Strategic Assessment Of Caribbean Airline Industry

Executive summary

The Caribbean region is an archipelago of islands worth investigating the nature of transportation connecting them. In this paper, the discussion has focused on the evaluation of the airline transportation by the largest regional carrier which is Leeward Islands Air Travel. The paper discusses the strategic concepts of the company including PESTEL, SWOT and knowledge analysis. The paper also identifies the company’s corporate and competitive strategies and describes the findings to recommend any changes that may improve its operation in the future.

Introduction

In the Caribbean region, airline transportation is very is very important for the transportation of both people and freight. The Caribbean Airline industry comprises of airports and ground facilities, and the airplane and the air control system (ECLAC, 2011). Although this industry operates across small island economies, it offers the essential contribution of social and economic link between countries, cultures and people.  These links offer employment and act as a catalyst that enhances business efficiency and productivity since the access to suppliers and customers is made easy (ECLAC, 2011).

Tourism industry also benefits a great deal as the airline transportation industry opens up new markets for international travel. The Caribbean region is an Archipelago of island states which are located in very close geographical proximity situated between large continental land masses of Northern and Southern America. These Caribbean economies are separated by large sea expanses which is what makes air transportation the best and most practical transportation mode. This is the case especially with the tourism industry which had an approximately 20 million visitors in 2009 and an annual growth of about 1.5% over the past decade. During the 2000-2009 periods, 13-15% of the total international arrivals to America were accounted by the Caribbean.

The region’s air transport promotes the growth of the tourism industry by acting as destinations for foreign carrier services and through foreign hubs use in the case of North America. Different parts of the Caribbean depend on their air travel in different ways. For instance, tourist dependent economies like Barbuda, Barbados, Antigua and Bahamas comprise of a larger percent air travels while others are dependent on handling local residents like the Guyana, Trinidad and Tobago. The foreign visitors to the Caribbean sub-region are mostly from smaller sources in North American and Europe. Intra-regional flows account for a relatively smaller tourism share compared to the extra-regional air traffic of passengers.

Given the sizeable domestic markets and the wider rang e of international source markets, it is impossible to exercise any degree of control over developments in these traditional source markets (ECLAC, 2011). This is so the case especially when socio-economic changes on air transportation GHG emissions in the US and the European countries arise from new regulatory framework. The local air carriers in the Caribbean have poor financial performance records and several rounds of blanket subsidies by region’s stakeholders have been issued by stakeholder governments (ECLAC, 2011). Some of the affected airlines are Leeward Islands Air Transport (LIAT), and Air Jamaica among others.

Inefficiencies stemming from lack of access to scale economies, weak capitalization, preferential lease and fuel rates and relaxed labor markets, are some of the factors that bring about poor financial performance. This paper discusses the strategic management assessment of LIAT. Much consideration will focus on the company’s critical strategic management concepts and provision of workable recommendations to sustain the firm’s competitive advantage and viability.

Leeward Islands Air Transport (LIAT)

This is an airline whose headquarters are located at V.C. Bird International Airport. This headquarter is in Saint George Parish, Antigua.  The company has about 21 destinations within the Caribbean region and these are efficiently and effectively served by its high frequency operations across them. The company was founded on the 20th of September in 1956. It was then that the company began its operations flying with only a single Piper Apache to and from Antigua and Montserrat.  LIAT’s expansion to other Caribbean destinations was facilitated by its acquisition by the larger BWIA in 1957. This acquisition also brought about the acquisition of new types of aircrafts like the Beechcraft Bonanza and the De Havilland Heron airplanes.

Later on in its operations, LIAT decided to do away with the Hawker Siddeley HS 748s in 1965 and this landed the company to a new form of operation all together. During the first years of its operations, LIAT was an all propeller engine airline but in 1971, this airline company decided to get into the jet age after 75% of its airline was obtained by court line with this start made possible by the BAC One Eleven airplane which was used by the company for its long distance routes. The Britten-Norman airplane types were also used for transportation to long distance route. However, court line later got bankrupt and 11 Caribbean airlines decided to get it going by buying the airline replacing the jets with smaller airplanes like De Havilland Canada DHC-6 Twin Otters.

In the 1980s, the airline experienced a great deal of growth expanding even to other parts of the Caribbean region where it had not operated. In order to reduce the flight time systems, faster airplane were bought. In the 1990’s, the airline experienced hard financial times that led to its partial privatization in 1995 to put aside it’s already was bankruptcy position. LIAT has destinations from Southern Georgetown Guyana in the south to Santo Domingo Dominican in the North. It therefore connects all the islands found between these two islands through its high frequency services.

