Strategic Management Case Solution: Plane Wreck: The Airline Industry in 2001-2004
Q:1. Use the competitive forces model to analyze the structure of the airline industry during 2001-2004. How well does this analysis explain the low profitability of the industry?
The competitive forces model:The competitive five forces model focuses on five forces that shape competition within an industry. These five forces are:
1)The risk of entry by potential competitors
2)the intensity of rivalry among established companies within an industry
3)The bargaining power of buyers
4) The bargaining power of suppliers
5) The closeness of substitutes to an industry’s produt Point to point system
The first factor, risk of entry by potential competitors, was a major factor for airlines during 2001-2004. The airline industry took a big hit when oil prices went up and the want to fly due to 9/11 had gone down severely. Airlines needed to stay ahead of their competition to survive and several companies found themselves filing for chapter 11 bankruptcy protection, etc. to keep themselves established. If new competitors were to come in at this time the main airline companies could go out of business since the demand to fly was down and prices were skyrocketing for oil. This explains the low profitability of the industry by showing how how potential competitors would bring down the profits of the other companies in the industry since the demand for flying was low at the time.
The second factor, the intensity of rivalry among established companies within an industry, was also key during this time. Companies were challenging each other by price instead of quality. Consumers were now more concerned with lower price tickets then the quality of their seat due to the fact that oil prices went up therefore ticket prices went up. This affected the companies whose main focus was quality because they had to change into the market of price and started to become competitive with the airlines that were already focused on price. This explains the low profitability of the industry because it shows how each company was fighting over price so they were all lowering their prices and trying to stay equal with each other and not a lot of the companies were gaining a profit.
The third factor, the bargaining power of buyers, is shown through the budget airlines. They were a target for consumers because they were cost driven and focused on getting the consumers the flight they want at a good price. This is also shown by network carriers who were more for business travelers who paid for tickets at last minute and were more concerned for the quality of their flight not the price. This shows low profitability because they were trying to bargain with the buyer and give them the cheapest deal possible which was lowering the profits.
The fourth factor, the bargaining power of suppliers, is also shown through the budget airlines when they moved into the coast-to-coast markets, which were high fare prices. The budget airlines were able to control the consumers because they knew that they were going to get consumers so they directed them towards buying higher priced tickets to make money. This affected low profitability because when they went for coast-to-coast markets the tickets were higher but the cost of oil was higher so they were still not making much of a profit due to the fact of their cost v. demand to travel the long distances went down.
The fifth factor, the closeness of substitutes to an industry’s product, this was shown by the budget airlines coming in and taking the consumers away from the network airlines by lowering the price of their tickets. Which shows low profitability because the tickets where cheaper and they were also taking consumers away from other companies which were putting them into debt.
Q:2. Are the budget airlines in a different strategic group then the major airlines?
I would have to say that they do have different strategies, the major airlines works on a hub and spoke strategy which means they network there routes through major hubs. They do this so they can serve more cities then they would flying point to point. This helps them also fill the seats on the planes. they also have unions for their employees so this means they pay higher salaries.
The budget airlines strategy is to save the customers money by cutting cost. They train their employees to be able to do multiple task instead of one job. Also they offer no frills on their flights meaning no food or drinks. This helps keep their cost low. Also they only fly in the large market routes such as the east coast. One way that they make sure they keep there cost low is they buy a mass amount at once of the same type of plane so they get a discount.
So to over view the differences in strategies the budget airline offers a low cost flight with no frills through a high traffic routes. They do this with a small crew and less employees. The major airlines work on a hub and spoke strategy and offer comfort and frills. They also work with a large amount employees and crew who have unions.
Q:3. Compare and contrast the business models of the network and budget airlines. What are the strengths and weaknesses of each model?
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Business Model |
Network Airlines |
Budget Airlines |
|
1) Strategy |
Differentiation Network airlines pride themselves by the services that they provide their passengers, as travellers choose them for the quality of experience. Thus, network airlines must differentiate themselves from other airlines so passengers who value flight experience will perceive a difference and choose them over their competitors. A hedonic user appreciates the finer things in life and is both able and willing to pay for the higher ticket prices if they know they can receive excellent in-flight services as they travel. |
Cost Leadership Budget airlines’ positioning is one of cheap flights for the budget conscious traveller. Budget airlines offer no-frills pricing for their tickets, and passengers travelling light will appreciate the lower ticket costs as they can save money on in-flight meals and baggage allowances. A truly utilitarian user which places more emphasis on getting to their destination safely prefers the cheapest alternative that they can obtain and will gladly sacrifice extra comfort if it can save a few dollars. |
|
2) Operation |
Hub-and-spoke system Network airlines usually dominate a single airport where they operate from, forming a sort of ‘hub’ where they coordinate flights into and out of this main airport. For example, one of United Airlines’ hub is Chicago’s O’Hare International Airport, serving as their largest hub in terms of passenger volume as well as frequency of flights. The hub-and-spoke model, as compared to the point-to-point model, requires fewer routes. This creates economies of scale that allow an airline to serve (via an intermediate connection) city-pairs that could otherwise not be economically served on a non stop basis. |
Point to point system Widely used by budget airlines, a point-to-point system occurs where passengers go directly to a destination from their origin, rather than being routed through a hub. This system is advantageous to passengers as they can reduce travel time considerably due to the flights not needing to stop at a connecting point, thus eliminating the risk of baggage loss if baggage is not transferred onto the connecting flight as fast as the passenger is. A point-to-point system also reduces the risk of a domino effect of delayed connecting flights, whereby an not be economically served on a non-stop basis. Thus, a point-to-point system mitigates that risk. |
Network Airlines business model:
Strengths
- can provid differentiate/unique services than competitors
- can achieve economies of scale by hub-and -spoke system
- can charge high prices
- enhance loyalty and image
Weaknesses
- high cost for superior services
- may loss economies of scale
- may increase high competition
Budget Airlines business model :
Strengths
- may earn economies of scal
- may provide multiple services than competitors
- high customers preferences for low prices
-point to point system mitigate risk
-advantageous from low level of competition
Weaknesses
- may decrease image and loyalty for poor services
- may consume high time for point to point operation system
- low profitability
Q:4.What is required for the industry to return to profitability ?
In order for the industry to return to profitability, the major airlines need to set up their competition with the budget airlines. The major airlines can do so by following the examples of budget airlines such as hiring non union labour and cross training employees to perform multiple jobs. The major airlines can also cut cost by not offering in flight meals or beverages.
Q:5. What must the major network airlines do to respond to the competitive threat posed by the budget airlines? Have they taken steps in this direction ? Have they done enough?
They need to get out of the unionized work force. By doing this it will allow them to assign different tasks to different employees and they won't need so many employees anymore. But the main idea I believe they need to work on the most in order to get back on track is the price of a ticket.
The major airlines have taken a slight step in the right direction however its still not good enough to get back on track. In order for them to take over its going to take a lot of time, energy and the biggest thing of all is trust from their customers.
No they have not done enough at all to get out of this black hole they are in. What I believe should happen is all the major airline companies should agree on becoming one big corporation. That way here they will be able to give their own ideas and come up with the best plan to attack the smaller airline companies and really take charge of the industry. The biggest step for them to take is to truely give out a survey to their customers and see what they think should be done in order to get back on track. Thats the only way a company can get out of debt fast, is by listening to their customers.
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