Essay: Supplier Power In USA Airline Industry - Strategy And Case Analysis.

Describe the trategy and Case Analysis For the Supplier Power.

Airline industry is the major catalyst in the process of globalization in modern economic world. The global airlines industry consist of 2000 airlines that operates through almost 24,000 aircrafts providing services o more than 3750 airports all over the world (Belobaba, Odoni and Barnhart 2015). As per the statistics recorded in 2016, almost 28 million scheduled flights took departure carrying approximately 2 billion people. The global air travel growth has been around 5% consistently over the past there decades and tending to become twice the annual GDP growth (Belobaba, Odoni and Barnhart 2015). US airlines is one of the significant industry contributing hugely to this global picture. The national economy of USA is world’s largest in terms of GDP and second largest in terms of purchasing power parity. The nation heavily dependent upon manufacturing and international trade mostly consisting of greater export to the global countries and with decent import too (Hannigan, Hamilton and Mudambi 2015). The nation is also receiver of higher number of immigrants annually. These consolidate the importance of airlines service within the economy and further provide the central theme of this discussion.

The paper aims to depict present scenario by conducting a case study on the airlines industry of USA. The case study is performed mostly having it based upon the strategic analysis as well as suggested recommendation.

The airlines industry of US operates through 100 passenger airlines which are certified and conduct 12 million flight departures annually within nation as well as cross-border. The importance of the US airlines lies in the fact that it is one of the extensively used network of air transportation owning 12^th position among 3o most busy airports and carries almost one third of the global traffic. As per carriage and transportation of cargos, 8 national airlines earn position in the world’s 30 busiest airports. Commercial aviation tends to contribute over 8% annually to the Gross Domestic Production of the nation as per estimation shared by the Federal aviation Administration in 2009(Choi, Lee and Olson 2015). The industry draws revenue of $160 billion and triggers economic activity globally worth $1.3 trillion . The US airline is source of almost 10.2 million jobs within nation (Choi, Lee and Olson 2015). 546,450 employees put effort daily in the 8000 aircrafts operating in the industry overall further capturing 30,000 flights per day. The industry  consolidation depicts Continental and United form having largest service providers like Delta, Northwest followed by Southwest and AirTran in the second position (Choi, Lee and Olson 2015).

Five Forces Analysis

The industry were under higher government regulation and treated as public utility from 1937 to 1978. Following 1978, the industry experienced deregulation and role of private firms became evidently important in boosting its growth. With growth and development came advancement that led o 30% lower fare in 1990 compared to 1976 post deregulation period. The period of 1978-2001, 10 airlines firms faced bankruptcy. The situation improved when firms like Northeast and Airtrans followed merging strategy.

Various external factors has evoked consistent and strong headwind in the airlines industry of USA. The outlines crucial factors are the higher operational cost and its over time upward movement. One of the driving reason behind this is the hike in the global price of oil that translates into higher fuel cost that is mandatorily incurred by the industry. This leads to higher maintenance cost which raises the fare and that further reduces the air traffics. Amid this appearance of firms being able to incur lower cost from low cost carriers started giving cut throat competition to the existing big firms. This led to higher competition within the industry and evident price war. The analysis of the industry applying porter’s five forces analysis tool allow us to get the snapshot of recent functioning. The most important external factors influencing the market operation are covered by five component of Porter’s model, which are discussed below:

The growth of demand for airlines service is greatly linked with income of the people and higher economic growth paves way for the airlines industry to grow as a result. The inclination of the buyers have shifted more towards online booking and purchasing curbing out the role of intermediaries as well as the airlines (Dälken 2014). Buyers community is enjoys immunity form price fluctuation in the market reflecting their power in the market specially in determining growth of the industry.

