Threat of Entry

Characteristics

Current situation

Future trend

Importance of reputation and brand loyalty in purchase decision

Moderate. The purchase decision in the internal market is influenced by the offer by the airline of a particular route and the price of the ticket. Customers are unlikely to remain loyal to a certain company if its price increases significantly, so the effect of reputation and brand is not so strong. However, some level of brand loyalty exists and it arises not only from advertising and marketing, but mainly from the reputation of offering services of a relatively high-quality.

Might be higher, as there is a trend of growing variety of marketing campaigns driven by the increasing competition.

Entrants' access to distribution channels

Low access. Distribution is not particularly easy, as new players need to establish an online booking system, and relationships with travel agents and other sales intermediaries.

There is also high popularity of internet channels of distribution. Most internet sales are of air tickets. Air tickets can be purchased on the websites of air companies, through travel retailers and through special aggregators offering all the available tickets for a chosen route. All the retailers apart from the air companies include the commission fee in the ticket price.

It would probably stay the same or be a little bit easier, since e-commerce is developing fast. But still marketing and ticket distribution for new airline sector entrants would not be easy, since the companies would have to create a reservation system, implement advertising campaigns, and create friendly relationships with travel agents.²⁶

Entrants' access to raw materials

It is low. Overall there is access, but it is associated with high costs, high prices for jet fuel, governmental regulations, and preferable rights for main players.

It will stay the same. Because of the growing fuel prices, it may be difficult to maintain margins, thus discouraging new players to entry this market.

Entrants' access to technology and know-how

Access is limited. The overall situation is rather bad: outdated air transport, overall lack of air transport of different classes²⁷. Access is associated with high costs and complicated process of getting licenses, patents and state purchases.

There is high difficulty for new comers to gain access to technology, owned by entrenched firms. There is the difficulty of obtaining a certificate to perform operational and periodic servicing of aircraft, as well as to independent "heavy" forms, which are the most comprehensive and demanding check for an airplane. This check occurs approximately every 5–6 years. It is a check that, more or less, takes the entire airplane apart for inspection and overhaul. Such a check can generally take from 3 weeks to 2 months, depending on the aircraft and number of technicians involved. There are also specific "technologies" which include technologies of processing and analysis of flight information. According to the Federal Air Transport Agency, share of the decoded flight should be at least 90%.²⁸

Thus, we can consider that there are significant technological entry barriers, which, in turn, significantly reduces the possibility of access to technology for newcomers.

Access will stay limited, due to the same reasons as for which there is limited access nowadays.

Entrants' access to favorable locations

Low. There is a limited amount of airport hubs, inadequate and cumbersome airport infrastructure.

It is also vital to obtain airport “slots” for take-off and landing. There has been a growth in air traffic over recent years which mean that congestion at airports is expected, especially at the major hubs. The time slot given to an airline is important, and means that all airlines negotiate with airports. This creates difficulties for a new airline aiming to negotiate prime slots at busy airports and can result in it being restricted to offering flights only at off-peak times, or having to fly to airports further away from popular destinations. This can be a restriction to new airlines, as customers may seek more convenient alternatives. The larger airlines achieve this not only through their own fleet, but through code sharing agreements with other carriers in alliances; however, a new entrant will not necessarily be approved for membership.

It will stay the same. Established airlines will already hold the monopoly over slots at certain airports, making it harder for new airlines to break into.

Experience-based advantage of incumbents

Moderate. There is a lack of experienced flying staff in the market. Moreover our legislation limits the adoption of foreign nationals on the staff of the flight personnel. Meanwhile already about 30% of the flight crews is over 50 years old. In addition, the annual rate of professional level of training is not at a satisfactory level.²⁹

Might be lower. In case of not preparing future generation of flying staff, such experience - based advantage might be lost.

Network externalities

There is network effect in the market, but nowadays it doesn’t work to the full excess, as now in Russia too few people are using aircraft as the main mean of transportation.

As if the aircraft will have a higher load forecast, the price in theory should decrease, since all costs will be shared by more people.

Such trend might hardly change in the near future. Positive network externality is only possible in the distant future when more people will be using aircrafts.

Government protection of incumbents

Very high. Today, the government wants to control the industry. It retains inherent regulatory functions, and is actively involved in business.³⁰ Moreover it controls and prevents the entry of foreign players. Regulation forms are an additional barrier. Our government is responsible for aircraft registration, airworthiness and related issues. Compliance costs increase the barriers to market entry. Moreover Russia’s domestic flight market is effectively closed to foreign competition. This fact also limits the likelihood of new entrants to the airline market to the international segment.

There is also such a very high barrier, as high transaction costs of operating in this market, in particular, unofficial payments to government officials for the opportunity to operate in this specific market for the provision of slots (time of departure / arrival, etc). Thus, we can infer that there are significant administrative barriers to entry, which greatly reduces the threat of new entrants.

It is difficult to predict. But the future Russian entry in WTO might decrease the level of government protection of existing incumbents.

Perception of entrants about expected retaliation of incumbents

There is high perception of entrants about expected retaliation of incumbents, especially in case of 5 biggest players and their preferable positions and high degree of influence.

It might decrease due to the new Russian antimonopoly legislation bills³¹ and future entry to WTO.