Post on 14-Apr-2015
Module leader: Mr. Ali Ehsan
Coursework 1 – 325 BSS International Business
Academic Year: 2011/2012
The US Airline Industry
in 2004
Bachelor of International Business 3rd year
Nelly Maccario – Student ID: 4039851
The US Airline Industry in 2004 International Business
Coursework 1 – 325 BSS International Business | Nelly Maccario
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Summary
Summary .................................................................................................................................... 2
Presentation of the case study .................................................................................................... 3
Strategic position ....................................................................................................................... 4
1. External analysis ............................................................................................................. 4
1.1 Macro analysis ......................................................................................................... 4
1.1.1 PEST analysis ................................................................................................... 5
1.2 Micro analysis.......................................................................................................... 7
1.2.1 5 forces ......................................................................................................... 7
1.2.2 Industry lifecycle ........................................................................................ 10
1.2.3 Strategic group analysis .............................................................................. 11
2. Internal analysis ............................................................................................................ 13
2.1. Value chain ................................................................................................. 13
2.2. 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 Bowman’s Clock ............................................................................. 16
3.3. Corporate / business level ..................................................................... 17
3.3.1 Ansoff ............................................................................................. 17
Conclusion ............................................................................................................................... 17
List of references...................................................................................................................... 18
Appendices ............................................................................................................................... 20
The US Airline Industry in 2004 International Business
Coursework 1 – 325 BSS International Business | Nelly Maccario
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Presentation of the case study
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 Hofstede’s cultural dimensions, we
have to notice that the main cultural dimension in USA is individualism4.
1 Lecture 8 – Strategic position
2 Lecture 7 – Analysis of strategic position
3 Lecture 2 – International Business Economies
4 Lecture 4 – Cultural environment
The US Airline Industry in 2004 International Business
Coursework 1 – 325 BSS International Business | Nelly Maccario
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Strategic position
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.
5 Lecture 7 – Analysis of strategic position
US Airline Industry
Political environment
Economical environment
Socio Cultural environment
Technological environment
The US Airline Industry in 2004 International Business
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1.1.1 PEST analysis
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 cities”6. (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 employee’s 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.
6 Case study « The US Airline Industry in 2004 » by Robert M. Grant
The US Airline Industry in 2004 International Business
Coursework 1 – 325 BSS International Business | Nelly Maccario
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Economical
Inflation of fuel prices, fluctuations in the price of crude oil.
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.
The US Airline Industry in 2004 International Business
Coursework 1 – 325 BSS International Business | Nelly Maccario
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1.2 Micro analysis
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
7 Lecture 7 – Analysis of strategic position
Competitive rivality: 4/5
Threat of new entrants: 1/5
Buying power of
buyers: 4/5
Threat of substitutes: 2/5
Bargainig power of
suppliers: 4/5
The US Airline Industry in 2004 International Business
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Threat of new entrants: 1/5
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).
The US Airline Industry in 2004 International Business
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Threat of suppliers: 4/5
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...).
8 Article from Le Parisien.fr (French Newspaper online)
The US Airline Industry in 2004 International Business
Coursework 1 – 325 BSS International Business | Nelly Maccario
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1.2.2 Industry lifecycle
“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.
The US Airline Industry in 2004 International Business
Coursework 1 – 325 BSS International Business | Nelly Maccario
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1.2.3 Strategic group analysis
“Strategic groups are organisations within an industry with similar strategic characteristics,
following similar strategies or competing on similar bases”9. 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.
9 Lecture 8 – Analysis of the strategic position, part 2
The US Airline Industry in 2004 International Business
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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.
The US Airline Industry in 2004 International Business
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2. Internal analysis
2.1. Value chain
“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.
10
Lecture 9 – Value Chain
The US Airline Industry in 2004 International Business
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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).
11
Lecture 10 – Strategic choices
The US Airline Industry in 2004 International Business
Coursework 1 – 325 BSS International Business | Nelly Maccario
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3.2.1 Porter generic
The US Airline Industry in 2004 International Business
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3.2.2 Bowman’s Clock
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.
Bowman’s strategy clock for the US airline industry
The US Airline Industry in 2004 International Business
Coursework 1 – 325 BSS International Business | Nelly Maccario
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3.3. Corporate / business level
“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.
12
Lecture 10 – Strategic choice
The US Airline Industry in 2004 International Business
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List of references
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
The US Airline Industry in 2004 International Business
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Ehsan, A. (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. 147–65
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-du-
nouveau-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]
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Appendices
Appendice 1 - Strategy frame works