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1 Netwrk f Internatinal Business Schls WORLDWIDE CASE COMPETITION Sample Case Analysis #4 Qualificatin Rund submissin frm the 2015 NIBS Wrldwide Case Cmpetitin, Ottawa, Canada Case: Ethipian Airlines: Bringing Africa Tgether 2015, Netwrk f Internatinal Business Schls This dcument is prvided fr educatinal and training purpses, and is fr the exclusive use f teams seeking t prepare fr the NIBS Wrldwide Case Cmpetitin. It may nt be used r reprduced fr any ther purpse withut the explicit cnsent f the Netwrk f Internatinal Business Schls.

2 ETHIOPIAN AIRLINES Bringing Africa Tgether Submissin prepared fr the Qualifying Rund f the 2015 Netwrk f Internatinal Business Schls Wrldwide Case Cmpetitin Carletn University by XXXXXX University (Name f Student 1) (Name f Student 2) (Name f Student 3) (Name f Student 4) Wrd cunt: 1,472

3 Key Issues The African aviatin market is highly cmpetitive, with Eurpean, African and Asian cmpanies all fighting fr market share (Appendix 1). The future success f the strategy that Ethipian Airlines (Ethipian) has planned hinges n the success f the first hub. Hwever, when lking at the pssible strategic regins f the cuntry, Ethipian must cnsider factrs that have influence n the success: the high restrictive regulatins f the African cuntries; the gvernmental influences; the lcal cmpetitin; the nn-african airline presence; the negative psitin f African airlines in the mind f the passengers; develpment level f infrastructure; allcatin f financial resurces fr the investment. Prblem Statement Based n the issues mentined abve, the key prblem facing Ethipian Airlines is as fllws: Which strategic regin is the mst suitable fr establishing a new hub with the right wnership-level t increase Annual Passenger Traffic and create cnnectins within African cuntries? Strategic Analysis Cmpany Ethipian Airlines is cmpeting in a market clse t perfect cmpetitin. In an effrt t becme successful and prfitable, the cmpany set up ne f the yungest and mst mdern fleet f the cntinent (Appendix 2). It was the first in the African airline market with Being Dreamliners in the fleet. Despite having higher prices cmpared t Eurpean and Asian cmpetitrs, Ethipian still remained 1

4 prfitable thanks t its ancillary services. The cmpany has its wn aviatin academy where pilts, technicians, crews and management prfessinals are being trained. Therefre the safety and servicequality level f the cmpany is higher cmpared t their African cmpetitrs. Service Ethipian s passenger transprtatin service is ne f the best amng African airlines. The yung and mdern fleet, tgether with the aviatin academy, cntribute t their high level f service. This leads t a cmpetitive advantage against ther African cmpanies. The psitin f the African airlines in the passengers minds is lw, wing t numerus accidents. The safety and quality f the flights result in success. T maintain success, the airline has t cntinue the differentiatin frm the cmpetitrs by maintaining the quality and safety f their services. This wuld lead t a mve frm a lw psitin t a higher psitin in the passengers minds. Passengers The mst sensible target market is the middle class, whse numbers have increased in recent years. Therefre it is a critical that the airline chse a regin with high GDP and ppulatin. It is als imprtant t have unlimited traffic rights. Thse factrs will help the cmpany t reach the best target grup pssible fr the first hub. Regins with high GDP are Nrthern Africa and Suthern Africa. Regins with high ppulatin are Western Africa and Eastern Africa. Regins with the mst cuntries with unlimited traffic freedm rights are Western Africa and Middle Africa. 2

5 Cmpetitin Cmpetitin in Africa is intense. Nn-African airlines hld apprximately 80% f the market due t their lwer prices. Hwever, thse airlines d nt transprt passengers between African destinatins. Therefre the main cmpetitrs are the African airlines. As the nn-african airlines perceptin are higher in the passengers minds, a partnership with ne f them can cntribute t an increased perceptin f Ethipians. The passengers will see the flights safe n the market. All the airlines suffer frm heavy gvernmental restrictins. Thus, it is reasnable fr Ethipian t cnsider fcusing n regins where there are n lcal airlines in rder t gain cmpetitive advantage. This can be reached by a share in the wnership f the new hub with the gvernments t be a lcal peratr. This will lead t lwer restrictins and sustainability in lng term. Mrever, the financial stress can be reduced by gvernmental investments. Alternatives Three alternatives ffer viable slutins. A detailed descriptin f these alternatives can be fund in Appendix 3. An explanatin f the decisin matrix can be fund in Appendix 4. Alternatives Measurability Gvernment Ecnmic Cmpetitin Prfitability Ttal influence grwth New hub in Nrth Africa New hub in West Africa New hub in Central Africa New hub in Suth Africa

