Substitutes and Complements

Characteristics	Current situation	Future trend
Availability of close substitutes	Close substitutes are available. These are other means of transport. Train is the closest one. Cars and buses are low-quality substitutes due to excessive time costs and bad infrastructure. Substitutes for long distances increase time and incidental costs significantly and are, hence, not very convenient.	Trains become closer substitutes because of fast-speed railway and higher range of destinations across the country. The railways in Russia are currently being developed and are likely to offer increasingly better substitutes to air travel.
Price-value characteristics of substitutes	Varying from low prices to high prices. Substitutes on short distances are preferable in terms of pricing but these services are more time-consuming and less comfortable (trains, individual cars). So budget airlines are more or less comparable with these substitutes. Substitutes on long distances (railway is a unique mean for Russia) offer preferable prices, but railway is more time-consuming and of lower quality[10]	Substitutes are tend to raise prices: - fuel prices increase in future[11] - growth of tariffs will be about 10% each year for next 3 years for railway passenger transportation[12].
Price elasticity of industry demand	Low elasticity of demand in remote destinations and high elasticity in close destinations.	In case of further development of roads and railways price elasticity on remote destinations can increase
Availability of close complements	Extra beverages, shopping of the board, SMS and MMS services on the board[13], internet connection, taxi for/to the airport Most of these services are available on internal flights. Except for shopping on charter flights that is not needed by customers and internet connection that is available only on specially equipped planes.	Possibly it will be permitted to do calls on the board. Technically calls are available even now but corporate rules prohibit them because calls can disturb other passengers. Internet connection is becoming more common because wireless internet is absolutely technically available and safe for air displays.
Price-value characteristics of close complements	Prices for complements are high but these costs can be easily regulated by consumer. if a consumer rejects the complement then the entire quality of air service does not suffer.	The same.

