feedback loops.
Both proposals do not require significant capital investment since Aegean could take advantage of the star alliance partnership and code sharing. More intensive supportive functions, such as marketing or internal administration, would also be required.
The evolving recession and possible collapse of Greek economy could risk the success of such business idea. However the exposure of Aegean would be limited since no intensive investment is required. Aegean should also invest in restructuring and change management since it would need to develop a new corporate culture without disturbing existing balance in operations. New tools and processes should be also introduced for performance measurement such as balance scorecard while personnel remuneration should be directly related to the company performance. Finally the new strategic plan should be clearly communicated to all company personnel via clearly defined objectives, mission and vision statements but also through workshops and open discussions.
International Expansion(Expand to USA/Canada, etc)
Tourist Market(Increase market share)
Increase Revenues(Improve liquidity, profits, etc)
Operational Efficiency(Reduced costs, higher load, reliability, convenience etc)
Compete in the Market(LLC, no-frills, full service)
Augmented Services(air transport, resorts, car
rentals, cruiser services, etc)
Customer Satisfaction
Brand Reputation(Perceived customer value)
Group Tourist Services(Luxurious hotels resorts,
cruiser services, etc)
Tour Operators & Travel Agents
Homogeneous Fleet
Offer Price Discounts
Invest
Trained Staff
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8 CONCLUSIONS
Following the analysis so far and the suggested business plan for the following years, it is evident that in order for Aegean to sustain its competitive advantages and survive under the highly competitive and many times adverse (i.e. economic recession, 9/11 etc) conditions, it should first remain cost effective by optimising processes and keeping operating cost low, secondly exploit available resources to expand towards targeted destinations but also integrate products to present new offerings. Finally develop towards a corporate organization with uniform culture and objectives. That way Aegean would sustain its competitive advantage, protect its shelf from competition, survive the economic recession and be established as a highly value perceived company by its customers.
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9 REFERENCES
(Harvard Style of Referencing Notation is used but references are identified by numbers within the text)
[1] European Commission, 2010, EU energy and transport in figures, 2010, Statistical pocketbook 2010. [2] OneSource Information Systems, 2010, One‐Stop Report Aegean Airlines, InfoGroup. [3] Emissions Trading System (EU ETS), Available at http://ec.europa.eu/clima/policies/ets/index_en.htm
[Accessed on 5th of January 2011]. [4] Aegean Airlines, 2009, Annual Report 2009, Available at http://en.aegeanair.com/ShareDetails.aspx
[Accessed on 5th of January 2011]. [5] Aegean Airlines, 2008, Aegean Annual Report 2008, Available in
http://en.aegeanair.com/ShareDetails.aspx [Accessed on 5th of January 2011]. [6] Athens International Airport, Aerostat Handbook 2009. [7] Athens International Airport, Aerostat Handbook 2005. [8] Star Alliance Reference, Available at http://www.staralliance.com/ [Accessed on 5th of January 2011]. [9] Athens International Airport, Available at http://www.aia.gr/ [Accessed on 5th of January 2011]. [10] Aegean Year 2010 9‐month financial results, Available at http://en.aegeanair.com/ShareDetails.aspx
[Accessed on 5th of January 2011]. [11] Aerlines Magazine, 2007, Business Strategy and Competition for the Future in the Airline Industry,
http://www.aerlines.nl/index.php/magazine/older‐issues/issues‐20‐29/issue‐28/ [Accessed on 5th of January 2011].
