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Back to Subjects - Aviation

Airline Industry

Airline Industry The airline industry is very stable and unlikely to change in the near future. There are many reasons for this. Air travel continues to grow and will continue in this fashion as long as the economy stays in an upward trend. US domestic air traffic grew 2.3% in 1998 and 3.5% in the first six months of 1999 according to Air Transportation Association. The percentage of flyers has increased an average of 2% each year and the percentage of people who have ever flown before increased from 73% in 1993 to 81% in 1997. (Airport Transport Association, Internet). The top three reasons that people fly are business trips (47%), visiting relatives (38%) and going on vacation (13%). Most airline revenues are gained from the fares they charge these passengers, but they also earn ancillary revenues from transporting mail, shipping freight, selling in-flight services and from serving alcoholic beverages (Airport Transportation Association, Internet). The primary target market of airline passengers today is the business traveler because business trips account for the majority (47% ) of airline flights. Though this percentage of business trips is slowly declining, the actual number of business travelers is increasing. The business traveler fits the description of the average airline passenger of being male, between the ages of 35 and 54, having a household of $60,000 or more and lives in the western region of the country (Airport Transportation Association, Internet). The business traveler tends to be very price inelastic in terms of plane fares and as a result, airlines provide benefits to them such as priority check-in, expedited baggage handling, frequent flier miles and in-flight cell phones to business people to entice them to fly with their carrier. The other segment of the airline market is that of leisure travelers. These passengers tend to be extremely price sensitive which is exactly opposite the business traveler. As a result, airlines must find ways to beat competitors in terms of prices. Because the leisure traveler is not loyal to any one carrier, price becomes the determining factor in deciding which carrier to fly on. Again just opposite of the business traveler, the number of leisure fliers has decreased while the number of trips has increased. While the industry seems to be doing extremely well as a whole, there have been recent problems that may continue to effect the industry in the future. The recent jump in gas prices will undoubtedly affect the industry on both the customer and corporate levels. Consumers are already feeling the punch with increases in ticket prices. This could ultimately cause the number of fliers to fall, and in turn reducing profits immensely. On the corporate level, managers are faced with the decision to raise ticket prices and risk loosing significant profit or keeping prices steady and as a result gain customers who would otherwise fly with a competitor, but have their profits decrease temporarily. Also of recent concern is the issue of safety of airlines both as a whole and on an individual basis. The recent crashes have caused safety standards to be increased across the board and are affecting profits for several reasons. Consumers are becoming increasingly skeptical and may refuse to fly if the number of incidences increases. Increased safety checks and requirements are very expensive and will cause ticket prices to increase leaving consumers other options of transportation. · large capital requirements to start · potential counter attacks of stable competitors to force new airlines out of the market · potential for alliances and mergers to become very powerful · too much invested to cease operations · inability to use materials for something else The bargaining power of suppliers is relatively low because there are not many airplane manufacturers and they all are very similar in product quality. Mergers such as Boeing and McDonnell-Douglas allow such companies to gain a slight degree of power because they create many opportunities for market domination. The increase in capital and reputation of the involved companies says a lot to potential buyers of their carriers. The bargaining power of buyers is also relatively low. They do not have many suppliers o choose from and none of them are of any higher quality on average than another. There are also so many planes that have been produced that buyers have the option to buy used planes and save on production costs of new ones. Buyers are also unable to buy in volume and planes are a standardized product so there is no chance of product diversification leading to an airline choosing one over another. There is a great amount of threat of substitutes in the airline industry. With so many different carriers, one becoming an outright leader, especially a new entering firm, is almost unforeseeable. Consumers are more likely to fly on carriers that have been around for along time and that have a good reputation. A new firm will struggle to gain these things for many years and may be overtaken by the larger more established firms rather easily. Also, with the existence of price wars, it is very difficult for new firms to compete without a significant capital base, leading to easy substitution of services buy competitors. Current Developments in the Airline Industry The airline industry has many new innovations that will help individual carriers to gain a competitive advantage, even if only temporary. The change from booking travel arrangements through a travel agent to booking arrangements electronically or on the Internet will undoubtedly change the industry. This change will require less travel agents and promote more competition among carriers. United Airlines for example, has created a service for people who visit their web site. Not only can they book flights on United, but on over 500 other airlines as well (Competition Bulletin, Internet). United Connection, as it is called, is likely to be imitated by other airlines and because of this may only be a temporary competitive advantage at this point in time. The idea of third tier on-line travel agents such as Microsoft’s Expedia and Preview Travel allow travelers to choose flights at reduced prices. Currently, on-line travel is the most frequently used e-commerce medium on the Internet with revenues of $274 million, or 1% of the ticket booking market. This is estimated to increase to 6 to 9 billion by 2002. (US Business Reporter, Internet). Online services such as these result in intense competition in the industry. Because sales from the airline directly are reduced by such methods, carriers are faced with the problem of finding other profit producing measures. Another new innovation is that of “ticketless travel”. The idea was originated by Air Tran (Value jet) as a way to cut costs and provide faster service for customers. The passenger is able to pick up boarding passes at the check-in counter or can have one printed through automated dispensing machines. The e-tickets are then activated with a credit card or frequent flyer card. E-tickets will save a lot of time and could likely separate the top airlines from the lesser ones if the idea catches on because airline passengers are drawn to services that speed up travel time. Consumers may quickly become more price sensitive in the near future with companies such as Sabre and Priceline.com. These outfits allow consumers to pick their price and are automatically booked if