Analysis and Recommendations for the Airline Industry
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The United States airline Industry is a complex business that is affected by many internal and external factors. The successes and failures of this industry are constantly fluctuating over time. While deregulation brought great triumph and positive change, the tragedy of 9/11 was the initial factor leading to the downward spiral of failure that the current airlines face today (Siddiqi, 2009). Currently, the International Air Transport Association reported that the airline industry suffered a net loss of $8 billion dollars during 2008 (wikinvest). The current failures are most affected and influenced by competition, buyer power, technology, and the economy. While it is evident that the airline industry is suffering as a whole, there is one airline that is flourishing with achievement amongst the failing industry. Southwest airline’s unique way of operating has generated a consistent profit throughout the most influential factors that affect the industry.
COMPETITIONRivalry among competitors within the airline industry is an extremely important aspect. With more competition within the industry, consumers will experience more benefits. Advantages such as lower ticket prices and less competition will cause potential financial problems for the consumers. As many of the major competitors within the industry actively take steps to overpower other airlines, we as consumers may begin to feel the effects.
Major Players in the IndustryThe domestic Airline Industry consists of many different competitors, some that are more successful than the others. At the current time the leading competitors in the United States include Delta Air Line, American Airlines Corporation, United Airlines Corporation, Southwest Airlines Company, and US Airways Group Incorporated. These five Airline companies make up nearly 50% of the Market Shares within the Industry with Delta owning the largest portion of the market shares. Of these five Airlines, the only one that has been consistently profitable within the last five years is Southwest Airlines. The other major US airlines have proven to experience unstable profitability. (IBIS world)Mergers and alliancesWithin the past years airline companies have begun to strategize on ways to be more successful against their major competitors. Due to the rising prices of fuel, the costs associated with operating an airline have continued to increase. One action airlines have decided to take is to merge with other competitors.
This action is one that can increase profitability and the airline’s long term finances by eliminating duplicated operating costs. (gao gov) The most recent merge in the U.S. is that between Delta Air Lines and Northwest which took place in 2008, making it the only alliance in the United States to include financial integration (national academic press). (IBIS world) The merge successfully helped Delta become the largest provider of air transportation by combining the Northwest flights with the Delta flights. ( national academic press) These flights were originally half full; therefore, the combination creates full flights decreasing operating costs. With mergers such as these starting to occur, there will be less competition within the airline industry, resulting in higher revenues for the airline companies as well as higher ticket prices for the consumer. (airfinance journal)
Other airline companies have decided to create a partnership or alliance with other airlines rather than to merge. These alliances most commonly occur between an airline that is stationed within the United States and foreign airlines (cq weekly). The difference between a partnership and a merge is that the airlines do not share finances, but are connected through code sharing (booking codes assigned to a flight) or frequent flier miles. Alliances make it possible to book a flight through a US airline and connect to a foreign airline such as AirFrance to fly from city to city within France. Alliances can increase the number of travel options that consumers have as well as create a common financial interest among many airlines. (cq)
With separate airlines sharing similar interests the competition among the airline industry will decrease. Some of the most successful airlines in the United States that have participated in such partnerships include Delta, American Airlines and US Airways.(IBIS)SuccessIn the current state of the airline industry, one aspect of competition that is extremely relevant is the threat of the successful airlines who operate with a low-cost low-fair method. Southwest airlines primary focus is to overcome their competators by providing lower fairs, one class flights, and point-to-point flights (understanding ebusiness). This strategy has brought Southwest a net income of $178 million in 2008 (southwest fact sheet). Southwest has been more successful than any other of its competators in the past five years. (see appendix).
Buyer Power is a very significant aspect of the United States airline industry. This refers to the amount of pressure the consumers put on an industry that affects the prices, volume, and profit potential. (Porter, M 1998, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, Texas) The industry is highly competitive and therefore there are many different choices of airlines. Many airline companies exist in the market, however, each of these companies do not differ much from one another. Each company is virtually offering the same service to the consumer so the main aspect affecting buyer behavior in the industry is price. This makes buyer power very high because the consumer is able to choose a flight from a variety of different companies based on which fare is the cheapest. As time has passed, buyer power has become increasingly important in the airline industry.
The invention of the internet has allowed for a convenient and easy way for the consumers to compare prices and choose based on the cheapest. (w303)The main components of demand for airline services are business travelers, tourism, freight transport, and mail transport.( ). With the development of new technology and electronic commerce, travel has emerged as the top selling product online and is increasingly growing.