[12] Athens Airways, Available http://www.athensairways.com/ [Accessed on 5th of January 2011]. [13] Sky Express, Available at http://www.skyexpress.gr/ [Accessed on 5th of January 2011]. [14] Air France, Available at http://www.airfrance.com/ [Accessed on 5th of January 2011]. [15] KLM, Available at http://www.klm.com/ [Accessed on 5th of January 2011]. [16] Swiss, Available at http://www.swiss.com/ [Accessed on 5th of January 2011]. [17] GloabalData, 2010, Aegean Airlines S.A., Financial and Strategic Analysis, Ref. Code GDTTL23303FS,
Available at http://www.globalcompanyintelligence.com/ [Accessed on 5th of January 2011]. [18] Costa Navarino Luxury Hotel Resorts, Available at http://www.costanavarino.com/ [Accessed on 5th
of January 2011]. [19] Hertz AutoHellas, Available at https://www.hertz.gr/, [Accessed on 5th of January 2011]. [20] Cisco Systems, Telepresence Collaboration Systems, Available at
http://www.cisco.com/en/US/netsol/ns669/networking_solutions_solution_segment_home.html [Accessed on 5th of January 2011]
[21] Crimson Consulting Group, 2009, Study Shows Cisco TelePresence™ Delivers Rapid ROI and Unique Business Benefits, Available at
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http://www.cisco.com/en/US/prod/collateral/ps7060/ps8329/ps8330/ps9599/TelePresence_Research_Brief_Final_03_20_09.pdf/ [Accessed on 5th of January 2011].
[22] Lufthansa Airlines, 2009, Annual Report 2009, Available at http://www.lufthansa.com/ [Accessed on 5th of January 2011].
[23] Singapore Airlines, Annual Report 2009, Available at http://www.singaporeair.com/ [Accessed on 5th of January 2011].
[24] Euromonitor International, 2009, Transportation – Greece Country Sector Briefing.
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10 ANNEX: MARKET ANALYSIS NOTES
Aegean is a full service public air Transport Company providing services to domestic and international destinations. Aegean carried 3.8m passages in 2009 in 26 domestic destinations [4], occupying almost 48% of the market share. In addition, Aegean carried 2.6m passages in 24 International destinations, mainly in Western Europe [4]. Scheduled flights contribute by 84% to the total revenues while charter flights (addressing the needs of large travel operators) contribute only by 10%. In addition, a 6% of the total services derive from supplementary activities.
Based in AIA statistics, 89% of the international passengers choose conventional carriers to travel, as Aegean. Consequently, Aegean targets the largest market segment (rather specific niche markets).
Aegean provides services to the most significant international and domestic destinations. For example, Aegean flights to the top‐5 international destinations from AIA contributing to 54% of the total market. In addition, it services charters to the top‐3 international destinations from AIA contributing 75% of the total market. Aegean services the top‐10 domestic destinations from AIA contributing to 82% of the total market.
Based in AIA statistics, the 68% of the passengers travel for personal reasons. 67% of them travel for tourism and another 25% for meeting relatives. Aegean does not provide services to USA which is the top country for the incoming tourism with a share of approximately 8% of tourist passengers. In the last five years, the business passengers are gradually reducing reaching today 32% of the total passengers [6][7].
Based in AIA statistics, the majority (53%) of international passengers have the Greek nationality, of which 85% live in Greece. Aegean provides services to the vast majority of them (as it does not provide service to US and Australia).
Based in AIA statistics, approximately 53% of the Greek residents book their tickets in the last 10 days before travelling. On the contrary, the majority of foreign residents book their tickets more that 20 days in advance.
Based in AIA statistics, 73% of passengers have higher education. 30% and 22% of the passengers have age between 25‐34 years and 35‐44 years, respectively.
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11 ANNEX: ANSOFF’S PRODUCT / MARKET MATRIX ANALYSIS NOTES
11.1 CONSOLIDATED FIGURE
Figure 9: Ansoff’s product/market matrix.
11.2 BRIEF ANALYSIS Aegean is a full service carrier offering premium quality to short and medium haul services.
As the company has the largest share in the domestic market, significant growth may be achieved by expanding the network to more international destinations in USA, Canada and Australia, especially in regions that many Greek immigrants live. In addition, Aegean may pursuit expansion to Africa and Middle East by taking advantage of the geographical position of Athens compared to the rest European cities.
Aegean may try to exploit economies of scope to provide air cargo services and maintenance, repair and technical support services to other airliners landing in AIA. This opportunity requires the company to strengthen its current competences in order to address the challenges of very competitive markets. Catering and IT services focused on airliners needs may also be considered but the company has no experience today, i.e. high and risk investment will be necessary to enter these markets.