The most recent of the Airline’s incidents and accidents was the huge fire that swept through the hangar located in Antigua’s international airport on 10 June 2012 (Nationnews, 2012). This fire destroyed the airline’s two office buildings, a hangar and a Dash8-300 aircraft (V2 LGH). Investigations on the cause of the fire began immediately but and its operations resumed to normal the next day. No one was injured during the explosion but the company suffered a huge deal.

The main shareholders in LIAT are regional with the Barbados,, Barbuda and Antigua being the largest shareholders of all. St. Vincent & the Grenadines are also major shareholders (Nationnews, 2012). This fire is a major blow to this 56-year old company which have been saddled with financial and industrial relations problems over the years.

Business environment analysis

In order to evaluate the environment within which LIAT airlines operate, this section will evaluate the company’s strategic management components which are PESTEL, SWOT and knowledge analysis as well as the five forces model.

PESTEL analysis

PESTEL analysis is a tool that looks at the external factors and assists organizations to consider external factors and help them to think about their impacts. This analysis takes place through the evaluation of external factors of the political, economic, socio-cultural, technological, environmental and legal nature.  In order to understand the strategic management plan in LIAT Airlines Company, the PESTEL analysis will help us understand the big picture of the Caribbean airline operations, and look up for the available opportunities and minimize threats.

Political factors

The political factors around any business have a very huge impact on its operations. These factors either regulate the business or the spending power of consumers and the business. LIAT operates frequent and rapid operations to most of the Islands in the Caribbean region (Wensveen, 2010). Any political changes in this destinations like the change in government type and stability would actually affect the way the airline carries out its operations. Any likely change in the political environment within the Caribbean region or regulations due to the need to control against terrorism would destabilize the organization’s operations. 

Other factors include the regulations and de-regulation trends, tax policy and trade tariffs and social and empowerment legislations. The governments within the Caribbean region encourage the private sector model for economic growth which is what calls even for foreign investors. In this case, external investors can invest in the company to avoid bankruptcy. It is also the governments that allow regional air transportation that enables LIA T to offer frequent daily services to and fro most of the 26 Eastern Caribbean destinations.

Economic factors

The economic factors have the likely effect of affecting the purchasing power of potential customers and the firm’s cost of capital. For instance, the recent global economic recession had the impact of reducing the number of airline travels as the cost of living went high and many potential customers prioritized on the basic needs (Wensveen, 2010). This led to the low number of people preferring to use the airline’s services.  This was worsened by the level of inflation which went high and so were the interest rates. It meant that the organization could not risk going into borrowing only to pay their loans at unmanageable interest rates. 

During hard economic times as these, it is likely for a company to go into reducing the costs of labor. When these happen, it means contributing to the increasing rate of unemployment. Other potential aspects that may influence the airline economically are the changes in technology that calls for the firing of employees to pave way for automated systems that require little or no human operation. Some factor like the September 11, 2001 attacks in the United States and the need to keep citizens safe meant regulating air the number of air travelers to the Caribbean region affecting not only the extra-operations but also the intra-operations of airlines.

Sociological factors

The Caribbean region is well populated by Hindus, Muslims and Christians as the main religious groups. This encourages free travel of people from these religions throughout the years. Most of these nations also celebrate main holidays for persons in these religions encouraging visits between the Caribbean states for religious celebrations and other operations (Wensveen, 2010).  The bled of people from different ethnic groups has also led to the growth of tourism across the different regions.

The different social factors are like value and attitudes affects the way people view traveling with the airlines. For instance after the recent fire in the airlines main hub, people had fear of traveling with this airlines. The fire also prompted fear in those willing to have their cargo ferried by this airline. These changes have affected the purchasing power of potential clients forcing the company to operate in low demand for travel and therefore low incomes. Some other factors that are likely to affect LIAT operations include ethical issues and diversity as the workforce has to provide equal employment and labor opportunities to all.

Demographics are like age, race and gender and family size.  In most cases, the minority races like the African Americans are associated with low income which reduces the number of those who seek LIAT airline services. Conditions of low income occupations, low earning capacities and poor living standards will not allow potential airline customers to seek for LIAT or any other company’s services.

Technological factors

Technological advancements have major impact on the business success. These requires for companies to keep up or risk going out of business. Most technological changes affect people’s attitudes like the way they spend their leisure time (Wensveen, 2010). While some people would prefer traveling, others would prefer learning about different world destinations over the internet.  This means there are less air travelers.

