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Chief Information Officers (CIOs) expect IT budgets to increase by 2.5 percent in 2005, and believe their focus will be on supporting business growth and results, according to a survey by Gartner Inc. In the past few years, CIOs have had to focus on internal efficiency and cost control, while preparing their organization for an economic upswing. CIOs voiced concerns about their relationship with the CEO and whether they have the right people to meet current and future business needs. Ted Kennedy says that the solution for run-away costs with Medicare is Information Technology.
ATP Clinic
Tomorrow, Wednesday at 4 to 5 PM Baskin Engineering, room 318. Leslie Clark will run the session.
ISM Toastmasters
Chapter 3
The Porter Competitive Model for Industry Structure Analysis
Agenda
Competitive Strategies
Build barriers to prevent a company from entering an industry Build in costs that would make it difficult for a customer to switch to another supplier
Intra-Industry Rivalry
Strategic Business Unit
Figure 3-1
INBOUND LOGISTICS
SERVICE
PRIMARY ACTIVITIES
Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright 1985 by Michael E. Porter.
Figure 3-6
Competitive Strategies
Primary Strategies
Supporting Strategies
To date we have addressed three models developed by Michael Porter: Diamond of National Advantage, Competitive Model and Value Chain. Explain the objective to be gained from using each of these models. Identify three mistakes that are often made in using the Porter Competitive Model.
2.
Chapter 4 Introduction
Airline Industry Analysis
Industry History
Wright brothers first successful flight in Kitty Hawk in 1903. American Airlines in 1928 and United Airlines in 1931. Development of the mail system by the U.S. Postal Service helped create the airline industry. Increased R&D of aircraft after World War II. FAA created in 1958 to develop an air traffic control system. Deregulation in 1978.
Deregulation Entry and exit of routes and the pricing of fares were deregulated. Benefits: 1. The creation of new jobs and lower fares. 2. More Americans were flying so airplane load factors were up. 3. There was increased competition and a wider choice for passengers.
Does the airline industry have basic structural problems or is it just a collection of poorly managed companies?
Foreign Carriers Regional Carrier Start ups Cargo Carrier Business Strategy Change
Intra-Industry Rivalry
SBU: American Airlines Network (traditional) Rivals: United, Delta, Northwest, US Air Low-cost Rivals: Southwest, JetBlue, ATA
Alternate Travel Services Fast Trains Boats Private Transportation Videoconferencing Groupware
North America
Europe
Asia
Latin America
Routes and Route Structure Short Haul Long Haul Hub and Spoke Point to Point Company Structure Independent Alliances Code Sharing Information Systems
Customer Systems Operational Systems Logistical Systems Business Systems
2.
Importance of IT
Convenience to Customers. Knowledge of Customers. Providing a Foundation of Other Systems. Building a Base for other Business.
Conclusions
A clearly structured industry. Vital role of Information Systems in the industry. The industry is greatly affected by many factors. Strategies dictated by the market are crucial. Still regulated.
Chapter 4
Porter Competitive Model and the Airline Industry
Key Points
Question raised by 1993 Presidential Commission addressing the competitiveness of the industry
We must look at the world as it is versus how airlines would like it to be.
Robert L. Crandall
Return to Investors.
Country Strategic Resource.
Foreign Carriers Regional Carrier Start ups Cargo Carrier Business Strategy Change
Intra-Industry Rivalry
SBU: American Airlines Network Rivals: United, Delta, US Air, Northwest Low-cost Rivals: Southwest, JetBlue, ATA, etc.
Alternate Travel Services Fast Trains Boats Private Transportation Videoconferencing Groupware
Figure 4-2
Product/Service Strategy
Scheduled Passengers Business Travelers Charter Services
Cargo
Customer/Fare/Market Strategy
Leisure Senior Travelers Citizens Low Fare Super Saver Europe First Time Frequent Flyers Flyers Premium Fare Latin American
North American
Pacific Rim
Sales Strategy
Reservation Agents Travel Agents Web Page
Routes and Route Structure Strategies Short Haul Hub and Spoke Long Haul Point to Point
Independent
Passengers
Alliances
Operations Logistics
Code Sharing
Business Figure 4-1
-Financial Policy - Accounting -Regulatory Compliance - Legal - Community Affairs Flight, route and yield analyst training Pilot Training Safety Training Baggage Handling Training Agent Training Product Development Market Research In-flight Training Baggage Tracking System
Computer Reservation System, In-flight System Flight Scheduling System, Yield Management System
PROCUREMENT
Route Selection Passenger Service System Yield Management System (Pricing) Fuel Flight Scheduling Crew Scheduling Facilities Planning Aircraft Acquisition
INBOUND LOGISTICS
OPERATIONS
OUTBOUND LOGISTICS
SERVICE
Adapted with the permission of Michael E. Porter from Competitive Advantage: Creating and Sustaining Superior Performance, copyright 1985 by Michael E. Porter.