Aegean may risk expanding its business into new markets and new products. The company may focus to leisure passengers and offer augmented tourist services to individual travellers or
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international travel agents in middle haul destinations in Europe and specific destinations overseas. Under this perspective, Aegean future strategy has to better aligned with the corporate strategy of major stakeholders that have developed versatile activities in the tourist industry, e.g. luxury hotel resorts [18], car rental services Error! Reference source not found..
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12 ANNEX: EXPLORING THE BUSINESS ENVIRONMENT ANALYSIS NOTES
12.1 CONSOLIDATED FIGURE
Figure 10: Exploring the Business Environment.
12.2 BRIEF ANALYSIS There are multiple uncertain factors in the contextual environment that may influence the Aegean operation in the near future. At one hand, it is uncertainty when the Governments across the world will decide to control of the environmental pollution and try to significantly reduce the climate change. On the other hand, the political instability in many regions of the planet has caused terrorist incidents that impact the citizens’ trust to air transportation services.
The four possible scenarios that derive from the environmental analysis suggest that Aegean should be cautious in its market expectations and consider measures that minimise the CO2 emissions of the airplanes and strengthen the security during the flights.
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13 ANNEX: PESTEL ANALYSIS NOTES #1
POLITICAL
• The expansion of the European Union to eastern European countries (e.g. Turkey, Croatia, Serbia, Ukraine, etc) will further increase the market size in terms of passenger volumes, number of destinations, etc. In addition, more non‐European countries are becoming more fully integrated to EU legislation, e.g. Russia.
• Open Skies Policy
Not considered as “trend”
• Governmental funding for flights to small islands
• Political instability in Greece and strikes of relevant unions
• EU anti‐monopolistic/competition legislation
ECONOMICAL
• Increasing competition between airliners
• Pressure for concentration of activities (vertical integration) as a mean to reduce costs and strengthen the market position
• Increase of fuel costs
Not considered as “trend”
• Global economic recession, i.e. less tourists in Greece. It won’t last for ever!
• Greece economic recession, i.e. less travellers. It won’t last for ever!
• Growing unemployment in most economies. It won’t last for ever!
• Declining consumer spending due to economic recession. It won’t last for ever!
• Increasing social insecurity due to economic recession. It won’t last for ever!
• The possibility of the bankruptcy of general government in Greece.
• Its seems that there is no increase of Greek investments in Balkan peninsula.
SOCIAL
• Increase of transportation of passengers and freight via air [1].
• Less business travellers
TECHNOLOGY
• Trends for larger (and thus more economic) aircrafts, e.g. Airbus380 and Super Jets
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• Increasing usage of advanced communication technologies, such as teleconference/telepresence, may reduce the number of business travellers.
• Further improvements in security systems (e.g. ultra sound passengers control) improves citizens security feeling and reduce time / cost for travelling.
Not considered as “trend”
• Inability of Athens International Airport to allow landing of large airplanes
ENVIRONMENTAL
• Increasing pressure to reduce CO2 emissions in air transportations. o In 2020, emissions is planned to be 21% lower than in 2005 [2]. Airlines will join the
scheme in 2012.
Not considered as “trend”
• Environmental disasters
• Noise pollution issues in cities
LEGAL
• Driven by International Air Transport Association (IATA), the airline further deregulation process has certainly had a positive influence on inter‐European travel rates. Flying has become much easier, faster and convenient. This trend is expected to continue in the following years in regions outside Europe.
• The harmonisation of existing business processes and working practices in airports and airliners is going to increase in order to more effectively address terrorism threats (e.g. 911 attack) and global health care concerns (e.g. “bird flue” epidemics, etc). Compliance with international regulations is becoming increasingly more complicated and requires significant admin efforts. In the short term, this trend causes an increase to the air fare cost. In the long term, these changes will strengthen the confidence of EU citizens to the air transportation.
Not considered as “trend”
• Pressure to include insurance costs for terrorism event to air fares.
• The number of Schengen countries. Not a significant increase!
