Strategic Analysis of United States Airline Industry

Running head: STRATEGY AND CASE ANALYSIS
STRATEGY AND CASE ANALYSIS
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1STRATEGY AND CASE ANALYSIS
Table of Contents
1. Introduction............................................................................................................................3
2. Overview of the US airline industry......................................................................................3
3. Five Forces analysis of US airline industry...........................................................................4
Analysis:.................................................................................................................................4
Advantages and disadvantages of porter’s five forces tool:...................................................6
4. Economic performance..........................................................................................................6
5. Identifying strategies for the airline profitability...................................................................7
6. Discussion..............................................................................................................................7
7. Conclusion..............................................................................................................................8
References:.................................................................................................................................8

2STRATEGY AND CASE ANALYSIS
1. Introduction
The airline industry have rapidly expanded over the last two decades and is still
expanding its routes both domestically and globally. However, there are still many airline
industries in different parts of the world that have yet not grown to their fullest. The UK
industry is one of them and it is significantly known for one of the industries that are
struggling hard to make profits from many years. This report is going to present a brief
analysis of the US airlines industry. It will shed light on the primary factors that have assisted
to low profitability in this industry along with discussing the principle advantages and
disadvantaged of using the five forces framework in assessing the macro industrial factors
affecting the industry. Furthermore, the paper will also discuss upon the economic
performance of this industry in order to address significant questions on the provided case
study. After briefly analysing the entire thing, the report will present few strategic
recommendations for the industry in order to improve its chances of being persistently
profitable in the national as well as the international market. The main aim of this report
revolves around assessing the strategic position.
2. Overview of the US airline industry
The competitive structure of the US airline industry has went through many changes right
after the deregulation in the year 1978 (Borenstein and Rose 2014). Since then it has
experienced much flexibility in its networks of routes and the pricing strategies of it. After
that it has become very easy to enter to the routes which were once highly regulated through
the Civil Aeronautics Board. This have resulted in an influx of entry in the last two decades
through low-cost carriers. The U.S airlines consists of the AirTran Airways, Southwest
Airlines, JetBlue Airways and the Spirit Airlines (Tan 2016). They are capable of charging
low prices because of their efficient cost structure. They are benefitting from the usage of

3STRATEGY AND CASE ANALYSIS
non-unionized labour, implementation of point to point networks and the operation of same
kind of aircrafts. In contrast to that the legacy carriers that implements a network of hub and
spoke, make use of the most unionised labour and they operates with numerous different
aircrafts. This type of carriers include the Continental Airlines, Delta Airlines, US airways,
United Airlines, and Northwest Airlines. They get their so called name as they were operated
and are founded before deregulation.
3. Five Forces analysis of US airline industry
Analysis:
Threats of New Entrants- The threats of new entrants for the United States’ airline industry is
very high. There is an involvement of bureaucracy in the new airline set up. It needs huge
capital investment for entering and even exiting the sector. The exit barriers are subject to
regulations as well because the regulators in the U.S do not allow airlines to exit the industry
until and unless they are sure of the fact that there is a genuine business reason for the same.
Threats of the substitute
Cost of changing to rail is quite
expensive
The low cost airlines of U.S offers very
less price as compared to the high speed
trains
Supplier power
Very little or no control over the rise of fuel or
oil prices (Carter et al. 2014)
It is boosted by presence of Airbus, Bowing
and a duopoly upstream.
Staff and labour cost contributes to more
than 40% of the total costs of the airline.
Buyer Power
They are very price sensitive
It is increased in the presence of
online booking system
Threats of New Entrants
Economies of the scale
The threat of new entrants and the entry
barriers for the U.S airline industry are very
high
Involvement of bureaucracy
Competitive
Rivalry
The exit barriers are very
high
Customers could easily
switch to different
airlines (Gregoire, Salle
and Tripp 2015)
High competitive rivalry
due to low cost airlines

