Discuss about the Case and Strategy Analysis of US Airline Industry.
The report is based on strategic position of U.S. airline industry by understanding and demonstrating of the strategic concepts into the particular industry. This report conducts a competitive forces analysis of the U.S. airline industry and analyzes the causes of lower profitability into the industry. Advantages as well as disadvantages of the five force framework are also analyzed in the report. The economic performance of the airline industry appears to be cyclical. In order to make development into the airline industry of being persistently profitable, strategies are implemented into US airline industry. The strategies own to slow the global growth of gross domestic product as well as rise into cost.
The airline industry of UK struggles a lot to make of profit. The US airline industry is being structured into three of the components such as commercial, military as well as general. The commercial aviation industry is included of national carriers like United, Delta, and American which are hurt by the lower cost budget carriers to enter into the business such as “Southwest Airlines, Jet Blue, AirTran Airways, and Virgin America”. From the staring of the year 2001, there is complication into higher price of oil (Dai, Liu and Serfes 2014). The air transportation is scheduled as well as non-scheduled. Most of the commercial airlines are operated as per the schedule as well as flying of the regular routes (Goetz and Sutton 2017). The air carriers are not operated based on schedule throughout the off peak hours in addition to flexible to choice of airports. Most of the airlines are bankrupted in the year 2000, includes of Delta, Northwest, United, and US Airways. The airlines are continued to fly, and it is recognized under the bankruptcy laws.
Diagram of competitive force analysis
The five force model was invented by Porter is used framework for analyzing the competitive environment of the airline industry. The five forces are as follows:
The competitive force analysis is a model which helps to explain why the US airline industry is able to sustain into various levels of profitability. This particular model is applied to search for profitability, competition intensity along with attractiveness (Laudon and Laudon 2016). The Porter’s five force analysis is a practical tool for analyzing the exterior environment where the business can operate. The competitive force analysis of the US airline industry is as follows:
Threat of new entrants: It is high for the airline industry. It is analyzed that entering into airline industry is critical as it is involved with higher amount of investments. The airline industries are not pool capital easily as it is required of financial clearances from the banks and creditors (Galliers and Leidner 2014). When there is fallen down of the interest rate, new entrants are entered into the US airline industry. As the airline industry leverages efficiencies from economics of scale, therefore the threat of new entrants are higher.
Bargaining power of suppliers: The power of suppliers is high. When the products are at higher demand as well as the supplier have few substitutes to the products. There is an increase into bargaining power of the supplier. The US airline industry is fallen under control of two of the organizations such as Boeing as well as Airbus. The suppliers are available for supplying the parts along with machinery of the aircraft (Pearlson, Saunders and Galletta 2016). There are three inputs that the airline industry has based on fuel, aircraft as well as labor. The price into aviation fuel is focused to fluctuations into the worldwide market. The labor is subject to authority of unions those negotiate as well as expensive concessions from the airline industry.
Bargaining power of buyers: When the buyers have various choices to decide starting various airline services. Into the US airline industry, the air tickets are expensive, and then the customers can choose to travel by other airlines which are offering of reasonable deals. There are rigid regulations to the demand side of airline industry means that the travelers are secluded by the controller’s means balance of power is being inclined in favor (Alamri et al. 2016). The buyers are engaged into price discovery means there is fluctuations into price do not deter as there are various channels throughout which the passengers can order tickets
Threat of substitutes: Into US, the airline industry is not facing threat from the substitutes into the developing world. When the price of the air tickets is not suited with the budget of passenger, then the passenger can switch with other travelling options like train as well as bus (Manoharan, Melitski and Bromberg 2015). The customers are induced by lower fares of tickets than other aspects such as free Wi-Fi, passenger amenities and others.
Competitive rivalry: The US airline industry is extremely competitive. If new entrants are offered of affordable prices as compared to existing competitors, then the consumers have no time to switch to other airlines. Therefore, the chances are medium. The US airline industry is regulated on supplier side as compared to demand side (Dai, Liu and Serfes 2014). The low cost carriers are beached the full services airlines when mutual with strong competition.
There are various reasons which lead to lower profitability into the US airline industry as follows:
Price: This factor can affect the business of airline industry in huge. There is an increase into price of fuel, urges airline companies are raised the price of travel to cover additional expenses (Ogiela 2015).
Comfort and flexible: The customers are preferred travelling by means of air as they have good income. When any types of glitch are noticed into the airline services, then it provides an effect on profitability of airline industry (Sarif et al. 2018).
Competitors: The business arena is not complete without the competitors as well as rivals. The new entrants are offered enhanced agreement by offering of discounts on the air tickets, then the clients are likely to woo by the proposes. This strategy can pose the threats to closest competitors.
Suppliers: When there is rise into the cost of production, then it would be less number of suppliers interested into creates of inputs at higher prices.