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14 ANNEX: PESTEL ANALYSIS NOTES #2
POLITICAL FACTORS
• Geopolitical stability (e.g. war, terror, disease) Unstable political global situation (expressed, for example, in the forms of 9/11 and other terrorist events) and new global health concerns (e.g. epidemics such as “Sars” or “Bird Flu” ‐ The World Health Organisation (WHO) has already forecast a global epidemic within the next years) give rise to new increased regulations imposed by the EU and IATA that will cause changes to existing business processes and working practices in order to achieve compliance.
More Specific to Greece:
High danger of political instability and social unrest as a result of the latest economic crisis.
• International liberalization of air travel (e.g. the EU‐USA open sky agreement) Stiff competition and price wars between airlines. Cheaper ticket prices are imposing the need of maximum capacity in order to make a profit. Renewed interest in airline industry consolidation
• Harmonization of air traffic controls (Single European Sky) Safer and more efficient utilisation of airspace and air traffic management within and beyond the EU.
• Governmental competition policy – Barren rows It has been estimated that within the next two years leading up to the new tender the EU regulation will provide more stringent criteria for the classification of services within this particular public service obligation, as well as a fairer competition scheme.
• Regulatory constraints governed by International Air Transport Association (IATA), as well at the EU In general airline industry regulations are getting increasingly more complicated and require extensive admin efforts to maintain the compliance with those regulations. All these factors add up as an additional cost having a huge economical impact on the airline.
• Further EU expansion The recent and potential continuing expansion of the European Union eastwards will offer a growing market in terms of passenger volumes, destinations, and suppliers, particularly as the new markets become more fully integrated, including membership of the Euro zone.
• Political support for airport expansion Airports and airlines receive special subsidies from Governments which directly fuel unsustainable airport expansion and growth in air traffic.
• Allocation of airport slots and fees With the increase of air traffic, there is a continuously growing demand for capacity at congested airports. Under the new EU framework it is hoped that slots will be distributed in an equitable, non‐discriminatory and transparent way ensuring the fullest and most efficient use of existing capacity at congested EU airports while maximizing consumers' benefits and promoting the competition.
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ECONOMICAL FACTORS
• European/Global economic recession Due to the global recession the airline industry is unable to perform well. The recession in 2009, was a major factor contributing to the downturn in demand for air travel, which is distinguished by high income elasticity. (Economic decline in 2009, 6% in Europe, 3% globally for air industry. The sector ended in 2009 with the largest drop recorded since the Second World War. In terms of demand, "2009 will be recorded in history books as the worst year ever seen the airline industry," according to IATA Director Giovanni Biziniani.) This resulted in a dynamic trend passengers to fly with low cost airlines instead of more expensive.
Tighter fiscal policies in most European economies ‐ Higher taxes, less government spending
Declining consumer spending.
Growing unemployment in most economies.
• Prices of oil/fuel and CO2 certificates Since the political situation in most major oil producing countries will stay unstable for the foreseeable future, the oil prize will remain a main problem for airlines. The fuel cost difficulty is exacerbated by unpredictable currency exchange rate fluctuations because aircraft fuel prices are denominated in US dollar. (According to UK National Statistics' CPI, the cost of passenger air transport in the UK enlarged by 34.3% in 2008 due to high oil prices(peak oil $147 a barrel). The price of oil was, too, the main factor affecting the mode of the Aegean in the same year.) (To manage this risk, the company applies fuel surcharge on ticket prices and abroad, as well as it uses commodity swaps as hedges to cover that risk.)
The impact of deteriorating economic climate in the financial results can not be quantified and will depend on: a) the degree of decline in demand in Europe, b) the progress of the new routes, and c) the competitive environment for network
The overall yield will continue to decline across the airline industry, and hence efforts to further reduce unit cost may be required.
• Capital market risks (e.g. exchange rates, interest rates, liquidity) EMU in danger.
Foreign currency exchange risks.
Less credit available to business for investments coupled by higher interest rates.
• Expansion of low‐cost carriers (e.g. in terms of distances, destinations, services) Business flyers face no‐frills future. “The recession significantly reduced the amount of UK business travel but also changed its nature,” said Harry Bush, the CAA’s group director of economic regulation. “It accentuated the trend away from short‐haul business class to economy and no‐frills. Businesses economised across the board.” “There seems to be a general acceptance that demand for business class on short‐haul trips will never recover,” says the CAA report. (FT, 28/12/2010)
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• Shift of economic power towards Asia Asia, as it is widely argued by politicians and academics alike, will be the growth engine for the next two to three decades at least, and spending power has shifted away from the richest countries towards a growing middle‐income bloc.