their price is matched. As a result, airlines may be forced to match these prices in order to stay competitive and make profits. Major carriers are producing low-fare offshoots such as US Airways Metro Jet and Delta’s Delta Express. These carriers travel more frequently and usually cost a good deal less than the larger carriers. International low-fare carriers are expected to enter the US as well which should increase competition for carriers such as these. These new services have been very successful in attracting travelers, especially business travelers who are very sensitive to time constraints. Some critics, however, feel that these off-shoots are simply defensive measures rather than profit centers- only time will tell. Formation of Key Strategic Alliances The formation of alliances in the airline industry have helped both consumers and the airline industry immensely. According to James Goodwin, the CEO of United Airlines, various alliances have contributed around $200 million in additional revenues and cost savings. One of the most successful contributors to the additional revenues is the Star Alliance, of which Goodwin is a part of (Mooreman p.2). United Airlines, Luftsana, SAS, Air Canada and Thai Airways comprise the Star Alliance. This alliance is revolved around domestic carriers teaming with international carriers to gain an entry point into a new market. Included in this alliance is “code-sharing” which should provide a competitive advantage for alliance partners. Code-sharing makes it possible to book a passenger on one airline that allows them to fly on the other airline as well. In addition, a combination of benefits from frequent flyer programs will be available to consumers. Four of the world’s leading airlines have merged and are now known as Skyteam. Those involved are Aeromexico, Air france, Delta and Korean Air. This alliance is based on the premis that a competitive edge is gained in the airline industry by focusing on customers. This alliance caters to customer needs and demands and develops routes and flights accordingly (Transportation and Distribution p.1). It is the first of its kind and should prove advantageous. In the process of teaming up is Northwest and American airlines, the number 2 and 4 carriers in the industry. If it happens, American would acquire Northwest and as a result, American would complete the alignment of all four carriers in the oneworld alliance that it and British Air anchor (Carey p.1) There are still talks going on in relation to the possible merger and no one really knows for sure what the outcome will be. Implications for the airline industry Our group recommends that those firms presently in the airline industry aim to provide high quality services at the lowest possible price. In order to successfully reach all aspects of the consumer market, firms need to fully understand their customers needs. Providing flight packages to satisfy both the business traveler and the leisure traveler market segments will greatly help each firm. We also feel that consumers desire quick and effortless travel from purchasing tickets to the actual travel time on the plane. As a result, firms should aim to provide the quickest and most simple way to travel. The airline industry is not very attractive to a firm looking to enter the market. There are many reasons for this. First, there are many established carriers that have worked extremely hard to be successful and are not tolerant of new threats that may make them less so and will attack new firms to remain at the top. Second, it would take a great deal of capital to start a new airline firm. And third, entry as well as exit costs are extremely high and to risk putting so much money into something only to risk having it not succeed is a consideration that should not be taken lightly. Another important issue is that the airline industry seems to be very niche oriented. Airlines enter the market most often in areas that had been previously uninhabited by other airlines. Many seem to be focused on either west coast or east coast for example and do not enter other areas. Finding an area, at least in the US, that does not already have a significant amount of airlines in it is difficult. Key Success Factors of Winners Vs. Losers What determines the winners from the losers in the airline industry is difficult to tell. Advanced technological innovations will be one of the most important aspects of maintaining a prominent position in the industry. Mergers and alliances are also very powerful because of the synergy of two different airlines produce when combined. Also, the winners in the airline industry will understand their customers needs and cater to their needs whether they are business travelers or leisure travelers. Increasing benefits to both markets will only help an individual carrier to separate itself from the others. Recommendations of where the industry will be in 2001 The airline industry will undoubtedly expand and become increasingly more competitive in the next year. The likelihood of new airlines is slim but possible mergers are not. Companies become very powerful when joined with eachother and in the airline industry is no different. We look to see technologies that will facilitate both purchasing tickets and flying in general to increase and become more prominent as consumers become more sensitive to time constraints. Safety issues will receive a great deal of attention and standards will continue to increase. Price wars will become more intense and enable certain carriers to separate themselves from the competition by finding a way to provide quality at a lower price. How to Position a Firm Successfully in the Airline Industry A firm should first decide which niche they are to be a part of to be successful in the airline industry. A successful firm will likely enter an area with little competition, such as Alaska did on the west coast. Granted some carriers fly all over the world, gaining a foothold in a smaller niche is the smart way to go. A firm may also consider looking into a merger or alliance to strengthen their position in the industry. Putting the best of two companies together could be a definite bonus in the future with the likelihood of intense competition becoming a major factor. Developing a technique or technology that is not currently used by another airline and using it through a larger airline may be a smart move. Some amount of capital should be devoted to improving technology because it is, in a sense, the power of the future. Bibliography: Bibliography Air Transport Association. “Air travel Survey.” Online. MSN.com. Internet. 12 Nov. 2000. Available: www.londecon.co.uk/pubs/comp/crb8.htm. Carey, Susan et.al. “AMR, Northwest talks turn serious as pressure rises for decision on merger”. Wall Street Journal. July 12, 2000. Competition Bulletin 8. Online. MSN.com. Internet. 9 Nov.2000. Available: www.activemedia-guide.com/airindustry.htm. “Four leading airlines launch global alliance,”Transportation and Distribution, Cleveland, OH, August 2000. Mooreman, Robert W. “United turns to academics to show alliances aid consumers.” Aviation Week and Space Technology. New York. Oct.2,2000. Travel Agent. “Forecast for the Future: Airlines.” Online. Yahoo.com. Internet. 12 Nov.2000. Available: www.finarticles.com/cf_1/mOVOU/2-298/59013812/p2/article.jhtml. US Business Reporter. “Airline Industry Profile.” Online. Yahoo.com. Internet. 12 Nov. 2000. Available: www.air-transport.org/public/industry/23.asp.

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