MNG93002 - US Airline Industry: A Strategy and Case Analysis Report

This report provides a comprehensive strategy and case analysis of the US airline industry. It begins with an overview of the industry, highlighting the challenges posed by low-cost carriers and online ticket booking services. The report then applies Porter's Five Forces model to assess the competitive intensity, including the threat of new entrants, buyer and supplier power, the threat of substitutes, and competitive rivalry. The advantages and disadvantages of using Porter’s Five Forces are discussed. The report also delves into the cyclical economic performance of the industry and suggests strategies for airlines to improve their profitability, considering factors like cost management and customer service improvements. This document is available on Desklib, a platform providing a range of study resources for students.

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STRATEGY AND CASE ANALYSIS 1
Table of Contents
Introduction................................................................................................................................2
Overview of the Industry...........................................................................................................3
Porter’s Five Forces Analysis....................................................................................................5
Advantages and Disadvantages..................................................................................................7
Economic Performance..............................................................................................................8
Strategies for Airline Profitability..............................................................................................9
Discussion................................................................................................................................10
Conclusion................................................................................................................................11
References................................................................................................................................12
List of Figures
Figure 1: Growing rate of Jet Fuel Price....................................................................................4
Figure 2: Porter's Five Forces Model.........................................................................................5
Figure 3: Economic Growth and US Airlines Revenue.............................................................9

STRATEGY AND CASE ANALYSIS 2
Introduction
In the rapidly changing business world, management struggles to implement policies that are
focused on achieving organisational objectives. The management uses different strategic
tools to develop and implement policies in order to improve a firm’s profitability. Porter’s
five forces model is a popular strategy development tool which was developed by Michael
Porter. This report will analyse the attractiveness of the US airline industry by evaluating its
strengths and weaknesses and examine different factors that affect the business of
corporations operating in the industry. The primary goal of this report focuses on using
Porter’s five forces model in order to develop strategies for airlines companies that operate in
the industry. This report will also include advantages and disadvantages of Porter’s five
forces framework. Economic growth of the US airline industry will also be discussed in the
report while developing the strategies for improving the profitability of the airline companies.

STRATEGY AND CASE ANALYSIS 3
Overview of the Industry
In the US airline industry, a large number of corporations operate that provide their services
to customers. The industry includes both high priced airlines along with low priced airlines.
The corporations operate in high priced zone include United, Delta and American Airline
(Belobaba, Odoni and Barnhart, 2015). However, in previous few years, the number of low-
cost airlines has increased in the US airline industry. The companies operating in low priced
zone include AirTran, Southwest Airline, Virgin Airline and Jet Blue. The low priced airlines
have increased issues for the leading organisations because they offer substantially lower
prices to their customers which increase their customers. The low priced airlines reduce their
flight charges by selecting air routes which are most convenient and affordable (Hannigan,
Hamilton and Mudambi, 2015). These companies use specific type of aircraft that did not
increase their operating costs, and they use non-union workers maintain low operation rate.
Due to increase in low priced airlines, the business of other high priced airlines is suffering
which also negatively affect the US airline industry.
The increase in a number of online ticket booking services has also affected the economic
growth of the US airline industry. Due to the popularity of smartphones and online-based
services, many small companies have emerged in the market that enables customers to
purchase flight tickets directly through their smartphones (Daraban, 2012). Companies such
as Travelocity, Orbitz, and Expedia are the main leaders in online flight ticket booking
service. Other than ticket booking services, these companies also allow its users to compare
flight ticket prices between airlines. These create issues for high priced airlines because
customers can easily compare between air ticket prices and choose the most affordable option
(Lee, Seo and Sharma, 2013). Other than the reduction in sale of tickets, the increase in jet
fuel prices also results in increasing issues for the corporations operating in the US airline
industry. The fuel makes up about 32 percent of the airlines’ costs and increases in fuel prices
increase their operating costs. The labour costs take another big part of overall airline costs.

STRATEGY AND CASE ANALYSIS 4
Figure 1: Growing rate of Jet Fuel Price
(Source: IATA, 2017)
The labour costs contribute around 26 percent of the overall operating costs of an airline.
Together labour and fuel costs contributes to more than 58 percent of overall airline costs and
increase in these expenses result in effect the growth of an airline (Brueckner, Lee and
Singer, 2014). On the other hand, between the 2000s and 2010s, many big mergers took place
in the US airline industry which affected its economic growth. For example, Delta Airlines
merged with Northwest Airline in 2008. In 2010, United Airlines merged with Continental
Airline. Same year, SouthWest Airline announced it plans to acquire AirTran Airline. In early
2013, the US Airways pushed a merger agreement with American Airlines. All these mergers
and acquisitions are occurred due to the introduction of low-cost airlines and third-party
online ticket booking services which result in reducing the sales of airlines in the US airline
industry (Borenstein and Rose, 2014). Although the companies are facing many risks in the
US airline industry but the industry is substantially large, and it provides opportunities to
airlines to face these challenges and improve their customer services in order to attract more
customers (Ciliberto and Schenone, 2012). The companies are becoming more customer-
centric, and they are improving their services such as baggage handling, customer services,
flight check-in, delays in flights and others.

