The alternative products/services for destinations up to 400

The basic service of the airline industry is to transport
passengers and goods from destination A to destination B. This service is
challenged by various operators from different industries (e.g. trains, busses,
ships), which leads to competition in terms of duration, price and comfort (for
passengers). As a result, the main variable is thereby the distance, which
influences duration as well as the price and the comfort. For that reason, we
observed data from air traffic in North America, Europe and Asia1.
Based on the gained data, we divided the transportation service into three
categories of distance. Thus, we obtain a more concrete analysis of the
potential threats of substitutes for the transportation of passengers and
goods.

Distances
up to 400 km:

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The first category analyses the alternative
products/services for destinations up to 400 km of radius around the starting
destination2. In
this segment, the threat of substitutes is high for passengers as well as it is
for 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 (or
even vanished) by the time the passenger/good reaches the center of the
destination city. In comparison, (bullet) trains and coaches4
mostly arrive directly in the center of the city and provide the same or higher
on route services5 as
airlines for lower prices6. Additionally,
trains and buses operate more frequently on the same routes than planes and
increase thereby the flexibility of choice for customers. Last but not least,
there is always the possibility to travel by car, which also allows a higher
flexibility but also goes in hand with no service.

However, the air cargo industry is mainly competing with the
logistics companies, respectively their trucks or trains7.
The biggest disadvantages airlines have, are the quantities carried and the
relatively small time differences of the delivering process for smaller
distances. Additionally, “The demand for
air freight is limited by cost, typically priced 4–5 times that of road
transport” (Worldbank.org)8
and so, less products will be shipped by air for this distance.

Distances
between 400 and 1.000 km:

Although no competitor fell off the roster by increasing the
analyzed distance in this category, the threat of substitutes can be considered
as moderate for passenger’s transportation. In this second section the duration
advantage becomes more significant and weakens the alternatives9.
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 countries
like 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 trains
can speed up to 1.150 km/h and would be even faster than normal planes, which
might lead to a high threat of substitution on certain routes11.

Accordingly, to passengers, the airplane industry also
becomes more important to the fast delivery services in the cargo industry due
larger distances. So, the threat of substitute decreases but stays on a high
level. 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 or
sea delivery12.

Distances
above 1.000 km: 

The threat of substitutes for passenger transportation in
the last segment is quite low. The distances are just too far to have real
competitors in terms of duration. Even bullet trains take 10 hours to connect
larger cities whereby planes just need 3 hours and they have limited
connections13.
Additionally, many distances need to cross oceans or larger seas and therefore
trains, cars or busses can’t provide such services. Adding ferries to solve the
problem of crossing water barriers would lead to an increase of duration and
thereby decrease the threat of substitute further. However, the biggest threat
of substitute in all three categories is the decision not to travel at all.

In terms of the cargo industry, the threat of substitute is
highly depending on the products. For products which require a short-term
delivery, the threat of substitution is low, because the distances and the
length of time are too large14.  For all other goods, which need to be
delivered in large amounts and can be stored over a longer period, the threat
of substitution is high. Therefore, almost 90 % of nonperishable goods are
shipped by sea15 due
the lower costs of shipping, which are estimated to be 12-16 times lower than
air freight16.
Furthermore, the air cargo also faces the problem, that certain goods simply
cannot be shipped in the required quantity17.

5.2. Recommendation

 

Our recommendation to
lower the threat of substitutes, especially for the first and second category,
is to increase the availability of flights to more destinations and at a higher
frequency. Thereby, flying could become more attractive to passengers.
Furthermore, we suggest to increase the service for passengers in terms of free
baggage claim and faster transport to the city center18. To
realize this, cooperation’s with local transportation companies could be
established to enhance the passengers overall comfort and lower their travel
time to their final destination. Another possibility to shorten the flight
durations might be the relaunch of the Concorde19.
Thereby, passengers would travel at a higher speed and reach their destinations
faster, which also would lower the threat of substitution. Lastly, the airline
industry could also try to lower the threat of substitution further through
lowering ticket prices, which requires to lower the overall costs.

1 Most flights are domestic flights, whereby
the 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 the
average of destinations by the top 5 destinations within the continent

2 We based this distance on the average
domestic 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 various
continents

3 (U.S. Department
of Transportation, not dated)

4 including maglev and bullet trains, which
speed 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 arriving
earlier to check in the baggage) (Lufthansa, 2018); (Jetstar,
2018)

6 Based on various price calculations for
different routes; (Goeuro, 2018);

7 Based on research on the German transportation
sector (Statistisches Bundesamt, 2018)

8 (WorldBank, not dated)

9 Average flight duration for 800 km is
approx. 1:30h, whereby bullet trains need approx. 3:30 – 4h and busses even
longer

10 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 distance
between Beijing and Guangzhou

14 Average shipping time from China to the East Coast
of 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 or
products as cars trains, or other larger machines

18 Up to two baggage; (Armtrak, 2018)

19 Supersonic passenger jet airliner