Introduction to the Airline Industry
Question:
Discuss about the Implications Of A Long-Term Increase In Oil Prices.
Airline industry is that industry which aims at providing transport services for the passengers along with freight services. Airline industry uses aircrafts to provide services to the travelers. It is a part of aviation industry which focus on maintaining a true relationship between users and service providers. Basically there are many types’ of airlines such as international, domestics, intercontinental, passengers, cargo, scheduled and nonscheduled. Airline industry has been widely used and spread over 188countries and have 88% of international world’s traffic. Here, the report will cover the overview of the airline industry along with the Overview of the US airline industry analyzed with porter’s five forces, economic performance of the industry and the majorly used strategies to make huge amount of profit. Airline industry has played a major role in the growth of the country and it was early developed in 1910s which later made a huge transformation in recent years (Belobaba, Odoni and Barnhart, 2015).
In the recent years, the airline industry of US has successfully been able to produce a sound balance sheets with increased valuations and also created 13 quarters. The airline industry of US has created a major competitive advantages and discipline principles in driven with quality. The domestic airlines of US are generating a huge profit margin with limited operating costs. But then the prices of crude oil has also been a barrier in the airline industry. US industry is still facing hurdles in growing from single digits to double digits (Gaggero and Piga, 2011).
In the last five years, routes from US and Latin America have owned a great expansion in terms of seats and miles. However, expenses of labor, maintenance, and cost has created a pressure on the industry. Several new contracts were held that aimed at creating high profits which will be seen in recent coming years (Kim and Mauborgne, 2014). In 2014, the prices of jet fuel were reduced which announced production costs later in 2016. Coming to 2017, the industry must focus on improving the customer experiences and differentiate their product with their major competitors. There must be more efficient aircraft which will help to reduce the expenses and escalate fuel prices (Morrison and Winston, 2010).
Porter’s five forces is a tool which is used to analyze the competition involved in the business. It also helps to analyze the intensity and attractiveness of an industry in terms of profits. Coming to US airline industry, it is facing a moderate competition over prices, routes and frequency in flights. There has been a competition in the US market which has given rise to major competitors such as American Airlines Group Inc, Delta Air Lines Inc, United Continental Holdings Inc and Southwest Airlines Co. The following diagram shows the porter’s five forces of US airline industry (Magretta, 2011).
The bargaining power of buyers in airline industry is very high because there are passengers who are free and want to travel. They will get involved in searching those flights which will cost low to them. Some customers are not loyal enough so that they will prefer the same airline despite of higher price ranges. The people prefer low cost instead of focusing on better qualities. Moreover, there are huge number of substitutes that are available to the passengers which give them an opportunity to switch to other airlines (Mazzeo, 2003). It is also very difficult to differentiate products in such industry because there are very few aspects where one can differentiate for other in terms of aircrafts. There are large number of options which are available to the customers where they do not have to think for a while to adopt new airlines if they are not satisfied with one. Several internet travel sites are introduced which generates more options for travelers. Available internet sites are Expedia, Travelocity, and Orbits which has created options for travelers in terms of low fares and other many factors as well.
US Airline Industry Analysis using Porter’s Five Forces
The bargaining power of supplier in airline industry is also high because there are less number of suppliers who aims at creating a value chain in terms of manufacturing airbus, aircraft lessors and gas and petrol. The manufacturers who produce aircrafts are very few in numbers. However, this industry involves many travel agents who plan trips for travelers as per their affordability. Those travel agents create many options for the travelers and they choose best out of the many. But due to shortage of manufacturers, they earn huge profits because there are no substitute manufacturers. Lack of technicians also helps to reduce the competition in this industry (Porter, 2011).
Coming to airline industry, there are very few number of competitors. Though there are many other carriers such as Southwest Airlines, Jet Blue, AirTran Airways, and Virgin America who have entered the market by providing low cost budget but then larger carriers such as United, Delta, and American has successfully ranked itself on the top. The new entrants usually follow lucrative routes and tends to provide services from point to point. They have also been able to create a capacity in airline industry and also successfully involved in generating shares in incumbent air lines. There are very few competitors who have proved themselves to provide safety record features. Safety record is one of the most important factors in airline industry. A customer will automatically be satisfied if he/she gets all the necessary features and some additional benefits.
There are large number of options available to the traveler when they plan to travel for short duration. Options available are trains, cars, buses which helps them to choose between one another in terms of fares and time as well. One will definitely examine the available options and choose best out of all. While, when a traveler plans to travel for long duration, there are very few options available to them. They are not allowed to choose among many options and they cannot even compromise on long routes. When a person travels for long duration, he/she will primarily focus on safety rather than focusing on cost. So they will prefer travelling with the available options instead of searching for other many substitutes (Prince and Simon, 2009).
The rivalry analyzed in the airline industry is very intense. There is a stagnant situation that has been seen in this industry. The industry is on the mature stage because the number of competitors are constant. The fixed cost are high which do not provide options to leave the industry for any reasons because they are involved in long term agreements which force them to stay in business for longer duration. The products of airline industry are very complex which do reduced the chances of competition (Rothaermel, 2015).
- This model helps to analyze the basic question related to strategic management i.e. the reason behind why other industry earn more profits than airline industry.
- It also helps to identify the main reasons that hinder the growth of the industry. There are huge number of factors that create an obstacle which can easily be eliminated if taken into consideration.
- This model also helps to shape industry competition and examine the number of factors that will guide in enhancing the overall performance of the industry.
