Strategy And Case Analysis For United States Airline Industry

The US Airline Industry: An Overview

Describe about the Strategy and Case Analysis for United States Airline Industry.

According to the case study, the United States Airline Industry is one of the most renowned airlines that have gone through several ups and downs. The large carriers are facing significant competition from low cost carriers. The aim off this report is to study the competitive forces of the US airline industry. Firstly, an overview of the US airline industry is presented where the data is represented in the form of numerical figures. According to the case study, it is observed that the US airlines have gone through significant losses in the previous years. Therefore, the Michael Porter’s model of competitive forces is adopted for analysing the causes of low profitability in the airline industry. Further, according to the case study, the economic performance of the US airline industry is cyclical. The growth of the airline industry is cyclical as the business depends on the country’s economic growth. Therefore, a justification and thorough explanation regarding the same is provided. Further, after discussing the issues faced in US airlines, several strategies are identified that can be adopted to help make the airlines profitable. A justification for adopting the strategies is also provided. Last, but not the least, a critical discussion regarding the US airline industry scenario is made.

The US airline industry handles over 1,000,000 passengers annually (Statista.com 2016). It is ranked twelve among the thirty busiest airports in the world (Rita.dot.gov 2015).  The US airline industry has faced significant ups and downs due to several consolidations and mergers. There are three major international carriers operating in US- American Airlines, Delta Airlines and United Airlines. Apart from these, there are nine large carriers with both domestic as well as international destinations such as Virgin America, JetBlue, Hawaiian Airlines, Frontier Airlines, Alaska Airlines, Southwest Airlines, Sun Country Airlines, Spirit Airlines and Allegiant Air. According to Statista.com (2016), Southwest Airlines hold the highest market share of 18.2% in 2015. Majority of the airlines have improved both in capacity as well as traffic.

However, the pricing pressures and fall in oil prices and capacity growth has led to a decrease in passenger net revenues. Lorenzetti (2015) argues that the airlines are facing a lot of issues despite high profits. The US airlines have hit over $8 billion in the first six months of 2015, but the lower ticket prices have caused a decline in passenger unit revenue (Statista.com 2016). However, as soon as the labour cost and oil prices will increase, the airlines shall require the customers to spend more money that could be challenging job. The US airline industry has faced bankruptcies, technological advancements, presidential intervention and tumultuous attacks of 9/11 (Statista.com 2016). The airlines have downsized 160,000 jobs for cutting huge losses (Statista.com 2016). Services have been cut to multiple destinations. One of the significant mergers that changed the US airline industry scenario was the Southwest Airlines and AirTran thereby making Southwest the fourth largest airline in US. Majority of the airlines had to cut down prices due to low cost carriers. The overall travel experience of the customers also declined. The onboard conditions and cuts in food were also experienced. It is observed that the rising jet fuel and oil prices are making a heavy dent in the US airline industry (Statista.com 2016).

A Competitive Forces Analysis of the Industry

 

Figure 1: Market Share

Source: (Statista.com 2016)

A Competitive Forces Analysis of the Industry

A competitive analysis can be made using Porter’s five forces as it is a crucial methodology to analyse the external environment. The level of competition in the US airline industry is high. The US airline industry has been buffeted by strong headwinds from multiple external factors such as increasing operating expenses, greater landing and maintenance costs, declining passenger traffic, intense price competition from low cost carriers and various others. The US airline industry has also faced bankruptcy because of a global death spiral in the airline industry. The US airlines have also formed mergers to survive in the global landscape. The low profitability in the airline industry can be studied in greater detail due to the effects of following forces:

Supplier power- There is a huge list of suppliers for the airline industry in US. The three main supplied are fuel, labour and aircraft which are directly influenced by the external environment. For example, the oil prices fluctuate according to the global price fluctuations. The geopolitical factors cause change in fuel prices. Further, labour is also affected by the power of unions who get costly concessions and unreasonable bargains from the US airlines. Lastly, the airlines depend on two aircrafts, Boeing and Airbus for the aircraft needs. Therefore, these three inputs- fuel, labour and aircraft make the bargaining power high and profitability low (Assaf and Josiassen 2012).

Buyer power- The buyers have high bargaining power over the US airlines as it is not difficult for the customers to switch from one airline to another. The low switching cost, online ticketing and distribution systems makes the bargaining power of the customers high. Several low cost carriers have entered the US airline industry thereby causing price wars. The advancement of technology and internet has led to the creation of sites such as Orbitz, Expedia and Travelocity. Therefore, these websites allow comparison of prices thereby helping the airlines to keep the fares low. Further, the tight regulations are in favour of the customers. There are multiple airlines available from which the customers can choose from in the case of price discovery that again makes the buyer bargaining power high and low profitability in the US airline industry (Barros, Liang and Peypoch 2013).

