The Airline Industry: Success and Failures Essay
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The Airline Industry is a highly competitive industry with companies operating in domestic and/or international markets. Many airlines are stilled owned by their respective countries and have treaties between countries to allow airlines to land there. The industry has been taking a relatively shaky course as costs are rising and profits have been decreasing. This was further intensified with the recent terrorist attacks on US soil, which lead to higher costs as the need for more security arose. Recent financial statements of major airlines showing major losses reflect the problems that the industry is having.
Yet amidst the storm, some regional airlines such as Jet Blue Airlines have managed to focus on specific markets and maintained or increased their profits. It is no doubt that Porter’s 5 forces of competition are at play in this industry. These forces are the Threat of Substitutes, Threat of New Entrants, Competitive Rivalry, Bargaining Power of Buyers and Bargaining Power of Suppliers.
Threat of Substitutes
The airline industry has been plagued by rising costs resulting in poor profits.
The recession adversely affected the industry during the first half of 2001. This was intensified by the September 11th attacks, when two airlines were crashed into the Twin Towers in New York City by terrorists killing everyone on board and demolishing the buildings. This lead to an immediate reduction in air travel as customers did not feel safe about flying and an increase in the use of other forms of transportation. Amtrak, a railway company, reported an increase in passenger volume in the days following the attacks. Though this has leveled off as things returned to normal, rail travel is a substitute for air travel that will be utilized by customers if they are looking for cheaper travel and if they are looking for a leisure trip that would not be too time consuming. Automobiles are also a form of travel that is a substitute for air travel. This is especially the case when a family is traveling as the costs are minimized and schedules coordinated on the travelers’ timetable.
Read more: Airline Industry Competition
Threat of New Entrants
Historically, entry into the market has been relatively easy for airline companies. When the economy was booming, people traveled more for leisure and companies used this opportunity to enter the market and purchase more planes. With the downturn of the economy however, the result was less travel and a saturated market. Many airline companies found themselves with heavy losses that lead to layoffs and in some cases bankruptcy. The industry has turned to Congress to bail them out of hole that they are in. Some of these airlines have been granted loans, but others were not because it was deemed they would be unable to repay. The industry is unattractive at this time so new entrants are not a major threat. There has been an increase however in the use of regional carriers and larger companies have entered this focused market themselves. Examples are American Airlines which owns American Eagle and Delta Airlines which owns Delta Express.
This is a fiercely competitive industry. There are several major carriers that all seem to have a large market share. Airlines are always looking for ways to gain market share and this is often done through price wars, improved quality and customer service. Some airlines that started alliances with other airlines such as Sky team, an alliance between six airlines. The goal is to gain market share by giving the customer more benefits such as more flights, more lounges, fare options and quality service. These wars are extremely critical in times of depression because it forces airlines to go into bankruptcy or to close down. Airlines also use incentives such as frequent flyer miles to promote customer loyalty and passenger volume.
Purchasing Power of Buyers
Because of the fierce competition in the industry, buyers have relatively strong purchasing power. They can choose an airline that offers them the best benefits. A major factor in this increased purchasing power is the Internet. The Internet has allowed customers to bid for a price that is more cost effective for them. Generally the earlier a customer books in advance the better the chance of getting cheaper flights but price bidding allows the customer to get cheaper flights at the last minute than if they went directly to the airline. It is estimated that there will be a continued increase in online bookings by customers.
Purchasing Power of Suppliers
Many of the suppliers in this industry have been hard hit because there is a downward trend in the economy as a whole and as a result of having little power. One of the major suppliers of parts, Boeing, saw a reduction in orders after September 11th. This company also has plans to lay off employees. Oil suppliers have more power as airlines still need fuel for their planes. The airline industry has seen rising costs of fuel and this lowers profits.
US Airways groups own three main divisions; US Airways (major airline), US Airways Express (regional airline) and US Airways Shuttle (hourly airline service). US Airways also operates US Airways sales and leasing, Allegany Airlines (Middletown, PA), Piedmont Airlines (Salisbury, MA), and PSA Airlines (Dayton, OH).
US Airways operates the seventh largest airline in the United States and the fourteenth largest in the world. US Airways employed almost 40000 full-time and part-time employees. US Airways is the largest airline headquartered east of the Mississippi River. In 2001, 56 million passengers flew US Airways, which generated $8.3 billion in operating revenues.
