The Growth of the US Airline Industry
Question:
Discuss about the Strategic Analysis Of U.S. Airline Industry.
Airline industry has seen absolutely very high growth since US airline began its operations in Florida in 1914. In today’s time, aircrafts that are supersonic fly in the regular way all across the oceans. They provide travel and employment to many of the travelers. Operations are good if the US airline industry is concerned but also the competition is very high. In the past, interests in aviation raised the financial viability of the fledging or airlines (Steinberg, 2007). During the period of 1930’s, military in aviation also received interest. American airlines supports the employees for shaping up the crucial policies and measures which promotes safety and security for all the customers. The American airlines work in collaboration with the airlines, labor and the administration for the improvement of the travel for every customer. Commercially every year, aviation helps in driving $1.5 trillion U.S. economic activity and more than 10 million of jobs in U.S (Airlines, 2018). Prices for all the services are decided by the International Air Transport Association and the trade group. National Bureau of Economic Research analyzed all the changes that occurred in the pricing, service and the competition in this industry since 1978. In this report, the focus is done on the market analysis of the US airline industry.
During recent years, the airline industry of United States is successfully able to produce sound balance sheets with the increase of valuations and the performance had quarterly increased in terms of the profit. US airline industry is able to create huge competitive advantages and discipline and principles driven with quality. Airlines which are domestic in United States always generate a good amount of profit margin whereas the costs of operating are limited (Statista, 2017). However, the crude oil prices acts as a barrier for the airline industry. It still faces hurdles when it comes to growth from becoming double digit profit from the single numbers. If the last five years of trend is noticed, Latin America and routes of US owns a huge expansion in terms of miles and the seats. Though, the pressure on the industry is created in terms of the labor costs, maintenance and operations costs. In the year 2014, the jet fuel prices were reduced which later were announced in the year 2016 while the production costs were being discussed (Lim et al., 2016). In 2017, the major focus of the US airline industry is on the customer experiences and on the plan as to how they can make their product different from the other airline services. The aircrafts must be efficient which can help in the reduction of the costs and escalate fuel prices.
Porter’s five forces are used to analyze the competition which is involved in any kind of business. It will always help in analyzing the profits of the industry or the organization. US airline industry faces a medium competition when it comes to the prices, frequency and routes in the flights (Indiatsy et al., 2014). The major competitors are Delta Airlines, United continental holdings, Southwest Airlines Co. etc.
Current State of the US Airline Industry
Bargaining power of the Buyers (High)
In this type of industry, the bargaining power is always very high as people take many flights when they are free to travel across the globe. Passengers will always search for the flights which are low in cost. A few customers are loyal to the airlines and they will always travel with the same flight despite of the high costs. Majorly, the focus on the costs is there instead of the quality the airlines are providing (Omsa et al., 2017). A very good amount of substitutes are available in the market for the customers and they always have the opportunity to switch flights. A few travel sites are also introduced which always will generate options for the avid travelers. Some of the websites are Expedia, Travelocity and Orbits that creates options for the travelers when it comes to low costs and other factors.
Bargaining power of Suppliers (High)
This industry has high bargaining power of the supplier as the number of suppliers are also very less and they aim at creating value chain in terms of manufacturing airbus, less aircrafts and fuel. Aircrafts are always very few in numbers. This industry provides a lot of planners for the travelers so that the customers can get planned holidays within their affordability criteria. Although, the shortage of the manufacturers is always there and they earn lot of profits due to this. Techniques are also less and that helps in the reduction of the competition (Tehrani & Rahmani, 2014).
Threat of New Entrants (Low)
Competitors are very less when it comes to this industry. There are many other options such as Southwest Airlines, Jet Blue, Airtran Airways and Virgin America which provides low costs of the flights to travel but there are larger carriers too such as Delta Airlines, American Airlines etc. These larger airlines have made their mark in the top airlines. New entrants will always provide profitable routes and trends. Few are the competitors those who proved that they provide safety record features. This record is most important for the airline industry. A passenger will be stratified when he or she will get good deal with good costs and other benefits (Rahman et al., 2015).
Threat of Substitutes (Medium)
There are a huge number of options which are available for the travelers when they want to travel for shorter duration. There are always trains, buses or cars available which will always help a traveler to choose from the best of all. But when a traveler plans for a longer duration, there are always fewer options which are available. For the longer routes, the travelers will always have to choose from fewer options. They sometimes have to compromise. For long routes, instead of searching for the feasible options, travelers will always look for the available options rather than looking for more options.
Rivalry in the Existing Companies (High)
Rivalry which is analyzed is generally intense in nature. This is a type of the dull situation which this industry sees. As the competitors of the industry are constant and nothing new, this is at the mature stage (Stonehouse & Snowdon, 2007). Fixed amounts are high and they do not have options to provide for leaving the industry for any reason as they are always involved in the long term agreements. This forces them to stay in business for longer time. Products of the airline industry are complicated and they reduce the chances of the competition.
Competition in the US Airline Industry
- Porter model always helps in t he analysis of the questions which are very general and based on the strategic management i.e. it provides the reason because of which the airline industry makes lesser money than the other industry.