Technological changes have affected LIAT’s operations as clients can book and pay air tickets online. Cargo carriage and destinations can also be booked and information assessed online. The emergence of new types of airlines has made it possible to offer safe and faster travel services for both people and cargo. Given the many airline companies in the Caribbean region, competing technological developments have made it possible for companies to hire only what they can afford and this has the impact of limiting the quantity and quality of services. Other airline companies have even suffered bankruptcy for aiming too high yet with too little resources.

Legal factors

LIAT has to operate under different industry specific and global regulations. The increased number of airlines operating into bankruptcy has led to the increased number of alliances. Since its formation, LIAT has been acquired by different companies and airlines to relief it from bankruptcy.  Such regulations have made it possible to remain in business. Other regulations like the US control of airports have led to the reduction in the number of visitors who would require the service of LIAT to travel to different Caribbean destinations. Other factors that affect its operations include the current market operations and others.

Environmental factors

The most common environmental factor is on the regulation of airline traffic and airline safety. Airline traffic reduces the number of air trips an airline has to offer to different destinations. This is done to reduce the level of air pollution (Wensveen, 2010). Safety and security are also other regulations that affect LIAT as all airplanes have to be maintained after a required period of time. Such maintenance increases the costs of operation depending on the type of aircraft under maintenance. Being partly privatized, investors’ regulations and values affect the airlines operations since they want operations that will return on their investment.

SWOT analysis

SWOT analysis is the technique used by businesses to understand both its internal and external environment.  This tool is very important for strategic planning and involves the assessment of strengths, weaknesses, opportunities and threats.

Strengths

Within the Caribbean region, LIAT has a very good brand name which makes it the most preferred airline in the industry. This is evident in the fact that the airline dominates the operations to fly in the Barbados/Guyana and Barbados/St. Lucia routes which are the two most profitable routes.  There is also a good reputation on how the managers handle their subordinates as they use a participative approach to ensure no useful idea is locked out from the businesses operations.  Over the years, the company has had no crash with the government or agency as they have made it a duty to pay all debts to allow for continuity and profitability. The company is also using effective means for the promotion of its products.

Weaknesses

The company has on several occasions landed in mismanagement making it to suffer from bankruptcy. This means the company is insufficient to handle problems. In June this year, the company suffered from huge losses due to a fire inferno that destroyed one hangar, one airplane and two buildings and this has tarnished its image. The airline staffs are not as well trained as they could have managed the fire before it caused too much damage. The company is also associated with high fare charges to St. Lucia.

Opportunities

LIAT operates within a very highly competitive business environment which calls for the aggressiveness (LIAT, 2012).  The company as for now serves the Eastern Caribbean region and a few other islands. Given the demand in the other parts of the Caribbean region, considering expanding to cover other upcountry destinations would serve it right.

Considerations of getting into alliances would also increase the number of destinations for this airline company (LIAT, 2012). The loosening of air traffic regulations would mean that travels to different destinations increases. Schedules for different flights would change guaranteeing the company increased flight income. The lowering of the local and regional inflation levels since 2010 are a good opportunity to take flights to different parts of the globe.

Threats

The June 2012 fire incident in the airlines headquarter is a big blow and would have a great impact in shifting the consumer tastes away from the firm into the competitors’ preference.  New regulations like the opening up of the Barbados/Guyana and Barbados/St. Lucia routes by the Barbados’ government to the REDjet poses the risk of low profits. This is because the two routes are the most profitable for LIAT. The new entrance of REDjet and the recent fire inferno may work against this airline causing even less preference by travels in this routes. The shrinking of profitability of these two routes is worsened by the region’s small size yet too many airlines in operation.

There has also been a recent decision by St Lucia not to invest any funds into this regional carrier which means less operation funds. The St. Lucia government has also issued a report that they will be seeking alternatives to the high charges by LIAT by encouraging the investment by other airlines (LIAT, 2012). The global economic state has severely affected the prices of oil which have in return affected the operations of LIAT among other airlines. Fuel cost has been one of the largest expenses especially during the 2007-2010 global recession period.  Being a short- haul airline, LIAT has lower fuel efficiency due to take offs and landing (investopedia, 2012).

Porter’s five forces

A very simple way to assess the airline market is to use Michael Porter’s five forces model. This model is useful in providing relevant information on the categories of the market forces in the industry. These forces include substitute, suppliers, buyers, new entrants and competition.