6 Recmmendatin Based n ur Decisin Matrix (Appendix 3) we recmmend that Ethipian Airlines establish a new hub in West-Africa. The mst suitable lcatin is Nigeria; it has the highest ppulatin and is ne f the mst develped cuntries in the western regin. The attractiveness f this lcatin als derives frm the Nn- African airlines presence and the lack f a lcal airline. Ownership f the new hub shuld be divided three ways. One third f the share will be given t the gvernment and ne third t a nn-african airline, Air France. This airline is ne f the biggest in Eurpe and has numerus flights between these tw cntinents. This will reduce the financial stress f Ethipian when establishing the new hub. Gvernmental participatin in the wnership structure is beneficial because it incentivizes a reductin in restrictive regulatins and lwers peratinal csts. Ethipian will functin as a lcal airline and the gvernment will gain ne third f its revenue. By having Air France in the partnership, Ethipian will have direct access t its Eurpean travellers. The hub will functin as an intermediary and the airline will fly them t their African destinatins under the reach f Ethipian. Likewise, Air France will have access t passengers wh wish t travel t Eurpe. Ethipian shuld perfrm market research in rder t identify the airprt with the highest aviatin traffic, t determine where the new hub will be built. The relatinship with the tw ther parties shuld be established and maintained by tw key accunt managers. They shuld be respnsible fr cnducting the negtiatins with partners, and supervising the partnership under the directin f Ethipian s senir management. 4

7 A cmmn investment fund shuld be created which will be managed by 3 bard members, ne frm each party. The new hub shuld be enfrced with persnnel trained in the aviatr academy in rder t keep up the higher service quality cmpared t African airlines. In the lng term Ethipian shuld create new cnnectins with regins nt currently served. In this way, annual aviatin traffic will be increased and the slgan f the cmpany will be realized, cnnecting mre destinatins n the cntinent. Implementatin Plan Near-Term (0-1 year) - Marketing research f Nigerian airprts ptential Lcate the airprt with the highest aviatin traffic - Hire tw key accunt managers One will build a relatinship with the Nigerian gvernment The ther will build relatinship with France Airline - Negtiate cnditins and terms with the Nigerian gvernment Negtiate a reductin f fuel cst Negtiate a reductin f airprt charges Negtiate access t airprts Shrt-Term (1-2 year) - Sign the cntract with the gvernment 33% wnership f the gvernment 5

8 - The secnd key accunt manager negtiates cnditins and terms with Air France Guarantee direct access t each ther s travelers - Sign the cntract with Air France 33% wnership f the new hub Mid-Term (2-4 years) - All three parties create an investment fund managed by 3 bard members frm each party, and a Chief Financial Officer elected by the bard. Gvernmental investment share 33% Air France investment share 33% Ethipian Airlines investment share 33% - Building the new hub in the area f the chsen airprt Lng Term (4-5 years) - Training f new persnnel in the aviatin academy - Marketing research f aviatin demand f lcal travelers - Create new cnnectin between the new hub and unreached destinatins within African cuntries - Prjected perfrmance can be fund in Appendix 5 Cntingency Plan There are pssible negative utcmes where the cmpany may fail t perfrm as expected wed t external factrs: 6

9 1. The relatinship with the gvernment cannt be established a. The airline has t try t wrk it ut with Air France financially b. If nt pssible -> Secnd best alternative: new hub in Central-Africa (Plan B) i. Fcusing n the regin ii. Same strategy try t build relatinship with the lcal gvernment and Air France 2. Air France will nt be able t be in the partnership a. Ethipian has t try t wrk it ut with the gvernment financially b. Try t find anther nn-african airline c. If a and b are nt pssible > Plan B 3. Expectatins are nt met regarding the Annual Aviatin Traffic a. If financially pssible -> Plan B b. If nt -> the airline has t wait until it will regain financial strength n the markets that are successful 4. Future plitical cllapse a. The gvernment may shut dwn in the future i. If pssible wait fr the end f the crisis ii. If nt -> Plan B if financially pssible If plan B is nt pssible -> Regain financial stability n the markets that are successful 7

