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Chapter 5 Analysing Supply Issues in Tourist Transport 1.

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1 Chapter 5 Analysing Supply Issues in Tourist Transport 1

2 Theoretical perspectives on tourism and transport supply issues Tourism supply Tourism supply is a complex phenomenon because of both the nature of the product and the process of delivery. cannot be sbe examined Principally, it cannot be stored, cannot be examined prior to purchase, it is necessary to travel to consume it, and a number of components are required, which may be separately or jointly purchased and which are consumed in sequence. 2

3 tourism and transport supply issues composite product It is a composite product involving transport, accommodation, catering, natural resources, entertainment, and other facilities and services different markets, Since tourism products operate in different markets, it is difficult to analyze supply issues. In fact, it proves even more complex when seeking to separate out one element of the tourism product 3

4 large number of com In markets with a large number of competitors, some airlines became more risk- assertive in the way they priced products. The main principles outlined focus on four market situations: perfect competition contestable markets monopoly oligopoly Tourism and Transport Supply Issues 4

5 Supply Issues and Markets 5

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8 Perfect Competition In economic models of conditions of perfect competition, a number of assumptions exist: substantial number of consumers firms There are a substantial number of consumers and firms, implying that neither can affect the price of an undifferentiated product. free entry to and exit no barriers There is free entry to and exit from the market, assuming that there are no barriers. in the real world, many economists believe that markets are not perfectly competitive 8

9 Contestable markets insignificant entry and exit costs, In this (contestable) markets, there are insignificant entry and exit costs, so that there are negligible entry and exit barriers. information and supply conditions are available to all producers Owing to technology, information and supply conditions are available to all producers and, producers cannot change prices (price takers). rival businesses The key principle here is that new and established firms are able to challenge rival businesses through pricing strategies. 9

10 Monopoly major business firm a high level of control over the price This is market where a major business or firm is able to exercise a high level of control over the price of the product and level of output (price makers). prices above the average cost The implications are that firms operating in a monopolistic market charge prices above the average cost of production to generate high profit levels. monopoly conditions In many countries, domestic air and rail networks operate under monopoly conditions. 10

11 11 Monopoly

12 Monopoly beneficial deregulation In some cases a monopoly condition may be more beneficial than competition, as in the case of deregulation in the transport industry. new entrants In such situations an influx of new entrants following deregulation may lead to smaller firms being taken over by larger businesses. prevent higher prices Where monopoly situations exist, regulation by the state is normally imposed to prevent higher prices and supernormal profits. 12

13 State Monopoly 13

14 Oligopoly a limited number of producers An oligopoly exists where a limited number of producers dominate the transport sector. dualistic large numbers of small firms a small number of large companies This is the situation in relation to tourism and transport since 'tourism has a highly dualistic industrial structure which is polarised between large numbers of small firms (typically in retailing, accommodation services) and a small number of large companies (for example, in air transport)'. 14

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16 Oligopoly each firm controls its price In an oligopoly, each firm controls its price and output levels and there are entry and exit barriers. profits are maximised In an ideal world, oligopolies prefer prices to be set at levels where the profits are maximised for all producers in that industry sector. a monopoly higher profits If the firms colluded (agreed) to set prices, it could lead to a monopoly and higher profits for producers if they restricted the supply. 16

17 Oligopoly joint profits The impact of inter-airline pricing route-sharing agreements to achieve joint profits is an oligopolistic situation. some routes are competitive, In the international market some routes are competitive, being served by many carriers. at least two carriers, Most of the others are served by at least two carriers, indicating an oligopolist market, although a few routes are served by a single carrier which may be tempted to exercise monopoly powers. 17

18 18 Oligopoly

19 Oligopoly high capital costs, fixed capacity, peaked demand The structures of the bus, coach and rail sectors are similar to that of air travel in that they too experience the problems of high capital costs, fixed capacity, peaked demand, the need for feeder routes to sustain profitable ones. Some state support and regulation characterise these modes. 19

20 a large number of small firms It is apparent that where a large number of small firms operate in the transport sector a competitive market exists. limited number of firms In contrast, where a limited number of firms operate, similiar to an oligopoly or, at the extreme, a monopoly, different conditions affect the supply of transport services for tourists. 20 Tourism and Transport supply issues

