The alternative products/services for destinations up to 400

The basic service of the airline industry is to transportpassengers and goods from destination A to destination B. This service ischallenged by various operators from different industries (e.g. trains, busses,ships), which leads to competition in terms of duration, price and comfort (forpassengers). As a result, the main variable is thereby the distance, whichinfluences duration as well as the price and the comfort. For that reason, weobserved data from air traffic in North America, Europe and Asia1.

Based on the gained data, we divided the transportation service into threecategories of distance. Thus, we obtain a more concrete analysis of thepotential threats of substitutes for the transportation of passengers andgoods. Distancesup to 400 km: The first category analyses the alternativeproducts/services for destinations up to 400 km of radius around the startingdestination2. Inthis segment, the threat of substitutes is high for passengers as well as it isfor good transportation(s).

Airports are located outside of the city center to avoid(reduce) noise complaints by residents or comply to government restrictions3.Thus, the advantage gained through faster air transportation is diminished (oreven vanished) by the time the passenger/good reaches the center of thedestination city. In comparison, (bullet) trains and coaches4mostly arrive directly in the center of the city and provide the same or higheron route services5 asairlines for lower prices6. Additionally,trains and buses operate more frequently on the same routes than planes andincrease thereby the flexibility of choice for customers. Last but not least,there is always the possibility to travel by car, which also allows a higherflexibility but also goes in hand with no service. However, the air cargo industry is mainly competing with thelogistics companies, respectively their trucks or trains7.The biggest disadvantages airlines have, are the quantities carried and therelatively small time differences of the delivering process for smallerdistances.

Additionally, “The demand forair freight is limited by cost, typically priced 4–5 times that of roadtransport” (Worldbank.org)8and so, less products will be shipped by air for this distance.Distancesbetween 400 and 1.000 km:Although no competitor fell off the roster by increasing theanalyzed distance in this category, the threat of substitutes can be consideredas moderate for passenger’s transportation. In this second section the durationadvantage becomes more significant and weakens the alternatives9.

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Additionally, the average price difference between the competitors is smaller,and therefore less powerful, which leads to a decreasing threat of substitute.Nevertheless, a vast amount of people, especially in less developed countrieslike China and India, still depend on trains and buses10.Taking the plane would simply be too expensive. However, another competitor,who might gain importance in the future is the Hyperloop train. These trainscan speed up to 1.

150 km/h and would be even faster than normal planes, whichmight lead to a high threat of substitution on certain routes11.Accordingly, to passengers, the airplane industry alsobecomes more important to the fast delivery services in the cargo industry duelarger distances. So, the threat of substitute decreases but stays on a highlevel. One reason is that most goods don’t need to be delivered within one day.Another is the immense costs for air delivery service in comparison to road orsea delivery12. Distancesabove 1.000 km:  The threat of substitutes for passenger transportation inthe last segment is quite low. The distances are just too far to have realcompetitors in terms of duration.

Even bullet trains take 10 hours to connectlarger cities whereby planes just need 3 hours and they have limitedconnections13.Additionally, many distances need to cross oceans or larger seas and thereforetrains, cars or busses can’t provide such services. Adding ferries to solve theproblem of crossing water barriers would lead to an increase of duration andthereby decrease the threat of substitute further. However, the biggest threatof substitute in all three categories is the decision not to travel at all.

In terms of the cargo industry, the threat of substitute ishighly depending on the products. For products which require a short-termdelivery, the threat of substitution is low, because the distances and thelength of time are too large14.  For all other goods, which need to bedelivered in large amounts and can be stored over a longer period, the threatof substitution is high. Therefore, almost 90 % of nonperishable goods areshipped by sea15 duethe lower costs of shipping, which are estimated to be 12-16 times lower thanair freight16.Furthermore, the air cargo also faces the problem, that certain goods simplycannot be shipped in the required quantity17.5.2.

Recommendation Our recommendation tolower the threat of substitutes, especially for the first and second category,is to increase the availability of flights to more destinations and at a higherfrequency. Thereby, flying could become more attractive to passengers.Furthermore, we suggest to increase the service for passengers in terms of freebaggage claim and faster transport to the city center18. Torealize this, cooperation’s with local transportation companies could beestablished to enhance the passengers overall comfort and lower their traveltime to their final destination. Another possibility to shorten the flightdurations might be the relaunch of the Concorde19.

Thereby, passengers would travel at a higher speed and reach their destinationsfaster, which also would lower the threat of substitution. Lastly, the airlineindustry could also try to lower the threat of substitution further throughlowering ticket prices, which requires to lower the overall costs. 1 Most flights are domestic flights, wherebythe average distance between the different regions varies (Asia: 875 km (IATA, 2017); Europe: 400 km (Eurostat, 2017);USA: 2.000 km (BUREAU OF TRANSPORTATION STATISTICS, 2017); We calculated theaverage of destinations by the top 5 destinations within the continent2 We based this distance on the averagedomestic flights in Germany to perceive a general picture for short distances; (Deutsches Zentrum für Luft- und Raumfahrt e.

V. (DLR), 2017);other categories are based on the average destinations of the variouscontinents3 (U.S. Department of Transportation, not dated)4 including maglev and bullet trains, whichspeed up to 600 km/h; (Lo, 2017)5 Offering food, drinks, Wi-Fi, baggage(there are mostly no extra fees for baggage claim and no need of arrivingearlier to check in the baggage) (Lufthansa, 2018); (Jetstar, 2018)6 Based on various price calculations fordifferent routes; (Goeuro, 2018); 7 Based on research on the German transportationsector (Statistisches Bundesamt, 2018)8 (WorldBank, not dated)9 Average flight duration for 800 km isapprox.

1:30h, whereby bullet trains need approx. 3:30 – 4h and busses evenlonger10 carried passengers by air 2016(china): approx.: 870 million (Worldbank.org, 2018); carried passengers by train(china): approx.:  2,900 million (CEIC Data Company Ltd, 2018);11 (Cellan-Jones, 2018)12 (BUREAU OF TRANSPORTATION STATISTICS, not dated)13 Example is calculated by the distancebetween Beijing and Guangzhou14 Average shipping time from China to the East Coastof the USA takes 30 days; (US Department of Commerce, not dated)15 (International Chamber of Shipping, 2017)16 (WorldBank, not dated)17 For example, commodities as oil and gas orproducts as cars trains, or other larger machines18 Up to two baggage; (Armtrak, 2018)19 Supersonic passenger jet airliner