The Marketing Environment

Abstract

The tourism marketing environment consists of internal and external forces which could impact the organisations’ performance. To be successful, companies must adapt to ongoing trends and developments in their macro and micro environments . When organisations scan their marketing environment they will be in a position to deal with any possible threats from the market and to capitalise on any available opportunities. Therefore, this chapter explains the external environmental factors, including; political, economic , social and technological influences. It also considers the internal environmental factors, including; capital structures, resources, capabilities and marketing intermediaries ; as it identifies competitive forces from differentiated or low-cost service providers.

Appendix 1

1.1 The Aviation Industry’s Regulatory Environment

In the past, many governments have adopted a very high degree of regulation in all areas of the tourism industry’s activities, particularly in the aviation sector. Such regulations imposed severe constraints on how airlines marketed their services. To gain a better understanding of the marketing environment, it is important to understand the regulatory environment and the changes which take place in this area (Kotler et al., 1990).

• 1. Safety

Safety is an important issue when discussing aviation regulation. As a means of ensuring that safety standards are maintained in airline operations, governments have imposed regulations into the industry. Only airlines which can demonstrate their ability to operate safely will gain admittance in their air space. This form of regulation has always been, and still is agreed upon by many countries.

• 2. Protection of Scheduled Service

A scheduled service may be defined as a regular, reliable service which is provided all year round, in accordance with a published timetable. For such a service to be maintained during the quieter off-peak periods, airlines must make substantial profits during the peak season. Without regulation, a heavy entry of airlines will only be attracted to the market during the peak season , which would greatly reduce the profits during off-peak periods. Consequently, regulation has often protected scheduled services. This argumentation has been used by incumbent airlines to discourage the arrival of new competing operators.

• 3. Maintenance of Services for Societal Interests

Although it may be declining in importance; in the past governments wanted to ensure that airline services were provided in thinner markets (even though it would have been unprofitable to the respective airlines) in order to encourage regional economic development in their respective country.

• 4. Prevention of Excessive Competition

Without regulatory controls, fierce competition would work against the consumers’ interest (Porter, 1986). In normal conditions, competition should be seen as productive and healthy. It could be perceived as a positive market force, particularly for customers . However, a massive influx of competitors into the market can have a negative effect, if not controlled in an adequate manner. It could result in a substantial drop in air fares and price wars among airlines . Consequently, the weaker airlines will be unable to maintain their service at low fares levels, and will eventually file for bankruptcy; leaving stronger airlines to monopolise the market. This will lead to higher fares and the quality of service could be reduced, in the long run.

• 5. To protect national interests

The Paris agreement of 1919 accepted the principles that nations have absolute authority over the airspace above their territories. Since then, governments have regulated air transport to ensure that their national interests prevail. Regulation has often been reinforced by the governments’ ownership of airlines . The governments often considered their flag carriers as a symbol of nationhood. National airlines were maintained to improve relationships with stakeholders , including bilateral relationships with other governments. Very often, national governments imposed strict regulations to promote their objectives. The state ownership of the national airline was prevalent for a number of reasons: Most airlines developed at a time when heavy government involvement in the industry was commonplace. Defence considerations were also of paramount importance, and the ownership of an airline was considered a matter of national security. Owning an airline was also seen as a way of protecting the balance of payments and promoting regional economic development. However, such ownership gave rise to the following problems: Unprofitable routes that were kept open for political reasons; Staff levels that were maintained at a high level as a means of keeping unemployment figures down. Fares were kept low as a means of reducing domestic inflation. As a result, money was coming out of public funds to keep an undercapitalised industry afloat, and so the tax payers had to fork out more money from their pockets to subsidise unprofitable airline operations.

1.2 Forms of Regulation

In the past, the governments’ regulation has been prevalent in the aviation market. Governments often controlled the industry by granting or refusing entry into their market, as well as controlling capacities and frequencies, types of services and fares.