• New competitors from emerging countries
SOCIAL FACTORS
• Corporate travel budgets Decline of business travelers as a result of organizations’ cost reduction policies (Business flyers face no‐frills future. “The recession significantly reduced the amount of UK business travel but also changed its nature,” said Harry Bush, the CAA’s group director of economic regulation. “It accentuated the trend away from short‐haul business class to economy and no‐frills. Businesses economised across the board.” “There seems to be a general acceptance that demand for business class on short‐haul trips will never recover,” says the CAA report. (FT, 28/12/2010))
• Increased mobility of all EU citizens. More traveling trends within Europe – Increase of leisure travelers Over the last thirty years, there has been a boom in mobility in Europe. For millions of citizens travel has become a reality, indeed a right.
• Migration Increase of migration due to economical reasons
More Specific to Greece:
In addition to the millions living and working abroad an additional factor that promotes aviation in Greece is the wave of immigrants entering Greece in recent years. In 2007, indeed, was in fifth place in the global ranking of countries taking immigrants, following the U.S., Sweden, France and England. Simultaneously, it is the European country with the largest number of immigrants per 1,000 inhabitants. New roots such as Istanbul, Cairo, Bucharest, Sofia, Belgrade and Tirana give an opportunity to the company to strengthen its reputation and increase revenue.
• Country’s population – geography – demographics More Specific to Greece:
Given the size of Greece (11 million approx.) it could be argued that the room for higher domestic growth is limited and its prospects and growth can come from further EU roots expansion. Especially for the Greek economy, the sector is of great importance, since the vast majority of tourist trips (about 75%) is air. Moreover, Greece has no land borders with other countries of the EU, and because of its geographical position is a natural gateway to the southeastern tip of the Community and in Europe generally.
• Service/comfort/price expectations of potential customers
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• Trend to use more climate‐friendly transportation means, such as electric trains
TECHNOLOGICAL FACTORS
• Improvements in operational efficiency (e.g. speed, safety) Internal and external constraints and their implications on airline operational and financial performance, safety, and the environment. Continuously changing technology requires continuous upgrade, training and development of the existing processes.
• Broadband communication technologies – telepresence Advances in video conferencing and other communications technology will most likely cut demand for business travel.
• Technological advances in rail/ship travel (high speed, climate friendly transportation means) • New technology airplanes ‐ lower fuel consumption ‐ Development of synthetic jet fuel replacements
For the past several decades, commercial airlines have dramatically improved fuel and GHG efficiency by investing billions in fuel‐saving aircraft and engines, innovative technologies like winglets and cutting‐edge route optimization software. For example, between 1978 and 2007, the U.S. airline industry improved its fuel efficiency by 110 percent, resulting in 2.5 billion metric tons of GHG savings – roughly equivalent to taking more than 18.7 million cars off the road in each of those years. (Source: U.S. DOT Form 41; automobile equivalent calculations from www.epa.gov/cleanenergy/energy‐resources/calculator.html.) The research, development, production and deployment of advanced, fuel efficient airframes, engines and other fuel‐efficient equipment will play an even more decisive role in the aviation industry in the years to come.
• E‐commerce The biggest technological impact on the airline industry is the rapidly expanding application of e ‐commerce. This may be a huge advantage for airlines, because according to Computer Weekly, the Internet became the most dominant technology for booking travel. Expensive costs of maintaining internet sites are balanced by huge savings in other cost reductions, and improvements in service.