Non-stable pricing: The US airline industry is followed of non-stable pricing which provides an impression to customers that higher prices are being charged for the tickets (Bahador et al. 2018). When the customers have no suggestion on the charges of air tickets, then they are not worried to choose for it.
Advantage of using the five forces framework:
Disadvantage of using the five forces framework:
The airline industry is cyclical; it means that the business is based on financial growth of the country. Throughout the periods of the monetary wealth, the income of disposal is at the rise. The economic performance into the airline industry is based on number of factors such as cost of fuel, cost of labor, low cost budget carriers which provide an effect on the large carriers, number of the business travel and others (Hill, Jones and Schilling 2014). Both the cost of fuel as well as labor is biggest portion of the variable cost. The lower cost budget carriers are focused on nonunion labor system. It helps to reduce the cost as compared to earlier. In the early of the year 2000, the cost of oil is ranged from $15 to $25 a barrel. In the year 2008, due to demand of the developing nations such as India along with China, the oil price is at high of $ 147 a barrel (Flouris and Oswald 2016). Therefore, the revenue of airlines is at higher throughout the economic growth as well as lower throughout the economic contraction.
The economic presentation of an airline industry is cyclical as this is the case because of scenery of the industry as well as association to economy. As the airline industry is based on who have disposal income afford to fly, when there is lag into economy, fewer individuals are flying to the personal as well as business reasons. On the other hand, when the economy is humming, then people can afford to travel by the airlines. In the starting of the year 2001, the higher price of oil is a complicated matter (Dodgson 2018). The cost of fuel is being accounted for 32% of the total revenues in the year 2011. The cost of labor is accounted for 26% where are considered as two biggest variable expenses items. Profit from the fuel price is made not in refining part of value chain but there is upstream by the producers of oil. The US airline industry is expected to slow the pace to hire over next years (Goetz and Sutton 2017). Employment growth will be strong by the year 2014, while there is an increase of hiring over next 12 months. By the next year, it is estimated that there should be rise into total employment by the airlines will be reached to 2.45 million, with a gain of 1.5% over the year 2014.
After the strategic analysis, the airline industry should adopt of low cost strategy to get better chances of being determinedly gainful. It is the greatest approach to be cost-effective as it would lessen the airline fares as much it is potential while accumulation of incentive programs for the customers to enlarge the sales (Cummings and Worley 2014). There are various US airline industries those have teamed up with the credit card companies to embrace them into the inducement programs. The low cost strategy facilitates to main the competitive advantage. It is emphasized on reduction of cost as well as control to compete with the legacy carriers. It offers of competitive price to the customers (Lee and Olson 2016). The other strategy is to merge with other airline companies for decreasing the competitions as well as increasing profitability to have two of the companies together. The cost is cut over the board. The flights are to be booked over the phone where there is elimination of the commissions as well as cut down on the staffs. Reduction into the delay of the flights would provide the airline industry with competitive advantage. Two of the strategies are combined as cost-leadership competitive strategy which is functional by means of the low cost carriers.
It is discussed that the strategies are designed for achievement of growth based on the low cost which moved the expectations to be considered as norm for airline industry. The methods used to answer to the questions are the strategic analysis of the airline industry, change into market forces and economic performance of the airline industry. The review of economic performance of the airline industries seems to be cyclical finds the dramatic changes into the competitive landscape. The key factor which is contributed to losses of US airline industry is economic slowdown into the country, there is massive decline into the business travel and there is an increase into competition. The factor which is contributed towards profitability of the low cost carriers is higher productivity of the labor forces as well as use of technology for improvement of operations as well as management. Record of higher price of oil is a major barrier to improve the financial health of the industry. The cost reductions areas of airline industry are labor, fuel, external distribution and fleet. The US airline industry has adopted of low cost carriers strategy to maintain of their competitive advantage into the US market. The low cost carrier is emphasized with reduction of cost as well as control to compete with the legacy carriers. It offers of competitive pricing to the customers. Low cost carrier has low cost structures and they have faced increasing pressure from rise into cost of fuel.
Conclusion
It is concluded that the low cost airlines has cut down the segregation of the passengers. The airline company is targeted the leisure customers not the passengers of business. The study is focused on “cost-leadership competitive strategy” which is being useful through the low cost carriers into the US airline industry along with explore of the elements which concern competing capability of the airlines into the region. The research study shows authoritarian environment into the regions of air transport businesses. Into the US market, the airline industry is not dependent on growth for attracting the new customers, but it is dependent on new opportunities for increasing profitability of the airline industry. The lower price of the tickets are supported by the airline industry and the customers so that they can maintain a better service level required to attract as well as keep the business travelers. The cost cutting strategies are used to adopt of competitive advantage.
References
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