Competitors and competition

Characteristics	Current situation	Future trend
Market concentration (number of firms, concentration ratios, HHI)	Concentration is high. Despite the fact that there are 180 national air carriers in Russia, 40% of all traffic is carried by only 25 airlines and almost 60% of civil air transportation are generated by 5 largest companies[14]. A small amount of foreign companies also operates in intra-country air services, although the percentage of such flights is relatively small.	Concentration is growing – the share of the top 15 airlines by number of passengers rose by 2 % and reached 82.8%[15]. Another tendency which is feeding the concentration increase is the tendency of national and foreign air companies to establish strategic alliances. However, a new legislation bill devoted to monopoly restriction in the industry was put under governmental consideration and, in case it is passed, it may change the trend of concentration[16].
Market growth	Except of 2009, the industry shows positive growth rates.[17] For example, the industry growth rate in 2011 will reach 12,71% in terms of the number of passengers.	Considering the historical stable growth rates during the last four decades[18], one can estimate the continuous growth of air transportation in the future.
Cost differences (among firms)	Cost difference is unavoidable since costs can vary a lot among the components of overall expenditures. Cost difference can vary a lot due to differences in fleet, agreements with airports, technical support, attracting and retaining personnel, etc. For example, very strong cost differences exist between air carriers who organize haul air travel and who operate in segment of regional and local air travel. Small regional airlines have older fleet and higher service costs than more modern fleet of haul air carriers[19]. For regional and local air transportation, there is a huge demand for lowering airport fees (which are too high for them). In general, regional and local air carriers have larger costs per passenger than haul air transporters.	Undoubtedly, cost differences will be present in the future periods, since it is not easy thing to renew a fleet or to supplant “big top five” companies from their hubs. Furthermore, the government’s position is not in favor of supporting small airlines, so it is unlikely that they will able to receive their costs as a result of government support.
Product differentiation	Product differentiation in this passenger air carring market is relatively low. Generally, services provided by any national carrier are not considered as something unique by buyers. Usually, all national companies provide clients with the comparable level of services, not paying attention to additional attributes (both tangible and intangible) which can differentiate flying with some particular company from flying with any competing firm. However, some attempts have been made within the market. Airlines start to complement flight services with additional goods and services, such as journals on board, special cuisine, different classes, and other entertainment, etc. Some of the airlines have their own travel agencies which help passengers to plan their trips; taxi service. Nevertheless, most of the air companies do not have incentives to differentiation because of the geographical peculiarities of Russia. Some distant regions are served by sole company and passengers have no other option. This means that there is no need for such airlines to offer differentiated services and occupy a certain market segment.	The level of product differentiation will stay more or less at the same level. Such judgments can be proved by taking into account the peculiarities of Russian market from the standpoint of distances and effective demand. The probability of new companies enter this regions is very low and competition won’t increase in the nearest future.
Price differences	There are price differences between various airlines. First of all, price differences occur due to differences in costs among large and small companies, firms with significant control over any airport and without such a control.[20].Airlines with owned facilities may keep prices lower than competitors, due to lower operational costs. Price difference can be also explained by the fact that some distant areas of the country are served only by a single company which make it possible to charge higher prices. Overall, price differences arise from the differences in costs and also from the opportunity to offer flights on different routes (demand for some of them is high, while demand for some others is lower).	Nowadays, the Russian government tries to restructure the airport – airline relations. The level of market concentration is growing. Perhaps, in the future the price differences won’t be connected to such a competitive advantage as having an “own” airport or kind of monopoly position in the market, which will lead to the relative equality of prices. However, it is debatable whether this will happen due to the inefficiency of the Russian government in most of the things that it does.
Excess capacity	The excess capacity exists during the last decade, with the growing trend of percentage of passengers' seats taken. In 2010 the used capacity ranged from 73,5% to 81,8 %[21]. There is also strong correlation between the capacity in use and season. The hugest excess in capacity can be observed during the 1st quartile, while the highest percentage of places taken can be observed during the 3d quartile.	The overall excess capacity will decrease since the demand for air transportation is stably growing. However, this estimation is based on the assumption that the companies will hold the same amount of vehicle in their fleet. The expansion of fleets may not only keep the excess capacity at the current level, but also increase it, if the predictions of the demand growth will be wrong.
Are prices and terms of trades transaction observable?	Prices are observable for all clients, since the companies openly provide information about prices for different dates and destinations. Clients can easily observe all possible suggestions and compare prices. The terms of trade are also observable. However, when it comes to dealing with business clients, the situation is different. Certain airlines offer different packages to B2B clients. The prices of these packages are not publicly available. Therefore, airlines are able to charge their B2B customers depending on their ability and willingness to pay and thus extract extra consumer surplus.	It is possible that as the system of bonuses and discounts develops, airlines will try to make prices and terms of trade less observable so as to extract extra consumer surplus from each customer. This will be possible as a bigger portion of the customers will be charged different prices, depending on the discounts that they are offered.
Can firm adjust prices quickly?	Since airlines companies have rather complicated structure of expenditures and great part of them are considered as fixed, it is not easy for firms in this industry to adjust prices quickly to any market situation. However, if companies charge prices with high premium for getting large margins, in case of necessity they can adjust their price as a response to changes of some market factors.	The very nature of the business explains high costs which cannot be eliminated or decreased eventually as a response to some event. So, most probably the same trend will continue in the future.
Type of competition (price, quantity, simultaneous, sequential)	First of all, Russian market of civil air transportation is a normal oligopoly without domination of any company. The Russian market of air transportation can be described as a market with discrete competition. Under the discrete competition (competition on particular routes and not on the market in general), we understand that the market structure, characterized by, first, a relatively large number of participants for the entire product space of the market, secondly, the relatively small number of participants for the individual spatial segments of the market, which, thirdly, have a high localization with relatively high entry barriers (to separate the spatial segment of the market). The Russian market of air transportation is a good example of a discrete market competition, since the input to the individual airline route networks (space segment of the market) is hampered by a sufficiently low level of substitution between airports for airlines and consumers. We think that in this industry there is sequential competition. Usually, one firm changes its price and the other firms react to this change in price. It would be difficult for firms to compete simultaneously because there is quite a significant amount of companies present, so it would be difficult for them to carry out such complex calculations and compete simultaneously.	This type of discrete competition will stay the same.[22]
Leadership pricing?	The leading low-cost carriers are S7 Airlines (Siberian Airlines) and Sky Express. These companies compete on the markets with high completion (regions with several players) by offering cheap services of a basic version. However, their prices are not significantly lower than market prices and it is not always possible to buy tickets at low prices. As a result the prices of this companies do not affect the prices of the other companies.	Avianova became the first low-cost Russian company which reacted to the new customs duties regulations fixing the direct dependence between the customs duties size and the number of seats in an aeroplane. In order to keep the ticket price at a low level, Avianova had to reduce the number of seats in order to avoid high customs fees. This means that the same will happen to all the low-cost carriers in Russia. This trend may lead to a reduction in the number of tickets available at a low price in the near future.
Tacit collusion (actual and potential)	There is not only a tacit collusion among all the players, but also actual collusion. So, there is a combination of both types. Very often the companies explicitly agree not to lower the prices. In other cases there is tacit collusion when one firm understand that lowing the price will cause the competing firms to also lower the prices and as the result no one will benefit. The existence of overt and tacit collusions is proven by the fact that the prices are in general quite high and are not lowered by the companies.	In general the situation will be the same. Successful tacit collusion raises price, making consumers worse off than, and may allow excess entry and the continued operation of inefficient firms, leaving producers worse off. It might change in the better way due to the fact of harder antimonopoly regulations[23].
Antitrust litigations	There are legislation bills "On Protection of Competition" and "On natural monopolies". During the period of high demand to "seasonal" license can be given to low-cost airlines, including foreigners, should be of the bill. For example, the most recent case of FAS complaints happened with “Utair” and “Yamal” in October,2011, when these two companies were blamed of establishing equal prices[24].	In general, FAS responsibilities will be broader. FAS is to get the authority to approve methods of calculating tariffs for domestic flights.[25] So, there will be more antitrust litigations.

