The Airline Industry - Airline Essay Example
According to First Research (2010), the main products or service in the industry is air transportation. This includes the scheduled or unscheduled transportation of passengers, mail or cargo. The bulk of the revenues in the industry (estimated by first research (2010) to be 70% of total revenues) come from the scheduled transportation of passengers. Cargo and express mail contribute up to 10% of total industry revenues, unscheduled (i. e. Charter flights) gross 4% of total industry revenues, with the balance coming from other services such as “providing maintenance, servicing, training, and reservations.
Some airlines carry only cargo, using specially equipped planes” (First Research, 2010, p. 1). The US airline industry is one of the key sectors of the country’s economy. Employing over ten million people, it contributes up to half a trillion dollars in annual revenues (about 5% of the US GDP). In recent years, the industry has been faced with major challenges arising from its external environment. Some of these include rising fuel prices and the global economic recession.
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As a result, growth in the industry has significantly slowed down with the Air Transport Association (ATA) estimating that by the end of 2008 the industry had lost between $9 and $24 billion. With high intensity of industry rivalry, high supplier bargaining power, low threat from new entrants, low threat of substitution, and low buyer bargaining power; the industry’s attractiveness can be described as moderate. To be successful, players in the industry must exploit the opportunities offered by the external environment while overcoming the threats extant in that environment.
To do so, they must adopt the following measures, which must also be in line with their internal strengths: cost reduction initiatives, product innovation and value addition to their service, upgrade their fleet to newer generation aircraft that have better emission, take advantage of open skies agreements to expand to international markets, improve the safety record of the industry, and adopt aggressive market penetration strategies such as increasing frequencies on growing routes and use of more attractive loyalty and reward programs.
Valid generic strategies to use include the differentiation, overall low cost, and niche strategies. The US airline industry is made up of three categories of players, classified by the Department of Transport (DOT) on the basis of their revenues. These include the major airlines, the national airlines, and the regional airlines (Gale, 2005). The major airlines are those airlines which have annual revenues of more than $1 billion. Some of the leading major airlines include Delta Airlines, Jet Blue, Southwest Airlines, Continental, United Airlines, and American Airlines.
National airlines are those which have revenues in the range of $100 million and $1 billion, while those which annual revenues of less than $100 million are generally classified as regional airlines. Some national airlines include Midwest Airlines, Hawaiian Airlines and ASTAR Air Cargo while examples of regional airlines include Grand Canyon Airlines, Republic Airlines, Aloha Air Cargo and Ameristar Air Cargo (ATA, 2009). According to the ATA (2009), there are twenty major airlines in the US airline industry.
There are thirty national airlines, and more than one hundred regional airlines. This means that the US airline industry is made up of more than 150 players. First Research (2009) puts the number of companies in the industry at 3,000. There are four types of forces have been identified as being extant in influencing the success of firms in any industry. These include: economic forces, political-legal forces, technological forces and socio-cultural forces (Robbins and Coulter, 2008). The success of the airline industry heavily depends on the performance of the economy.
In this regard, the global economic recession which was touched off by the sub-prime mortgage crisis has had a singularly harsh impact on the US airline industry. The International Air Transport Association- IATA -(2009) writes that as a result of the recession, the global airline industry experienced one of its worst downturns, shedding off a whopping $10 billion in industry revenues at the close of 2008. This is because consumer demand for air travel declined sharply as most consumer cut off discretionary expenses (including air travel) in line with the deteriorating economic situation.
The deteriorating global economic conditions had a very substantial impact on the US airline industry, leading to an across-the-board fall in most industry performance benchmarks. Evaluating the performance of the US airline industry against the harsh glare of the equally harsh economic conditions, the ATA (2009) notes a decline in revenue passenger miles, available seat miles, seat factor utilization, and revenue ton miles. Apart from the recession, the other factor which is a critical determinant of the fortunes of the US airline industry is the cost of fuel.
Tracing the movement of oil prices since 2008 and their impact on the airline industry, IATA (2009) writes that oil prices began 2008 at $97 a barrel, and later skyrocketed to touch a historic high of $147 per barrel in July, before easing to about $40. The impact of this rise in the cost of oil was an increase in the price of jet fuel (from a low of $1. 26 per gallon to a high of $4. 26 per gallon), which is a major factor input in airline operations. This rose by about 60%, and became the major cost component of airlines, accounting for up to 50% of the total cost structure of many airlines.
