Competitive Advantage of American Airline Industry

This report analyzes the American airline industry using Porter's Five Forces model and discusses the economic performance of the industry. It also identifies strategies for airline profitability.

Running head: COMPETITIVE ADVANTAGE OF AMERICAN AIRLINE INDUSTRY
Competitive Advantage of American Airline Industry
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Table of Contents
Introduction:...............................................................................................................................1
Overview:...................................................................................................................................1
Five forces analysis:...................................................................................................................2
Diagram:.................................................................................................................................2
Components:..........................................................................................................................3
Advantages and disadvantages of Porter’s Five Forces analysis of the US airline industry: 5
Advantages:............................................................................................................................5
Profitability analysis:.........................................................................................................5
Facilitates decision-making:...............................................................................................6
Disadvantages of the Porter’s model:....................................................................................6
Not always accurate:..........................................................................................................6
Incomplete with PESTEL:.................................................................................................6
Economic Performance of the American airline industry:.........................................................7
Capital Generation:................................................................................................................7
Revenue generation:...............................................................................................................9
Identifying strategies for airline profitability:..........................................................................11
Product line extension:.........................................................................................................11
Product line bundling:..........................................................................................................11
Discussion:...............................................................................................................................12
Conclusion:..............................................................................................................................12

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References:...............................................................................................................................13
Introduction:
The airline industry in USA is playing an important role and act as a crucial
transportation system for the people (passenger airlines) and for delivering the goods (air
cargo). Importance of the airlines in USA has been observed since its incorporation in 1903
and it has become one of the most preferable transportation medium for the people
(Belobaba, Odoni and Barnhart 2015). There are several airline companies in USA and it has
been observed that all of them are working within the specific purview of the aviation body in
USA. Proper licensing is required to run the business and agreements are required for
partnerships (Zou et al. 2014). Considering the significance of the airline industry, there are
several airlines companies start up their business in USA and therefore, a competitive market
has been grown up. There are certain frameworks that are helping to analyse the nature and
scope of the competitive business and five forces framework of Porter’s is one of them
(Treanor et al. 2014).
The main aim of the report is to analyse the airline industries in USA and discuss
about the theoretical view of five forces. It has also discussed about the economic
performance of the industry and recognises the strategies for airlines profitability.
Overview:
The airlines industry is one of the best popular transportation industries in USA
and it has been observed that the success of the industry has been growing in nature. There
are one hundred passenger airlines are operating in the U.S market and there are certain
models and drivers works to help the industry so that it can work promptly (David 2013). The

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airlines industry has a very successful historical background and development has been
observed since 1945. However, the market of the airlines industry becomes more competitive
and the low-cost airlines are trying to attract the customers. More dilemmas cropped up when
there is a declination observed in case of crude oil and prevent the flight operating system to
generate the revenue through fuel surcharge price. The total revenue of this industry is $132
billion for the year 2017 and the annual growth has been calculated as 1.5%. The airline
industries are creating significant implication on the American economy and it is expected
that the annualised rate will be increased up to 4.5% per annum. However, the industry is
facing the threat of bankruptcy and the network airlines have made an attempt to reduce the
mainline cost up to $20 billion. The airline industry also suffers from certain geo-political
issues like terror attacks, security burden and hike in the fuel price. The rise of the low-cost
carriers and declined ticket price are also generating certain dilemmas. Certain airline
companies like Alaska Airlines, Jet Blue, Delta Airlines and American Airlines have lowered
the cost of the tickets and ease the way of flight servicing. A new tendency has been observed
now days in the airline industry. Many airline companies are making alliances with the
banking companies strategically to offer new products to customers like travel insurance and
airline packages which they can avail by using debit and credit cards.
Five forces analysis:
Diagram:
Due to the increment in the American aviation industry, certain competitions have
been observed and it is important to analyse the business perspectives. Five forces framework
is the most common model to justify the competitive intensity. The founder of this theory was
Michael E. Porter and was first published in the year 1979. The external environment of an
industry has been analysed by the theory. The main objective of applying this theory is to

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help the USA airlines so that it can recover its business (Greenspan 2016). It has been
reported that the industry has been affected by certain external forces and it has lost its flow.
The external forces can be classified as increasing expenses, price hike in case of fuel,
deteriorating passenger traffic and rise of subsidiaries in case of transportation. The graphical
design of the five forces is being sketched here:
Figure 1.Porter’s five forces analysis
(Source: Author)
Components:
Certain elements have been observed in this graphical design and they are
recognised as the key components of the framework. A brief discussion on these will help to
understand the effect of this model on the USA airline industry:
The first thing is the power of the suppliers. The airlines industry is based on three
pillars such as fuel, aircraft and labour. All these things are essential and depending on the
global markets (Dobbs 2014). Therefore, the power of the suppliers are regarding these three

