The U.S. Airline Industry Essay
The U.S. Airline Industry
The U.S. airline industry provides a unique service to its customers. It transports people and goods with efficiency and convenience which is not achieved by any other service. The purpose of this article is to collect data on the U.S. airline industry and analyze the state of the industry today. Data came from sources such as the Federal Aviation Administration, scholarly articles, and websites such as dallas.culturemap.com and airwise.com. Tools used to analyze the data include P.E.S.T., and Porter’s five forces. The analysis also focuses on the industries’ drivers of change and its key survival factors.
Key Survival Factors Include
Locations that an airline services – The servicing of particular markets is essential in the nature of the airline industry. Airlines need to offer routes between markets that are desired by customers. Cost structure of an airline’s operations – The costs of operations for an airline are a limit to how low airfares can be. Costs include maintenance, fuel, labor, fees and lease payments for operating in airports. Those airlines that are able to control costs can attract customers with lower fares and can improve overall profitability. (Site this web article here http://dallas.culturemap.com/news/travel/05-19-14-southwest-airlines-virgin-america-new-low-fares/) An airlines’ workforce and its interaction with customers – A Pleasant workforce can encourage repeat business. An unhappy workforce can drive customers away to rivals.
Reliability of Service – An airline with a reputation for reliable service has a positive image among customers, which can lead to repeat business. Issues with reliability include mishandled baggage, the on-time arrival of flights, overbooking flights, and passenger complaints. Those airlines that are able to control these elements provide better service to the customer.
Drivers of Industry Change
Consolidations and Alliances – Many airlines operating in the U.S. have recently consolidated due to high competition and improper cost structures. These newly consolidated firms are also establishing alliances with international carriers which enable them to expand their market participation strategies. Globalization – Growth potential in the global travel market has led to a drive for globalization in the airline industry. U.S. airlines are lobbying for “open skies” treaties between the U.S. and other nations. The U.S has signed more than 60 open skies treaties with nations around the globe.
Low-cost Competition – The rise of the low-cost carriers has forced a change in the competitive environment of the airline industry. Southwest, JetBlue, People Express and Airtran operate off of low-cost strategies that allow them to offer lower airfares. These low fares put pressure on the industry and force rivals to lower their costs to stay competitive. (http://www.nbcnews.com/business/travel/new-low-cost-airline-peoplexpress-tickets-go-sale-n122971)
(P.E.S.T.) Political, Economic, Social, and Technological forces that impact the industry.
Security Regulations from FAA
War on Terrorism led to stricter guidelines
Customer Protection Regulations – must show fees (http://www.npr.org/2014/05/31/317429334/regulators-and-airlines-fight-over-fares-fees-and-fairness) Economic
High operating costs
Fuel Costs are huge
Less people traveling due to expense
Very high fixed cost
Impact of holiday travel
Cancellation fees/checked bag cost
Security – Is it safe to fly?
Customer service (friendliness, flight attendant/pilot being funny) Technological
Business changes (using Skype instead of traveling)
Buying tickets online/cancel online
Porter’s Five Forces Model – is one way to analyze the environment in which airline companies operate. This model shows the major forces that form the industry: threat of new entrants, bargaining power of buyers, threat of substitutes, bargaining power of suppliers, and competitors. Threat of new entrants is relatively high in the airline industry. It seems like it would be hard to enter the airline industry due to the large amount of fixed costs however lending has made it not only possible but fairly simple. New entrants will have to endure years of little or no profit until a strong customer base is established though. Meanwhile existing companies will be able to lower prices and take losses against their capital reserves just to drive a new competitor out of business. Further, consumers prefer well-known brands mainly due to safety concerns.
Lastly, stringent licensing requirements and heavy regulations by organizations such as the Federal Aviation Administration and the Department of Transportation require significant knowledge base and time investment on the part of the new entrant. Bargaining power of buyers is also relatively low in the airline industry. Two main groups of buyers exist: individual buyers purchasing tickets for personal or business travel, and travel agencies and/or online portals that work as a “middle man” between the airline companies and individual buyers. There is definitively a large amount of buyers compared to the number of airlines; therefore, loss of one customer does not strongly affect the bottom line of a given airline. Typically, each airline has a niche. Some airlines focus on cost, while others focus on having the best amenities, etc.
Although switching costs are low for buyers, they tend to remain within a niche and purchase tickets based on their price vs. amenities preferences. Threat of substitutes is medium in the airline industry. Consumers can choose other forms of transportation such as a car, bus, train, or boat to get to their destination. However, there is a cost to this switch, mainly time. For long distance travel, airlines usually exceed all other forms of transportation when it comes to cost and convenience. Nevertheless, there is one important development that should be noted – technological advances are allowing business people to telecommute, this significantly cuts down on required business travel. Bargaining power of the suppliers presents a medium threat in the airline industry. Major suppliers include the airplane manufacturers, aircraft leasing companies, fuel companies and labor unions. Although airline companies cannot easily switch suppliers, most firms have long term contracts with their suppliers.
On the other hand, there are very few suppliers in the airline industry because of the amount of money and expertise required. Airlines represent the main source of income for these suppliers so airline’s business is extremely important to them. Rivalry among existing players is very strong in the airline industry. The first reason is the fact that the airline industry is currently stagnant; the number of competitors remains more or less the same and the industry does not have overcapacity. The fixed costs are extremely high and it is hard for an airline firm to leave the industry because of the long term debt obligations. The rivalry is reduced by the brand identities of different airlines.
Some are known for exceptional amenities, others for low prices. The market seems to be equally divided as each company maintains its own niche in the market. Highly competitive industries such as the airline industry typically see low rates of return due to the fact that they competition drives down prices. Couple this with the high amount of government regulation in the airline industry and the investor may be weary of investing in the industry. However, the next five years look promising for the U.S. airline industry due to the fact that many of the participant firms will be newly consolidated and have influence in markets outside of the U.S. as well as those inside.