Coursework 1 - International Business

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

2

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



3

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



4

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.


US Airline Industry

Political environment

Economical environment

Socio Cultural environment

Technological environment



5

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



6

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.



7

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


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



8

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).



9

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)

http://en.wikipedia.org/wiki/Delta_Air_Lines_Inc.

http://en.wikipedia.org/wiki/Delta_Air_Lines-Northwest_Airlines_merger



10

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.



11

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



12

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.



13

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



14

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



15

3.2.1 Porter generic



16

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



17

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



18

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

http://fr.delta.com/



19

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]

http://www.leparisien.fr/economie/fusion-united-continental-naissance-du-nouveau-n-1-mondial-03-05-2010-907969.php

http://www.leparisien.fr/economie/fusion-united-continental-naissance-du-nouveau-n-1-mondial-03-05-2010-907969.php



20

Appendices

Appendice 1 - Strategy frame works

Coursework 1 - International Business

Documents

Transcript of Coursework 1 - International Business