4STRATEGY AND CASE ANALYSIS
Threats of Substitutes- The threat of substitute in the U.S airline industry is quite low. This is
because of the fact that unlike in the developing countries, the passengers do not always take
the train or bus journeys for travelling outside the city or the country and in today’s world,
flying in the sky has become a very natural phenomenon. With the same, the low cost airlines
of U.S offers very less price as compared to the high speed trains (Newman, Kenworthy and
Glazebrook 2013). Hence, the substitutes in terms of buses and trains is minimal in their
impact.
Buyer Power- The customers are very price sensitive. They tend to move towards the ones
who give them good service at low cost. With the same, with the advancement in science and
technologies there is an emergence in the proliferation of the distribution systems and online
ticketing (Gubbi et al. 2013). Through these, the customers no longer have to depend on the
agents and the intermediates for their ticketing needs. Also, the entry of the low cost carriers
and resultant price wars have highly benefited the customers,
Supplier Power- The suppliers have an immense power in the airline industry of United
States. This is due to the fact that all the three inputs that the airline industry have, i.e. in
terms of labour, aircraft and fuel are all influenced by the external environment. The price of
fuel is bound by the fluctuation in international market for the oil that could gyrate wildly due
to the geopolitical and other related factors (Hirth 2013). Similarly, the labour is bound by the
powers of union parties who frequently bargains and successfully attain unreasonable
concessions from the airlines. Also, the industry needs aircraft either on wet lease basis or on
outright scale and this means that the industry needs to rely on Boeing and Airbus for their
needs.
Competitive rivalry- As it is mentioned earlier, the U.S airline industry is very competitive
and this is because of various reason such as tight regulation of the industry, low cost carriers

5STRATEGY AND CASE ANALYSIS
and as they operate as per a business model which is quite outdated particularly during the
time of turnover (Borenstein and Rose 2014). Also, the industry is regulated o the supply side
and this means that although the airlines are free to choose the markets they would operate
and the segment that they would target, it is on the passengers who need to be pampered
through the regulators.
Advantages and disadvantages of porter’s five forces tool:
The porter’s five forces model has its own advantages and disadvantages. The framework
of Porter’s five forces delivers valuable information regarding the industry attractiveness
trough identifying industry forces and through understanding the interaction in between them
in order to make an evaluation of the possibilities of the profitability within the industry
(Martelli 2014). For the firms who thinks of expanding their business at international level,
the subsequently competition level within the industry as well as the easiness of entry to
particular industry are factors that could have a notable influence on the profitability. The
lesser is the threat of entry, the more attractive is the industry (Mathooko and Ogutu 2015).
One of the key disadvantages of porter’s five force model is that the model is set up for an
economies which are in successful markets. However, at the same time, it is also a fact that if
a firm is willing to do the work, it could make this framework work for it. Furthermore one of
the other advantages of the model is that certain departments of a business could actually do
the research with its help but at the same time, its disadvantage of it is that those departments
could overlook the vital information. In today’s world of advanced technology, all the
business make use of computers which could assist them in doing all the researches for them.
Furthermore, for the small business, the model assist a lot. It allows them to go step by step
for learning what they are up for and what they should expect in certain situations.

6STRATEGY AND CASE ANALYSIS
4. Economic performance
The economic performance of the U.S airline industry keeps on fluctuating. In the
beginning of the year 2001, there was an increase in oil prices. The total fuel costs accounted
for about 32 percent of the total revenues in the year 2011 and the labour cost accounted for
about 26 percent (Hummels et al. 2014). Both the fuel costs and labour costs together are the
two most variable expensive items. Furthermore, many of the airlines incusing the United,
US Airways, Delta and Northwest went bankrupts as well in the year 2000s. With the same,
the early 2010s have experienced a wave of the mergers in the industry. In the year 2008, the
Northwest and Delta merged (Luo 2014). Also in the year 2010, the Continental and the
United merged as well as the Southwest Airlines announced that they were planning to
acquire the AirTran.
5. Identifying strategies for the airline profitability
In order to improve its chances of being persistently profitable, I think the best
strategy for the U.S airline industry would be to make a decrease in their fare as much as
possible and add up incentive programs for the passengers so that to increase the sales of their
services. Many successful airline companies have teamed up with the credit card companies
to include them in their incentive programs (Porath and Pearson 2013). With the same, I think
getting merged with any other airline company would help in decreasing the competition and
at the same time, would also assist in increasing profitability.
6. Discussion
 The main reason behind the low profitability in the Airline industry are the increase in
price, fluctuation in consumer preferences, high industry rivalry or competitors, non-
stable pricing and the power of suppliers (Ziadi 2015).

