Airline Industry Analysis and Deregulation

This assignment requires you to thoroughly analyze the structure and dynamics of the US airline industry. Key areas of focus include the competitive landscape, the rise and influence of low-cost carriers, and the effects of deregulation on market behavior and pricing. Students will apply Porter's Five Forces framework to understand the industry's competitive forces and examine how factors like competition, supplier power, and buyer power shape the airline sector.

Running head: STRATEGY AND CASE ANALYSIS
Strategy and Case Analysis
Name of the Student
Name of the University
Author Note

1STRATEGY AND CASE ANALYSIS
Table of Contents
Introduction......................................................................................................................................2
The US airlines industry: An overview...........................................................................................3
Causes for the loss of profit.........................................................................................................5
Five Forces Analysis of the airlines industry..................................................................................5
Porter’s Five Forces Model.........................................................................................................5
Components of the Five Forces for the airlines industry.............................................................7
Economic Performance of the Airline Industry in the USA............................................................9
Strategies for improving profitability..............................................................................................9
Discussion......................................................................................................................................10
Conclusion.....................................................................................................................................10
References......................................................................................................................................12

2STRATEGY AND CASE ANALYSIS
Introduction
The contemporary commercial world has undergone significant changes in the mode of
operations, behavior and domain of activities. The changes have been more prominent after
Globalization, which facilitated more inclusive and interconnected framework for the growth of
different countries as a whole and many industries in particular. In this context, it can be asserted
that the international airlines industry has developed significantly over the last century and the
industry has also experiences significant modifications over the years (Belobaba, Odoni and
Barnhart 2015). The airline industry, by nature, is one of those industries, internationally, which
requires both capital and labor extensively and in which the initial venture requires huge capital
investment as the initial fixed cost of the industry is high. However, with the expansion of the
domain of operations, the firms in this industry are expected to experience increasing returns to
scale.
It is unanimously accepted that the one of the life changing inventions of all times, which
hugely affected the life of people across the world by changing the ways of commuting. The first
commercial airlines routes came after the Second World War, in Europe and with time airlines
and travelling by air has become a common personal as well as business activities all over the
world (Williams 2017). The contemporary airline industry, in the global scenario, operates in a
highly competitive construct with the airlines (both public as well as commercial) venturing in
both domestic as well as international areas of prospects. The airline industry in the United States
of America, the most influencing economy in the world, is highly privatized with few privately
owned companies enjoying a major share of the industry (Borenstein and Rose 2014). The airline
industry in the country is highly widespread and has a unique characteristic, which is that there
are many domestic as well as international travelers (mostly travelers for business purposes),
who travel by air almost regularly. This, therefore, indicates that transporting by air is quite

3STRATEGY AND CASE ANALYSIS
common in the country and flights are no longer luxury services but they are becoming almost
necessary services, utilized by the people of the country, both domestic as well as national,
almost regularly.
The assignment tries to discuss the overall condition of the US airlines industry and tries
to analyze the overall profitability and prospects of the industry, using the Five Forces Analytical
Method. The report, on the basis of the industrial analysis conducted, also tries to find the key
causes of low profitability of the airlines industry in the recent periods (Goetz and Sutton 2017).
The US airlines industry: An overview
The airlines industry of the country, being one of the most well connected and expansive
industry of the country has developed significantly with time and has continually expanded its
area of operation. The industry can be broadly classified into four categories, on the basis of the
Department of Transportation of the country. The categories are as follows:
Regional – This part of the industry comprises of those companies which have revenue of less
than hundred million USD and which mainly operated in the domestic boundaries by
emphasizing on the short-haul flights. The regional flight sector of the airline industry of the
country does not experiment much in terms of their flight routes or the types of services which
they offer to their customers. They, in general, try to maintain operations in conventional routes
and cater to their share of loyal clientele.
National – This sector of the industry includes airlines with 100 to 150 seats and those earning
between 100 million to 1 billion dollars. The airlines in this sector operates within the national
boundaries of the country (Brock 2013). The national sector of the aviation industry of the