- This model also helps to know about your buyers and suppliers along with their nature. This also gives them a guideline to take a corrective actions if required (Yezy, Vipin, Diana, Tianyi, 2016).
- Since this model is very static which cannot record all the changes that takes place in the industry. Sometimes, it fails to snapshots the changing factors
- According to this model, industry is given more importance rather than focusing on the factors of profits. The gaps that are seen between single companies are often avoided.
- It does not analyze the intangible assets of the company. This model only focus on the operating factors and external resources instead of focusing on internal factors as well. In case of complex industries, this model is not best suitable.
- Apart from all the five forces, it should also categorize digitalization and globalization factors in it because today every industry is moving towards digital platform. This model should also analyze how well an industry is exposed to international market (Yu, 2012).
Despite of growing well, airline industry has also faced some serious issues. In 2001, the issues regarding oil prices was the major concern. The prices of oil used by aircrafts increased which created a problem in the industry (Becken and Lennox, 2012). Later in 2011, it was accounted that 32% of the total revenues were invested in consuming fuel for the aircrafts. Moreover, it was also accounted that 26% out of total revenue were invested in labor cost. So these two factors were the major issues of concerns. Further in 2000s, many airline were unable to meet the expenses and they were declared bankrupt. Some bankrupted airlines are Delta, Northwest, United, and US Airways. Some airlines which are huge are still engaged in providing the services to the customers (Gordon, 2012).
Key Strategies for Profitability in the Airline Industry
Later in 2010s, airline industry were involved in mergers. Some common mergers were Delta and Northwest, United and Continental, and Southwest Airlines announced plans to acquire AirTran. Today it has been examined that airline industry serves 2.5 billion customers worldwide with 5.5 million airline employees. Moreover, it has also served 9.5 million airlines supply chain employees along with 18 million indirect tourism jobs (Williams, 2017).
One of the most common used strategy followed by airline industry is pricing strategy.
Here, every customer is ready to pay prices based on their suitability and conveniences. It also depends on the characteristics of purchase. They choose the best options out of many which matches their preferences. There are many strategy that comes under this category. Some of them are mentioned below.
Versioning strategy: It aims at introducing many models of the same version of the product and then charging different price ranges for every model.
Example: Southwest (Goldilocks Principle)
First class: $574
Business class: $545
Economy class: $369
Dynamic Pricing strategy: This strategy gives an opportunity to the customer to set some pricing standards and later prices of airlines are decided which will be based on the customer’s ability to pay.
Example: Seasonality, Mileage programs, and Bulk quantity discounts (Spiegel, 1997).
This degree aims at charging different prices which will be based on the type of customers. If they have high income, prices are charged high and if they have low income, prices are reduced. Prices are also dependent on different group of customers.
Origin: Here, the price will be based on the demographic location and nature of competition of the flights.
Example: If a traveler with high income wishes to fly out of city might be more expensive as compared to the traveler with low income who wishes to fly out of town.
Destination: Here, the price of airline will be based on the destinations.
Example: Flying into a city with high tourism rate might be more expensive than flying into a suburb (Liu and Serfes, 2010).
Bundling pricing strategy also plays a major role in airline industry. Here, several combos are offered to passengers by providing them set of goods at low price. If the passengers would buy the products separately, then it would charge them high (Kim and Lee, 2011).
Example: Hotel + Flight Seat+ beverages, food, services
From the above report, it can be discussed that there are many other strategies if followed can help airline industry to earn huge profits. Airline industry can also adopt advance booking facilities. It includes the prices gap between the high fare customers and low fare customers. Those who book tickets in advance are charged lower than those who book tickets at time. Let us take an example: JFK to BOS: $2331 day in advance, $78 42 days in advance, and $88 126 days in advance. Likewise, it can also be included that the airline industry should follow the predatory pricing strategy because it helps to determine price which will be below marginal cost. Prices below marginal cost helps to reduce the number of competitors (Borenstein and Rose, 1994).
Moreover, it can also be discussed that airline industry has played a major role in maintaining overall growth of a country and a nation too. Besides of several issues involved in airline industry, it has successfully created huge number of customers towards it. Today people prefer to use air services rather than investing unnecessary time in other means of transportation. Further, it can also be argued that despite of having few number of competitors in the industry, it has failed to build its image in the mind of customer (Borenstein, 2011). Today people prefer paying less and getting more. Today, airline industry must focus on managing cost effectiveness rather than focusing on other aspects. Likewise, airline industry today are more focused towards creating ecofriendly environment which will be pollution free (Li, Granados and Netessine, 2014).
Conclusion
As a result, it can be concluded that airline industry is not so attractive industry to enter because it involved huge fixed costs and once entered into such industry, it involves several agreements for long duration. Later, it becomes difficult to exit such industry. Moreover, the current ratio of airline services and the number of travelers is balanced which do not create any chances for new company to enter the industry. It is very difficult to manage the initial capital required along with maintaining a customer base. The airline industry is at maturity stage which has created problems in managing more competitors (Oum and Yu 2012).
Thus, it can also be concluded that the main reason behind the downfall of the airline industry is the hike in the prices. The fares of airline industry has increased in such a way that people prefer looking for other options available. Nevertheless, it can also be concluded that airline industry has made a crucial changes in the growth of a nation. Coming to airline industry of US, it has built its image and ranked itself successfully because of few number of competitors and substitute products.
References
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Yu, G. ed., 2012. Operations research in the airline industry (Vol. 9). Springer Science & Business Media.
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