• Inability of Athens International Airport to allow landing of large airplanes (e.g. Airbus 380) • New security check technologies (ultra sound)
ENVIRONMENTAL FACTORS
• Global warming ‐ Carbon Dioxide Emission Aviation currently accounts for 3% of global carbon dioxide emissions and air transport has an impact on global climate, by 2012, emissions from all flights to and from EU airports will most likely be included in the Emissions Trading Scheme European Union (EU ETS). This innovative move is the result of lengthy and difficult negotiations, confirms the intention of Europe to reduce the impact of aviation on climate and economical way. The inclusion of aviation in emissions trading scheme means that we put limits on
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how much carbon dioxide may be emitted by each airline. Companies that exceed their limits will have to pay for the excess, while those that manage to emit less carbon than their share could sell the rest to other companies.
• Environmental consciousness of citizens/consumers and the adoption of Corporate Social Responsibility practices in the airline industry Sensitive social issues such as: Emission reduction programs, employee wellbeing and engagement, diversity and social equity, community wellbeing and economic prosperity, can no longer be overlooked by no company. People’s concerns and the need for ecologically sustainable development can no longer be ignored and communities across Europe join efforts to ensure the industry and Governments start acting responsibly, with people’s health and their environment at the heart of all decision making.
• Noise level controls EU regulations directive on noise requirements placing obligation on the installation of hush kits on all aircrafts
• Increasing amount of environmental regulations
All the above are issues that must be considered very carefully as they can result in very high costs for the airline.
LEGAL FACTORS
• Inclusion of the aviation industry in the EU Emission Trading System In a move which has predictably angered the airline industry, the EU overwhelmingly passed legislation which will include airlines in the EU Emissions Trading Scheme from 2012. Under the rule, airlines will have to cut CO2 emission by 3% in the first year, and by 5% from 2013. All airlines flying in and out of the EU will have to meet the reduction numbers. With or without any proven benefits for the environment, it means even more financial pressure on airlines.
• Changes in collective bargaining law A significant legal factor affecting Airlines, and Aegean in particular, is the power of trade Unions.
(According to the Independent (2010) it was estimated that the recent strikes cost BA between 40m to 45m and subjected its public image. Legal regulations on customer rights will have tremendous financial impact on airlines due to recent closure of European airspace. The regulations setting up airlines' responsibilities in the event of flights being delayed or cancelled cost BA between 15m and 20m per day.)
• Changing safety regulations The most important indicator of the overall safety of an airline is how it is regulated by its nation's civil aviation authority. Airlines operating large capacity passenger aircraft in the major industrialized countries have to follow the strictest safety regulations.
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15 ANNEX: 5 FORCES PORTER’S ANALYSIS NOTES
15.1 THREAT OF NEW ENTRANTS
Positive to Aegean
• A high capital investment is necessary. There are substantial costs to access credits (e.g. long term loans), especially due to the economic recession
• Learning curve advantages seems to be less significant as access to experienced personnel is possible.
• Exit barriers are high (e.g. liquefying the assets is problematic) and investors are more conscious
• Aegean has acquired prime time slots in AIA, which will be difficult for a new entrant to acquire (Panos said that time slots may traded in the open market).
Negative to Aegean
• Regulation of the market protects the new entrants in the Greek market. The merge with Olympic Air will not be granted!
• Internet (forward vertical integration) and travel agency services guarantee easy distribution channels to end customers
FACTS
• Many new entrants in the industry were acquired (or merged) in the last decade
• The size of domestic market does not justify more than two competitors.
15.2 POWER OF SUPPLIERS
Positive to Aegean
• None identified
Negative to Aegean
• The airline supply business is mainly dominated by Boeing and Airbus. For this reason, there is a lot of competition among suppliers.
• Switching costs too high for any airline to switch to another plane provider since cost is high and there is possibility for service disruption.
• Jet fuel prices. There is no means to negotiate prices (as these are set by world demand)
• Lack of control to catering subsidiaries
• Lack of extensive airport technical facilities
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• Entertainment
FACTS
• Other competitors have catering subsidiaries, technical facilities,
15.3 AVAILABILITY OF SUBSTITUTES • Substitute products to the airline industry are considered vehicular, rail and boat
transportation services,
Positive to Aegean
• Due to the geo‐location of Greece, vehicular, rail and boat transportation services are not considered as close substitutes
o Speed of transportation offers performance advantage that customers value
Negative to Aegean
• For domestic transportation, vehicular, rail and boat transportation services are close substitutes
o Boats for islands (transport vehicles, reduced prices) o Trains (reduced prices to Athens – Thessaloniki, fear to travel with airplanes) o Bus services (for price‐sensitive customers)
• New communication technologies reduce the need for business transportation o Large usage of Internet o Small portion of videoconference
15.4 THE POWER OF BUYERS
• Due to economic recession, buyers are becoming more price sensitive (and thus the profit margins are reduced)
• Travel agencies have significant power, as they contribute by 10% in the company revenues [4].