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country is primarily dominated by the newly entered low cost and efficient airlines, which are
constantly forming a significant competition to the existing big airlines, who have been
traditionally operating in the country for quite a long time.
International- The international sector of the airlines industry of the country consists of 130
plus seats airplanes, which are capable of travelling around the world with passengers and fall
under the revenue slab of $1 billion or greater than that. This sector comprises of both the
traditionally operating big airlines as well as the comparatively new, low cost airlines, which are
strongly gaining grounds in this sector of the industry.
Cargo- The above three categories deal with commutations of passengers within the country or
outside the country. However, the airlines industry of the country also has airlines which
transport goods across the world as well as domestically (Lawton 2017). The cargo sector of the
airline industry of the USA is significantly different from the other three sectors and has its
expansion in domestic as well as international scenario. There also exists different aviation
companies in the country, which venture in both the passenger as well as cargo transporting
insider as well as outside the country.
The airline industry of the country, though being heavily privatized, however, the shares
of the market, enjoyed by the different players in the industry are not uniformly distributed. The
domestic market share of the leading aviation companies in the country are shown as follows:

5STRATEGY AND CASE ANALYSIS
Figure 1: Domestic share of the airline companies in the USA (2016)
(Transportation.gov, 2017)
As can be seen from the above figure, the major players in the industry includes the
aviation companies like Southwest, Delta and American, United Airlines and others, with each of
them enjoying market share of 15% or more. Over the last few decades, these few companies
have been consistently increasing their domain of operations, both domestically as well as
internationally, with their clientele increasing continuously as the availing of flight for travelling
increased over the years.
However, in the contemporary period, in spite of being one of the biggest and busiest
industries of the country as well as of the world, the airlines industry of the United States of
America, in the contemporary period, has been experiencing a huge downturn in the aspects of

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revenues and profit generation. This can be attributed to several factors, which have been
occurring in the industry in the current periods, simultaneously (Dai, Liu and Serfes 2014).
Causes for the loss of profit
There have been many factors arising in the airlines industry in the contemporary US
economy, which have been collectively contributing to the issue of low profitability in the
industry in the contemporary periods. The primary factors contributing to this problem are the
entry of the low cost carriers, like Southwest, Virgin America and others, which have been
hampering the revenue generations of the large carriers like Delta, United and others (Brueckner,
Lee and Singer 2013).
With the entry of more cost effective and non-adventurous small carriers, the excess
capacity of the industry has also increased, which in turn has affected the upper cost incumbent
airlines as they are also forced to enter into a price war. Apart from this, the external factors like
rising cost of oil prices increased the share of oil prices in the total revenues in the industry. The
new trend of online travel sites has contributed to the complication even more by offering the
customers the facility to compare among the fare prices. Highly frequent bankruptcy amongst the
airlines and mergers of the big players in the industry in the early 2010s also indicate towards the
not so profitable situation in the industry (Wensveen 2016).
Five Forces Analysis of the airlines industry
The problems, prospects and areas of concern in the contemporary airlines industry of the US
can be analyzed using the widely used analytical tool for the industry, which is known as the
Five Forces Analysis. The Porter’s Five Forces Analysis is one of the primary mechanisms,
which is widely used while measuring the competitiveness in any industry. The Model is briefly

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discussed in the following section before applying the same to analyze the scenario in the
aviation industry of the country.
Porter’s Five Forces Model
This analytical framework analyzes the level of competition faced by a business with the
help of five forces, derived from the concepts of industrial organizational economics, which,
according to the model, contributes to the competitive environment in any business or industry
(E. Dobbs 2014). These factors can be diagrammatically explained with the help of the following
figure:

8STRATEGY AND CASE ANALYSIS
Bargaining Power of
Suppliers
[Manufacturers of
aircraft, Leasing
companies, Fuel
companies, Airports,
Hotels, Labor unions
and others]
Potential Entrants and entry and
exit of the Industry
[International carriers, Regional
small-scale low cost carriers,
Cargo carriers with new business
strategies]
Bargaining Power of
Buyers
[Travelers and travel
agents, Military,
Government officials,
Cargo transporting
industry, Pleasure
travelers and others]
Substitute Services
Alternative travelling options
like trains or vehicles, private
transportation, online
conferencing for commercial
enterprises and others]
Rivalry in the Industry
[Rivals for big airlines are the
cheap carriers, which are
hampering their prospects,
especially in domestic
operations]

