Research Notes

Lessons learned from the airline industry

“Mobile Operators and service providers find themselves in rough turbulence and must prepare themselves for a hard landing”. The established European mobile operators and service providers will soon be part of a major aerial dogfight for customers as the discount mobile service providers are ready to take off. They will impact the European Mobile Operators in the same way that the low-cost airlines have crippled the National Airlines.
“This is your captain speaking – we will be landing shortly – we hope that you have enjoyed your flight and that you will soon fly with us again “. The competition between airlines has for some time now been fierce, with the established national airlines having difficulty making any kind of profit that can give a return on billions this industry craves in investments. The recent travel recession has lead to lay-offs and forced airlines to reorganize. There has been plenty to see to over the past few years. As if that wasn’t enough, competition has increased after the low-cost airlines have launched. Even though these new players have totally dumped the price of an airline ticket – they are actually making a profit. So now the message back to the captain must be that the customers are enjoying their flights elsewhere – and may not return to the established airlines again.

But the above account of the troubles of the major airlines could just as easily been about the Western European mobile operators. Tough competition, major losses, billions in investments, lay-offs and reorganizations are also part of a mobile operators everyday life – but up till now at least the mobile operators had been spared from the unbelievable competition from discount companies dumping prices. However, this is about to change. Discount mobile telephony has up to now not been widespread at all in Europe, but in Denmark it has been around for over 2 years now. Today Danes can choose between no less than ten different Discount Mobile Service Providers – eight of which have launched within the last 12 months! To say that the Danish discount mobile providers have revolutionized the Danish mobile market is simply an understatement and the competition they have created on the market has financially hurt both the established mobile operators and service providers.

The message is very clear. If there are any employees in the mobile industry around Europe that feel sorry for the hard pressed personnel in the airline industry, they should listen up now to this message: “This is your captain speaking – we are expecting discount mobile service providers ahead – so fasten your seatbelt – there is major turbulence ahead”.

There is absolutely no doubt in anyone’s mind that the major airlines have suffered severe losses after the introduction of the discount airlines. And it is here that the established mobile operators may as well start learning their lessons – as there are a number of strong similarities between the two industries.

The already established companies did not start the discount companies:
In neither the mobile- or airline industry did the established companies think about – or launch – the first discount companies. The discount companies were either started by newcomers that only offered discount solutions (e.g. Virgin, Easy Jet) or they were started by companies that saw their only future opportunity was to radically change their strategy (e.g. Ryanair, Sterling) Even the major airlines are not really continuing “business as usual”, but are also having to “rethink” themselves.

The large established airlines are also moving towards offering cheaper solutions – or starting their own discount companies:
When the discount companies have taken a large enough chunk out of the market, the established companies introduce their own discount offerings. In the airline industry we have see British Airways do this (Go) and SAS (Snowflake). SAS have been working with their low-cost concept Snowflake since March 2003 and are now contemplating whether to expand this concept or start an independent discount airline.

The basis of the discount companies is to offer a very simple product:
The low-cost carriers strive to offer a very simple product, for example by just offering one-way tickets, without any frequent flyer points or rebates. The discount mobile service providers are doing exactly the same – by most often only having one (or maximum two) very simple pricing tariffs, where the price pr. minute is the same irregardless of what type of customer you are or how much you talk on your mobile.

The large established companies are forced to lower prices and offer more flexibility as a direct consequence of the competition from the discount companies:
The competitive rules change radically with the entrance of discount offerings on a market. In the airline industry, national airlines like SAS have had to reduce their prices after the discount airlines broke SAS’s Scandinavian monopoly. SAS is now contemplating discount air-fares between the Scandinavian capitals. Also the major airlines are now becoming much more flexible regarding dates and times of departure and return in connection with their low-cost tickets.

The discount companies are making money:
Both industries have fierce competition as a distinctive characteristic and the already established players are having difficulty making money. Even so, the discount companies in both industries are making money.

Streamlining organisations by using the Internet as the sales and distribution channel:
Both the discount airlines and the discount mobile service providers have aimed at keeping their overheads at a minimum by using the Internet as their primary sales and distribution channel. The vast majority of the the discount companies customers book and pay online. In 2002 16% of all airline bookings in the USA were made online and the figure for 2003 is expected to be 25%. In 2003 SAS sold 5.1% of all their tickets online, triple the number from the previous year. Efficiency gains from using the Internet have shown that the low-cost airline carriers save the travel agents commissions and in the same way, the discount mobile service providers cut costs by not having dealer networks.

Use of “confrontational marketing”:
Both the low-cost carriers and the discount mobile companies have deliberately been using “confrontational marketing”. This can be seen when a charismatic head of a company profiles the company in the press by using provocative statements and viewpoints that then start debates in the media (e.g. Michael O’Leary, CEO of Ryanair and Frank Rasmussen, CEO of Telmore)

The Internet gives both sectors the possibility of a “visual guide”:
This gives the customer an online view of all prices – from the most expensive to the cheapest. The customer is of course tempted to go for the cheapest offerings.

The discount companies are taking major shares of the markets:
Although they often start with targeting a niche market, their fast customer uptake and rise in turnover lead the discount companies relatively quickly towards larger market shares that cannot be described as “niche”. While the discount airlines expect to have around 15% of all passengers in Europe, already over 20% of all mobile customers in Denmark are today using a discount mobile service provider.

In other words, all mobile operators and service providers all over Europe may as well start preparing for the competition they are about to face from the discount mobile service providers – because it is not a question of whether the discount mobile service providers will arrive on their markets or not. The only question is whether their ETA – Estimated Time of Arrival – will be in 3 or 6 or 9 months from today.

The new business area of discount mobile telephony has just been thoroughly analysed in Strand Consults latest comprehensive report “The Moment Of Truth – A Portrait Of The Discount Mobile Service Providers Success”. This report has examined the Danish mobile market, where discount mobile telephony has in a very short period of time, managed to turn the whole mobile market upside down, completely changing the competitive parameters that were until recently governing the market.

The report focuses on how the two Discount Mobile Service Providers (Telmore and CBB Mobil) have managed to acquire no less than 43.7% of all new mobile customers from 2H 2000 to 1H 2003! This is an outstanding achievement considering these two companies were both launched at the end of 2000. Add to this that around 20% of the total Danish mobile customer base is using a Discount Mobile Service Provider today and you just have to be pretty impressed. The report also analyses the development of the end-user prices for voice and SMS messages. In the past 10 months alone the price has dropped by around 50% so a discount mobile customer can today talk on his mobile phone for just 0.091 Euro and send SMS messages galore at only 0.026 Euro pr. message. It is only a question of time before we see a similar trend on all the other Western European mobile markets.

So listen up to the announcement once again: “This is your captain speaking – our Danish colleagues have just warned us about discount mobile service providers ahead – so please fasten your seatbelt, you’ve never experienced turbulence like this before.!”

More information “”The Moment Of Truth” – A Portrait Of The Discount Mobile Service Providers Success”

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