Entry and exit barriers- The entry and exit barriers in the US airline industry is high. This is because the airline requires huge capital investment for entering and exiting the sector. Not everyone can enter the airline industry as significant investment, knowledge, resources ad expertise is required. Moreover, the US airline regulators so not let the airlines exit the industry unless there is a strong and genuine business reason. Therefore, the airline industry leverages the synergies and efficiencies from the economies of scale. Such high government cost and operating cost are exceedingly complex. Therefore, the threat of new entrants is low while the exit barriers are high (Bilotkach and Lakew 2014).

Intensity of Competitive Rivalry- The intensity of competitive rivalry in the US airline industry is high due to the entry of low cost carriers, tight regulations, high operating expenses and others. A  few examples of large carriers are American Airlines, Delta Airlines and United Airlines. These are directly hurt by low cost carriers such as Southwest Airlines, AirTran Airways, Jet Blue and Virgin America. These airlines keep very low airfares that intensify the US airline industry competition (Dai, Liu and Serfes 2014).

Economic Performance

Threat of Complementarities and Substitutes- There is low threat from complementarities and substitutes in the US airline industry. A few examples of substitutes are the customers travelling in cars, trains, or buses which are only possible in short distance journeys. For long distances, people would travel in airlines. Therefore, there is low threat of substitutes. A few examples of complementarities are ala carte meals, provision of Wi-Fi services, and multiple other amenities. However, it is argued that the passengers find lower fares more  attractive than the provision of such amenities (Mallikarjun 2015).

The economic performance of the airline industry seems to be very cyclical. The growth of the airline industry is cyclical as the business depends on the country’s economic growth. In the times of economic prosperity in US, the disposable income is high. Therefore, the people are willing to spend a greater amount on the booming economy especially on air travel. Therefore, the airline revenue is higher in times of economic growth and vice versa (Marketrealist.com 2016).

 

Figure 2: Economic Growth and US Airlines Revenue

Source: (Marketrealist.com 2016)

According to the reports by The International Airline Transport Association (or IATA) the demand for airline services increased 5.9% by July, 2016 (Marketrealist.com 2016). Due to low airfares and expansion in routes, the low cost carriers experienced highest growth and aggressive expansion. The airline demand seems to be slowing down and the global economic growth has subdued in the year 2016 (Marketrealist.com 2016). The terror attacks have also affected the travel demand adversely. However, the low prices are attracting the customers. The consumer spending accounts for around 70% of the US economy (Marketrealist.com 2016). The consumers increasingly contribute to the economy up to 4.2% on an overall basis (Marketrealist.com 2016). The job growth declined to 150,000 jobs in August 2016 (Marketrealist.com 2016). The main question is about the consumer spending and its effect on traffic growth of airlines. The consumer spending is not at pre-recession levels after 2008-2009 (Marketrealist.com 2016). The spending has declined as the race is tightening and election was drawing closer. The other factors affecting airlines demand is capacity, travel demand, utilization and yield. There has been a decline in the airline yields in US after the second quarter 2014 coinciding with the capacity restraint (Marketrealist.com 2016). The passenger yield has declined 5.1% during second quarter 2015 in comparison with the previous year (Marketrealist.com 2016). The airlines in US are facing revenue challenges while sustaining profit margins. The airline capacity is growing faster than the economy.

Based on the above analysis, certain strategies are identified for enhancing profitability in the US airlines. As the US airlines have high labour cost, there are situations of bankruptcy. To avoid any strikes, the US airlines must address the labour demands. US airlines perform heavy maintenance and must emphasize control over product. Significant cost savings can be achieved by outsourcing mechanical labour. Various options can be explored if the maintenance can be performed at a lower price.

Fuel efficient practices can be implemented as the prices are escalating. Not only the fuel efficiency can be improved, but the environmental impact of operations. The sensitivity to price fluctuations can also be reduced by continuous fuel efficiency initiatives. As US airlines are merging with other companies, it can also partner with low cost carriers as they are in high demand. Seamless service to customers can be provided. The international offerings can be enhanced so that the connections to Asian markets are better. New routes and hubs can be addressed so that the future delivery can be improved. Frequencies of routes can be enhanced so that greater number of passengers can be served (Oum and Yu 2012).

Hub-and-spoke airlines can lower the operating costs through onerous labour agreements for United Airlines, American Airlines and US Airways. It shall also help in negotiating better deals with intermediaries and eliminate discretionary costs. The hub operations can be smoothened out. Adding low-cost subsidiaries shall be helpful in enhancing US economy. The legacy carriers can make a case for an incentives-based program that will preserve the viability of the network service they provide. A successful lobby for tax credits could position the legacy carriers to compete with low-cost carriers and return to sustainable profitability. The airport and onboard services can be separated so that the complex processes and systems can be eliminated. The US airlines must provide best quality services at low operating cost. The key service advantages can include destination breadth, onboard amenities and superior loyalty programs (Ratliff and Gallego 2013).

The above report focuses on the issues faced by the airlines. Based on the above analysis, it is evident that competitiveness is one of the critical issues. The change in GDP is reflected in the fuel costs and airline usage. It is necessary for the airlines to make alliances be it with high-speed rail or other airlines (Zou and Hansen 2012). As an example, British Airlines gains immense benefits from the merger despite the non-integration of operations. Another matter of concern is the fuel price. The airlines impose fuel surcharges on the customers thereby leading to high costs. It is argued that with increasing fuel prices, the airlines shall have an effect on the bottom line. As seen in the case of Singapore Airlines, fuel is the greatest challenge. It is further argued that US airlines mainly compete on prices and not on quality service (Baker 2013). The US airline is facing tough competition due to a combination of low prices on the same routes with limited competition. This can be challenging for both regulators and consumers. There has been less competition at US’s major airports and the passengers are willing to pay higher fares as they have higher disposable income. There has been an increase in the domestic airfares at a pace greater than inflation which is challenging due to decline in competition (Assaf and Josiassen 2012). 

It is argued that the passengers had limited choices and paid a higher price back in 1978 (Zou and Hansen 2012). Currently, the airlines choices are high in number. The US government had control over the prices and routes before the competition got intensified in 1980s (Zou and Hansen 2012). The market fares reduced as new entrants entered the market. The US airlines also faced financial shambles after the attacks of 9/11 and recession. There was bankruptcy in the US airlines and a number of deals were restructured starting 2008 (Zou and Hansen 2012). Therefore, it is argued that there is less competition in the US airline industry than before.

Conclusion

Conclusively, US airlines have gone through significant losses in the previous years. There are three major international carriers operating in US- American Airlines, Delta Airlines and United Airlines. The pricing pressures and fall in oil prices and capacity growth has led to a decrease in passenger net revenues. The US airline industry has faced bankruptcies, technological advancements, presidential intervention and tumultuous attacks of 9/11. The overall travel experience of the customers also declined. The US airline industry has been buffeted by strong headwinds from multiple external factors such as increasing operating expenses, greater landing and maintenance costs, declining passenger traffic, intense price competition from low cost carriers and various others. It is observed that the rising jet fuel and oil prices are making a heavy dent in the US airline industry. The low switching cost, online ticketing and distribution systems makes the bargaining power of the customers high. Further, the US airline regulators make the entry and exit barriers strong. The low cost carriers have grounded the larger carriers thereby making the competition in US airline industry intense. In the times of economic prosperity in US, the disposable income is high. main question is about the consumer spending and its effect on traffic growth of airlines. The consumer spending is not at pre-recession levels after 2008-2009. Significant cost savings can be achieved by outsourcing mechanical labour. The international offerings can be enhanced so that the connections to Asian markets are better. . The airport and onboard services can be separated so that the complex processes and systems can be eliminated.

References

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Baker, D., 2013. Service Quality and Customer Satisfaction in the Airline Industry: A Comparison between Legacy Airlines and Low-Cost Airlines. American Journal of Tourism Research, 2(1).

Barros, C., Liang, Q. and Peypoch, N., 2013. The technical efficiency of US Airlines. Transportation Research Part A: Policy and Practice, 50, pp.139-148.

Bilotkach, V. and Lakew, P., 2014. On sources of market power in the airline industry: Panel data evidence from the US airports. Transportation Research Part A: Policy and Practice, 59, pp.288-305.

Dai, M., Liu, Q. and Serfes, K., 2014. Is the Effect of Competition on Price Dispersion Nonmonotonic? Evidence from the U.S. Airline Industry. Review of Economics and Statistics, 96(1), pp.161-170.

Lorenzetti, L., 2015. Here’s Why The Airline Industry Is In For A Rough Ride. [online] Fortune. Available at: <https://fortune.com/2015/08/19/airline-industry-challenges-ahead/> [Accessed 15 Dec. 2016].

Mallikarjun, S., 2015. Efficiency of US airlines: A strategic operating model. Journal of Air Transport Management, 43, pp.46-56.

Marketrealist.com, 2016. Flying in the Face of Investor Concerns, Airlines Add to Capacity – Market Realist. [online] Marketrealist.com. Available at: <https://marketrealist.com/2016/09/flying-in-the-face-of-investor-concerns-airlines-add-to-capacity/> [Accessed 17 Dec. 2016].

Oum, T. and Yu, C., 2012. Winning airlines. 1st ed. Boston: Kluwer Academic Publishers.

Ratliff, R. and Gallego, G., 2013. Estimating sales and profitability impacts of airline branded-fares product design and pricing decisions using customer choice models. Journal of Revenue and Pricing Management, 12(6), pp.509-523.

Rita.dot.gov, 2015. 2015 U.S.-Based Airline Traffic Data | Bureau of Transportation Statistics. [online] Rita.dot.gov. Available at: <https://www.rita.dot.gov/bts/press_releases/bts018_16> [Accessed 15 Dec. 2016].

Statista.com, 2016. U.S. airline market share 2015 | Statista. [online] Statista. Available at: <https://www.statista.com/statistics/250577/domestic-market-share-of-leading-us-airlines/> [Accessed 15 Dec. 2016].

Zou, B. and Hansen, M., 2012. Impact of operational performance on air carrier cost structure: Evidence from US airlines. Transportation Research Part E: Logistics and Transportation Review, 48(5), pp.1032-1048.