Figure 4-3
Suppliers
Aircraft Engines
Services
Insurance Financing Distribution Telecom Maintenance Fuel
Passengers
Business Travelers Leisure Travelers
Electronics
Computers Chemicals
Lost Revenue
The total economic impact of the airline industry is approximately $900 billion or 9% of the U.S. GDP.
Ten million people owe their jobs directly or indirectly to the airline industry.
U. S. leisure travelers spent $187 billion in 2000. This was 7% less in 2001.
Operating
YEAR 1940 1950 1960 1970 1980 1990 1991 1992 1993
CUMULATIVE PROFIT/(LOSS)
Revenues ($000)
N/A 839,920 2,884,779 9,289,658 33,727,806 76,141,739 75,234,234 78,357,040 85,298,379
Net
N/A 42,678 9,140 -200,503 17,414 -3,921,002 -1,940,157 -4,791,284 -2,135,626
Operating
13,064 270,281 1,383,754 5,439,165 10,763,271 20,590,676 18,805,935 16,361,475 17,799,647
Net
N/A 60,211 638,095 2,226,533 5,810,207 4,343,887 2,403,730 -2,387,554
-4,523,180
-4,867,295 -2,553,704 250,211 5,417,868 10,321,071 15,681,323
18,167,621
9,892,755 -1,419,660
-5,042,710
2004
Airline Profitability
Profitability = [yield X load factor] - cost In order to survive and profit in this tough environment, airlines attempt to manipulate three main variables: Cost, calculated as total operating expenses divided by available seat miles (ASM) Yield, calculated as total operating revenues divided by the number of revenue passenger miles (RPM) Load Factor, calculated as the ratio between RPMs and ASMs, which measures capacity utilization.
Southwest Airlines
Aircraft Utilization, focus on city pairs, corporate culture, cost savings in reservations
Singapore Airlines
Geographic Locations, National Strategies, Shrewd Management and Leadership in IT, Competitive Strategies
Southwest Airlines
A U.S. carrier success story. Commuter airline that concentrates on city pairs. (Average flight is 541 miles and takes about one hour) CEO Herb Kelleher, a Connecticut attorney turned Texan, had the best labor relations in the industry and an excellent company culture. Lowest cost structure in the industry. 31 years of consecutive profitability
Southwest Success
5. Southwest came into the deregulated era of the industry as a small, intra-state airline that had always been able to compete on the terms that they chose since they were not subject to federal regulation. 6. The financial success of Southwest has received a large amount of free publicity that has certainly helped to create an image of an airline to be trusted and used by many passengers.
6.
7. 8. 9.
10.
Singapore Airlines Swiss Air Cathay Pacific Midwest Express ** Japan Airlines Quantas ANA Virgin Atlantic Lufthansa KLM-Royal Dutch
11. Finnair 12. British Airways 13. Alaska 14. Air France 15. Varig 16. Aer Lingus 17. Kiwi 18. Air Canada 19. American ** 20. Delta**
Source: Zagat Survey of Frequent Flyers
Singapore Airlines
Winner of multiple awards for airline excellence. Leader of the Orient Airlines Association (OAA) Abacus reservation system. Price collusion on major routes.
Singapore has always been only an international carrier and focused accordingly on global competitiveness through quality customer service.
2. The airline is an integral part of the country strategy to be the center for commerce and travel within Southeast Asia. 3. The success of the country strategies promotes travel demands.
Dysfunctional labor situation. High taxes, fees and other government-mandated costs. Inadequate long-term plans for air and ground infrastructure. Restrictions on airline consolidation and foreign investment.
2.
3.
4.
Rank
Occupation
Hourly
Weekly
Earnings
Hours
1 Pilots
$107.22
21.9
Lawyers Math Teachers Electrical Engineers Financial Managers Transportation Attendants Computer Scientists High School Teachers Architects Aircraft Mechanics, Engine Police Aircraft Mechanics, Non-engine National Average
$59.78 $37.51 $34.56 $34.29 $32.73 $30.52 $30.23 $24.08 $22.04 $21.50 $20.64 $17.13
41.4 38.9 41.0 40.4 20.7 40.1 37.1 39.7 40.0 40.0 40.0 39.6
Union Power
The highly unionized airline industry is unable to respond in a timely manner to changing markets and unable to prevent labor led service disruptions.
American Airlines
Has historically been the largest airline in the world in terms of revenue and number one in the U.S. A premium service carrier. Hub and Spoke System SABRE System Strongly opposed industry deregulation. Financial losses same as most other carriers
Donald Carty to Gerald Arpey, May 2004 James Goodwin to John Creighton, Oct. 2001 John Creighton to Glenn Tilton, Sept. 2002 Leo Mullin to Gerald Grinstein, Jan. 2004
Northwest Richard Anderson to Douglas Steenland, Oct. 2004 US Airways Rakesh Gangwal to Dave Siegel, May 2002
A Glamour Industry
The place for the rich and famous: Barney Oldfield, Amelia Earhart, Howard Hughes, Bill Boeing, Manfred von Richthofen aka The Red Baron, Eddie Rickenbacker, Billy Mitchell, Jimmie Doolittle, Saburo Sakai, Curtis LeMay, Frank Borman, Sir Freddie Laker, Frank Lorenzo, Richard Ferris, Robert Six, Richard Branson, Jan Carlzon, Herb Kelleher, Bob Crandall, Stephen Wolf, Sam Walton, Larry Ellison Conquistadores del Cielo, crop duster, jet-setter, Concorde, SABRE, CRS, frequent flyer, Admirals Club.