- This model always will help in the identification of the problems which creates as the obstacle of the growth of the airline industry. There will always be many options which hinders the growth and these can be easily removed too if they are considered to be important enough and removed on time.
- The competitions in the industry are also shaped due to the porter model and always will help in examining the factors which will increase the performance of the overall industry.
- This model makes the organization know about the buyers and the suppliers and t heir nature of work as well. Corrective actions which are to be taken are also provided incase if it is needed(Njambi et al., 2016).
- The model being static, it is unable to record the changes which keep on taking place in the industry. In case of the factors which are changing are not recognized then it will be of less use for the airline industry.
- This model tells that the airline industry is given most of the importance irrespective of the profit the industry is making. These types of gaps are seen in the industry and these are usually avoided too.
- This model will not analyze the concrete assets of any company. It will only emphasize on the factors which are operating and external rather than focusing on the internal factors. When it comes to the industries which are complicated, this model is not preferable.
- With the five forces, this model should also be able to categorize globalization and digitalization factors as the world is moving towards the digital platforms. With this, the model must also analyze the industry that it is exposed to the international market as well(Dostaler & Flouris, 2006).
Though the industry is growing well in the market, the industry faced some serious issues. In the year 2001, the oil prices were the major concern. The prices of the oil had increased which became to be the he problem in the industry. In the year 2011, it was found that 32% of the revenue was put into the consumption of the fuel for the planes. 26% of the total cost was invested into the labor cost too. These two factors became to the huge concern for the airline industry. In the year 2000, the airline industry went a little down in the earning of the profit and it was approximately declared bankrupt (Wyman, 2017). A few airlines were Delta, Northwest, US airways etc. Few airlines which made their mark on a huge basis were able to provide services till the end as well.
Later in the year 2010, airline industry went into mergers. Delta, Northwest, United and continental and southwest airlines planned for the acquisition of the Airtran. In today’s world, it is estimated to be 2.5 billion customers and 5.5 million employees are there. It also served 9.5 million airlines supply chain. They also has 18 million jobs supply worldwide.
Pricing strategy is the most cliché pricing strategy which is used by the airline industry.
Second degree price strategy: In this type of strategy, every customer is always ready to pay the prices which are based on the sustainability and their convenience. It all depends on the purchasing characteristics. The best option is chosen by them which match their priorities and preferences.
Versioning strategy: This type of strategy introduces models of the same version of the product and then they charge variety of prices for every other model.
Dynamic Pricing Strategy: The customer can set their own prices according to their comfort and the standards and later the prices are decided on the basis of the customer’s ability to pay.
Other Strategies: Several combos are given to the customers in the bundling of pricing strategy. These offers are a low cost of the flights. In case if the customer buy the tickets in bundle, it will cost the customer less (Ko, 2016).
The strategies that are discussed above depicts, that all these are followed by the airline industry to gain more profit. Also they try to give their customers a good experience in the end when they book their flights. For this, they can also opt for the advance booking. There are huge gap in the prices if the flights tickets when a person books two or three months prior to the flight. For example: JFK to BOS is $2331 if booked in advance, $78 for 42 days in advance, and $68 for 126 days in advance. Predatory pricing strategy should be followed by the airline industry as marginal cost if to be determined. Number of competitors are reduced if t he marginal costs are included (Perezgonzalez, 2011).
The overall growth is also maintained by the airline industry and the nation too. A huge number of customer data base of maintained by the airline industry irrespective of the fact that in included several issues. People prefer flights to travel instead of the any other transport as it saves a lot of time for them. People prefer to pay less and get more for what they are paying. Airline industry must put their focus on the management of the costs instead of putting their efforts in other aspects (Mantin & Wang, 2012). Eco friendly environment should be provided which should be free of pollution and airline industry should be more focused on that.
Porter’s Five Forces for the US Airline Industry
Conclusion
It can be said that the airline industry is not at all an attractive industry for entering into as the operations involve a huge number of the costs and also it involves a few agreements if once the person wants to move in this type of industry. In case if one wants to exit this industry, it is almost impossible to exit because of t he huge costs and agreements made. New competitors are not easy to enter in this type of industry as the cost and the number of travelers is all balanced all the time. The capital which is invested in the initial phase of the business, it is required to maintain that and it is quite difficult to do that. Customer base should always be maintained in order to come up with the profits. The airline industry maintains their customers and it shows that it is at the maturity stage of the life cycle (Jawabreh et al., 2012). Hence, it is concluded that the major reason for the downfall of the industry would be the hike in the prices. The fairs should always be increased to maintain the profit of the industry but there is always a way to do that. It should be done in a way that the customer base remains maintained and they should not be looking for other options. The airline industry made very important changes which were necessary for the growth of the nation. If US airline industry is concerned, it has made its mark worldwide and ranked itself in the successful list of competitors and substitutes.
References
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Tehrani, M.B. & Rahmani, F., 2014. Evaluation Strategy Michael Porter’s five forces model of the competitive environment on the dairy industry. American Journal of Engineering Research, 3(5), pp.80-85.
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