The US Airline Industry in 2012

Case Study:

THE US AIRLINE INDUSTRY IN 2012

Table of Contents

Introduction……………………………………………………………………….1

Analysis

Political

Environmental

Social

Technology

INTRODUCTION:

US Airway is one of the American airlines subsidiaries company starting with the service of mail; began in 1920’s. In 1939 the service was extended to small communities of western Pennsylvania and Ohio; with the service of flying post office. In 1949 the airline begins its transition from airmail to passenger service with introduction of the DC-3.

US airways operate widespread internationally and domestic routes with almost 200 destinations in countries of North America, South America, Europe and some in Middle East. The US

Analysis

Political

The airline industry operates in a highly governed environment; the consumer of this service has more favourable cost. This is due to the fact that passenger safety important and the political establishment have been made weary of the airlines and resorted towards strict regulations for their operations, due to their earlier inclinations towards monopolistic behavior. In addition, with there being more competition after regulation in the industry, passengers are in a commanding position where they can push for lower prices and amenities; as they have lot of option’s of travelling.

Economic:

Aftermath of 9/11 attacks left a major impact on the airline industry as well. The prolonged recession; fluctuations in oil prices and a consistent global slowdown are other devastating influence that is affecting the growth of the airline industry. Airlines have to cope with declining passengers, high fuel prices, stiff competition from low-cost airliners, labor demands, unionization and soaring operating and maintenance costs. In addition, event of terrorism through these industry has adverse the affects.

SOCIAL

As the generation’s Y (1980 to 2000) appearance into the consumer class has resulted in major social changes, more importantly in terms of service, where travellers have become much more intuitive. Hence, to fulfil the requirement of this market segment, the industry has to stabilize their charges. In addition the people mindsets have been changed to become more economically wise decision. When it comes to business class passengers; lot of companies have changed their travelling policy for employee with deduction of business Travel as improved communication facilities have reduced the need to fly down for meetings, other factor such as safety concern and travel through train, bus, cr

TECHNOLOGICAL

The intense competition in the airline industry, latest technology must be adapted by airliners in order to survive in the already tough environment. Additionally, the use of latest technology in aircrafts would not only lower fuel consumption, but also the cost of airline operations and improve efficiency.

THREAT OF NEW ENTRANTS:

The airline industry has low threat of new entrants. High barriers to entry make it difficult for new firms to enter the industry. There is however two aspects that raise the threat and should not go unmentioned. First, a low switching cost for customers makes the entry into the market more lucrative to outside firms. Second is the lack of proprietary technology and product differentiation. Planes are either manufactured by Boeing or Airbus, choosing between a seat on United’s 747 and Southwest’s 747 doesn’t make much difference to the consumer. It look appealing for outsider entry but as discussed in the case 43 new airlines has gone since 1994.

Although switching costs are low, high ticket prices influence buyers to be more brand loyal, opting to purchase from companies they recognize and trust. Furthermore, the creation of “hubs” has forced regional carriers to operate out of smaller domestic airports. Cutting off access to the large distribute networks (airport gates at large international airports) has forced regional carriers to either leave operate solely out of small regional airports or pay an extremely high cost for leasing a gate. Delta’s control over Atlanta and United’s over Denver are prime examples of how national carriers dominate regions and force smaller carriers out. High capital requirements and economies of scale are also required to properly access the market, the cost of establishing one hub can costs hundreds of millions of dollars and most national carriers (Delta, United) have multiple around the country. The “Open Skies Agreement” also emphasizes the need for large economies of scale.

THREAT OF SUBSTITUTE PRODUCT/SERVICE

The threat of a substitute product service in the airlines industry is low when referring to medium and long haul flights .There are multiple substitutes in the airline industry and consumers can choose other forms of transportation such as a car, bus, or train. However, those means of transportation can be more costly than a plane ticket. The main cost is time. Planes are by far the fastest form of transportation available. There are two types of travelers and each has a different perspective towards alternative. For Business personnel travelling in time is important rather than cost. This type of traveler, the threat of a substitute is very low. The price-sensitive leisure traveler, short-haul flights could become susceptible to substitutes. families may opt to drive or use train or buses for the sake of budget. As time is not

INDUSTRY RIVALRY

The competition among current players in the airline industry is high. The industry is consolidated, exit barriers and fixed costs are high, and there is little differentiation in the product (service differentiation does exist). Mega-mergers between Delta/Northwest, Continental/United, and American/US Airways have consolidated the industry over the past few years and have intensified the rivalry among existing competitors. The three firms battle intensity over the convenience, time oriented business traveler, while smaller carriers like Jet Blue, Southwest, and Allegiant battle over the price-sensitive leisure traveler. Large investments in equipment and long lease agreements with airports increase barriers to exit making firms more likely to battle for market share instead of backing out of the industry altogether. The airline industry’s extremely high fixed costs (80%) make it one of the worst net operating margin performers when measured against other industries. This high fixed costs structure increases rivalry and causes airlines to invest heavily in developing tools to maximize capacity utilization (“Load Factor”). With only two global airline manufacturers (Boeing & Airbus), differentiation between products offered by competitors is very low, leaving firms to differentiate via services (booking, boarding, baggage check, and in-flight services). POWER OF SUPPLIERS The power of suppliers in the airline industry is moderate. The main factors contributing to a moderate power of supplier is that there are only two global suppliers (Boing & Airbus) in the airline industry. With no alternative supplier, airlines become susceptible to suppliers maximizing profits and spreading increased costs downstream. Although airplane manufacturing is a highly consolidated industry, this does not give them complete control over the airlines. Airplane manufacturers only serve two markets, commercial airlines and government contracts. For this this reason, airplane manufacturers have a vested interest in the success of airlines. If the manufacturers/suppliers begin to eat too far into the airlines profits, the airlines will fold and leave the manufacturer with no buyer. There is also little threat of forward integration from the suppliers. High capital requirements, operating with economies of scale, and access to distribution points (“Hubs”) makes it tough for suppliers to forward integrate. POWER OF BUYERS

Buyer power in the airline industry is moderate. Price wars between competitors, low levels of differentiation in product, coupled with very low switching cost gives buyers strong influence over prices and services. Although buyers typically have a strong voice in product/service offerings, it is important to differentiate between two distinct sets of customers; customers traveling from rural areas to urban cities and travelers traveling from one urban city to another. Those traveling from city to city have many choices in the airline they wish to take thus leveraging a stronger influence on airlines. These high demand flights (for example; LA to NY or SF to NJ) are much more competitive and customers are willing to choose carriers depending on price. Travelers going from less dense rural areas tourban cities have less options, the “hub-and-spoke” approach allows carriers to dominate a rural area with one central hub, thus eliminating competition and lowering the power a buyer has over price and services. This highlights the importance for airlines in developing a “hub-and-spokes” network to service a region, or, reinvent the wheel and continually improve “industry best practices” like Southwest did.