9STRATEGY AND CASE ANALYSIS
Figure 2: Five Forces Analysis for Airline Industry
(Source: As created by the author)
Components of the Five Forces for the airlines industry
Bargaining Power of Suppliers
The airlines industry has three major players in the supply side, which includes the fuel
suppliers, the same being one of the primary components in the supply side of the aviation
industry, aircraft making and leasing companies and also the labor market, as different types of
labor and human capital are required to operates in this technology intensive industry. Any
external fluctuations in the economy can have implications on these factors, like the hike in the
oil price or the unrests of the labor unions can have effects on oil prices and labor wages and
availabilities respectively, which in turn affect the operations of the airline industries. Thus, it
can be asserted that the supply side players enjoy immense bargaining power in this industry as
much of the dynamics of the industry and the performance and profitability of the companies in
this industry depend on how the supply side factors are operating in the industry (Borenstein and
Rose 2014).
Bargaining Power of Buyers
The recent development of online ticket booking and fare comparing sites and
widespread usage of the same, the consumers are attaining considerable bargaining power in the
market as they do not need to be solely dependent on the knowledge shared by the airline
companies regarding ticket prices. The entry of low cost companies has also increased the
number of service providers, which in turn has increased the options available to the customers,
especially in regional sector. Thus, the bargaining powers of the buyers in this sector is
constantly increasing as there different substitutes in this sector and the number of options in this

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industry is continuously increasing, which are empowering the buyers to choose according to
their convenience and affordability.
Entry and Exit
The industry being one with a huge initial fixed cost in terms of capital investment also
includes high exit cost for the companies. The entry and exit, in this industry, is therefore not
easy. The regulations of the government also do not allow easy exit of the firms, unless there are
genuine reasons behind the same. Therefore, it can be said that the impact of the entry and exit
dimension is high.
Substitutes and Complements
Though there are substitutes like trains and buses, especially in the domestic and regional
sector of the industry, however, in the USA the threats of these substitutes are not that high
because in this country, the consumers do not usually tend to substitute flights by trains or buses
for the journeys. The companies constantly add the complementary services like Wi-Fi, luxury
meals on board and other amenities but these do not however have much effect in increasing the
demand for flights by the passengers. On the contrary, the lowering of ticket prices, as can be
seen from the recent developments in the airline industry of the country, has significant impact in
increasing the demand for flights by the consumers (Chen and Miller 2012).
Intensity of Rivalry
The industry operates in an extremely competitive framework, which has even
aggravated in the recent times due to the entry of a number of low cost domestic and
international flights, stringent regulatory framework pampering the consumers, which in turn is
affecting the big airliners adversely.

11STRATEGY AND CASE ANALYSIS
Therefore, from the above analysis, it can be asserted that though the demand in this
industry is high and consistently increasing. However, the huge competition in the supply side,
along with pro-consumer type of regulations by the government of the country, coupled with a
recent hike in the oil prices has made the profitability in the industry less (Goetz and Sutton
2017).
Advantages and Disadvantages
From the above discussion, it can be asserted that there are factors prevailing in the
airline industry of the USA, which have both positive as well as negative implications on the
industry itself. While with the constant increase in the clientele and with expansion in the
international domain, the companies in the industries are expected to have increased operations
in the coming years. The constant innovations in technologies and skill development of the
workers, the cost effectiveness of the industry also is expected to improve. However, the cost
effectiveness, till now is accrued to the small scale low cost airlines, which in fact is hampering
the business and profitability of the cumbersome large airline companies. The regulations of the
country are also pro-customer. With the increase usage in the online booking and fare comparing
sites, the bargaining power of the supply side players are also decreased. However, with
implementation of unique marketing strategies and cost effective measures, the airline companies
in the industry is expected to increase their profitability and long run sustainability, given the
continually increasing client base in the global scenario.
Economic Performance of the Airline Industry in the USA
The airline industry in the country, being one of the primary sectors in the country,
currently creates job prospects for 545,000 jobs in the country as well as outside the country.
Being a sector of high backward and forward linkages, the expansion of the operations of the

