Porter (1980) argues that competition amongst existing rivals takes place largely when a firm or firms in one industry seeks to improve their position and their financial
25
performance. In some industries where one or few large firms have market power, the other small firms can act like followers to the leader firms. They are not likely to compete due to their extensive production experience and much lower output cost (Schnaars, 1994). However, when there are a large number of small firms or there are a small number of equally balanced firms within an industry, it is argued (Porter, 1980) that rivalry is likely to be very intense. Any move by one firm to attract more customers would affect other firms and would be likely to give an incentive for competitors to act quickly to defend themselves. Such responses from competitor firms may intensify and escalate over time.
When firms fall under different groups with diverse characteristics and have different goals, they may have dissimilar views and may develop different sophisticated methods to compete (Wharton School, 1997). Porter (1980) believes that firms, mainly those that strive to establish their robust position on an international level to gain worldwide reputation, may even have the potential to give up profits and incur losses in order to achieve their goals. Therefore, intense rivalry among firms in an industry will drive them to compete on prices, which in return will reduce average profitability (Porter, 1980). Furthermore, when there are a large number of firms in a given market, there is a greater uncertainty about relative costs and other operating factors, which may reduce opportunities for cooperation between firms (Oster, 1994).
In the case of airports, it is argued (Doganis, 1992) that the concentration of traffic at a large number of small airports within a region will result in increasing the operational cost of each of the airports due to the spread of traffic between them and the increase in unit costs. Doganis (1992) assumes that when there is a small number of large airports serving a region, airports will find it more profitable to operate, as unit cost would be likely to be lower for each of the airports. The intensity of the rivalry among existing airports is usually dependent on airports’ locations and their proximity to each other (Starkie 2002, Graham 2004). Barrett (2000) argues that the overlap of the catchment areas, which can be determined by the depth of the market and the production technology (Starkie, 2002), is likely to cause significant rivalry among airports. Studies
26
by Cranfield University (Fewings 1999, cited in Barrett 2000), covering 13 countries and 431 airports, found that in countries like the UK, France, and Germany there are respectively, 34, 32, and 28 airports located within an hour’s surface access of another airport. In the remaining 10 countries, the study shows that there are 131 airports within one hour surface travel and 369 in one to two hours journey time. Another example is the enormous overlaps between the major airports in the Asia-Pacific region (ACI, 2006). Conversely, in situations where an airport is located in distant areas or in an island where there is no other competitor airport in close proximity, the amount of rivalry is likely to be very low (Graham, 2004).
Since industries pass through different stages, known as the Market Life Cycle (Development, Growth, Shakeout, Maturity and Decline), each of these stages has an impact on a firm’s competitive situation and the intensity of rivalry (Porter 1980, Johnson 1999, Henry 2008), as illustrated in figure 2.5. It is essential for firms to understand their industry’s life cycle in order to formulate strategies that match the needs of each of the stages. In the case of the airport business industry, Graham (2004) argues that the airport business is still in the growth stage and has yet to reach its maturity. This assumption means that the competitive situation in the airport industry is likely to be less intense than other industries operating in shakeout, maturity or decline stages. Therefore, airports in general are able to achieve growth more easily due to the availability of market shares.
27
Figure 2.5: The Life Cycle Model
Source: Johnson (1999)
In some industries, where high fixed costs are incurred, firms tend to use every available means such as lowering their prices to attract more customers and to fill their under- utilised capacity, which leads to higher intensity among existing rivals (Porter, 1980). Constructing a green field airport or developing an existing one in order to satisfy aviation demand or to accommodate a new type of traffic requires substantial capital investment that is likely to be in the form of fixed cost and would create efficiency problems in relation to investment cost-recovery (Forsyth, 2005). A firm with high fixed assets will find exit from particular markets quite difficult and will have to perform even if they are achieving low profitability (Porter, 1980). Assets are not just the infrastructure and the resources possessed by a firm, but can also be a brand name or information about the way a specific business works (Oster, 1994). Since an airport’s infrastructure has no alternative uses except for its purpose and cannot be transferred to
28
another place, they might be thought to be highly specific assets. It is argued (Forsyth, 2005) that the imposition of higher airport charges, reflecting the user’s willingness to pay (Button, 2005), will pose difficulties in ensuring the efficient use of airport facilities and would be likely to lead to under-utilisation of airports. Therefore, in order for an airport to avoid this efficiency problem its charges should be either kept at the same level or lowered so that users are attracted to use its facilities (Forsyth, 2005). Lowering airport user charges, although it will reduce revenues over the short-term, will improve airport efficiency over the long-run, when the demand for the facility becomes higher (Zhang and Zhang, 2001). Discounted airport charges for airlines starting new routes or services from an airport for a limited time to fill up under-utilised airport capacity are now broadly used by airports (Clayton, 1997). Such airport discounts if adopted by large number of airports, and if taking place for a long time, may cause higher intensity among existing airports.