Both domestic and cabotage¹ services were under single government control. This avoided excessive competition among the national carriers. However, depending on the governments’ policies, the regulatory regimes varied from country to country. For example, in the past a few governments allowed single, state-owned airlines in the market, where tight control cut out any direct competition between domestic airlines. The United States of America (USA) and the European Union (EU) countries have swept away from these regulatory systems as they liberalised their internal market (Wensveen, 2016; Shaw, 2016).

1.3 Deregulation and Liberalisation

Since October 1978, the American domestic services were deregulated. Other countries, like; Canada, Australia and the UK have followed, with varying degrees of deregulation within their domestic markets. In international markets, significant developments have also taken place, with very liberal air agreements being conducted between European countries. USA has also signed a number of agreements which allowed competition on some of the international routes to and from America. In June 1990, the EU adopted the second phase of Air Transport Liberalisation in anticipation of the full common market (i.e. 31th December 1992). This package covered market access, fares, capacity, competition policy and external relations. From a multinational point of view, the main developments in deregulation have affected those EU carriers operating intra-European services.

The overall picture in relation to the regulation of the airline industry is one of substantial changes—changes which are still evolving (Belobaba et al., 2015). Some markets are still unaffected by liberalisation , and will probably continue to be so in the foreseeable future. However, many airlines hailing from regulated markets, will be affected if they compete with deregulated carriers in major international routes. In marketing terms, deregulation and liberalisation offer a considerable opportunity for efficient airlines to compete effectively. Nevertheless, incumbent airlines which could have been protected by regulation may be subject to considerable threats, unless they change and adapt to the competitive environment. It is important for their marketing managers to be aware of the differences between competition in regulated markets and competition in liberal or deregulated ones, so that they can make the necessary adaptations to their marketing policies.

1.4 Competition in the Deregulated Airline Market

Opportunities created by deregulation allow airlines to optimise their route networks. New and promising markets can be entered rapidly. Similarly, services can be quickly withdrawn from unprofitable routes , and the resources devoted to these markets may be transferred to other developing markets. Deregulation also means that airlines can increase their capacity levels, as soon as an increase in demand justifies it. The airlines who incur lower costs than their rivals, can afford providing reduced fares. This will enable them to exploit their cost advantages to the full.

It has been argued that deregulation has threatened inefficient airlines. The airlines who operate their services in liberalised markets had to learn to compete with other carriers (Button, 2017). To do this, they had to take quick decisions quickly, and they also needed access to up-to-date information about the changing marketing environments . This way, they would minimise their rivals’ chances to compete against them. For instance, they may use smaller aircraft , improve their service and enhance their route network. If an airline garners control over particular routes, over slots and gate space, they will be in a dominant position in the market, relative to their competitors. The airlines’ capability to control its market loyalty, feed traffic and operating costs (including labour costs) are also extremely important factors. The airlines should also defend their brand status, at all times.

Today, the airline industry is considered as a service business and must be prepared to operate in a highly competitive environment. No longer will public funds and regulation protect inefficient airlines. In the last few decades, many governments have reduced their direct involvement in the aviation industry. Many European airlines which were previously state-owned have sold their equity stake to private investors. Recently, the European Commission has put forward a comprehensive strategy to strengthen the competitiveness and sustainability of the entire EU air transport network. It has therefore identified three key priorities:

• “Tapping into growth markets, by improving services, market access and investment opportunities with third countries, whilst guaranteeing a level playing field;

• Tackling limits to growth in the air and on the ground, by reducing capacity constraints and improving efficiency and connectivity;

• Maintaining high EU safety and security standards, by shifting to a risk and performance based mind-set” (EU, 2015).

In the main, the EU airlines have an unprecedented choice of European destinations , and they could offer competitive prices to their passengers. The liberalisation of the European aviation industry has led to increased frequencies of domestic and international flights. As a result, the number of passengers carried have increased substantially, following the deregulation of markets. Moreover, low-fare carriers are now amongst the top airlines, both in terms of passengers and in terms of market capitalisation. For example, there is no limitation on traffic rights within Europe for EU airlines , as long as they have been granted an EU operating licence. However, restrictions and obstacles are still very common outside of Europe and in the context of international services and third country markets. The international routes (beyond the EU zone) will usually involve at least two governments. This means that international aviation is negotiated by way of bilateral bargaining.