STRATEGY AND CASE ANALYSIS 5
Porter’s Five Forces Analysis
The five forces framework is a management tool which assists top-level management in
analysing the attractiveness and competitiveness of an industry (Dobbs, 2014). Primarily, the
corporation uses this model in order to analyse different strengths and weaknesses of the
sector in which they operate to create future business plans that are focused towards
achieving corporate objectives. The framework was given by Michael Porter in 1979. Before
launching a new product, entering a new sector and developing future business strategies, the
senior level executives use Porter’s five forces model for analysing the strengths and
weaknesses of the industry (Yunna and Yisheng, 2014).
Figure 2: Porter's Five Forces Model
(Source: Kilic and Demirkaya, 2016)
Threat of New Entrants
In the US airline industry, the threat of new entrants is low because the barriers to entry of
new companies are relatively large. For new entrants, the initial investment costs are massive
without guarantee of appropriate returns. The companies also require complying with a large
number of government regulations because the security of aircraft is a major issue for the

STRATEGY AND CASE ANALYSIS 6
government (Bilotkach and Lakew, 2014). These factors increase barriers for airlines in the
US airline industry due to which the threat of new entrants in the industry is relatively low.
Buyers’ Power
In the US airline industry, the bargaining power of buyers in high. The number of airlines is
large in the US airline industry, and customers can easily choose between any of them. There
are no additional costs of switching between airlines which increase the bargaining power
customers. Furthermore, many third-party companies provide the ticket booking services
directly on the smartphones of customers which makes it easier for them to choose between
different airlines and select the most affordable option among them (Dana and Orlov, 2014).
These factors result in increasing the bargaining power of customers in the US airline
industry.
Suppliers’ Power
In the US airline industry, suppliers include aircraft manufacturers, labour unions, and fuel
companies. Although there are five major aircraft manufacturers which include Bombardier,
Airbus, Embraer, Tupolev and Boeing, but Airbus and Boeing are the primary aircraft
suppliers in the US airline industry. These manufacturers hold monopoly which increases
their bargaining power. The labour laws are strict in the United States as well, and companies
are under significant pressure from the labour unions (Pitt and Norsworthy, 2012). Similarly,
fuel companies have a monopoly in the market, and they can easily raise prices of jet fuel.
Due to all these factors, the bargaining power of suppliers is high in the US airline industry.
Threat of Substitution
In the US airline industry, the threat of substitute options is relatively low. The substitutes of
airlines include train, bur, cars and ships. However, for both overseas and local destinations,
flights are the fastest medium of travel than compared to all other substitutes. On the other
hand, the flight experience is also substantially comfortable than compared to its substitutes
(Dai, Liu and Serfes, 2014). Therefore, the threat of substitutive is low in the US airline
industry because customers have no other substitute that offers similar level of comfort and
speed when it comes to travelling.
Competitive Rivalry within the Industry

STRATEGY AND CASE ANALYSIS 7
In the US airline industry, the industry rivalry is intense due to a number of factors. There are
a large number of airlines operating in the industry that offer high priced to low priced ticket
options to customers. Online ticket booking services enable customers to choose most
affordable flight option which increases pressure on airlines to offer competitive pricing
(Treanor et al., 2014). Many international airlines offer their services in the industry as well
which result in increasing competition in the industry. Therefore, competitive rivalry is
intense in the US airline industry.
Advantages and Disadvantages
Following are different advantages and disadvantages of Porter’s five forces model.
Advantages
1. Porter’s five forces framework use five key forces in the industry to analyse
attractiveness or unattractiveness of the industry based on the level of its
competitiveness. The model assists management in evaluating a number of external
forces that have a direct impact on the profitability and performance of an enterprise
(Lee, Kim and Park, 2012).
2. While launching new products or services or entering a new market, the senior level
management can use the five forces model to analyse the competitiveness of the
industry which assists them in creating policies for ensuring the effectiveness of the
products or services (Sutherland, 2014).
3. The model assists the management in evaluating the profitability of the corporation
through which they collect relevant data to develop strategic policies that assist them
in improving their performance and increasing overall profitability.
Disadvantages
1. The primary critique of Porter five forces model is that it was developed in 1979 and
it is not suitable for modern enterprises because many factors have changed. Many
factors that influence industry are not included in the model because they were not
present in the 1970s. Due to the advancement of technology, organisations are facing
new challenges and opportunities due to use of technology which is not analysed by
the model, therefore, it is not suitable for modern corporations (Hoque and Chia,
2012).