In North America, US Airways operates a “hub and spoke” structure. Its primary domestic hubs are Charlotte, Philadelphia and Pittsburgh. US Airways significant spokes are Boston, New York and Washington, D.C. In total, US Airways provides airline service to 200 destinations in 38 states across the United States and in Canada, Mexico, the Caribbean, and Europe.
As far as quality, US Airway sets the standard. US Airways consistently places near the top of DOT’s monthly service and quality statistics. In 2001, US Airways was ranked first in three of the four DOT quality measurements. The airline quality-rating index placed US Airways as the top network carrier.
Recently, US Airways filed for bankruptcy. According to US Airways; competitive pressures, unfavorable economic trends and rising fuel and labor costs assisted in US Airways decision for protection from its creditors. In July of 2001, the company implemented a restructure plan as a stand-alone carrier.
Many Airlines have blamed the tragic events of September 11, 2001as the cause for their demise. As is shown in the case of US Airways, they had problems awhile before then. As such, references to the effects of September 11, 2001 will not be included. It seems this has become the blanket reason for the airline industry’s demise when poor management, rising costs and an increased number of firms have more logical economic impact.
US Airways last year of profitability was 1999. To address the problem of profitability, US Airways proposed a merger with United Airlines. This would have developed a “global network” but the Justice Department did not approve the merger.
US Airways has incurred an increase in competitive pressures. The flood of regional jets and low cost carriers has increased competitive pressures. Also, US Airways short haul capabilities have been affected by increased competition by trains and commercial auto traffic.
In an attempt to stay out of court, US Airways appointed a new management team to solve its problems. The plan’s goal was to stabilize profits and return the airline to profitability through three measure; 1) significant cost savings of $1.3 billion, 2) boost revenues and enhance competitiveness, and 3) enter into strategic alliances for code sharing with other airlines. Chapter 11 commenced when these goals did not meet expectations. US Airways will conduct a “labor friendly chapter 11 restructuring” because US Airways recognizes the importance of it employees to the process and the customer’s experience. The goal to emerge from Chapter 11 is the first quarter of 2003.
To improve liquidity, US Airways has secured numerous financing options. A debtor in possession commitment of $500 million has been agreed to by a group of institutions including Credit Suisse First Boston and Bank of America Corp. The Texas Pacific Group will provide a $200 million equity investment. In turn, the Texas Pacific Group will own 38 percent of US Airways. $1 billion loan has been secured to maximize the company’s liquidity guaranteed by the federal government.
To increase revenues, an aggressive strategy has been established. Regional jet use to service markets will be increased in a more efficient manner. A marketing alliance agreement with United Airlines has been submitted to the Department of Transportation for review. This alliance would allow code sharing and is expected to increase revenues by $200 million per year.
Code sharing is a commercial agreement between two airlines that allows an airline to put its two-letter identification code on the flights of another airline as they appear in computerized reservations systems and in the Official Airline Guide. US Airways code is US. Airlines that share codes typically coordinate schedules to minimize connection times as well as provide additional customer services, such as one-stop check-in and baggage checked through to the final destination (US Airways website).
To achieve cost savings, all major constituents have been approached with revised contracts requesting consensual approval and the bankruptcy process will be used. All but one labor union, the CWA (Communications Workers of America), have reached new agreements with US Airways. Due to the large number of lessors, financiers, and vendors, only large accounts have been approached as time constrains US Airways efforts.
Southwest first starts off with a powerful mission statement “dedicated to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit. Southwest has four main strategies to success, concentrating on high frequent, short stops, low fare strategy, commitment to employees and customers, and lastly aggressive marketing.
Southwest’s first main strategy concentrates on flying large passenger planes on short hops. Dallas for example, a low fare carrier offers over 2700 flights to 55 cities and 29 states. Southwest usually lands at small airports to avoid congestion and competitors’ at larger hubs. As for being a western company they are gradually expanding to eastern cities. Most of their flights are about an hour, which makes it hard to believe that they are among the top 10 US airlines. Southwest has made it a point to focus on point-to-point systems for more direct routes, which reduce connections and delays, in order to arrive on time.
