Competitive Advantage in the Us Airline Industry

Competitive Advantage in the US Airline Industry

The GREENair Strategy

Executive MBA in Business & IT

Class of 2014

Module 4 - Strategy & Organization - Assignment

Author: Luís Faria

Reviewer: Prof. Dr. Isabell Welpe

Abstract

The US airline industry experienced many years of difficult and had consistently failed to earn returns that covered its cost of capital. Several changes such as regulation, deregulation and consolidation have affected the structure of the industry. The new conditions of competition led to changes on the strategy of airlines as they struggle for a competitive advantage. This document describes the current situation of the US airline industry and shape the strategic position of a medium-sized airline in the US market.

Table of Content

Abstract        

1        Introduction        

2        The US Airline Industry        

2.1        Main competitors        

2.1.1        Major Legacy Carriers (United,  American , Delta, US Airways)        

2.1.2        Low Cost Carriers (Southwest)        

2.2        Competitor analysis        

2.2.1        Competitive Rivalry        

2.2.2        Threat of New Entrants        

2.2.3        Supplier Power        

2.2.4        Buyer Power        

2.3        Threat of New Substitutes        

3        The GREENair Strategy        

3.1        Strategy        

3.2        Cost Leadership        

3.3        Differentiation Leadership        

3.4                

4        Implementation Plan        

4.1        Communication        

4.2        Main Initiatives        

4.2.1        Stabilization of fuel costs        

4.2.2        Reduction of fuel burn        

4.2.3        Improve operating procedures        

4.3        Marketing        

5        Conclusion        

1. Introduction

The airline industry history can be split into two distinct periods: the period of regulation up until 1978 and the period of deregulation thereafter.

Between 1938 and 1978, the U.S. government, through the Civil Aeronautics Board (CAB), regulated the US airline industry by imposing entry and price restrictions on airlines. The CAB had three main functions: to award routes to airlines, to limit the entry of air carriers into new markets, and to regulate fares for passengers. In a regulated environment, the competition within the industry focused on non-price dimensions: customer service and in-flight food and entertainment. Most of the cost increases were passed along to consumers under a fixed rate-of-return based pricing scheme. As a result workers at the major airlines were overpaid with labor unions acquiring a lot of power.

After deregulation of the industry, the structure of the airline industry changed. The elimination of many governmental imposed restrictions over entry, route allocations, and fares minimized the barriers thus immediately attracted new entrants hoping to profit from a very competitive market. Fare pricing became the focus of gaining a competitive advantage. In particular, the arrival of new, low-cost entrants with high efficient cost structures and unbundling of fares intensified the price competition, and forced the legacy airlines to make price cuts on specific routes and price-sensitive segments in order to achieve high capacity utilization on their aircrafts. Several changes in the structure of the airline industry have been observed as the new conditions of competition led to changes on the strategies of the airlines as they struggle for a competitive competitive advantage. The consequences of this development led to several bankruptcies followed by a wave of consolidation with the fittest carriers surviving and the rest being acquired or going out of business. With the consolidation of the industry, a growing number of strategic alliances have been formed to enable rationalization and attractive offers such as frequent flyer programs.

This document provides an industry analysis based on Porter’s Five Forces framework and explores a business strategy to reposition our medium-sized airline in the US market. Furthermore the document contains suggestions for an implementation plan.

1. The US Airline Industry

Industry competitors

The abolition of controls resulted in a wave of new entrants and many changes on the structure of the airline industry. At the beginning of 2012, the US airline industry (including air cargo firms) comprised 151 companies with 5 major passenger airlines dominating it: