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Coursework 1 325 BSS International Business

Module leader: Mr. Ali Ehsan

The US Airline Industry in 2004


Bachelor of International Business 3rd year
Nelly Maccario Student ID: 4039851

Academic Year: 2011/2012

The US Airline Industry in 2004


Summary

International Business

Summary .................................................................................................................................... 2 Presentation of the case study .................................................................................................... 3 Strategic position ....................................................................................................................... 4 1. External analysis ............................................................................................................. 4 1.1 Macro analysis ......................................................................................................... 4 PEST analysis ................................................................................................... 5

1.1.1 1.2

Micro analysis.......................................................................................................... 7 1.2.1 1.2.2 1.2.3 5 forces ......................................................................................................... 7 Industry lifecycle ........................................................................................ 10 Strategic group analysis .............................................................................. 11

2.

Internal analysis ............................................................................................................ 13 2.1. 2.2. Value chain ................................................................................................. 13 SWOT analysis ........................................................................................... 13

3.

Strategic choice ............................................................................................................. 14 3.1. Corporate level ..................................................................................... 14 3.2. Business unit level ................................................................................ 14 3.2.1 Porter generic .................................................................................. 15 3.2.2 Bowmans Clock ............................................................................. 16 3.3. Corporate / business level ..................................................................... 17 3.3.1 Ansoff ............................................................................................. 17

Conclusion ............................................................................................................................... 17 List of references...................................................................................................................... 18 Appendices ............................................................................................................................... 20 2

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


Presentation of the case study

International Business

In this coursework, we will deals with the US airline industry. An industry consists of a group of businesses producing similar outputs (goods or services) (Stonehouse, Hamill, Campbell and Purdie, 2000: 74)1. We will analyse the strategy of the industry. Strategy is the direction and scope of an organisation over the long term: which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations. (Johnson and Scholes, 2005).2 And we will use the strategic frameworks to analyse the US airline industry. First of all we can say that USA is part of liberal market economy3 and use principles of capitalism: maximum freedom to carry on enterprises, protection of private property and, minimum government intervention. Secondly, thanks to Hofstedes cultural dimensions, we have to notice that the main cultural dimension in USA is individualism4.

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Lecture 8 Strategic position Lecture 7 Analysis of strategic position 3 Lecture 2 International Business Economies 4 Lecture 4 Cultural environment

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


Strategic position

International Business

1. External analysis

1.1

Macro analysis

The macroenvironment consists of the forces at work in the general business environment which will shape the industries and markets in which the organisation competes (Stonehouse, 2000).5 It affects the organization, although it is possible that the company influence its stakeholders.

Political environment

Technological environment

US Airline Industry

Economical environment

Socio Cultural environment

Lecture 7 Analysis of strategic position

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


1.1.1 PEST analysis

International Business

Political and legal

Government stability: US is a stable country, there is no corruption. But until 1978 the airline industry was under regulation with the intervention of the Civil Aeronautics Board (CAB) in the market. Taxations in the market are mostly landing fees, because airports play a critical role in the US aviation industry. [...] Indeed, most airports are owned by municipalities and can generate substantial revenue flows for the cities6. (Grant R.M, 2005). That is why good relations between government and the organisation are important.

Employment is an aspect very important because labor costs are the most expensive for an US airline company. According to the case study, labor costs are boosted by the high level of employees remuneration. Besides there is a dozen of trade unions in the industry and for business survival, it is important to negotiate with them. Green issues that affect the environment: because of the use of energies fosilles, some people concerned with ecology may prefer alternatives to the plane for short trips (train, car, bus). Indeed, in the industry the energy consumed is not renewable energy but it is very expensive with unpredictable cost.

Case study The US Airline Industry in 2004 by Robert M. Grant

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


Economical Inflation of fuel prices, fluctuations in the price of crude oil.

International Business

Consumer expenditure falling and lesser disposable income.

Communications costs fell in so business man are no longer forced to move and can use video conferencing software (Skype) or e-mails.

Social and cultural Change in lifestyle: the price difference for business travel and travel for pleasure breaks down. Leisure travellers tend to by flights to low cost compagnies.

The risk of terrorist attacks deterred some potential customers who prefer to use other means of transport. After each attack in transport (2001 in New York and 2003 in Madrid), the industry is in turmoil.

Technological

Adoption of new technology: The impact of the Internet with spatial and temporal barriers that break, business travelers do not necessary needs to cross the country for a meeting. Companies have to upgrade the product.

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


1.2 Micro analysis

International Business

Microenvironment is the competitive environment facing a business and it consists of the industries and markets in which the organisation conducts its business (Stonehouse, Hamill, Campbell and Purdie, 2000: 73).7

1.2.1

5 forces

Threat of new entrants: 1/5

Bargainig power of suppliers: 4/5

Competitive rivality: 4/5

Buying power of buyers: 4/5

Threat of substitutes: 2/5

Lecture 7 Analysis of strategic position

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


Threat of new entrants: 1/5

International Business

Low because of complexity of service: buy or rent an airplane (very expensive), get aircraft certification, set up routes, have gates, takeoff and landing slots, baggage handling services, marketing and distribution channels, deals with the dominance of gates and landing slots by a few majors carriers in several airports. Because of that, new entrants have to use secondary airports (e.g. Virgin USA). Market penetration of the US Airline industry also asks high investments, entry costs are very high, and it takes experience and a lot of resources.

Threat of buyers: 4/5 High because there are important changes in the structure of market demand. Indeed the segmentation between business class and leisure customers was breaking down. The price gap between these two kinds of buyers grows. LCCs offered to leisure passenger prices much lower than market. LCCs increasing price competition over more and more routes. Furthermore, the demand for first and business class travel slumped. (Grant R.M, 2005). More and more airlines are implementing their own chain of distribution of tickets, low cost companies in particular focus on reducing commissions for selling tickets below market prices. Also in 2004, the U.S. airline industry had 60 firms; including 7 major: United, American, Delta, Northwestern, Continental, US Airways and Southwest. These major set up alliances with smaller airlines in order to gain more market share. The market is competed so buyers can switch easily to competition. This is why large companies have established loyalty program targeted at business travellers: frequent flyer schemes.

Threat of substitutes: 2/5 Low because at the beginning of the twenty-first century, airlines provided the dominant mode of long distance travel in the US. For shorter journeys, car provided the major alternative. Alternatives forms of public transportation bus and rail- accounted for a small proportion of journeys in excess of a hundred miles. (Grant R.M, 2005). Currently on long flights there is no real alternative. But with the new information technologies and communication and through the development of internet, it seems that business people can no longer necessarily need to meet face to face (especially thanks to video conferencing and software Skype, and many of the emails). Coursework 1 325 BSS International Business | Nelly Maccario 8

The US Airline Industry in 2004


Threat of suppliers: 4/5

International Business

High because there are only two aircraft manufacturers: Boeing and Airbus. But it is possible to buy or lease aircraft to other airlines.

Industry Rivalry: 4/5 High because there is an increase in competition. As we have said above, in 2004 the US airline industry had 60 firms; including 7 major: United, American, Delta, Northwest (absorbed into Delta Air Lines Inc. by a merger approved on October 2008, making Delta the largest airline in the world), Continental (merges into United in 2010)8, US Airways (America West Airline merge into it, in 2005 in order to become low cost company) and Southwest. These major set up alliances with smaller airlines in order to gain more market share. The market is competed so buyers can switch easily to competition. This is why large companies have established loyalty program targeted at business travellers: frequent flyer schemes. Even after all bankrupt that occurred as a result of the oil shock of 1979 (which caused the recession and strikes in the industry, many airlines have closed or have been redeemed) the industry rivalry is very important. More, US companies also need to face international competitors on long flights (British Airways, Air France, Lufthansa...).