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elements can be categorised as high. This theory focussed on the effectiveness of the power
of the suppliers and opted to take the business in a better position.
The second element is the power of the buyer. The process of online ticketing
facilitates the process of ticket booking and the fliers are not required to go to the agents.
Additionally, the rebates in case of the price of the tickets and securities provided by the
authorities to the fliers have made an increment in case of the power of the buyer.
There is a mention in case of the new entrants have been observed in this diagram.
It is obvious to state that large amount of money is needed in this industry and that process
can be identified as entry mode. When the airline industry has to face certain losses; it can be
termed as exit process (Dälken 2014). Both of these terms are quite common in case of
airlines industry and according to the theory, concentration is required on this portion. The
theory has provided certain advices regarding cost advantage and economic scale for the
betterment of the industry.
Now days, there are many substitutes exists in USA market that have become a
threatening matter to the airlines industry and many people are using their motor vehicles
which become a potential threat for the industry. The airline companies should have to adopt
certain customer oriented methods in case of both passengers and business class flights.
The centre point of the diagram is stated about industrial rivalry which is
important in nature. Low cost carriers and other subsidiaries are provoking the competitive
rivalry in the airline business (Moreno-Izquierdo, Ramón-Rodríguez and Perles-Ribes 2016).
Apart from that the market of the country is open in nature. Therefore, there is a possibility
for the existence of various subsidiaries that are attempting to replace the business. According
to the theory, the airlines companies should provide certain cheap rated fares to the customer

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in order to attract the customers. Providing certain offers to the customers can be proved as a
good tactics and profitable to the airlines companies.
Advantages and disadvantages of Porter’s Five Forces analysis of the US airline
industry:
The following are the advantages and disadvantages of Poter’s analysis of the airlines
industry of the United States of America:
Advantages:
Profitability analysis:
The Porter’s model enables the business organisations study the profitability of an
industry. The components of the Porter’s five forces model indicate the level of competition
in the market. For example, threat of new entrants is the first component of the five forces
analysis and refers to the number of new companies, which are seeking entry into a particular
industry. As far as the American airline industry is concerned, the main players are American
Airlines, Delta Airlines and Alaska Airline. These airlines companies are usually premium
flyers offering onboard services at high prices (Shuen, Feiler and Teece 2014). However, the
industry is experiencing entry of low cost airline companies like JetBlue, which are offering
more cost effective airline services with the basic onboard services, which appeal to the large
population of the middle class customers in the US. Again, threat of new entrant also
embraces foreign airline companies like Etihad Airways, which are also providing superior
services to the customers in the US. This analysis shows that the market of the US experience
entry of both international airline companies from other countries as well as American low
cost flyers (Yee Liau and Pei Tan 2014). This means that the American market has become
very profitable. Thus, it can be inferred that the components of Porter’s model enable
companies to study the profitability of markets.

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Facilitates decision-making:
Porter’s five forces model facilitate business organisations like airline companies to
conduct decision making. For example, the entry of large number of passenger flyer of both
American origin and foreign origin means that the market has become extremely profitable
which is attracting these companies. Secondly, it also means that customers have more option
to choose from the large number of airline companies according to their budget. This means
that if the big airlines would lose their customers to low cost flyers if they charge very high
for their tickets (Flammer 2015). Thus, the management bodies of these airline companies
can use the Porter’s five forces to make appropriate decision like pricing.
Disadvantages of the Porter’s model:
Not always accurate:
The information gained from Porter’s model is not always accurate due to fast
changing market conditions. For example, the threat to new entrant gives information about
new companies, which are seeking to enter the market say, the United States of America.
However, this information is not accurate because it cannot be measured quantitatively like
how many companies are entering the American market and their strengths (Shepherd,
Williams and Patzelt 2015). Thus, this information cannot be used to form decisions.
Incomplete with PESTEL:
Porter’s model is incomplete without PESTEL and does not give accurate information
about the market. For example, threats of new entrants give information about the companies,
which are seeking to enter the American market. The present American airlines companies
can incorporate this information in their decision-making. However, the information about
new entrant does not give any data regarding the macro economical factors like political,