While the cost of oil per barrel has slightly eased from that history figure given above, IATA (2009, p. 12) notes that its cost is still “double the average 1990–2002 price level of $20 a barrel. ” According to the ATA (2009), the increase in and volatility of the cost of oil slapped the US airline industry with an unprecedented $58 billion bill, which led to massive losses, employee lay-offs, and bankruptcies. In total, the losses suffered by the industry have been estimated to range between $9 billion and $24 billion.
Rapid technological developments have also had a material impact on the industry, helping to lower costs, enhance efficiency, improve comfort and add value to services, and to reduce the airline industry’s carbon footprint (IATA, 2009). Some of the notable technological advancements which have been taken up or continue to be adopted by the industry with measurable positive impacts on the airlines’ bottom-lines include: electronic ticketing (or e-ticketing), Common Use Self Service Kiosks (or CUSS), Bar Coded Boarding Passes (BCPP), Fast Travel, and the use of RFID’s (radio frequency identification) tags (IATA, 2009).
For example, according to IATA (2009), the use of BCPP has made it possible to do away with magnetic stripe boarding passes (which are very expensive) thereby helping to significantly cut down costs. Additionally, the technology offers airline customers more choice and convenience given that the passes can be obtained over the internet, through the phone, or at the check-in counters. IATA (2009) estimates that BCPP has the potential to save up to $1. 5 billion in costs. Electronic ticketing does away with the need of having many reservation agents and clerks.
By cutting out the intermediation costs, it has the potential to also generate significant cost savings for the airline industry. IATA (2009) reports cost savings of up to $3 billion in 2008 as a result of the use of e-ticketing. Not only does e-ticketing help to save costs by cutting out intermediation costs, it also enhances accuracy and increases efficiency. As far as the use of radio frequency identification (RFID) tags is concerned, IATA (2009) writes that the use of RFID can help to eliminate a fifth of all cases of mishandled baggage as well as loss of baggage.
This will be a big improvement for the industry, considering that baggage loss and mishandling is the second most critical factor in customers’ evaluation of how pleasant their trip has been (IATA, 2009). Use of internet technology by cargo airlines (or what is referred to as e-freight) has further been associated with increases in the speed and reliability of airfreight. By deploying this technology, the airline industry has been able to drastically cut paper-based procedures and transactions thereby cutting airfreight costs and the time it takes to transport cargo.
According to IATA (2009), this has the potential of generating cost savings of up to $4. 9 billion and to reduce the average time it takes to ship cargo by 24 hours. It has also had a lot of impact in as far as the reduction of inconsistent data entry is concerned, or misplacement of documents. Given the increased skyrocketing costs which the US airline industry has been witnessing in the last couple of years, most airlines have adopted measures to improve their cost efficiencies as well as productivity in order to assure their survival (Smyth and Cox, 2008).
The no- frills airlines, which compete on the basis of offering cheap airfares, have taken up certain logistical and supply chain measures to ensure that they achieve a low cost structure. First and foremost, their use of the point-to-point operational model rather than the hub-and spoke model has enabled them to cut costs. In the point to point model for example, the airlines make extensive use of secondary airports, which generally attract fewer or lower charges (for example, such airports have lower handling rates as well as no en-route charges).
They also typically operate on short-haul routes only (Smyth and Cox, 2008). Additionally, most of the airlines have taken up internet-based distribution. Through selling airplane seats online, they have been able to disintermediate their distribution channels, in the process achieving substantial cost savings. Many of the low cost carriers also operate only one type of aircraft, which has enabled them to enjoy significant savings on aircraft maintenance and training costs. A good example of an airline following these strategies is the Southwest Airlines.
Other ways in which the achievement of cost savings is pursued include offering their customers fewer services (Smyth and Cox, 2008). For example, many low cost carriers do not include the cost of in-flight catering in their fares and only customers who need this service are given the option of paying for it. Even though premium airlines have also undertaken various measures aimed at enhancing their cost competitiveness, their basis of competition is the ability to offer a superior differentiated product, and their focus is not entirely on achieving the least cost structure in the industry (Smyth and Cox, 2008).
