Competitive Forces Analysis And Profitability Strategies For The US Airline Industry Essay.

With the aid of a clearly drawn diagram conduct a competitive forces analysis of the U.S. airline industry. What does this analysis tell you about the causes of low profitability in this industry? What are the principal advantages and disadvantages of using the five forces framework?

The economic performance of the airline industry seems to be very cyclical. Why do you think this is the case?

Given your analysis, what strategies do you think an airline should adopt in order to improve its chances of being persistently profitable?

The airline industry in USA is playing an important role and act as a crucial transportation system for the people (passenger airlines) and for delivering the goods (air cargo). Importance of the airlines in USA has been observed since its incorporation in 1903 and it has become one of the most preferable transportation medium for the people (Belobaba,  Odoni and Barnhart 2015). There are several airline companies in USA and it has been observed that all of them are working within the specific purview of the aviation body in USA. Proper licensing is required to run the business and agreements are required for partnerships (Zou et al. 2014). Considering the significance of the airline industry, there are several airlines companies start up their business in USA and therefore, a competitive market has been grown up. There are certain frameworks that are helping to analyse the nature and scope of the competitive business and five forces framework of Porter’s is one of them (Treanor et al. 2014).

The main aim of the report is to analyse the airline industries in USA and discuss about the theoretical view of five forces. It has also discussed about the economic performance of the industry and recognises the strategies for airlines profitability.

The airlines industry is one of the best popular transportation industries in USA and it has been observed that the success of the industry has been growing in nature. There are one hundred passenger airlines are operating in the U.S market and there are certain models and drivers works to help the industry so that it can work promptly (David 2013). The airlines industry has a very successful historical background and development has been observed since 1945. However, the market of the airlines industry becomes more competitive and the low-cost airlines are trying to attract the customers. More dilemmas cropped up when there is a declination observed in case of crude oil and prevent the flight operating system to generate the revenue through fuel surcharge price. The total revenue of this industry is $132 billion for the year 2017 and the annual growth has been calculated as 1.5%. The airline industries are creating significant implication on the American economy and it is expected that the annualised rate will be increased up to 4.5% per annum. However, the industry is facing the threat of bankruptcy and the network airlines have made an attempt to reduce the mainline cost up to $20 billion. The airline industry also suffers from certain geo-political issues like terror attacks, security burden and hike in the fuel price. The rise of the low-cost carriers and declined ticket price are also generating certain dilemmas. Certain airline companies like Alaska Airlines, Jet Blue, Delta Airlines and American Airlines have lowered the cost of the tickets and ease the way of flight servicing. A new tendency has been observed now days in the airline industry. Many airline companies are making alliances with the banking companies strategically to offer new products to customers like travel insurance and airline packages which they can avail by using debit and credit cards.

Advantages and Disadvantages of Porter's Five Forces Analysis of the US Airline Industry

Due to the increment in the American aviation industry, certain competitions have been observed and it is important to analyse the business perspectives. Five forces framework is the most common model to justify the competitive intensity. The founder of this theory was Michael E. Porter and was first published in the year 1979. The external environment of an industry has been analysed by the theory. The main objective of applying this theory is to help the USA airlines so that it can recover its business (Greenspan 2016). It has been reported that the industry has been affected by certain external forces and it has lost its flow. The external forces can be classified as increasing expenses, price hike in case of fuel, deteriorating passenger traffic and rise of subsidiaries in case of transportation. The graphical design of the five forces is being sketched here:

                                                                              Figure 1.Porter’s five forces analysis

                                                                                          (Source: Author)

Certain elements have been observed in this graphical design and they are recognised as the key components of the framework. A brief discussion on these will help to understand the effect of this model on the USA airline industry:

The first thing is the power of the suppliers. The airlines industry is based on three pillars such as fuel, aircraft and labour. All these things are essential and depending on the global markets (Dobbs 2014). Therefore, the power of the suppliers are regarding these three elements can be categorised as high. This theory focussed on the effectiveness of the power of the suppliers and opted to take the business in a better position.

The second element is the power of the buyer. The process of online ticketing facilitates the process of ticket booking and the fliers are not required to go to the agents. Additionally, the rebates in case of the price of the tickets and securities provided by the authorities to the fliers have made an increment in case of the power of the buyer.

There is a mention in case of the new entrants have been observed in this diagram. It is obvious to state that large amount of money is needed in this industry and that process can be identified as entry mode. When the airline industry has to face certain losses; it can be termed as exit process (Dälken 2014). Both of these terms are quite common in case of airlines industry and according to the theory, concentration is required on this portion. The theory has provided certain advices regarding cost advantage and economic scale for the betterment of the industry.

Now days, there are many substitutes exists in USA market that have become a threatening matter to the airlines industry and many people are using their motor vehicles which become a potential threat for the industry. The airline companies should have to adopt certain customer oriented methods in case of both passengers and business class flights.