1.5 Air Services Agreements

Agreements between governments relating to scheduled air services are known as air service agreements (ASAs) and they cover many aspects of air services between the countries. One of their primary functions is to regulate traffic rights, in terms of what traffic can be carried and what cannot. Traffic rights are defined under the so-called ‘Freedoms of the Air’ .

• The First Freedom permits overflying of one country’s airspace by airlines from another country. For example, when flying from London to Geneva, the aircraft flies through French air space.

• The Second Freedom allows airlines from the first country to land in a second for non-traffic purposes (for example for refuelling). Between friendly nations, the exchange of these non-controversial freedoms is virtually automatic.

• The Third Freedom allows traffic to be carried by the home airline to a foreign country, for example, a flight from London to Paris.

• The Fourth Freedom permits this airline to pick up commercial traffic in the foreign country and to bring it back to its home base.

• The Fifth Freedom is the right to carry traffic between two foreign points. Under the terms of the Air Services Agreement between the United Kingdom and India, the Indian carrier is granted the right to pick up traffic originating in the UK and to fly between London and New York. Therefore, the granting of the Fifth Freedom rights is often contentious. Again, where such rights are granted, it is nearly always on a reciprocal basis. In the case of flights offered to Air India, under the terms of the UK/India Air Service Agreement, these rights are only given by the UK government because, in return, the Indian government allows Fifth Freedom opportunities for a British carrier to pick up Indian traffic originating in Mumbai, and to fly beyond.

• The Sixth Freedom occurs when airlines fly passengers from outside destinations to their home base, and then from their home base to a point beyond; thus combining Third and Fourth Freedoms. For example: Singapore Airlines (SIA) is an active competitor in the markets between the UK and Singapore. It also has an agreement with Australia covering the same rights between Singapore and Australia. By combining these sets of rights, and using its home base as a refuelling and stopover point, SIA has been able to expand significantly.

Following the granting of traffic rights, air service agreements can dictate which gateways can be served by an airline or airlines, from each country. ASAs may also cover frequency and capacity of services. Arguably, the development of the Fifth and Sixth Freedoms has made many of the traditional forms of regulation less significant, in marketing terms. Even in nominally regulated markets, price competition became prevalent with consumers availing of discounts in many ways. For example, all routes within the European Union were open to Third, Fourth and Fifth Freedom services. The capacity restrictions have been eased and were completely abolished by 1993. Eventually, greater pricing freedoms became available. The EU commission has been empowered to go ahead with negotiations, initially with the European Free Trade Association (EFTA) and later with others, to extend the benefits of LUX II package. Other initiatives are currently being dealt with in possible multi-lateral ASAs.

1.6 Open Skies Agreement

Since 1992, the USA’s Department of State has pursued an “open-skies” policy that is designed to eliminate government involvement in airline decision-making about routes, capacity, and pricing in international markets. Open-Skies agreements also contain provisions governing commercial opportunities, safety, and security issues. The United States has negotiated open-skies agreements with more than 100 aviation partners.

1.7 The EU-USA Open Skies Agreement

The EU–USA Open Skies Agreement is an open skies air transport agreement between the European Union and the United States of America. The agreement allows any EU or American airline to fly between any point within their territories. Airlines of the European Union are also allowed to fly between the United States and non-EU countries like Switzerland. The initial agreement was signed in Washington, DC., on the 30th April 2007. The agreement became effective on the 30th March 2008. Phase two was signed in June 2010. For example, under this agreement, London Heathrow Airport was opened to full competition . This ended the exclusive right that was primarily granted for only two American airlines and two British airlines (Bermuda II) to fly transatlantic services out of Heathrow. Nevertheless, the expansion of transatlantic flights to or from Heathrow continue to be limited by lack of runway capacity (currently its two runways operate at over 98% of their capacity), government restrictions (especially when expansion plans to build a third runway and a sixth terminal was cancelled on the 12th May 2010, and the fact that many take-off slots are owned by incumbent airlines).