The industry runs based upon supplies made by the sectors important to build airlines as a whole. Important inputs of the industry being aircraft, worker and fuel mark out the importance of suppliers in it. Any fluctuation in the global or importing country’s economy greatly affects the US airline industry. The industry is bound to pay higher cost for fuel if the global oil suppliers raise the price (Dälken 2014). Similarly union hike wage rate can affect the supply of labor without which the industry cannot perform at all. Aircraft manufacturing is also necessary and Boeing and Airbus are two important source for that. All if this make the industry face power of suppliers.

Buyer Power

The industry contains greater investment cost as one of the crucial barrier to enter as well as exit taken by the firms. Huge capital is to be invested when entering and absorbed as loss when taking exit. Firms within industry achieve economies of scale that give many constraints to the entrant firms. The low price provided by the natural monopolist firm is hard to match by them preventing them from providing service (Dälken 2014). Moreover stringent government regulation stops the firms from taking random exit without providing proper reasons of leaving the business.

Air services has no close match to its importance even though bus and train are there. The population of USA are much sorted in relation to their choice of transportation hence bus and train can never pose threat to the air services through private cars sometime tend to give so. Introducing free internets and food were initially attractive component to the customer which later got faded and low price became only concern and major attraction for the consumers (Ciliberto and Schenone 2012).

The availability of many firms increases the concentration and competition dynamically specially from the new entries in the market that manages to provide carrier service at low cost (Dälken 2014). Moreover, there are immense regulation upon the industry which over time got relaxed. The operational cost is much higher by the bigger, which has become a loosing option for them.

One of the biggest advantages the industry recently facing is the higher growth in demand for airline services maximum of which are sourced from the contribution that the new entries firms are making to enhance the performance of entire industry. The main factor behind this is the provision of carriers at much lower cost than the established nig firms like American etc. This low cost opportunity is also explained by the existence of no labor union in order to increase the wage rate and inflate the cost of production or service. They also have lower maintenance cost. The presence of competition in the market shapes up the efficient outcomes the firms mandatorily needs to provide.

Greatest disadvantage facing the firm is the falling profit over time. Lower profit implies lower capital accumulation which hinders the self reliance of the firm as well as growth component that importantly depend upon capital. This make the industry shift the dependence upon the the various capital providers or strategic partners. New entrant firms like Virgin America, Southwest Airlines has posed greater challenge to the well off firms like American and United delta that incur higher operational cost. Moreover they deal with lot of aircrafts executed through hubs against the point to point operation made by the low cost carriers firms. Higher cost of labor is common disadvantage faced by the industry. Online operation has further increased price competition within industry. Bankruptcy has been major drawback of the industry (Ciliberto and Schenone 2012). Moreover the global economic fluctuation and impact on oil market influences the performance of the airlines to great extent.

Supplier Power

Global airlines industry, oil market and international market demand play crucial role in determining the performance of the US airlines. Increase in the need of communication among places, people enhanced further due to the impetus provided by the process of globalization. The expansion of market demand stems from mainly the introduction of new destinations, installations of port and increase in the global tourism (Belobaba, Odoni and Barnhart 2015).

With reduction in inflation-adjusted service charge, more demand for the air travel increased substantially. The estimation shows that there has been 4% expansion of newer destination, which increases the demand and requires supply form the industry. Moreover 1.3% of the national income is about to be spent on the air travel as per estimation in 2017, showing a bit higher trend from the last year.

From the graph it is evident that the firm had experienced smooth upward rising trend starting from 2004 and continued till 2008. In 2009 there can be seen a structural break in the revenue trend with steep fall. The situation again recovered from 2010 to 2014 it increased in outright way with further fall captured in the years 2015 and 2016.

The government sector is highly beneficial from the operation of airlines industry as it captures higher tax revenue from the sector. The firm captures net revenue of $200 billion with $120 billion be the net amount captured as recorded in 2016 (Bazargan and Hartman 2012).. The government receives almost 33.5%of the gross value added of the industry in various form like payroll, social security, corporate tax and so on. The role of government on the operation of the industry is immense through the adoption of industry specific policies.