Supplier power

In order to remain competitive, LIAT has to gain power of suppliers. The Caribbean market and the diverse portfolio of the airline’s assets attract numerous investors. The company needs resources like repairs, equipment and consumables which they have always gained from the best suppliers. This has made investors confident as the company only invests in the best of equipment which guarantees them good return for their investment.

In 2007 when oil prices shot up, LIAT had to buy jet fuel from the best bidders to avoid suffering the losses of high cost fuel at the verge of low traveling demand. Most suppliers trust the organization for its strong balance sheet that serves to attract reputable investors. The strong financial strength, its operations personnel, the depth and breadth of its operational skills have highly contributed to the reduction of suppliers bargaining power.

Bargaining power of customers

Customers are what make LIAT to exist and continue growing. The LIAT serves quite a large market area with over 21 destinations within the Eastern Caribbean region.  There is a cohesive loyalty among the buyers and the company for reasons such as attractive incentives and value added partnering. The investors and shareholders have also expressed their satisfaction on the services offered by LIAT. The presence of advanced technology has also seen most of the clients satisfied with the company’s services causing them to remain loyal to its services

Threats of new entrants

In the Caribbean airline industry, there is high threat for new entrants especially given the different opinions different governments have on LIAT. Recently, St. Lucia’s government has declared not to invent even a single cent in LIAT claiming it was exploitative in its fare charges and an alternative airline would serve better (Caribbean360, 2012). However, the many years of experience in the airline industry has placed the airline at a solid foundation against the threats of new entrants.  The company has also adopted a technology that has reduced the friction that may arise from the threat of new entrants.

Threats of substitutes

Customers are likely to switch to sea transportation. However, the company has taken up new aviation technologies that ensure that travel is safe and very fast. This has sufficiently cut off the room for customers switching or shifting preference to these other transportation models. The company’s strategy has also increased the switching costs, alliances and surveys to learn of their preferences, accentuated differences and the entrant of substitutes in the market. This has led to the reduction of threats.

Competitive rivalry between competitors

Competition is significant in any business. This is because it attracts customers and the less an organization places its products the more the customers they gain. However, the airline industry is not about price but on how best their strategy leverages their services (Caribbean360, 2012). Competitive advantage of LIAT is due to the ability to differentiate and segment itself to the Caribbean. This scope makes it very possible to offer high quality services by understanding the users’ needs and remaining ahead of any changes in regulations. The company also professionally manages the entire process of business hence diversified course of business.

Strategic direction

Vision

LIAT seeks to provide safe, reliable and affordable air transport service to all major airports in the Eastern Caribbean region.

Mission

To provide save, reliable and affordable air transport services to the general public

Objectives

To provide transport services for people and cargo with the highest level of safety and reliability

To remain the region’s most reliable and affordable airline services provider in the Eastern Caribbean

To grow to be the airline company that meets their needs in the most satisfactory way.

                                                             Business model

The airline operates in a business model that accommodates both people and cargo carriage. The LIAT is the largest regional airliner in the Caribbean islands and offers its service strictly within the 2,500 miles long and 160 miles wide archipelago islands (Cannegieter, 2011). The main reason is due to the fact that these islands are separated by stretches of seawater and the most sufficient and fast way to travel is by airplane.

The market for the airline covers the Spanish West Indies, French West Indies, British West Indies and the Virgin Islands (LIAT, 2012). This airline is government owned in partnership with four other governments after it suffered bankruptcy in 2007. This may however not last long as the airline industry has been provided with increasing awareness to privatize airlines and restructure the organization for more profitability (Cannegieter, 2011).

 

The present business model for this company has no City ticketing Office as they were contributing to the increased organization expenditures thereby draining its financial resources. Given the intra-operation nature of airline transport services, the model of business is point-to-point as flights are provided to and from these destinations. Aircrafts do not have to wait until there are connection flights and this reduces the fixed costs which account for the largest part of the operation costs. The current company’s business model comprises of a state of art reservation, booking, revenue management and flight information system named Navitaire.

Strategic choices and value creation

Corporate strategy

LIAT airline, like most of the airlines in the Caribbean has experienced a fair share of bankruptcy episodes since its formation in 1974. The company still remains a government own institution which is what most of its critics associate to its financial crises episodes. While the global airline is taking the privatization path, the airline has only partly privatized to other governments with the Barbados being among the largest shareholders (LIAT, 2012). This move is very critical given that Barbados has its own airlines like REDjet which they want to operate in the same region. In order to remain competitive, the company has to work on and overall privatization program.