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economical or legal (Anton 2015). This shows that Porter’s model is incomplete without
PESTEL and cannot be relied upon by the airlines companies to make decisions.
Economic Performance of the American airline industry:
The economic performance of the airlines industry in the United States of America
would be studied from two angles namely, the capital generation and revenue generation
Capital Generation:
Figure 2. Graph showing stock chart of American Airlines on NASDAQ
(nasdaq.com 2017)

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Figure 3. Graph showing share index of Delta Airways
(Source: bloomberg.com 2017)
Figure 4. Graph showing share index of Boeing on NASDAQ
(Source: nasdaq.com 2017)

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The graphs above shows the share prices of two of the leading American airlines
companies, American Airlines and Delta Airlines. The graph shows that the share indices of
both the airline companies, which lead the American airlines market, are on the rise. This
bullish trend of the market means that the airline industry of the United States of America is
able to attract immense capital from the market. The third graph shows the rising share index
of Boeing, America’s leading aircraft manufacturer. The graph shows that the share index of
the Boeing also shows an upward trend. One can infer from the analysis that both the leading
airlines companies and the suppliers of flights to these companies are performing very well in
the stock market (Rognlie 2016). This means that they are able to generate huge capital from
the market, which renders them their economic strength.
Revenue generation:
The two tables below shows the falling revenue of the two top players of the
American airline industry, American Airlines and Delta Airlines. The falling revenue shown
in the table can be attributed to the entry of new low priced flyers, which are slowly eating
into the market of these leading airline companies. Thus, one can infer from the discussion
that that though the American airline companies attract huge investment from the market,
they are facing stiff competition from airline companies from of American and foreign origin
(Board and Skrzypacz 2016). These companies serve customers at low prices, thus earning
lower revenue per customers, which ultimately erodes the revenue generation capability of
the industry as a whole.

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Figure 5. Graph showing revenue generation of American Airlines
(Sources: nasdaq 2017)
Figure 6. Table showing revenue generation of Delta Airlines

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(Sources: nasdaq 2017)
Identifying strategies for airline profitability:
The above discussion point out several factors, which the airline companies need to
consider to function profitably in the airline market in the US. First, the American market has
a large number of premium and low cost flyers, which have their individual customer
segments. The customers today prefer economic rates of flying, which means the leading
American airlines companies require to price their services to appeal to these new cost
sensitive customer base. The brand power is not the sole criteria to attract customers which is
evident by the dwindling revenue of the leading American airlines companies namely,
American Airlines and Delta Airlines. The following are the strategies which the airlines
companies can use in American market to make maximise revenue generation and profits:
Product line extension:
The American airline should stretch their product line both upwards and downwards.
This means that they should sell both high priced services to the upper class society and
economic rates services for the middle class society. This would allow them to serve both the
segments and generate more revenue (Aurier and Mejía 2017).
Product line bundling:
A very effective strategy, which companies functioning in the American airlines
industry can use to recover the revenue, is product line bundling. They can offer product
bundles like a combination of tickets, travel insurance and cab booking services on landing.
This would enable the airline companies maximise customer satisfaction and attract more
customers which would maximise their revenue generation (Dall’Olmo Riley, Pina and Bravo
2015.).

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Discussion:
The discussion of the profitability situation in the American airlines industry would
encompass three areas namely, the Porter’s model, the economic situation and the strategies,
which could be considered after their study. The Porter’s model reveals that the American
airline industry faces stiff competition from both local and foreign airlines companies. The
leading premium flyers like American are losing their market share to the low cost flyers,
which offer services at lower rates. This is reflected in the dwindling revenue figures of the
leading airlines companies. However, the airlines industry in America has great future and
can recover from this loss of revenue. First, the overall bullish trends in the share indices
show that the American airline companies are able to attract huge investments. They can
channelize the capital generated towards making new market strategies. The discussion of the
probable strategies, which the airline companies can make to recover their falling revenue,
bring into light two strategies. First, they can up stretch and down stretch their product line to
serve both upper and lower segments of customers respectively. The can bundle their
products to maximise customer satisfaction and generate more revenue.
Conclusion:
The analysis and detailed discussion of the American airline industry shows that the
players like American Airlines can no longer rely on their brand values and premium status to
generate revenue. They have to form strategies which offers customer intensive products to
attract more customers. They should utilise the immense capital they can generate from the
market to design premium and economic products. They should serve both the upper and
middle class customers to improve their revenue generation power.

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