7STRATEGY AND CASE ANALYSIS
 The framework is highly beneficial in organising and researching the market. It helps
the businesses to understand the competitive pressures present in it. Its primary
disadvantages is that the model is set up for an economies which are in successful
markets.
 The economic performance of the airline industry is based on numerous factors
including the labour costs, fuel costs, number of business travels, low cost carriers etc
(Kim, Chan and Renee 2014). The labour and fuel cost together are the biggest most
portion of the variable cost. The low cost budget carriers have a focus on the non-union
labour system. It assists them in minimising their costs as compared to the earlier in the
early 2000s when the fuel price was in between the range of 15$ to 25$ a barrel
(Pearlson, Wollersheim and Hileman 2013). Again, in the year 2008, the oil price hit
147$ a barrel in the developing countries such as China and India.
 Strategies that can be used
1. Decrease in fare as much as possible
2. Adding up of incentive programs
3. Getting merged with any other airline company
7. Conclusion
This article has identified the strategic groups among the major U.S. airlines by using the
Michael Porter's five forces framework. The Profitability analysis highly validated the usage
of Porter model to identify the strategic groups in the U.S. airline industry. Furthermore, by
analysing the porter’s five forces tool, it can be said that the U.S airline pose notable exit and
entry barriers that signifies that the effect of this dimension is very high. Furthermore, the
paper has suggested three strategic recommendations for the industry to improve further. The
companies could get into collaboration with other companies so that the level of competition

8STRATEGY AND CASE ANALYSIS
could get diminished. It could also increase the frequency of discounts and incentive
programs for the passengers.
References:
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.
Carter, M., Wright, R., Thatcher, J.B. and Klein, R., 2014. Understanding online customers’
ties to merchants: the moderating influence of trust on the relationship between switching
costs and e-loyalty. European Journal of Information Systems, 23(2), pp.185-204.
Grégoire, Y., Salle, A. and Tripp, T.M., 2015. Managing social media crises with your
customers: The good, the bad, and the ugly. Business Horizons, 58(2), pp.173-182.
Gubbi, J., Buyya, R., Marusic, S. and Palaniswami, M., 2013. Internet of Things (IoT): A
vision, architectural elements, and future directions. Future generation computer
systems, 29(7), pp.1645-1660.
Hirth, L., 2013. The market value of variable renewables: The effect of solar wind power
variability on their relative price. Energy economics, 38, pp.218-236.

9STRATEGY AND CASE ANALYSIS
Hummels, D., Jørgensen, R., Munch, J. and Xiang, C., 2014. The wage effects of offshoring:
Evidence from Danish matched worker-firm data. American Economic Review, 104(6),
pp.1597-1629.
Kim, W.C. and Mauborgne, R.A., 2014. Blue ocean strategy, expanded edition: How to
create uncontested market space and make the competition irrelevant. Harvard business
review Press.
Luo, D., 2014. The price effects of the Delta/Northwest airline merger. Review of Industrial
Organization, 44(1), pp.27-48.
Martelli, A., 2014. The Fundamentals of Environmental Analysis. In Models of Scenario
Building and Planning (pp. 40-70). Palgrave Macmillan, London.
Mathooko, F.M. and Ogutu, M., 2015. Porter’s five competitive forces framework and other
factors that influence the choice of response strategies adopted by public universities in
Kenya. International Journal of Educational Management, 29(3), pp.334-354.
Newman, P., Kenworthy, J. and Glazebrook, G., 2013. Peak car use and the rise of global
rail: why this is happening and what it means for large and small cities. Journal of
Transportation Technologies, 3.
Pearlson, M., Wollersheim, C. and Hileman, J., 2013. A techno‐economic review of
hydroprocessed renewable esters and fatty acids for jet fuel production. Biofuels, Bioproducts
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Porath, C. and Pearson, C., 2013. The price of incivility. Harvard business review, 91(1-2),
pp.115-121.
Tan, K.M., 2016. Incumbent Response to Entry by Low‐Cost Carriers in the US Airline
Industry. Southern Economic Journal, 82(3), pp.874-892.

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Ziadi, A.M., 2015. The role of lessors in the airline input market: efficiency-enhancing
agents or suprlus-ansorbing intermediaries? (Master's thesis, Universidad Torcuato Di
Tella).