21 In any analysis of transport supply issues, a range of criteria needs to be investigated in different market conditions. These are; number and size the number and size of firms concentration the extent of market concentration barriers entry and exit barriers economies/diseconomies economies/diseconomies of scale costs of capital costs of capital, fixed capital and costs of operation discriminationdifferentiation price discrimination and product differentiation pricing policies ( pricing policies (e.g. price leadership, price wars and market-share strategies). 21 Tourism and Transport supply issues

22 Travel and Tourism Competitiveness Index The Travel and Tourism Competitiveness Report in 2008 constructs a Travel and Tourism Competitiveness Index (TTCJ) for 130 countries in terms of their competitiveness. Switzerland public transport loping a The results for 2008, like 2007, ranked Switzerland on a range of indices in a country where its massive investment in public transport is seen as key attribute of developing a prosperous tourism sector. 22 Competitiveness, transport and tourism: key relationships

23 how these types of competitiveness study are used by different destinations What is also interesting is how these types of competitiveness study are used by different destinations and policy-makers to try to address perceived weaknesses in their investment in transport and tourism infrastructure. how a report which seeks to benchmark destination performance used to highlight areas What this shows is how a report which seeks to benchmark destination performance can be used to highlight areas for further development in terms of transport and accessibility. 23 Competitiveness, transport and tourism: key relationships

24 The state and the supply of tourist transport: airline deregulation in the USA Air travel provides an interesting example of how government policy has led to different effects upon the supply of transport services for tourists. Two approaches identified; regulated transport system 1.a regulated transport system where a country exercises sovereignty over its airspace; liberalised and unregulated 2.a liberalised and unregulated system characterised by an open-skies policy, protectionist and regulated environments which is somewhat problematic for a global industry that still has many protectionist and regulated environments in some instances. 24

25 Airline deregulation in the USA the supply of air travel The experience of domestic airline deregulation in the USA in 1978 led to a complete re-evaluation of the supply of air travel in terms of its organization, operation and regulation by the state. The case of the US domestic airline market is also interesting because it is more highly developed and more extensively used in the United States, in terms of; the effect on consumers service provision and service quality the effect on consumers service provision and service quality the impact upon complementary infrastructure (e.g. airports). the impact upon complementary infrastructure (e.g. airports). 25

26 The effects of deregulation on the supply of tourist transport services According to the US Department of Transportation, following deregulation the number of carriers serving the USA increased from 36 in 1978 to 72 in 1980 and 86 in 1985, dropping to 60 by 1990 (including air cargo carriers). mergers and acquisitions However, a range of factors such as financial insolvency, mergers and acquisitions reduced the number of operators to 10 carriers of regional or national scale by major airl28 national carriers 32 regional carriers 7490 By 2002 there were 14 major airlines, 28 national carriers and around 32 regional carriers although entry to/exit from the market will always leave these statistics subject to variation, with 74 carriers operating which had risen to around 90 in

27 concentration integration Thus, a 62 % increase in the number of domestic travellers carried on US airlines during was followed by a greater degree of concentration integration in the airline business The number of enplanements (i.e. the number of people boarding an aircraft) rose from 526 million in 1995 to 769 million 2007, two-thirds of which were enplaned at large hubs 27 The effects of deregulation

28 oligopolistic market structure limited availability of terminal space and gatesa lack of departure and landing slots the US airline operates in an oligopolistic market structure... [and] in recent years, access for airlines new to the industry has become more difficult due to the limited availability of terminal space and gates, a lack of departure and landing slots at major airports, and price competition from the dominant carriers. 28 The effects of deregulation

29 The spatial effects of deregulation hub-and-spoke From the transport geographer's perspective, a distinctive spatial structure in air travel has emerged in the USA, whereby the major US airlines have developed a hub-and-spoke structure as spatial and commercial strategies. 805 This contrasts with the CAB regulation era where inter-urban routes were often 805 km or more in length and little attention was given to integrating the route networks among operators. 29

30 cost reductions are a central element However, in a deregulated environment where cost reductions are a central element, least-cost solutions and network maximization are a priority to achieve efficient operations. hub-and-spoke system switching point In this context, a hub-and-spoke system of provision may enable airlines to serve a large number of people over a wide area, the hub acting as a switching point for passengers travelling on feeder routes along the spokes. 30 The spatial effects of deregulation

31 The Hub and Spoke System smaller city to another smaller city hubtwo hubs This system enables passengers to travel from one smaller city to another smaller city via a hub or even two hubs The hub-and-spoke system has two main benefits: more cities at a lower cost Airlines can service more cities at a lower cost maximize passenger loads Airlines can maximize passenger loads from small cities, thereby saving fuel