As everyone knows that Southwest is the low fare way to travel. Large airline companies tried to match Southwest’s fares, but only incurred a substantial loss. Southwest is a “simple” airline company. To show the simplicity of the company starts with open seating with a single class. To keep these fares low they do several key things. Only on Southwest you do not get meals other than a beverage and a pack of peanuts. They also only fly one type of plane a Boeing 737. This is so training is easier and maintenance is reduced. Employees become masters at their job because the planes never change. Southwest also offers a ticket-less travel system. This greatly reduces the need for travel agents and their commission. You never touch a ticket with this system. You can buy a ticket on Southwest in about 4 minuets. Their schedules and fares are linked with the single touch of the mouse, which makes it user friendly.
Southwest’s third strategy is commitment to employees as well as to their customers. Employees at Southwest are given enormous amounts of information. They feel that the more information an employee has the better he or she can understand the company, company mission, competitors, and their customers. CEO of Southwest, Herb Keller said, “put employees first, if you have happy employees, that will lead to happy customers.” Another factor added to this equation is customer service and a sense of fun. Twenty-eight years and counting Southwest has been profitable. Throughout its history Southwest has had only one strike.
This is so amazing with the fact that 85% of their workers are unionized and since the airline industry is always prone to strikes. Employees own 13% of the company through their profit sharing plan. Southwest does not like to layoff their employees either. In the history of the company they have only laid off 3 workers, but they were immediately hired back. Even after Sept.11 they were the only airline company who did not layoff any workers and even showed a profit during that quarter. This is why their employees show a strong sense of loyalty to the company. Employee strategy is to never inconvenience the customer.
Though this sounds like a great place to work it is actually easier to get into Harvard than it is the Southwest family. In 2000 Southwest received 216,000 resumes and only hired 5,134 new employees. The amazing fact is that Southwest only hires about 2% of those who apply. Southwest is a “fun” company. Rumor has it that if you do not smile at least 12 times during an interview then you will not get hired. An ex ample of how fun they are is by saying silly jokes over the PA system before takeoff. “If you are traveling with an infant, small child, or other person who needs a little extra help, make sure that you put your mask on first, then assist your husband.” Little jokes like that are what keep people coming back.
The fourth approach is through their marketing. It is evident that Southwest tries to differ from the ordinary airline. Everything from the jokes, to the open seating, Southwest is different. They try to portray themselves as a fun loving airline. They try very hard to communicate to the customer that they are offering a great value with a little extra fun. They promote safe, friendly, low cost airfare, with excellent service. With these commitments and abilities to follow through has proven to customers that Southwest is the best choice for low cost fares and for once the customer are getting a little more than what they paid for.
In conclusion Southwest has proven to be a very reliable company. With only service to 55 cities they are growing and the future looks bright for them. They have proven to be a pioneer in the airline industry. A first for open seating and only one class. They are also a first to offer 24-hour medical service to in flight customers. A service called “Medlink” can offer medical communication to flight attendants in case of a medical emergency. Southwest also shows many ways to cut cost by online ticketing, no meals, and short flights to a large number of passengers. Southwest is already purchasing more Boeing 737 jets as well as Boeing 700’s, which are faster and uses less fuel. They have proven that they want to be the lowest fare around without compromising customer satisfaction. All in all, Southwest is a great airline company and they continually take care of their customers.
The whole concept of a corporate merger and company acquisition has always held a stereotype of a hostile grasp of ownership. “Survival of the Fittest” can be the closet clichï¿½ considered for these risky moves. The entirely of this associated quoted is not far from the truth as compared to the lifestyle of the jungle. The only difference is that it is done with a little more finesse, an ounce of moral ethics and a lot of money. Extensive research has shown that when companies integrate, whether it may be a merger or an acquisition, it has numerous psychological casualties that affect their employees. The adverse effects are an important concerns of the upper chain conducting this evolution. It is the central core workforce that is affected by an increased amount of stress, poor attitudes their job and accomplishments, their negative behavior and eventual job turnover.
When American Airlines decided to acquire the financially troubled Trans. World Airlines they saw numerous positive and beneficial reasons for this acquisition. Not only would they have an increase market power in the airline industry but also gain an abundance of physical, innovational and most important human resources. While most corporate level managers are concerned with increasing the firm’s strategic competitiveness they overlook some of the problems associated with achieving acquisition success. One of the biggest problems is the integration of the two companies following the acquisition. Integration issues involve linking two different corporate cultures, different financial system, building effective work relationships and resolving problems associated with the status of the newly acquired firm.