According to the ATW (2007), one other strategy which airlines in the industry are using is e-procurement, whose deployment by the industry started in the mid nineties. An example of an airline which has used the e-procurement strategy with substantial cost and efficiency gains is Delta Airlines. It uses a vendor known as Verticalnet. ATW (2007) writes that “Delta has access to the entire suite of Verticalnet products and currently uses its Program Manager, Negotiation and Spend Analysis modules. We also use Verticalnet for auctions and to monitor supplier performance, which is very important for us,’ adds Hammoud (GM – Supply Chain Management). ” Porter’s Five Forces Analysis: With 3,000 firms operating in the industry, and twelve companies accounting for 90% of total revenues (First Research, 2009), the airline industry is highly concentrated. The industry also has high fixed costs, and slowing market growth rates. High concentration rates, high fixed costs, and low market growth rates point to a high degree of industry rivalry. The bargaining power of the suppliers is high.
This is because the suppliers (aircraft manufacturers) are few and concentrated (only two major suppliers – Boeing and Airbus – who hold substantial market share), and there are substantial supplier switching costs (First Research, 2009). The bargaining power of the buyers can be described as low. This is because buyers are predominantly individuals, who are many, different, and none of them can exert a significant influence on the airline’s sales (First Research, 2009). Substitutes to air travel may include transportation by road, water, or rail.
Given the unique selling proposition of the airline industry which is speed and reliability, the threat to substitution can be described as low, especially for long distances (First Research, 2009). Even though few regulatory barriers to entry exist (what with the Airline Deregulation ACT of 1978 and the more recent open skies agreements), the high capital requirements needed to be set up in the industry, asset specificity, as well as high market shares and established brand recognition by existing players act as veritable barriers (First Research, 2009).
Conclusion and Recommendations: The US airline industry is going through very difficult times thanks to factors such as rising costs and the recent global economic recession. To be successful, players in the industry have to exploit the opportunities offered by the external environment while overcoming the threats extant in that environment. To do so, they must adopt the following measures, which must also be in line with their internal strengths: 1. They must undertake cost reduction initiatives such as the adoption of technology to cut costs.
For example, they should disintermediate their distribution channels. Through the adoption of e-ticketing and internet based selling, they will be able to directly sell their seats, thereby cutting out the middleman and registering substantial cost savings. By sourcing aircraft from only one manufacturer, they will be able to reduce training and aircraft maintenance costs. E-procurement should also be widely adopted, as well as the use of radio frequency identity (RFID) tags, among other technologies. 2.
Advances in technology will enable airlines to respond to concerns about the need to improve their carbon footprint. For example, they should upgrade their fleets by ordering new generation aircraft which have better mileage and lower emissions rates. 3. US airlines must deliver superior value to customers. For example, they should take advantage of emerging technologies to offer cutting edge in-flight entertainment. They should innovate new products (such as reclining seats) and offer better service (e. . reduce baggage loss and mishandling, and improve on-time arrivals and departures).
4. Increased deregulation through frameworks such as the open skies agreements offer players in the industry the opportunity to expand to foreign markets and grow their revenues, but may also pose a threat to industry given that they have opened up the American airspace to foreign players and increased competition is inevitable. In this regard, US airlines need to venture in international arkets where growth opportunities still exist, while protecting their home markets from assault by foreign airlines. 5. Market penetration strategies which they should successfully deploy include more aggressive use of frequent flyer programs, more aggressive use of promotion (advertising, sales promotion, publicity and direct selling), and the addition of more frequencies on growing routes. 6. Work towards improving the safety record of the industry.
Air Transport Association (ATA). (n.d.). A new vision for moving America. 2009 Economic report, retrieved on 28 Jan 2012 from. Retrieved from http://www.airlines.org/NR/rdonlyres/83BC223A-6855-4257-B74C-209A43C70F65/0/2009AnnualReport.pdf Gale Encyclopedia of American Industries. (n.d.). Retrieved on 28 Jan 2010 from. Retrieved from http://www.answers.com/topic/air-transportation-scheduled International Air Transport Association (IATA). (n.d.). Retrieved on 28 Jan 2010 from. www.iata .org/NR/rdonlyres/A33BC4B3-431B-4690-BE6D-6788900C8AE3/0/IATAAnnualReport2009.pdf Research, F. (n.d.). Retrieved on 28 Jan 2012 from http://www.firstresearch.com/Industry-Research/Airlines.html. Robbins, S and Coulter, M. 2008. Strategic management. John Wiley and Sons. Smyth, M, & Pierce, B. (n.d.). Airline cost performance. IATA Economics Briefing No 5, Retrieved on 28 Jan 2012 from www.iata.org/NR/rdonlyres/52205DC1-8AE5…/CEOBriefSept2006.pdf.