Macro Issues That Affect Airlines Industry - Case Study Example

1. Macro Issues That Affect Airlines Industry The airline industry is also affected by macro issues taking into account the following: The current world financial crisis negatively affects the demand of the airline industry and customers’ disposable income as they becoming more price conscious. Market deregulation and liberalization in the airline industry had increased competition. The emergence of low-cost carriers (LCC) has exceeded the high performance and profitability of legacy carriers. The impact of terrorism and contagious diseases had also decreased the demand for air travel, because customers are more conscious on their safeness (Beamish & Ashford, 2005, p. 352). The airline industry is gravely affected by the rising fuel costs in the global market, rapid evolution of the internet, and other technological factors. 2. Competitive Forces of the Airline Industry Competition in the airline industry is becoming more aggressive since the “world is experiencing massive expansion of both domestic and international air travel” (Williams, 2009, p. 80). However, the industry has been shakedown by highly dynamic environment that influenced the industry’s competitive forces which include entry of competitors; threat of substitutes; bargaining power of suppliers; bargaining power of buyers; and rivalry among the existing players (Hubbard, 2004). The entry of competitors is determined by the existing barriers that include intense competition, differentiation and the high capital costs of entry. However, when the market is deregulated the liberalized the industry is becoming saturated with new entrants like the LCCs. In terms of threat of substitutes, customers can also use other carriers such as train, bus or cruise lines in order to reach the desired destination. Furthermore, the bargaining power of buyers and suppliers is among the critical competitive forces of the airline industry because of its direct impact on prices, volume, and profit (Porter, 1998, p. 45). Air travel carriers particularly those that are sharing the same routes need to have their own effective strategies in order to attract travelers, considering that the industry is centered on Boeing and Airbus suppliers. Lastly, competitive rivalry in the airline industry is high because of its low-cost nature; high fixed costs and competitive pricing make the industry grow at a very slow rate. 3. Airlines Firm Competes Today In the history, the airline industry is heavily regulated wherein almost all of the firm’s activities are highly supervised. This isolated manner of competition had initiated in the U.S.; however, it has been remodeled and “for the first time of history of commercial aviation, an open market situation in which competitive market pricing was to be the norm, and market entry was to become legally open to new airlines” (Williams, 2009, p. 78). The fact that U.S. is one of the highest performing countries in the world, and the reform strategy has been effective in the country, then the other countries are encouraged to adopt the diverse market deregulation. Today, airline firms are competing based on their sizes, assets count, competitive pricing and technological advancement. 1. Firm Competitiveness: Their Key Strengths and Weaknesses AA is one of the world’s largest air freight carriers, and they remain to be competitive despite of the existence of LCCs because they believe on their strengths from the principles of low costs, valued customers, cooperation, and strong financial condition (Subbarao & Murthy, 2005, p. 75). AA’s key strengths include 621 passenger fleet in more than 251 destinations in 41 countries, its alliances and partnerships with American Eagle and AmericanConnection (regional affiliates), Oneworld Airline Alliance, and trans-Atlantic and trans-Pacific joint business agreement. All these activities are realized by AA because of their strong relations with the government. Their key weaknesses include unstable financial position because of on-going economic crisis, high operating expenses and fixed costs, unprofitable routes considering the existence of LCCs in the domestic market and some of their old aircrafts are not fuel-efficient. 2. Competitive Advantages Technological advancement provides first-mover competitive advantage to AA. They are the first to develop their own online reservation system called Semi-Automated Business Research Environment (SABRE) which has been widely used by many airlines today. SABRE became the standard online reservations for three out of five airlines, and because of this AA earned an increase in their total revenue which is much higher compared to its airline operation (Gasson, 2004, p. 236). However, according to Oz (2009), “a system can only help the company sustain competitive advantage if the company continuously modifies and enhances the system, creating a moving target for competitors” (p. 57). Aside from SABRE, AA also launched AAdvantage, the first frequent flyer program in the aviation market which was created for the exclusive use of their customers. AA is also the “first carrier to react to that new-found freedom by introducing yield management...also known as value pricing” (Knorr & Zigova, 2004, p. 7). 3. Specific Issues, Opportunities, Threats, Perceived Internal Issues The current world financial crisis and the intense competition in the airline industry are big challenges to AA’s performance. Their operating expenses as well as their fixed cost variable ratio are increasing, that is why they need to implement cost-efficient strategies in order to address these issues. Good thing that there are various opportunities for AA in times of crisis such as favorable wage negotiation, wherein they reduce the size of their workforce in terms of real wages and at the same time increase productivity. Also, the demand for aviation services particularly in Asia will increase because of economic development, and most importantly is the introduction of new fuel-efficient engines (Oum, 1997, p. 1). The rising of information technology is also a great opportunity considering that it gives the company a first mover competitive advantage in the industry. On the other hand, the threats in the industry include increased air travel inconvenience because of the terrorist attacks and contagious diseases like SARS. Business travel is also declining because of technological advancement like video conferencing, and point-to-point competitors are also increasing against the hub-and-spoke network, as well as competitive pricing in the industry. 