Article from Le Parisien.fr (French Newspaper online)

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


1.2.2 Industry lifecycle

International Business

An industry consists of a group of businesses producing similar outputs (Stonehouse, Hamill, Campbell and Purdie, 2000: 74).

US Airline industry is in growth phase. Growth is no longer the main focus; market share and cash flow become the primary goals of the companies left in the space. Barriers of entry tend to increase so threat of new entrants is low, as control over distribution is established and economies of scale and experience curve benefits come play. Products standardize, High buyer power, brand loyalty with frequent flyer schemes, cost effectiveness. Legal requirements and high entry barriers. This stage comes after shakeouts where there are lots of mergers and acquisitions. Merger can be defined as the coming together of two or more enterprises to form a new enterprise (Cowling & al, 1980). Except for low-cost airlines that are in the growth area in 2004 because it is the rise of low-cost airlines, they begin their ascension. 10

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004

International Business

1.2.3

Strategic group analysis

Strategic groups are organisations within an industry with similar strategic characteristics, following similar strategies or competing on similar bases9. In US airline industry there are two groups of companies: well known and trust companies (biggest companies in the market) and the low cost companies. The three big companies are: Delta, United and American Airlines. What are the top three with the largest standing.

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Lecture 8 Analysis of the strategic position, part 2

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004

International Business

Merged since 2008 with Northwest Airlines, Delta has become the leading company in the world, with 75,000 employees, serving 375 destinations in 66 countries. This is the first US airline.

United Airline is currently in second place nationally and global. In 2010, the company announced its merger with Continental Airlines. The new company will be the largest global airline with a turnover of $ 29 billion positioning before Delta. But the merger has not yet been approved by US authorities.

In 2010, American Airline is the third largest airline in the world and is part of the AMR Corporation holding company which is one of the largest airlines of the United States. It including American Airlines, American Eagle Airlines and Executive Airlines.

US Airways in an American low cost which has four subsidiaries.

Southwest Airlines and Air Tran are two cheap US airlines.

Virgin America is a low cost airline who started business in 2007. The formation of this company is a project of the Virgin Group, owned by Englishman Richard Branson which already control Virgin Atlantic Airways and Virgin Blue.

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Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


2. Internal analysis
2.1. Value chain

International Business

Value chain is categories of activities with in and around organisation, which together create a product or service. (Ehsan A, 2012)10.

2.2.

SWOT analysis

SWOT analysis is an internally and externally framework, we will only analyze the external market (opportunities and weaknesses), in which case we focus on one industry and it would take too long to analyze the strengths and weaknesses of all companies forming the industry.

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Lecture 9 Value Chain

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004

International Business

3. Strategic choice

3.1.

Corporate level

Corporate level strategy is concerned with the overall purpose and scope of an organisation and how value will be added to the different business units of the organisation (Johnson and Scholes, 2003).11 In the US airline market, there is some segmentation with mainly two types of targets: business/first class travellers and leisure travellers. Offers are not the same, for example for business travelers; companies have implemented frequent flyer schemes, whereas for leisure travelers they have developed ancillary services (hotel reservation, transportation...)

3.2.

Business unit level

Is about how each business unit competes successfully in particular markets. (Johnson and Scholes, 2003).

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Lecture 10 Strategic choices

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


3.2.1 Porter generic

International Business

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Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


3.2.2 Bowmans Clock

International Business

US airline industry can be divided into two groups: well known and trust companies that focused their strategy on differentiation (biggest companies in the market) and the low cost companies. With focused differentiation strategy companies try to perceive value to particular segments (business or fist class travels). With LCCs there is a risk of price war and low margins (e.g. Virgin America). In low-cost airlines companies we have known companies who try to become hybrid and the other who try to have very low prices but not good quality.