This gives the buyers in the airline market a huge advantage and higher power to choose and control when choosing an airline company. It is evident that the buyer power is very high when analyzing the marketing strategies and programs being adapted in the airline industries. According to business wire’s May 2007 issue, when asked about industry impact in a survey 75% of the us airline companies rated customer loyalty as having the greatest impact from a cost, revenue, or operational standpoint. (http://www.allbusiness.com/services/business-services/4338964-1.html) Because the buyers have such an impact on the airline industry, the individual companies are focused on getting and keeping loyal customers that will continue to travel with that company even if the price rises. For example, frequent flier miles are a program that many airline companies have enacted to ensure customer loyalty.
Frequent flier programs allow customers to earn certain travel benefits and bonuses based on the number of miles the customer flies on a particular airline. (http://airconsumer.dot.gov/publications/frequent.htm). Today, frequent flier programs boast over 100 million members and members receive 10 million awards per year. Loyalty programs such as frequent flyer miles are effective because of the balance of interests for both the buyer and the airline companies enacting the programs. (http://www.frequentflier.com/ffp-005.htm). Other customer loyalty programs that exist in the airline industry today are financial services reward programs, retail gift certificates, hotel rooms, and rental car deals.
It is important for the airline companies to focus on loyal customers especially during an economic recession because as marketing budgets tighten it is crucial to identify and focus on the best customers that have high current or high potential value. (same as sentence before). The importance and emphasis on these customer loyalty programs prove how critical the buyers are to the airline industry. By focusing on the buyers, the airlines can increase profits tremendously.
SuccessAirlines are able to find success amongst the high buyer power that exists in the industry. Southwest airlines accumulated $11 billion in revenues in 2008 and according to southwest executive Colleen Barrett, the most influential numbers on Southwest’s balance sheet are those that indicate how many people have become frequent fliers because of the airlines low-fare, high-volume strategy (Knowledge@Wharton, 2008). Southwest’s low-fare method has changed the way that people think about flying. For example, Barrett points out that this low-fare travel method has held together long-distance relationships and separated families by giving people an option that makes frequent travel financially possible (Knowledge@Wharton, 2008). With Buyer power being so high and influential in the airline industry, Southwest has a unique method that appeals to a wide range of consumers and this customer-pleasing strategy has brought this airline company great success amongst the failing industry.
TECHNOLOGYIn today’s society technology plays a large part in the advancement of the human race and the surrounding world. It especially plays a big role in the advancement of the airline industry. Airlines today rely heavily on customer satisfaction, and technology helps to keep customers happy with many new advancements.
The new advancements include technology that involves the touch of a button or the click of a mouse. For instance, consumers can now conveniently buy and print their tickets from their personal computer. Consumers can also check in for their flights through their cell phones. It’s estimated that by 2012, 12% of all passengers will check in at the airport through their cell phone (Karnjanatawe, 2009). This makes it possible for travelers to avoid long line and hassles at the airport. Another technology advancement of the airline industry is the ability for passengers to compare prices of all flights on the internet. This allows consumers to book the lowest priced flight easily. This shows how the development of new technology keeps the costumers happy and less worrisome.
Technology is not only geared towards keeping customers happy but is also geared towards the operations of planes. The creation of auto pilot and the life-like flight simulator considerably decreased the number of crashes per year. Since the creation of the flight simulator in 1978 the number of crashes and deaths per year has decreased at a steady pace, from 2,525 fatalities in 1979 to 879 fatalities in 2009 (ACRO, 2009). Auto pilot is a system where it allows the pilot to set the plane to a certain course once the plane has reached the desired altitude. This prevents from crashes happening because of pilot error. The life-like flight simulator provides pilots with life-like simulations that serve as a training purpose for them to better their skills for real life flying. Technology in the airline industry is benefiting the pilots and employees and not just the costumers.
Technology plays a crucial role in the airline industry. Ultimately, these new technology advancements are making the customers happier which is one of the main goals of each and every airline corporation. Therefore, technological innovations have been key in the past and will continue to play an important role in the airline industry.
ECONOMYAlthough the economy is somewhat on the rise in 2009, many industries are still feeling the effects of the recession, especially the airline industry. The world airlines lost $8.5 billion in 2008 and are expected to lose $4.7 billion at the end of 2009 (Airline industry). The international Air Transport Association estimated that just in December 2009 the airline industry will lose $2.5 billion. This loss is generally due to four key economic factors: exchange rate, disposable income, unemployment, and fuel prices.
