Barriers costs of economies of scale are significant

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of entry: Firstly, economies of scale are extremely important in the airline
industry. Economies of scale arise when unit costs fall as a firm expands its
output. The costs of economies of scale are significant in the airline industry
such as: cost reduction gained through mass-producing a standardized output and
AA & OA are mass- producers of services; so, a new airline that would enter
the industry and produce on a small scale will suffer a significant cost
disadvantage relative to the established Aegean and Olympic Air. If in an
attempt to obtain these economies of scales, on the other hand, it will have to
raise the capital required to build large-scale production facilities but
should bear the high risks associated with such an investment. So, the company
as a whole has economies of scale so the threat of entry is reduced.

b)         Brand Loyalty: Olympic Air for all
travellers, in Greece and abroad, is the first Greek airline that concurred the
skies globally, “it became a synonym of security, it consisted point of
reference and pride for generations for more than 50 years” (Aegean-Olympic AirWebsite,
p1). The new Olympic Air, now at the hands of Agean, continues this history and
offers services based on the brand name of old Olympic along with its people
experience and power. Significant brand loyalty that OA has makes it difficult
for new entrants to take market share from the established company. Thus, it is
too costly for an entry by potential competitors to breaking down
well-established customer preferences and as a result this threat is eliminated (Jones &
Hill, p44). 

c)         Absolute Cost Advantages: To a large
extend these have to do with early entries into the market and the experience
so gained by old companies. It is difficult for a competitor to break into the
airline market facing the established Aegean & Olympic Air, an operator who
knows market well, has good relationships with key byers and suppliers and
knows how to overcome market and operating problems. Superior production
operations and processes, control of particular input required for production
such as labor, materials, equipment or management skills, easier access to
cheaper funds because existing Aegean & OA represent lower risks than new
entrants are the three main sources of absolute cost advantages that the
company as a whole already matches. “So, as established company has an absolute
cost advantage, the threat of entry by a competitive force is weaker” (Jones
& Hill, p44).

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d)         Customer Switching Costs: Switching
costs arise when it costs a customer time, energy and money to switch from the
products offering by one established company to the products offered by a new
entrant. If a new charter or other airline company enters the market, then the
switching costs for a customer of flying with the new company are high, if, for
example, he travels on an indirect flight. So, the switching costs are high and
then barriers to entry for a competitor are high (Jones & Hill, p45).

Categories: Industry


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