The centre point of the diagram is stated about industrial rivalry which is important in nature. Low cost carriers and other subsidiaries are provoking the competitive rivalry in the airline business (Moreno-Izquierdo, Ramón-Rodríguez and Perles-Ribes 2016). Apart from that the market of the country is open in nature. Therefore, there is a possibility for the existence of various subsidiaries that are attempting to replace the business. According to the theory, the airlines companies should provide certain cheap rated fares to the customer in order to attract the customers. Providing certain offers to the customers can be proved as a good tactics and profitable to the airlines companies.

The following are the advantages and disadvantages of Poter’s analysis of the airlines industry of the United States of America:

The Porter’s model enables the business organisations study the profitability of an industry. The components of the Porter’s five forces model indicate the level of competition in the market. For example, threat of new entrants is the first component of the five forces analysis and refers to the number of new companies, which are seeking entry into a particular industry. As far as the American airline industry is concerned, the main players are American Airlines, Delta Airlines and Alaska Airline. These airlines companies are usually premium flyers offering onboard services at high prices (Shuen, Feiler and Teece 2014). However, the industry is experiencing entry of low cost airline companies like JetBlue, which are offering more cost effective airline services with the basic onboard services, which appeal to the large population of the middle class customers in the US. Again, threat of new entrant also embraces foreign airline companies like Etihad Airways, which are also providing superior services to the customers in the US. This analysis shows that the market of the US experience entry of both international airline companies from other countries as well as American low cost flyers (Yee Liau and Pei Tan 2014). This means that the American market has become very profitable. Thus, it can be inferred that the components of Porter’s model enable companies to study the profitability of markets.

Porter’s five forces model facilitate business organisations like airline companies to conduct decision making. For example, the entry of large number of passenger flyer of both American origin and foreign origin means that the market has become extremely profitable which is attracting these companies. Secondly, it also means that customers have more option to choose from the large number of airline companies according to their budget. This means that if the big airlines would lose their customers to low cost flyers if they charge very high for their tickets (Flammer 2015). Thus, the management bodies of these airline companies can use the Porter’s five forces to make appropriate decision like pricing.

The information gained from Porter’s model is not always accurate due to fast changing market conditions. For example, the threat to new entrant gives information about new companies, which are seeking to enter the market say, the United States of America. However, this information is not accurate because it cannot be measured quantitatively like how many companies are entering the American market and their strengths (Shepherd, Williams and Patzelt 2015). Thus, this information cannot be used to form decisions.

Porter’s model is incomplete without PESTEL and does not give accurate information about the market. For example, threats of new entrants give information about the companies, which are seeking to enter the American market. The present American airlines companies can incorporate this information in their decision-making. However, the information about new entrant does not give any data regarding the macro economical factors like political, economical or legal (Anton 2015). This shows that Porter’s model is incomplete without PESTEL and cannot be relied upon by the airlines companies to make decisions.

The economic performance of the airlines industry in the United States of America would be studied from two angles namely, the capital generation and revenue generation

                                                    Figure 2. Graph showing stock chart of American Airlines on NASDAQ

                                                                                         (nasdaq.com 2017)

                                                                          Figure 3. Graph showing share index of Delta Airways

                                                                                           (Source: bloomberg.com 2017)

                                                                         Figure 4. Graph showing share index of Boeing on NASDAQ

                                                                                                  (Source: nasdaq.com 2017)

The graphs above shows the share prices of two of the leading American airlines companies, American Airlines and Delta Airlines. The graph shows that the share indices of both the airline companies, which lead the American airlines market, are on the rise. This bullish trend of the market means that the airline industry of the United States of America is able to attract immense capital from the market. The third graph shows the rising share index of Boeing, America’s leading aircraft manufacturer. The graph shows that the share index of the Boeing also shows an upward trend. One can infer from the analysis that both the leading airlines companies and the suppliers of flights to these companies are performing very well in the stock market (Rognlie 2016). This means that they are able to generate huge capital from the market, which renders them their economic strength.

The two tables below shows the falling revenue of the two top players of the American airline industry, American Airlines and Delta Airlines. The falling revenue shown in the table can be attributed to the entry of new low priced flyers, which are slowly eating into the market of these leading airline companies. Thus, one can infer from the discussion that that though the American airline companies attract huge investment from the market, they are facing stiff competition from airline companies from of American and foreign origin (Board  and Skrzypacz 2016). These companies serve customers at low prices, thus earning lower revenue per customers, which ultimately erodes the revenue generation capability of the industry as a whole.