The consumers who are experiencing the worst effects of the currency exchange rate are tourists and businessmen. Recently, the U.S dollar has been weak in the global market where one US dollar will only exchange for 0.6 Euro. This means more Americans are more likely to stay at home rather than travel to foreign countries. In addition, the currency exchange rate has had a huge impact on business between foreign countries which causes the demand for airlines to fall. Also, due to the low currency level of the dollar, many investment companies have gone bankrupt, taking away a huge number of sales from the airlines. All in all, the exchange rate is a big problem and is affecting the entire industry.
The unemployment rate is dramatically increasing because of the terrible economic crises. According to the Global Employment Trends, there will be more than 50 million workers who lose their job if the economic situation continues to deteriorate (Global Employment). The unemployment rate is a disaster for the airline industry. Many Americans who are suffering from unemployment will no longer have disposable income for the luxuries of flying. Also, the U.S. airlines have had to lay off more workers than ever before in order to reduce the total cost of operating. Data from the U.S. Department of Transportation’s Bureau of Transportation Statistics reported that 6.3% fewer workers were employed by the U.S. airlines in June 2009 than June 2008 (June 2009). Furthermore, the U.S. Department of Transportation showed that 8.1% more workers have lost their jobs in July 2009 than July 2008. The total number of full time and part time workers in the U.S. airlines was 563,112 in July, decreasing 2.2% from June (U.S. Airlines).
The greatest economic factor for the struggling airline industry is the current high fuel prices. According to the Air Transport Association, 30-40% of total operating costs are the fuel costs. In 2008, the prices of fuel were constantly changing, peaking at $147 per barrel in July, and dropping to $32 per barrel in December (Travel Survey). These uncertain fuel prices brought much pressure to the airline industry. Dave Barger, the CEO of JetBule Airways said that compared to 2007, the fuel costs increased by $400 million in 2008. Due to the uncertain fuel prices, airlines have added extra fees, such as excess baggage charges. Although the top 21 American airlines earned more than $1.1 billion due to the excess baggage charges in 2008, some of them still had negative profitability. For example the present of Delta, Ed Bastian, said that Delta had a $503 million net loss in 2008. Therefore, fuel price is one of the major economic problems that could continue to cause the airline industry to lose money.
SuccessThe economy greatly affects the airline industry and has caused great loss to the industry as a whole. With these difficult economic factors, it is important for airline companies to adjust to the changes. While the industry is suffering, Southwest is beating the odds and prospering. The main aspect of Southwest’s advantage in the economy is their fuel hedging program (New York times). This financial strategy allows airlines to protect themselves against rising oil prices by locking in a price for fuel (msnbc). While this strategy is a risky gamble, it has proven successful for Southwest and has saved the airline company $3.5 billion since 1998 over what it would have spent if it would have paid the industry’s average price for fuel (USA today).
Although hedging can cause airlines to sometimes lose money, a study done by professors at Oklahoma State University and Portland State University found that overall those that hedge have a 5% to 10% better financial performance than those that don’t (USA today). This strategy is very expensive and poses a risk that many airline companies do not want to take in this unstable economy. However, the risk could be well worth it and profitable. Richard Anderson, chief executive of Delta Airlines, says that fuel hedges are an expensive insurance policy in the short term, but every $1 decline in a barrel of crude oil equals about $100 million in lower expenses and the reduction in fuel costs could save Delta $5 billion annually (Dunn, 2009).
FUTURE RECONOMMENDATIONSThe airline industry as a whole is not currently operating in a way that will promise a successful and profitable future. The key factors for a successful future in the domestic and global markets will include the following:•Mergers among competing airline corporations will bring profitable results. By companies merging together this allows them to cut costs by eliminating duplicate operating costs. Through their success, Delta and Northwest have set the path for other airlines to follow. Mergers, such as that of Delta and Northwest, will eliminate duplicate routes from the two airlines departing from the same airport. By doing so wage and fuel expenses will decrease substantially. As airlines merge the competition in the industry will drop benefiting the entire industry. This will decrease buyer power and let the airlines set the prices they need to operate profitably.
•Currently customers have a great deal of power within the airline industry due to the fact that each airline does not differ greatly from one another. Therefore, price is ultimately the only factor that buyers will consider while choosing an airline. We recommend that the airline companies focus more on customer service in order to separate themselves from their competitors. This involves focusing both attention and finances into the human resources and marketing departments to create a loyal customer base. By focusing more attention on aspects such as reward programs, in-flight services, and timeliness associated with arrivals, departures, and baggage claims customers will be more likely to book future flights with that airline company.
•As technology continues to advance, many big airline companies feel they must conform by spending a great deal of money to include these advancements to satisfy customers. However, we found that the low cost, low fare method practiced by Southwest is more profitable and practical in the current