The first step in this integration process was to develop a transition team. This team consisted of senior executives from different departments in both companies. Their main goal was to develop a strategic plan that would make the transition process a whole lot easier. This team had several issues to deal with, but the main concern would be the integration of the human resources department and its employees. This team had a difficult task ahead of them because each airline had different ways of operating.
There were several issues that needed to be discussed. Such issues involved integrating the payroll system, should employees at TWA be paid equally as an employee at AA? Other questions involved the transferring of seniority. Many questions concerning this matter had to be considered. Another big issues with TWA was retirees and their benefits. This team also had to develop medical and insurance plans, employee benefits, vacation and sick time, establishing rewards and pay plans, attendance, staffing requirements, informing employees of changes, training and development.
During the time of negotiation, the employees of AA had a lot of questions in which the management staff had limited amount of information. This brought along a great amount of frustration and employee’s morale began to decrease. Everyone knew that the “signs of trouble was going to be a problem in the near future and began imagining the worst.” Employees began bargaining among themselves about the changes, opportunities, and conditions that would result from this acquisition. The more bargaining they did, the more frustrated they became. A lot of employees became depressed. They began focusing on the differences between the two airlines rather than the similarities. This brought on a lot of stress at the work place.
When the major part of the integration had occurred everyone had to adjust to the culture of the parent company. The adjustment proved to be a difficult task because there were new management, new procedures and policies, new technology and a new culture. Many employees were unwilling to accept change and became less motivated in their job. The workplace became a place of burden and stress. The absenteeism level had increased tremendously and valuable employees began resigning from their positions, which resulted in a high turnover rate.
Strategies that have been successful implemented in the airline industry include; lowering cost through regional carriers, maintain good labor relations, and networking systems with competitors. Southwest Airlines is profitable, it operates in a regional carrier structure, short flights with low over head cost (no meals and no reserved seating). In attempt to stay competitive, US Airways has bought and begun operations of 5 profitable regional carriers. All three airlines examined have attempted to maintain good labor relations.
Labor Friendly Restructuring is a main part of US Airways. American merger resulted in labor conflicts, which has adversely effected the operations of the airline and customer service. Southwest Airlines’ good labor relations are proven by the fact that Southwest has never experienced a labor work stoppage. Lastly, there is a trend in the industry to increase communications and networking among airlines. Orbitz.com has been launched by the big six airlines and is expected to generate an increase in profits for each airline involved. US Airways has entered into agreements with airlines to code share which is expected to increase revenues by $200 million.
The airline industry has begun a revitalization process. New procedures will and are be implemented by airlines to return to profitability and success. The airline industry witness many of its large firms began a path of self-destruction in the late 1990s. The violence of September 11, 2001 only enhanced the negative pattern by shutting the industry down for a week producing huge losses and the need for a government bailout program.
Airline Statistics (taken from Hoovers Online)
Revenues (in Millions) Sept 2002 Sept 2001
US Airways 1903.0 2493.0
American 4494.0 4816.0
Southwest 1391.2 1335.1
Net Income (in Millions) Sept 2002 Sept 2001
US Airways (248.0) (24.0)
American (924.0) (414.0)
Southwest 74.9 151.0
Total Assets (in Millions) Sept 2002 Sept 2001
US Airways 7705.0 9564.0
American 31502.0 31840.0
Southwest 8954.3 7994.9
Total Debt (in Millions) Sept 2002 Sept 2001
US Airways 10808.0 10106.0
American 28991.0 25609.0
Southwest 4631.6 4045.3
EPS (in dollars) Sept 2002 Sept 2001
US Airways (3.64) (.36)
American (5.93) (2.68)
Southwest .09 .19
Revenue Passenger Miles Oct 2002 Oct 2001
US Airways 2,965,753 2,802,967
American 3,048,000 2,851,000
Southwest 3,258,017 2,590,610
Load Factor (%) Oct 2002 Oct 2001
US Airways 66.9 61.7
American 63.2 57.8
Southwest 56.8 53.4