                                                                 Figure 5. Graph showing revenue generation of American Airlines

                                                                                                 (Sources: nasdaq 2017)

                                                                    Figure 6. Table showing revenue generation of Delta Airlines

                                                                                                 (Sources: nasdaq 2017)

The above discussion point out several factors, which the airline companies need to consider to function profitably in the airline market in the US. First, the American market has a large number of premium and low cost flyers, which have their individual customer segments. The customers today prefer economic rates of flying, which means the leading American airlines companies require to price their services to appeal to these new cost sensitive customer base. The brand power is not the sole criteria to attract customers which is evident by the dwindling revenue of the leading American airlines companies namely, American Airlines and Delta Airlines. The following are the strategies which the airlines companies can use in American market to make maximise revenue generation and profits:

The American airline should stretch their product line both upwards and downwards. This means that they should sell both high priced services to the upper class society and economic rates services for the middle class society. This would allow them to serve both the segments and generate more revenue (Aurier and Mejía 2017).

A very effective strategy, which companies functioning in the American airlines industry can use to recover the revenue, is product line bundling. They can offer product bundles like a combination of tickets, travel insurance and cab booking services on landing. This would enable the airline companies maximise customer satisfaction and attract more customers which would maximise their revenue generation (Dall’Olmo Riley, Pina and Bravo 2015.).

The discussion of the profitability situation in the American airlines industry would encompass three areas namely, the Porter’s model, the economic situation and the strategies, which could be considered after their study. The Porter’s model reveals that the American airline industry faces stiff competition from both local and foreign airlines companies. The leading premium flyers like American are losing their market share to the low cost flyers, which offer services at lower rates. This is reflected in the dwindling revenue figures of the leading airlines companies.  However, the airlines industry in America has great future and can recover from this loss of revenue. First, the overall bullish trends in the share indices show that the American airline companies are able to attract huge investments. They can channelize the capital generated towards making new market strategies. The discussion of the probable strategies, which the airline companies can make to recover their falling revenue, bring into light two strategies. First, they can up stretch and down stretch their product line to serve both upper and lower segments of customers respectively. The can bundle their products to maximise customer satisfaction and generate more revenue.

Conclusion:

The analysis and detailed discussion of the American airline industry shows that the players like American Airlines can no longer rely on their brand values and premium status to generate revenue. They have to form strategies which offers customer intensive products to attract more customers. They should utilise the immense capital they can generate from the market to design premium and economic products. They should serve both the upper and middle class customers to improve their revenue generation power.

References:

Anton, R., 2015. An Integrated Strategy Framework (ISF) for Combining Porter's 5-Forces, Diamond, PESTEL, and SWOT Analysis.

Aurier, P. and Mejía, V., 2017. Impact of Alignability and Size on Brand Lines and Line Extension Performance: Empirical Evidence. In Marketing at the Confluence between Entertainment and Analytics (pp. 1029-1041). Springer, Cham.

Belobaba, P., Odoni, A. and Barnhart, C. eds., 2015. The global airline industry. John Wiley & Sons.

Bloomberg.com. (2017). DAL:New York Stock Quote - Delta Air Lines Inc. [online] Available at: https://www.bloomberg.com/quote/DAL:US [Accessed 18 Dec. 2017].

Board, S. and Skrzypacz, A., 2016. Revenue management with forward-looking buyers. Journal of Political Economy, 124(4), pp.1046-1087.

Dälken, F., 2014. Are porter’s five competitive forces still applicable? a critical examination concerning the relevance for today’s business (Bachelor's thesis, University of Twente).

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Flammer, C., 2015. Does product market competition foster corporate social responsibility? Evidence from trade liberalization. Strategic Management Journal, 36(10), pp.1469-1485.

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NASDAQ.com. (2017). American Airlines Group, Inc. (AAL) Stock Chart. [online] Available at: https://www.nasdaq.com/symbol/aal/stock-chart?intraday=off&timeframe=5y&charttype=bar&splits=off&earnings=off&movingaverage=None&lowerstudy=volume&comparison=off&index=&drilldown=off&sDefault=true [Accessed 18 Dec. 2017].

nasdaq.com. (2017). Boeing Company (The) Stock Chart. [online] Available at: https://www.nasdaq.com/symbol/ba/stock-chart?intraday=off&timeframe=5y&splits=off&earnings=off&movingaverage=None&lowerstudy=volume&comparison=off&index=&drilldown=off [Accessed 18 Dec. 2017].

Rognlie, M., 2016. Deciphering the fall and rise in the net capital share: accumulation or scarcity?. Brookings papers on economic activity, 2015(1), pp.1-69.

Shepherd, D.A., Williams, T.A. and Patzelt, H., 2015. Thinking about entrepreneurial decision making: Review and research agenda. Journal of management, 41(1), pp.11-46.

Shuen, A., Feiler, P.F. and Teece, D.J., 2014. Dynamic capabilities in the upstream oil and gas sector: Managing next generation competition. Energy Strategy Reviews, 3, pp.5-13.

Treanor, S.D., Rogers, D.A., Carter, D.A. and Simkins, B.J., 2014. Exposure, hedging, and value: New evidence from the US airline industry. International Review of Financial Analysis, 34, pp.200-211.

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