32 Hub and Spoke System 32

33 Hub-and-Spoke System

34 Hub and Spoke System 34

35 Following deregulation and the growth in new entrants to the domestic airline market, consumer complaints increased to a peak The most commonly reported sources of dissatisfaction in 2008 were: flight problems, such as cancellations and delays baggage problems reservations, ticketing and boarding problems associated with refunds (paybacks) customer service issues such as unhelpful employees, inadequate meals and poor cabin service incorrect or incomplete information about fares disability issues overselling / overooking advertising animals 35 The spatial effects of deregulation

36 advantages and disadvantages of deregulation of the US domestic airline market Advantages Price drop in cost of air travel ( , prices fell by 2.8 % ; , prices dropped by 1.7 %) Growth in passenger traffic from 275 million passenger enplanements in 1978 to 769 million in 2007 Increased frequency Increased frequency on flights on trunk routes, as low cost airlines introduce point to point routes to improve accessibility and challenge oligopolistic behavior Greater competition 36

37 Disadvantages service standards delayed flights, mishandled baggage, involuntary 'bumping' of passengers off overbooked flights Rise in consumer concerns over service standards, delayed flights, mishandled baggage, involuntary 'bumping' of passengers off overbooked flights safetyageing fleet Concerns over the safety of an ageing fleet which led to several airlines grounding aircraft in March 2008 to complete safety checks Lack of a recognition Lack of a recognition of the business impact of the airline industry as having special characteristics that do not fit well with deregulation: excessive price competition on some routes has made operations too unprofitable even to recover the costs of operation 37 advantages and disadvantages of deregulation

38 Disadvantages of Deregulations reinvest in new fleets The failure of US airlines, to reinvest in new fleets for domestic operation due to profitability and affecting their efficiency in terms of fuel consumption and emissions Declining profitability declining yields Declining profitability and declining yields greater volumes of travelers casualties Major casualties across the sector with 165 airlines collapsing/merging or operating in bankruptcy protection

39 The supply chain in tourist transport services Research has focused on established areas of tourism and transport supply, notably: descriptions of the industry descriptions of the industry and its operation, management and marketing the spatial development and interactions the spatial development and interactions that characterize the industry at different geographical scales 39

40 Supply Chain Management 40

41 certain relationships within the organisation In the context of tourism and transport supply, the analysis of a firm or company is characterised by certain relationships within the organisation and with its purchasers or consumers. external process transaction between two parties The external process of selling a product or service involves a transaction between two parties following an agreement to purchase. 41 The supply chain in tourist transport services

42 Commercial transactions are based on agreed conditions between the parties. link the tourist with the suppliers of services Therefore transaction chains develop to link the tourist with the suppliers of services in tourism Researches highlight the significance of the 'chain of distribution' for transport and tourism services, which is the method of distribution of the service from production through to its eventual consumption by tourists. 42 The supply chain in tourist transport services

43 Transaction analysis specific supply chain The nature of the specific supply chain depends upon a wide range of factors that are internal and external to individual firms in the transport sector. For example; primary force what is the primary force driving the supply system? pull factors Is it driven by pull factors, where a tourist destination may market a region and supply transport services on a state-owned airline to stimulate demand for tourism? push factors is it driven by push factors, where the tourist generates the demand, and the transport and accommodation sectors respond to this as a com­mercial opportunity? 43

44 supply system The overall business environment, government predisposition to tourism and planning constraints may have a moderating influence on the supply system. transaction analysis contractual arrangements In addition, transaction analysis illustrates the significance of 'agents' in the system, corporate policy in transport provision and contractual arrangements in the supply chain. sale and consumption It is evident that a variety of distribution systems exist for the sale and consumption of transport services by tourists 44 Transaction analysis

45 seller is access to superior One of the critical issues in the distribution system for the seller is access to superior information on available services, so that these can be sold to the consumer. one- stop location medium of a brochure and/or catalog The travel agent comprises a convenient one- stop location for tourists to buy tourism services as an inclusive package, which includes transport and accommodation, usually marketed through the medium of a brochure and/or catalog 45 Transaction analysis

46 reduces the transaction costs The packaging of these products or services by wholesalers (e.g. tour operators) reduces the transaction costs to the tourist of purchasing each element independently. a travel agent overall cost the consumer is markedly lower Thus, a travel agent normally receives around 10 % commission on the sale of a holiday marketed by a tour operator, but the overall cost the consumer is markedly lower than arranging the same components independently 46 Transaction analysis

47 commissions to agents are declining However, in the case of air tickets, commissions to agents are declining as airlines seek to reduce this expense in competitive market conditions. able to reduce the number of transactions long-term contracts The tour operator is able to reduce the number of transactions involved by packaging a holiday, thereby making economies in the supply through wholesale purchasing and by entering into long-term contracts with the suppliers of accommodation and transport services. 47 Transaction analysis

48 the chain are eliminated by large tour operators Not only does this have benefits for the price charged to the purchaser, but it has more beneficial effects for the supplier as a number intermediaries or brokers in the chain are eliminated by large tour operators airlines that control a significant part of the distribution system. 48 Transaction analysis

49 The nature of corporations controlling the transaction chain to: maximise profit maximise profit by eliminating costs reduce the price reduce the price to the consumer to boost market share concentration increase their level of concentration in the tourism industry. horizontal and vertical integration Company strategies often pursue horizontal and vertical integration in the tourism and transport sectors, not only to control the production process but also to improve efficiency through economies of scale. 49 Transaction analysis

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52 Integration in the tourism sector: implications for the supply of tourist transport Integration is based on the concept of common ownership, which may involve the coordination or control of the production process or may have no direct effect on it. mergers, acquisitions, collaboration, franchising agreements and more complex contractual arrangements Horizontal integration occurs where two enterprises with the same output combine to increase the companies' control over output. It can occur through mergers, acquisitions, collaboration, franchising agreements and more complex contractual arrangements. 52

53 Integration in the tourism sector: an enterprise with different interests and involvemen Vertical integration occurs when an enterprise with different interests and involvement in the supply chain acquires or merges with companies contributing inputs to its activities, or where output purchasers provide a ready market for the service. dvantage of decreasing economic uncertainty This has the advantage of decreasing economic uncertainty in the supply system and the avoidance of problems related to contract breaking. 53

54 vertical ownership integration in tourist transport operations, vertical ownership, may help to reduce costs. Transaction analysis also raises some questions that researchers may wish to address in relation to specific companies and their role in tourist transport. it is evident that a variety of distribution systems exist for the sale and consumption of transport services by tourists (Figure 5.4) 54 Integration in the tourism sector:

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56 tourism supply chain management tourism supply chains delivery of tourism products the concept of tourism supply chains, moving the research agenda along in transport and tourism research as all the goods and services that go into the delivery of tourism products to consumers. all suppliers of goods and services It includes all suppliers of goods and services whether or not they are directly contracted by tour operators or by their agents... or suppliers 56

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58 business-to-business relationships Many of these supply chains are managed by business-to-business relationships, using what is known as supply chain management to improve the performance and output in the chain. management of tourism supply TSCM (tourism supply chain management) is more specific to the management of tourism supply since it focuses on a series of approaches to help manage the supply chain to meet tourist needs. 58 tourism supply chain management

59 better coordination of the supply chains assists in improving relationships Above all better coordination of the supply chains assists in improving relationships in the system as well as overall profitability and competitiveness. profitability, quality assurance and improvement of market share In the large tour operator sector, oligopolistic business relationships mean that TSCM can be used to assist in profitability, quality assurance and improvement of market share. This raises the issue of travel chains. 59 tourism supply chain management

60 Analysing annual reports: company accounts annual report company accounts An annual report is used by companies to provide a review of the year's activities and it contains company accounts that are prepared within accounting guidelines. specialist jargon Company accounts contain messages that use specialist jargon to deal with a complex situation. financial performance of busi Once the specialist jargon is decoded by the reader, company accounts provide an insight into the financial performance of businesses. 60

61 There are two key elements within company accounts: balance sheet - a balance sheet; profit and loss account - a profit and loss account. Within the balance sheet, items of value (assets) are listed and any claims against them are set out. liabilityunpaid A claim is a liability, such as an unpaid bill. fixed assets current assets Assets are divided into fixed assets, which are those acquired for use within the business, and current assets, comprising cash and other items that are to be converted into cash. 61 Analysing annual reports: company accounts

62 Liabilities Liabilities within the accounts are also divided into current liabilities, where settlement will be made within one year, and long-term liabilities to be settled after one year. snapshot It should be recognised that a balance sheet only provides a snapshot of an organisation's activities at one point in time. three- to five-year period business performance Analysts therefore tend to consider company accounts over a three- to five-year period to give a more realistic assessment of an organisation's business performance 62 Analysing annual reports: company accounts

63 End of Chapter slides 63


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