10 Appendices Appendix 1: Prter s Five Frces in the African Market fr Ethipian Airlines Entry barriers High barriers by the threat frm cmpetitrs and gvernmental restrictins depending n the regins. Supplier risk Higher airprt charges and cst f fuel -> High peratinal csts result in higher prices fr the passengers The industry is extremely cmpetitive. Therefre t gain market share n a new market is difficult Buying pwer The higher prices lead t a high buying pwer. Cnsumers chse the lwest price pssible. Threat frm substitute The airline cmpetitin is driven by prices and safety. The lwest and safest fare wins the cmpetitin, therefre the threat is high. The amunt f substitutes depends n the regin. The market is generally extremely cmpetitive, driven by prices and safety cnsideratins. As all the five frces are high the industry is clse t perfect cmpetitin. Hwever, there are cuntries where the cmpetitin is relatively less intense. 8

11 Appendix 2 SWOT Analysis f Ethipian Airlines Strength - One f the yungest and mst mdern fleet in Africa - First in Africa t use Dreamliners - Prfitable - Own Aviatin Academy - Pan African Netwrk Opprtunities - Grwing market - GDP, ppulatin, Demand - Alliances/partnerships - Gvernmental agreements - HS netwrk Yanussaukr Grwing middle-class ppulatin. Weaknesses - High Operatin Csts - Higher ticket prices - Nt grwn t its ptential - Decreasing net prfit Threats - Eurpean, ASian, African cmpetitrs - Gvernmental restrictins - Underdevelped insfrastructure - Limited acces t capital, human and technical resurces -Airprt charges and fuel csts - Pur safety and security recrds - Lw Custmer satisfactin The SWOT indicates that, t vercme the threats f the market, Ethipian Airlines shuld cncentrate n markets with lw gvernmental restrictins and develped infrastructure, where there is lwer cmpetitin. There is huge ptential in thse cuntries; demand fr air travel is getting strnger due t grwth in trade amng African cuntries. Appendix 3 Alternatives New hub in Nrth-Africa Prs - Aviatin demand - Highly ppulated regin - Mre hmgeneus cuntries than in ther regins - Ecnmic develpment - 5,77% GDP grwth - Already have a destinatin f Ethipian (Egypt) - Great access t human resurces - Better infrastructure encurages investments Cns - Lack f brand awareness - High cmpetitin Egypt Air, Air Algeria and Tunisair - Lw air liberalizatin - Only 1 destinatin f Ethipian 9

12 New hub in West-Africa Prs - Highly ppulated regin - Average GDP grwth 4,64 % - Already 6 destinatins f Ethipian - Lwer cmpetitin f African airlines cmpared t ther regins - Extensive vacuum bankruptcy f lcal - airlines - High liberalizatin New hub in Central-Africa Prs - Highly ppulated area - Average GDP grwth f 8.28% (highest) - 6 destinatins f Ethipian - Central lcatin n the cntinent - Increased aviatin traffic - Need fr safe and reliable air transprtatin service New hub in Suth-Africa Prs The mst develped ecnmy in the regin BRICS member Develped infrastructure Cns - Unstable plitical situatin in sme cuntries - Language and cultural differences - Lwer GDP than Nrthern- and Suthern- Africa Cns - Underdevelped infrastructure - Gvernmental restrictins - Secnd-lwest GDP Cns - Smallest ppulatin - Dminatin by SAA - Limited presence f Ethipian Only 1 destinatin - Slwer rate f ecnmic grwth - Lw air liberalizatin Appendix 4 Decisin Matrix Measurability: the size f segment, the number f destinatins Gvernment influence: air liberalisatin, traffic freedm Ecnmic develpment: infrastructure, purchasing pwer f the segment, natural resurces, and, GDP Cmpetitin: Africans airlines Prfitability: aviatin demand, flights netwrk with Eurpeans cuntries, flights netwrk within Africans cuntries. Attractiveness: : Less attractive 5: Mst attractive 10

13 Appendix 5 Prjected perfrmance fr Ethipian 11

14 Explanatin f the calculatin abve: 12