12STRATEGY AND CASE ANALYSIS
airline industry creates opportunities for many other complementing industries like tourism
industry, hospitality industry, road transport industry and others, which in its turn creates
immense job opportunities in the country as well as outside it. With 100 certified passenger
airlines, the industry carries over one third of the global air traffic.
The commercial airlines contribute nearly 8% of the GDP of the country. However, in the
recent times, with the entry of low cost carriers and an ensuing price war, the industry is
experiencing low profitability and lesser prospects, thereby leading to many mergers within the
industry, like that of Delta and Northwest (2010)or United and Continental Airlines. The fuel
price hike (32% of total revenue) and increasing labor costs (26% of total revenue) are also
leading to many bankruptcies including those of Delta, United and others, which however,
falling under the bankruptcy laws are still flying (Lee, Seo and Sharma 2013).
Strategies for improving profitability
The industry can take the following strategies for resolving the problem:
Labor costs- One of the primary ways of targeting the problem is by focusing on the labor costs,
which can in some cases, be done through bankruptcy process.
Fuel costs- The increasing cost of fuel can be combated by initiatives like single-engine taxing,
installation of winglets and also other fuel reserve techniques.
Customer Service- The competition in the industry being extremely high, other than the
ongoing price war, the companies can engage in improving their customer services framework,
which may help in increasing their profitability in the long run by creating a loyal clientele.

13STRATEGY AND CASE ANALYSIS
Maintenance- The old carriers being highly fuel inefficient, cumbersome and maintenance
intensive, replacing the same with new age efficient flights may include a big one time cost but
may prove to be efficient in the long run (David 2013).
Discussion
Thus, from the above discussion, it can be said that the US airline industry, though being
one of the predominant industry in the country, has been experiencing less profitability due to
high competition and hike in the oil prices and labor costs, which in its turn has led to an acute
price war among the different competitors. The demand for flights, however, with the fall in the
ticket prices, has increased as the customers do not tend to substitute this service by any other
transport services. There can be several cost effective strategies and planning on part of the
airline companies, which if undertaken can have positive implications on the revenue generations
of the industry in the long run.
Conclusion
It can be concluded from the above discussion that, the main factor, which have
contributed in the reduction of profitability of the major airlines in the country, in the recent
periods, is the entry of the low cost carriers. These carriers, operating in the most profitable
routes and providing one or one type of service, poses serious threats to the big and costly
airlines. The other supply side factors like hike in oil price, labor costs and consumer preferences
also have implications on the industry. Thus, in this context, the little backdated policies and
regulations of the country has to be modified and cost reducing technologies as well as labor cost
reduction in the industry can help the industry to come back to its high profitability state in the
long run.

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References
Belobaba, P., Odoni, A. and Barnhart, C. eds., 2015. The global airline industry. John Wiley &
Sons.
Borenstein, S. and Rose, N.L., 2014. How airline markets work… or do they? Regulatory reform
in the airline industry. In Economic Regulation and Its Reform: What Have We Learned?(pp. 63-
135). University of Chicago Press.
Borenstein, S. and Rose, N.L., 2014. How airline markets work… or do they? Regulatory reform
in the airline industry. In Economic Regulation and Its Reform: What Have We Learned?(pp. 63-
135). University of Chicago Press.
Brock, J., 2013. The structure of American industry. Waveland Press.
Brueckner, J.K., Lee, D. and Singer, E.S., 2013. Airline competition and domestic US airfares: A
comprehensive reappraisal. Economics of Transportation, 2(1), pp.1-17.
Chen, M.J. and Miller, D., 2012. Competitive dynamics: Themes, trends, and a prospective
research platform. The Academy of Management Annals, 6(1), pp.135-210.
Dai, M., Liu, Q. and Serfes, K., 2014. Is the effect of competition on price dispersion
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David Mc A, B., 2013. Service quality and customer satisfaction in the airline industry: A
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E. Dobbs, M., 2014. Guidelines for applying Porter's five forces framework: a set of industry
analysis templates. Competitiveness Review, 24(1), pp.32-45.

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Goetz, A.R. and Sutton, C.J., 2017. US Airline Industry. Low Cost Carriers:" Emergence,
Expansion and Evolution", p.199.
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Routledge.
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[Accessed 31 Oct. 2017].
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