The growth of airlines in the USA is beneficial for the labor market as it accelerates the recruitment. Studies show the growth in the industry has been strongly linked with the hiring of the labor, which shows improving, trend from the mid 2016. Analyst expect the industry to grow an d recruitment to be grown further by 12% and reach 1.98 million by the end of 2017. The wage rate is also expected to be increased keeping parity with the hiring. The increasing cost of oil leads to higher fuel cost in the industry that reduces the profit margin substantially. Employment sourced from airlines provides growth in the industrial performance as well as in the economy of US as a whole through increased income and GDP that has been expected to rise by 1.9% due to the increased gross value addition to the industry.

Entry and Exit Barriers

The lower rate of profit earned by the industry as whole makes it dependent upon various capital providers. The investment comes from them since the industry promises higher return on the capital invested. The tremendous performance of the industry and consequent decent payback to the investors even in time of business cycle earned more faith in the investors. North America has implemented free cash flow that made the debt ratio fall improving the credit metric of the industry.

The increase in both demand and investment make room for 1500 new aircraft in the US aviation industry. The higher growth and moderate return on investment motivates the capital investment hugely. Advent of technology leads to lower cost that further goes in favor of increasing number of aircraft in the industry that can substantially provide service to growing demanders (Hannigan, Hamilton and Mudambi 2015).  Even though the aircraft are expanding but the speed is lower due to the concern stemming from higher oil price in the global market that is supposed to enhance cost of fuel. Our of total globally  expanded seats of 4.3 million USA consist almost 2.6 million of it.

Quality of service heavily reliant upon the infrastructural position of the entire industry. Not only the cost but also the provision of efficiency in terms of time taken to cover up journeys, quality of the service while flying depend greatly on how well the infrastructure is in operation. Poor infrastructure will lead to low quality of service as well as greater cost incurred which will further fall on  the consumers in form of higher charges. The lack of competition among supply chain of the industry triggered higher infrastructure cost that also included escalated direct cost through inefficient routing, delays and carbon emissions issues that has stringer link (Armstrong 2013). 

Keeping parity with greatest disadvantages and downside the industry as a whole facing, few improvisation strategically can help it regain the good economic health. Since higher cost is the greatest challenge faced by the firm both internally and externally, cost manipulation lies at the heart of the recommendation that would be made to the firm (Grant 2016). This would further bring in the opportunity of charging lower price of the service which is required at the most in order to capture the growing demand from the consumer as well as retain the market share in terms of quality in the service. The demand has mostly increased in the developing nations who ask for more air travel now.

Threat of Substitutes

To provide best service making up for the lacking, the industry would require better knowing of the customer needs and incorporating them in planning the strategy for business. This can be achieved better by the application of customer data analytics extracting business insight from huge recorded customer data (David 2013). To reduce cost all the prominently contributing sectors have to be identified and their role so that unjustified cost can be curbed. For example, presence of labor union is very important factor to inflate the labor cost. Moreover capabilities vary among firm based on the differentiations they maintain in operation stemming from difference in planning of strategy. Technological advances and absorption of them into the production process can be great source of reduced cost as well better quality of service (Bazargan and Hartman 2012). The firms in the industry can maintain quality and quantity both if they merge existentially and promote strategy in combined way.

Conclusion

The contribution of US airline industry to the national economy is undeniably immense. It not only promotes mode and quality of international trade and carriage but also act as dynamic source of economic activities as well as creation of employment. The industry is highly concentrated and competitive through presence of both big, old and small, new firms. The competition comes from low cost new firms that drive the prices to be low through a price war, which further affects the profit motive as well as operational expenses of the big firms.  The lower price charged by them are shifting the market share in favor of them which acts as eye opener to the leading firms like Delta American and so on. This further enhances the competition level and signals out revision of strategy as one of the crucially important factor to materialize the untapped potential making the industry achieve higher growth. 

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