The US Airline Industry Case Study Solution

Case Study on The US Airline Industry in 2007 Group : 02

Course: Strategic Management [Mgt489] Section: 10 Semester: Summer 2017 Prepared for: Mr. Bobby Hajjaj Date of Submission: 27th July, 2017

Prepared By

Name Gourab Kumar Das Rashik Zulker Nain Saad Bin Hossain Sabil Sarhan Md. Sazzad Hossain Quazi Afzalul Haque Tahsinur Rahman Anwar Abedin Piash

ID 133 1151 630 1410098030 1130756030 1410810030 1220295030 1310419030 1221159030 1210542030

The US Airline Industry in 2007 Vision Framework What: This is an Airline industry. Why: The US airline industry is looking for Expansion of routes by achieving economies of capacity utilization. The industry is also keen to avoid destructive price competition and continue profitability in the long run. Strategic Intent: Airline industry wants to be the best in providing world class transportation facility and build customer loyalty by differentiating their offerings. Vision: To establish the industry in a sustainable position by the virtue of high customer loyalty and to provide faster transportation.

Key Issues - Choosing between cost reduction offer and differentiation service. - Making a fair treatment between long-suffering shareholders and customers. - The rise of fuel prices after the 9/11 attack.

Goals - To hold on to the period of profitability that came after 5 years (2001-5) by achieving high load factor. - To earn as much revenue as possible on each flight through proliferation of pricing categories and surplus of special deals.

PESTEL Analysis (Macro Environment Analysis) Industry: US Airlines Industry, Time Frame: 2003-2007 (5 Years)

Political Factors The condition is stable.

Economic Factors The incident of 9/11 had suffered a great overall loss which caused the oil prices go up. And for this the airlines industry had suffered a lot.

Sociocultural Factors Over the years, there has been a lot of spending on infrastructures and for this people tend to go for other means (bus, trains) to travel long distance. However, some forecasts predicted the 1|Page

growth of demand for air travel will grow in near future as increase in population will result in higher demand.

Technological Factors The advancement in engineering of producing high fuel efficient aircrafts has made airline companies cut down cost. Besides that, the addition of using sophisticated computer software has made the communication much more easy.

Environmental Factors There is specifically no environmental factor to consider.

Legal Factors According to the chapter 11 of the bankruptcy code which allowed to seek protection from their creditors and continue operation under supervision of the court. Airline Deregulation Act (giving pricing power to airline companies), Removal of Civil Aeronautics Board, Establishment of Federal Aviation Administration were the key institutions, which set the rules of the industry. However, the new agreement EU–US Open Skies Agreement (EU and US sharing their sky with each other) might bring upon a vital change by encouraging competition.

Analysis - Airline companies are more concerned with buying fuel efficient planes. - Airline companies can control their own pricing strategy.

Porter’s Five Forces Analysis Competitive Rivalry (High) The four-firm concentration ratios in table 3.5 represents the ratio has decreased from 1935 to 2005 from 88% to 55.4%. This means that competition is going up due to abundance of new competitors. When the ratio increases, the trend is to move from monopoly to oligopoly. We noticed that in 1987, the ratio has increased, this might be explained by the consolidation in the US airline industry in the eighties. The spectrum of airline industry shows that competition is intense which is explained by the low entry barriers and the high exit barriers. Exit barriers induced by government enable bankrupt airlines to compete with financially stable airlines through artificially lowered costs. Threat of substitutes (Low) Low probability of US to develop high speed train travel facility, which means there is a very low chance of replacing the air transport. Business/First Class travelers can easily switch to economy class with little payoff, if the price of luxury class tickets faces an upsurge. 2|Page

Barriers to entry (Moderate) The capital requirement of setting up and airline can be low but the expenses leading to comprising gates, airline and aircraft certification, takeoff and landing slots, baggage handling services are high. At several airports the dominance of gates and landing slots by a few major carriers made entry into particular routes difficult and forced startup airlines to use secondary airports. International airlines were also potential entrants to enter the industry. Bargaining power of buyer (Moderate) Air travel have no viable substitutes for long distance travel and the economy class become a commodity. Price competition among the companies’ gives customers upped hand. On the other hand, business class service is differentiated. Beside these facts, customers can buy tickets online through online agents and by websites. Supplier power (High) Supplier power is high because there is a lot of monopoly and duopoly upstream. The Labor unions and the airports are effectively monopolists. The fuel and equipment providers are also fall under this. The labor unions have used this power to keep their wages and benefit high and impose restrictive working practices which keep the productivity low. When the plane manufacturers are suffering from excess capacity, bargaining power is with the airlines – they can easily delay buying and extend the lives of their planes.

Analysis The industry is not attractive as the completive rivalry and supplier power is high whereas others factors are moderate.

Key success factors Capacity reduction. The financial woes of 2001–5 encouraged cutbacks in schedules and the substitution of smaller for larger planes on many routes which was cost effective. Product differentiation. The differentiation strategy for frequent flier schemes has been immensely successful. These have encouraged customer loyalty and provided incentives for alliances, as well as creating an additional revenue scheme for the airlines. Regional concentration. Much more successful than mergers and acquisitions at controlling competition has been the concentration by each airline on a few major airports which consolidated the capacity and routes at a few airports. Forward integration. The airlines have increasingly taken power from retailers (especially travel agents) by expanding their own direct sales and reservation services (both telephone and internet based) and creating specialized online ticket agencies.

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US airline industry’s lifecycle After post consolidation, the industry has become matured as things have become standardized and there is less scope for differentiation. So ultimately, the companies which are prevailing continue going for cost efficiency.

Recommendations 1. Keep on going for consolidation strategy which will eventually lead to lower competition. 2. Lock in prices (oil) to avoid fluctuation.

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