The company now finds itself facing the problem that has previously been considered impossible: getting into full privatization. In order to acquire this goal, the Antigua based airline privatized just part of its ownership but still it operations have not been harmonized. The company’s bankruptcy issue has been dealt with through several changes like rescheduling payment with all third party creditors, development  of a new business model, expansion from 11 to 13 Dash 8, creation of a new commercial department, appointment of a new CEO and the elimination of the city Ticketing offices and other cost cutting measures.

Competitive strategy

The company together with the Caribbean star is the largest regional airlines in the area.  For a long time, these two airlines have been competing side by side with each other. However, LIAT has proposed a merger which is now underway in order to increase the company’s market share and competitive advantage. As of now, the route networks for the merger are still under discussion and all flights are being marketed as LIAT flights (Cannegieter, 2012). This has provided LIAT with a more solid foundation and the two have agreed to work under their different certificates until the completion of the merger process. LIAT has now adopted the slogan “the star of the Caribbean as a way of including the names of the two organizations in the slogan.” The company’s competitive advantage has also been increased by the larger fleet consists of 24 Dash 8 turboprop bombardier aerospace. The airline is even rumored to go for larger flights like ERJ170 regional jets in future (Cannegieter, 2012).

Value chain and strategic cost analysis: viability and competitive advantage

Following the bumpy ride that have seen the company suffer bankruptcy, there has been need for the company to get on track and settle all its debts and reduce its expenses. This was emphasized by the global recession effects of 2007 which also saw the company plan a merger with the Caribbean star its closest regional competitor. In a return, the company has continually cut its costs by eliminating city ticketing offices and other cost cutting strategies aimed at retaining it competitive advantage. This move and other future mergers are viable given that the company will have a stronger foundation and more regional destinations and scheduled to operate with. The organization will also have funds to purchase and manage larger regional flights. Rebranding will also take place and have a positive impact on the company’s customers.

Strategic results and implementations

Synopsis of findings

The report reveals that much has to be done by this organization. It has been found that the company suffers problems related to transportation within the region. Company also suffers, from being government owned and should try being wholly privatized. Most of its customers complain of poor services, lost lug   ages and poor customer services. It has also been found out that that company has should consider alliances with other regional and international airlines. Findings reveal that the company.

Recommendations

The move to get into alliance with Caribbean star is commendable, considering further alliances in future will do the company more good. This will bring effects such as economic benefits due to productivity, improved customer service hence competitive advantage, cost reduction arising from lounge facilities sharing, terminal and code sharing among others.  Alliances will also enable the company to penetrate markets that had been restricted for individual airlines and room for expansion as customers receive larger choice of destinations and passage networks.

The company should consider being privatized. Today, most successful airlines are privately owned. Privatization also allows investment overseas through strategic alliances. Privatization should however be restricted to avoid exposing the country’s tourism industry.

Some problems of airline transportation in the region include the invasion of the market by foreign international airlines which are threatening the industry. The company should also consider getting into the international market whether through alliances or on its own.

The company should also consider evaluating leadership performance every year. Wrong leadership has been the source of the many bankruptcy issues and the tarnished images of the company. As a result, there has been a trail of failed revenue growth and profitability thereby leading to the inability to remain sustainable and competitive.

The threats of high speed railroads require the company to consider investing in faster airlines and flexibility in airline schedules.

Implementation schedule and action plan

Activitytime
Formation of alliances 
  • Network specialists alliances
2013
  • Megacarrier alliances
2013
Privatization2012
Effective cost cutting strategies2013-2014
Reasonable capital requirements 

 

References

Cannegieter, R., (2012). Caribbean Aviation: moving forward. Airline e-zine edition. Iss. 38

Caribbean360, (2012). Caribbean airline industry goes under microscope. Retrieved from http://www.caribbean360.com/index.php/business/12039.html#axzz1zmAYWCtF

Economic commission for Latin America and the Caribbean, (ECLAC), (   2011). An assessment of the economic impact of climate change on the transportation sector in Barbados.

Investopedia, (2012). The industry handbook: the airline industry. Retrieved from http://www.investopedia.com/features/industryhandbook/airline.asp#axzz1zmAwIK2u

Leeward Islands Air travel, (LIAT), (2012). LIAT: the Carribean airline. Retrieved from http://www.liatairline.com/navSource.html?page_id=62

Nationnews, (2012). LIAT resumes normal flights. Retrieved from http://www.nationnews.com/articles/view/liat-resumes-normal-flights/

Wensveen, J.,  (2010). The airline industry: trends, challenges, strategies. University of Sydney. Australia.

 

 

 

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