Bowmans strategy clock for the US airline industry

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Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


3.3. Corporate / business level

International Business

Is a part of an organisation for which there is a distinct external market for goods or services that is different from another SBU. (Johnson and Scholes, 2003: 11)12 3.3.1 Ansoff

Conclusion

Finally we can say that the industry is complex, with many companies (with sixty airlines and 7 majors) in size and types different. With important threats like terrorist attacks, gasoline prices, depreciation of aircraft, only two suppliers, strikes... But also with many opportunities such as business travelers who are more loyal to the company through frequent flyer schemes. But also the development of own travel agencies airlines that are going to intermediaries and thus reduce costs. 17

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Lecture 10 Strategic choice

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


List of references

International Business

Alaska Airline (2012)

Official website of the company [online] available from < http://www.alaskaair.com/> [27 January 2012]

American Airline (2012)

Official website of the company [online] available from < www.aa.com/> [27 January 2012]

Air Tran (2012)

Official website of the company [online] available from < www.airtran.com/> [27 January 2012]

Cowling & Al (1980). Mergers and economic performance. Cambridge: Cambridge University Press. Delta Airline (2012) Official website of the company [online] available from < http://fr.delta.com/> [27 January 2012] Ehsan, A. (2011) Module 325 BSS International Business: Lecture 2 The economic environment. Coventry: Coventry University Ehsan, A. (2011) Module 325 BSS International Business: Lecture 4 Cultural environment. Coventry: Coventry University Ehsan, A. (2011) Module 325 BSS International Business: Lecture 5 Strategy and organization Part 1. Coventry: Coventry University Ehsan, A. (2011) Module 325 BSS International Business: Lecture 7 Analysis of strategic position. Coventry: Coventry University Ehsan, A. (2011) Module 325 BSS International Business: Lecture 8 Analysis of the strategic position Part 2. Coventry: Coventry University Ehsan, A. (2012) Module 325 BSS International Business: Lecture 9 Value chain. Coventry: Coventry University Ehsan, A. (2012) Module 325 BSS International Business: Lecture 10 Business unit level strategy. Coventry: Coventry University 18

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


Ehsan, A.

International Business

(2012) Module 325 BSS International Business: Lecture 11 Strategic choice Development strategy. Coventry: Coventry University

Ehsan, A.

(2012) Module 325 BSS International Business: Lecture 13 Creating brand. Coventry: Coventry University

Frontier Airline (2012) Official website of the company [online] available from < http://www.frontierairlines.com/> [27 January 2012] Grant, R.M. (2005) Case study, The US Airline Industry in 2004 Hofstede, G. (1994) Cultures and Organizations: Software of the Mind (London: HarperCollins) Hofstede, G. (1996) Images of Europe: past, present and future, in Joynt, P. and Warner, M. (Eds) Managing Across Cultures: Issues and Perspectives (London: Thomson) pp. 14765 Johnson, G., Scholes, K. and Whittington, R. (2005). Exploring corporate Strategy. 7th Edition. Harlow: Financial Times Prentice Hall. Le parisien (2010) United-Continental merger: birth of the new World No. 1 [online] available from <http://www.leparisien.fr/economie/fusion-united-continental-naissance-dunouveau-n-1-mondial-03-05-2010-907969.php> [10 February 2012] Southwest Airline (2012) Official website of the company [online] available from < http://www.southwest.com/r> [27 January 2012] Stonehouse, G., Hamill, J., Campbell, D. and Purdie, T. (2000). Global and transnational Business: Strategy and Management. Chichester: John Wiley and Sons Ltd. United Airline (2012) Official website of the company [online] available from < www.united.fr> [27 January 2012] US Airways (2012) Official website of the company [online] available from

< http://www.usairways.com/default.aspxwww.united.fr> [27 January 2012] Virgin America (2012) Official website of the company [online] available from <http://www.virginamerica.com/> [27 January 2012] 19

Coursework 1 325 BSS International Business | Nelly Maccario

The US Airline Industry in 2004


Appendices

International Business

Appendice 1 - Strategy frame works

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Coursework 1 325 BSS International Business | Nelly Maccario

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