Orville Wright
Wilbur Wright
Warren Buffett
New York to Paris Timeline, May 20-21, 1927 33 hours, 30 minutes, 29.8 seconds Lindbergh had not slept in 55 hours
In the Beginning
Pacific Southwest Airlines began initial operations on May 6, 1949, flying a leased DC-3 aircraft with a seating capacity of 31 passengers once a week between San Diego and Oakland via Hollywood/Burbank. Original fares for the three-city route structure were: SAN-OAK $15.60, SAN-BUR $5.65, and BUR-OAK $9.95. By the end of 1949, PSA was operating two DC-3s and had carried 15,011 revenue passengers over 321,112 plane miles. The airline posted operating revenues of $172,796 against operating expenses of $160,902 for a net profit of $11,984.
PSA's 1969 fleet consisted of one DC-9, one Boeing 727-100, 14 Boeing 727-200s, and nine Boeing 737-200s. The airline's fare structure included the following: SAN-LAX, SAN-BUR, SAN-ONT, SFO-SMF $7.14; SAN-SFO, SANOAK, SAN-SJC $20.95; LAX-SFO, LAX-OAK, LAX-SJC, BUR-SFO, BUR-OAK, BUR-SJC $14.52. PSA entered the seventies with an all Boeing-equipped fleet that included one 727-100, 16 727-200s, and nine 737-200s.
One million passengers flew PSA in the month of August, 1986 marking the first time in the carrier's history that it boarded that many passengers in a single month. PSA carried a record 10.7 million travelers in 1986, but posted a year end net loss of $3 million.
The last PSA departure left San Diego, California as flight 1486 bound for Las Vegas, Nevada on April 8, 1988.
Commission Findings
The Airline Industry is more competitive than before deregulation in 1978. Travelers and shippers are charged less than in 1978. The Airline Industry has never made a sustained, substantial return on investment. It lost huge amounts of money from 1990 to 1993. It canceled many aircraft orders shortly after an unprecedented buying binge. Its freedom to compete in international markets is uncertain because of government restrictions.
Commission Conclusions
For the U.S. to prosper in a global marketplace the airline industry must:
Be efficient and technologically superior. Have the financial strength to respond to rapid change and opportunity.
Efficiently move people, products and services to markets, wherever they exist.
Recommendations
Efficiency: Reinvent the FAA. Financial Health: Deal with factors that impact the financial health of the industry. Access to Foreign Markets: Replace the current bilateral system with a multi-national regime.
To return their balance sheets to respectability, most airlines would have to achieve profit margins that are almost unprecedented in their history, and sustain those margins for years.
September 11 Impact
An absolute disaster for the industry.
A Sobering Fact
Before September 11, 2001, the global industry was showing a net loss on international services of around $3 billion.
Corrective Actions
It will take much more than concessions by labor for major U.S. airlines to solve their financial problems.
Southwest could pass American to become the largest U.S. airline by 2013, and JetBlue could pass Delta to become the third largest by 2020.
Airline Alliances
The Star Alliance is the largest of the major groupings. Consisting of 15 airlines led by United Air Lines and Lufthansa. Star serves about 815 destinations in more than 130 countries.
Oneworld, which is eclipsed by only Star among the major airline alliances, is led by British and American Airlines. Eight airlines offer service to 550 destinations in more than 130 countries. SkyTeam is quickly becoming a major alliance player by serving more than 450 destinations in nearly 100 countries. Led by Air France and Delta, SkyTeam has also consolidated cargo services.
The agreement is the biggest in the industry. US Airways and United Airlines have a similar agreement.
Barriers to Entry
Access to airports continues to be impeded by: (1) Federal limits on takeoff and landing slots at the major airports in Chicago, New York, and Washington (2) Long-term, exclusive-use gate leases (3) Perimeter Rules prohibiting flights at New Yorks LaGuardia and Washingtons National airports that exceed a certain distance.
US Industry Strength
Fifteen major US carriers represent the following significance in the world-wide airline industry: 29% of the aircraft
Does a business model exist that is more susceptible to things going wrong?
Safety factors.
Air traffic controllers. Impact on constituents.
International routes.
Continuing Concerns
1. Fuel costs
2. Decisions regarding passenger services like whether to charge for food, the need for more electronic capabilities. 3. Upgrading aircraft. 4. Route strategies. 5. Union relations. 6. Relations with travel agents.
4. Improve the capacity and capabilities of airports. Airports belong to cities and counties so there is no national-wide plan.
It is a vivid example of the dynamics of the markets that it serves. Establishing strategies dictated by the market is critical. Once the right strategies have been identified, information systems can play an important supporting role.