Negative to Aegean
• Low switching costs
15.5 COMPETITIVE RIVALRY
Positive to Aegean
• Aegean strong identity brand, built up over the last decade, protects the company for potential new entrants in the local market.
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• New fleet of planes
• Largest market share in Greece
• Member of Star Alliance (largest in the world)
Negative to Aegean
• Small size compared in Europe
• Exit barriers are high (e.g. liquefying the assets is problematic) and thus competition is strong
• A high capital investment is necessary and thus competition is strong
• Low differentiation (especial for domestic flights)
•
FACTS
• The international transportation is fragmented
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16 ANNEX: SWOT ANALYSIS NOTES
16.1 CONSOLIDATED FIGURE
Figure 11: SWOT Analysis
16.2 BRIEF ANALYSIS Aegean is considered a strong player in Greek market and has a significant market share of the flights towards Europe. Aegean is well positioned in the airlines industry and its cash reserves offered a valuable asset during the recent economic recession. However its increasing debt and high risks due to volatile oil prices and market competition (price war) could threaten its growth. Available opportunities could help Aegean redefine its strategic path towards future challenges. The SWOT analysis presented below:
Strengths
1. Significant Market share: Aegean has a significant market share of ~30% of passengers carried in Athens International Airport among 65 carriers and it holds a significant position in both domestic and international passenger traffic at the airports of Thessaloniki and Heraklion
2. Strong Financial Performance: Aegean’s compounded annual growth rate (CAGR) for revenue was 21.2% during 2004‐2008. This was above the S&P 500 companies’ average of 11.1%. This
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could be attributed to international expansion to many of the top European Destinations following a focused strategic plan and enables the company to grow in its business.
3. Strong Liquidity: Aegean is financially sound with strong liquidity and cash reserves. Also its current ratio was 2.25 at the end of 2009 which is above the S&P 500
4. High Operational Efficiency: Aegean has increased its operational efficiency due to the renewed fleet that offers high cost efficiency and higher capacity while it achieves high load factors and average passengers per flight
Weaknesses
1. Increased Debt due to LCCs: Aegean has a significant amount of debts (both short & long term) over equity resulting to high gearing that could impose the risk of reduced credibility and ability to raise funds for expansion
2. Declining Operating Margin: in recent year 2009 Aegean has experienced a reduced operating profit margin comparing to last years, that could indicate less management focus on profitability
3. Reducing Capacity: Aegean has postponed the ordering of 3 Air busses A320 for the 2014, reducing the capacity and therefore one of its competitive advantages
Opportunities
1. Network Expansion: The planned network expansion (especially in international destinations) would enhance its brand awareness as well as contribute to the establishment of its name as a quality carrier offering a wide range of choices in domestic and international market.
2. Increase in AirTravel Passengers: An increase in Airline passengers in expected especially from and towards emerging markets
3. Possible downsizing of Olympic Air: Aegean could benefit from the possible downsize of Olympic Air
Threats
1. Increased Competition: Expansion of Low Cost Carriers and No Frills due to demand of lower prices and economic recession
2. Expansion of Olympic Air: Successful restructuring of Olympic Air may lead to stronger than expected competition
3. Increase of Oil Prices & USD/EUR: Volatile oil prices and EUR to USD exchange rate would have adverse impact on Aegean cost efficiency (The Company incurs a substantial portion of its expenses, such as aviation fuel, aircraft lease expenses, distribution costs, spare parts,
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maintenance expenses and aviation insurance premiums in U.S. dollars, whereas it generates most of its revenues in Euros)
4. High risk due to Expansion: International expansion program involves high risks due to decreased air travel demand and capital intensive investment