Question

US airlines – Case Study

The United States Airline Industry The U.S. airline industry has long struggled to make a profit. Analysts point to a number of factors that have made the industry a difficult place in which to do business. Over the years, larger carriers such as United, Delta, and American have been hurt by low-cost budget carriers entering the industry, including Southwest Airlines, Jet Blue, AirTran Airways, and Virgin America. These new entrants have used nonunion labor, often fly just one type of aircraft (which reduces maintenance costs), have focused on the most lucrative routes, typically fly point-to-point (unlike the incumbents, which have historically routed passengers through hubs), and compete by offering very low fares. New entrants have helped to create a situation of excess capacity in the industry, and have taken share from the incumbent air- lines, which often have a much higher cost structure (primarily due to higher labor costs). The incumbents have had little choice but to respond to fare cuts, and the result has been a protracted industry price war. To complicate matters, the rise of Internet travel sites such as Expedia, Travelocity, and Orbitz has made it much easier for consumers to comparison shop, and has helped to keep fares low. Beginning in 2001, higher oil prices also complicated matters. Fuel costs accounted for 32% of total revenues in 2011 (labor costs accounted for 26%; together they are the two biggest variable expense items). Many airlines went bankrupt in the 2000s, including Delta, Northwest, United, and US Airways. The larger airlines continued to fly, however, as they reorganized under Chapter 11 bankruptcy laws, and excess capacity persisted in the industry. The late 2000s and early 2010s were characterized by a wave of mergers in the industry. In 2008, Delta and Northwest merged. In 2010, United and Continental merged, and Southwest Airlines announced plans to acquire AirTran. In late 2012, American Airlines put itself under Chapter 11 bankruptcy protection. US Airways subsequently pushed for a merger agreement with American Airlines, which was under negotiation in early 2013.

With the information above, addresses the following questions:

• With the aid of a clearly drawn diagram conduct a competitive forces analysis of the U.S. airline industry. What does this analysis tell you about the causes of low profitability in this industry? What are the principal advantages and disadvantages of using the five forces framework?   

• The economic performance of the airline industry seems to be very cyclical. Why do you think this is the case?   

• Given your analysis, what strategies do you think an airline should adopt to improve its chances of being persistently profitable?   

Answer 1

Five forces analysis on the airline industry

Airline industry is a very big market and has been producing huge revenues as well as facing the huge competition in each and every aspect. As the new competence are entering the markets they are increasing the overall competition and affecting the structure.

Competition rivalry

Because there are so many operators available in the same region with the same route. As the low cost Carriers entered the market, start to find the most profitable way to surpass the safety regulations of the industry. This specific Innovation and ideation is driving extreme changes in the airline industry. Airline industry is mainly fuelled by the regulator and they decide what should airline industry do. Low cost Airlines are having their full authority over the domestic transportation but in international trade premium carriers are only id and they are driving the industry. By having extreme diversity in the field we can say it is one of the most competitive businesses in the country.

Supplier bargaining

As the Companies are increasing number of plane manufacturers @ the plane suppliers are also increasing. Everything from labour to the fuel has a supplier and the suppliers usually bargain with the companies for getting a better price and a better profit. Geo political factors also influenced the condition of supplying and labour is also fuelled by the power of unions who usually bargain for the costly concessions from the Airlines.

and Boeing both are the biggest companies in providing aircrafts to the different airline industry and plays a major role in bargaining with those industrial companies.

Customer bargaining

As the online ticketing has introduced, customer has power to compare multiple ticket fares from different Airlines which gives in the authority to choose between the lowest available fare. This is specific revolution in the Information Technology has bring a bigger problem for the airline Industries to be more competitive. This specific power of the customer is driving the industr, hence airlines are helpless to reduce their affairs and work accordingly to the customer.

Threat of new entrants

Airline industry is going very fast and multiple new companies are putting off their planes in the industry every day. By having different competitors in the same field the number of increased competition also produces a threat for the existing airline companies as well as the new companies who is entering the industry. New entrants also increase the competition by reducing their affairs and implementing new strategies to attract the customer.

Threat of substitution

In United States America there is no threat of substitution as people prefer applying rather than going into the buses are the trains for long distances. Has been in the culture for a long time that's why there is no threat from the substitution of the airline industry that's why the airline industry has been growing since then. Airlines are providing different services like Wi-Fi and free food which is also attracting the customer towards them and they don't go for any other substitute.

Imitation of the services provided by the Airlines is a common thing. The practices are adopted by different Airlines at a very large scale as it provides a better implementation of different services by just looking into other Airlines operating the same. This affects the operation management of the airline industry implementation of the services require great effort and imitation also requires proper managerial system which matches with the other airline.
We can see that implementation and ideation of new strategies require advancement in managerial department of the airline or it requires intense efforts to provide better structure for implementation of the specific strategy. By keeping best strategy secret at an initial stage and applying it through a proper model would definitely benefit and airline and reading the chances of being copied by other Airlines.

Airline Industries can increase the overall business by reading battle strategy for reducing lags in between multiple event inside operating structure as well as by creating more intuitive customer oriented promotional strategy which would be beneficial for a customer. Type of approach would definitely provide an extensive support to the overall structure of the airline and would help to capture more of the market segment by attracting new customers. Analysis of different record systems which are implemented into the organisational structure of us airline industry global Impact of reducing cost can be turned into a beneficial strategy by creating cause differentiation for different Airlines.As america Is technically advanced in manufacturing of aircraft and services I could get benefit by the same industry at a global aspect by increasing the overall innovation in a specific industry and dominating market segment at a global scale.