Threat of Entry

Characteristics	Current situation	Future trend
Importance of reputation and brand loyalty in purchase decision	Moderate. The purchase decision in the internal market is influenced by the offer by the airline of a particular route and the price of the ticket. Customers are unlikely to remain loyal to a certain company if its price increases significantly, so the effect of reputation and brand is not so strong. However, some level of brand loyalty exists and it arises not only from advertising and marketing, but mainly from the reputation of offering services of a relatively high-quality.	Might be higher, as there is a trend of growing variety of marketing campaigns driven by the increasing competition.
Entrants' access to distribution channels	Low access. Distribution is not particularly easy, as new players need to establish an online booking system, and relationships with travel agents and other sales intermediaries. There is also high popularity of internet channels of distribution. Most internet sales are of air tickets. Air tickets can be purchased on the websites of air companies, through travel retailers and through special aggregators offering all the available tickets for a chosen route. All the retailers apart from the air companies include the commission fee in the ticket price.	It would probably stay the same or be a little bit easier, since e-commerce is developing fast. But still marketing and ticket distribution for new airline sector entrants would not be easy, since the companies would have to create a reservation system, implement advertising campaigns, and create friendly relationships with travel agents.[26]
Entrants' access to raw materials	It is low. Overall there is access, but it is associated with high costs, high prices for jet fuel, governmental regulations, and preferable rights for main players.	It will stay the same. Because of the growing fuel prices, it may be difficult to maintain margins, thus discouraging new players to entry this market.
Entrants' access to technology and know-how	Access is limited. The overall situation is rather bad: outdated air transport, overall lack of air transport of different classes[27]. Access is associated with high costs and complicated process of getting licenses, patents and state purchases. There is high difficulty for new comers to gain access to technology, owned by entrenched firms. There is the difficulty of obtaining a certificate to perform operational and periodic servicing of aircraft, as well as to independent "heavy" forms, which are the most comprehensive and demanding check for an airplane. This check occurs approximately every 5–6 years. It is a check that, more or less, takes the entire airplane apart for inspection and overhaul. Such a check can generally take from 3 weeks to 2 months, depending on the aircraft and number of technicians involved. There are also specific "technologies" which include technologies of processing and analysis of flight information. According to the Federal Air Transport Agency, share of the decoded flight should be at least 90%.[28] Thus, we can consider that there are significant technological entry barriers, which, in turn, significantly reduces the possibility of access to technology for newcomers.	Access will stay limited, due to the same reasons as for which there is limited access nowadays.
Entrants' access to favorable locations	Low. There is a limited amount of airport hubs, inadequate and cumbersome airport infrastructure. It is also vital to obtain airport “slots” for take-off and landing. There has been a growth in air traffic over recent years which mean that congestion at airports is expected, especially at the major hubs. The time slot given to an airline is important, and means that all airlines negotiate with airports. This creates difficulties for a new airline aiming to negotiate prime slots at busy airports and can result in it being restricted to offering flights only at off-peak times, or having to fly to airports further away from popular destinations. This can be a restriction to new airlines, as customers may seek more convenient alternatives. The larger airlines achieve this not only through their own fleet, but through code sharing agreements with other carriers in alliances; however, a new entrant will not necessarily be approved for membership.	It will stay the same. Established airlines will already hold the monopoly over slots at certain airports, making it harder for new airlines to break into.
Experience-based advantage of incumbents	Moderate. There is a lack of experienced flying staff in the market. Moreover our legislation limits the adoption of foreign nationals on the staff of the flight personnel. Meanwhile already about 30% of the flight crews is over 50 years old. In addition, the annual rate of professional level of training is not at a satisfactory level.[29]	Might be lower. In case of not preparing future generation of flying staff, such experience - based advantage might be lost.
Network externalities	There is network effect in the market, but nowadays it doesn’t work to the full excess, as now in Russia too few people are using aircraft as the main mean of transportation. As if the aircraft will have a higher load forecast, the price in theory should decrease, since all costs will be shared by more people.	Such trend might hardly change in the near future. Positive network externality is only possible in the distant future when more people will be using aircrafts.
Government protection of incumbents	Very high. Today, the government wants to control the industry. It retains inherent regulatory functions, and is actively involved in business.[30] Moreover it controls and prevents the entry of foreign players. Regulation forms are an additional barrier. Our government is responsible for aircraft registration, airworthiness and related issues. Compliance costs increase the barriers to market entry. Moreover Russia’s domestic flight market is effectively closed to foreign competition. This fact also limits the likelihood of new entrants to the airline market to the international segment. There is also such a very high barrier, as high transaction costs of operating in this market, in particular, unofficial payments to government officials for the opportunity to operate in this specific market for the provision of slots (time of departure / arrival, etc). Thus, we can infer that there are significant administrative barriers to entry, which greatly reduces the threat of new entrants.	It is difficult to predict. But the future Russian entry in WTO might decrease the level of government protection of existing incumbents.
Perception of entrants about expected retaliation of incumbents	There is high perception of entrants about expected retaliation of incumbents, especially in case of 5 biggest players and their preferable positions and high degree of influence.	It might decrease due to the new Russian antimonopoly legislation bills[31] and future entry to WTO.

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