STRATEGY AND CASE ANALYSIS 8
2. The model is suitable for creating short-term business policies rather than long-term
strategies because it only analyses current factors in an industry that influence a firm’s
profitability. However, many future technologies are developing in different
industries which are more likely to affect their profitability. For example, the
introduction of ‘Hyperloop’ by Tesla will provide a new substitute for customers
against airlines because it will travel them with a speed of 750 mph (1200 km/h) and
it will be comfortable as well (Trimm, 2017).
3. Porter gave equal importance to each of the five forces in the framework. However, in
reality, one force has a more major impact on a company than compared to other. The
management should prioritise the forces which has a significant impact on the
company.
4. The relevancy of the five forces model is entirely based on the accuracy of the
information. Therefore, based on wrong information, the management can develop
future strategies that are not suitable for their business which can negatively affect
their profitability as well.
Economic Performance
There are a large number of factors that influence the economic performance of the US
airline industry. For example, customers buying power reduces in recession, and they are
more likely to choose cheaper flights and alternative travelling options rather than investing
their money in high price airlines (Johnston and Ozment, 2013). According to the report of
IATA, the total spending on air travel in 2017 will be around $776 billion. The industry is
expected to grow by 5.3 percent in 2017 (Idea Works Company, 2017). However, as
compared to its performance from previous years, companies are suffering to maintain their
profitability in the industry. The profitability of the industry is affected by different factors
such as increase in jet fuel prices, reduction in sales, reduction in economic condition in the
nation, labour strikes and others. The US airline industry is also suffering due to increase in
number of low costs airlines which reduce the profits of market leaders. The introduction of
third party corporations that provide online ticket booking facility to customers has also
increased the completion in the industry which affects its economic performance (Williams,
2017). Most of the market leaders are able to sustain the negative impact of slow economic
growth in the US airline industry; however, small airlines have no choice but to merge with
others.

STRATEGY AND CASE ANALYSIS 9
Figure 3: Economic Growth and US Airlines Revenue
(Source: Schmidt, 2016)
Strategies for Airline Profitability
Following are different strategies that can be adopted by airlines operating in the US airline
industry for sustaining their profitability.
Customer-centric approach
The airlines should focus on demand of customers rather than increasing their profitability.
They should introduce new facilities for addressing customers’ issues rather than increase
their profits. The corporations should not compare with low priced airlines by reducing their
ticket prices; instead, they should focus on customers’ demands and issues faced by them
while travelling through airlines (Steven, Dong and Dresner, 2012). They should address
such issues and introduce facilities for improving customer experience such as improved
flight experience, reduction in check-in time and better services for economy class customers.
Implementation of Technologies

STRATEGY AND CASE ANALYSIS 10
The airlines should implement the latest technologies into their operations in order to
improve their efficiency and overall customer experience. For example, they can allow its
customers to check-in by using their smartphone as their identification. They can also use big
data technology for analysing customer purchasing pattern and providing them offers that are
customised to their demands.
Improved Customer Services
The airlines should focus on improving customer services experience rather than reducing
their ticket prices which will make customers’ travelling experience more comfortable.
Customers will prefer to pay extra money if the company is offering high-quality services
(David Mc, 2013). For example, ticket prices of Emirates Airline’s business class are over
$21,000; however, customers buy such tickets because the airline offers most comfortable
travelling experience. Similarly, airlines can offers services such as baggage tracking from
smartphone, reduction in check-out time, no flight delays and others.
Discussion
There are a large number of domestic and international airlines operate in the US airline
industry. The profitability of these airlines is affected by various factors such as increase in
fuel prices, labour strikes, low-cost airlines, online ticket booking services and others. The
leading market players are facing fierce competition in the industry, and they have to
implement appropriate strategies for maintaining their competitive advantage. Based on five
forces model, the bargaining power of buyers is relatively high, and the competitive intensity
is fierce as well. In order to address these issues, airlines should improve their customer
services experience which will provide them a competitive advantage over low priced airlines
and sustain their future growth. The airlines can implement the latest technologies for
improving their performance and customer services. These strategies can increase the
profitability of airlines and provide them a competitive advantage which sustains their future
growth.

STRATEGY AND CASE ANALYSIS 11
Conclusion
Conclusively, the US airline industry is suffering due to increase in low costs airlines, online
ticket booking services and slow economic growth. Both large and small airlines are affected
by these factors. This report used five forces model to analyse the attractiveness and
competitiveness of the US airline industry. The economic growth of the sector is analysed in
the report as well. Further, different strategies are given in the report based on five forces
framework. The airlines should focus on improving their customer service experience by
implementing modern technologies which will provide them a competitive advantage and
result in sustaining their future growth.