4. Recommendation in Order to Gain Employees Alignment Consumer brand is not the only thing that summarizes what the company is all about, because they also need to create a platform for alignment of employees in order to form a culture that is enhanced and become a high-performing organization (Manning, 2009). Gainsharing plan is one of the very effective ways in order for the airline industry to gain employees alignment. According to Price and Novak (2002), “Effective gainsharing plans have employees involved in all aspects of its design and implementation, including identifying and solving problems, soliciting, evaluating and implementing employee suggestions and managing the group’s performance” (p. 112). Airline employees should be aligned with the company’s brand promise and ultimately to the organization’s vision in order to increase moral and commitment. 5. Recommendations That The Airlines Firm Should Focus on to Take Advantage of: a. market - Considering that the market is newly liberalized and deregulated, airlines firms need to understand first their competitors and the market itself. They should not underestimate competitors in terms of size and market share; instead it should investigate their weaknesses in order to take advantage (Airline Fleet Management, 2011, p. 14). They should also focus in taking advantage in the international market particularly in Asia, because of the growing demand and in order for them to improve their market share and capacity. Finding international routes that are not yet served is one of the ways in order to trespass the liberalized market. Finally, competing at a lower price is the trend nowadays that is why it is time for hub-and-spoke network model to focus on providing short-haul point-to-point flights. b. competitive opportunities - In today’s highly competitive world, airlines firm should focus on creating their own competitive advantage that is inimitable to their competitors. As much as possible, the services must stand head and shoulder above other competitors in order to entice customers in favor to the firm, and to reel them particularly those that are price sensitive, firms should lower their prices. 6. Formula Action Plan in Short and Long Term AA’s Flight Plan 2020 is one of the firm’s frameworks in order to become the leading global premium air freight carrier in the world. Due to the changing market, AA had revisited and reset some of their original priorities in the plan particularly in terms of cost effectiveness, operation growth and integration of corporate responsibility. Inside the Flight Plans are formula actions in short and long-term that are important to the future success of the carrier. Some of its short-term plan includes substantial reduction of fares on domestic flights and substantial increase in services in order to compete with LCCs. American’s Turnaround Plan is considered to be a short term because actions inside the plan are needed in an urgent motion and will take effect as soon as possible (Subbarao, 2005, p. 75). Also, they are improving training programmes to their employees particularly to the pilots in order to address the safety concern of customers. On the other hand, AA also mapped out long-term action plans that include the establishment of fuel-efficiency plan in all of its fleet which had commenced in 2005 and will end in 2025. The airline had redoubled their efforts in order to reach the expected 30 percent of fuel-efficiency at the end of the time frame. In line with its fuel-efficiency action plan is the fleet replacement program wherein aircrafts that are not quieter will be replaced with most efficient ones in order to reach the projected savings of 120 million gallons of fuel in 2009 (“OneWorld,” 2009). 7. Financial Objectives Most of AA’s financial objectives are long-term and these include solid revenue growth of 5% for its domestic routes and 10% for its international routes, and maintain capital intact. Also, AA is aiming for a consistent increase of their earnings margin of at least 10% so that their employees will receive higher share of profits under the program annual incentive payment. To have consistent margins, they need to get at least 30% of operating margin and 30% of labor costs savings. They are also considering a reduction of their fixed cost variable ratio for about 50%, and increase their domestic aviation market share to at least 25%. 8. AA corporate culture One of the most distinguished aspects of AA resides in its culture because it is far unique than most (if not all) airlines in terms of discipline in process, trainings, and action plan. The company is also working hard in retaining their distinctive culture while growing as they dedicate some of their time and energy. However, because of the company’s actions toward cost-reduction, its relationship with its workforce is threatened and conflict arises that dramatically change the atmosphere of cooperation. When the issue of cost savings has occurred, the management had shifted in leadership which is materialized through layoffs and salary caps or real wage reductions. 9. Sustainable Competitive Advantage as an Elevator Pitch American Airlines (AA) is changing the future of aviation industry. They are one of the biggest and the leading global premium air freight carriers in the world. It has a market value of 2 billion and sales of 22.17 billion U.S. dollar. AA offers low fares, quality service and value to their worldwide customers in almost 251 destinations in 41 countries. In terms of alliance and partnerships, they are well-equipped considering that they have a combined route network with American Eagle and AmericanConnection, OneWorld Airline Alliance, and trans-Atlantic and trans-Pacific joint business agreement. The carrier has decades of experience in the aviation industry, and in fact, they are called the first-mover air freight carrier. They are the first to develop their own automated reservation and ticketing system known as SABRE which gives them a high return of capital investment and significant market share. SABRE is a unique offering that is valued by customers in a sense that reservation has been made easier and more reliable. This major project development yields AA a long-term advantage as it reduced labor cost and to be distinguished over its competitors. Part 2: ALLIANCE PACKAGE SCENARIO: San Francisco, California - Splendor or Explore Package: Provided by: American Airlines Vacation Packages Duration: 2 Nights / 3 Days Destination: San Francisco, California Accommodation: Marriott Marquis San Francisco Hotel Restaurant: Morton’s Steakhouse Packages may include: Roundtrip airfare “Meet & Greet” Limousine service Free night stays Free dinner at Morton’s Steakhouse (on the first day only) (Taxes, fees and restrictions apply) Day 01: Customers will be picked up from their houses to the airport by a limousine and will be treated as VIP in AA lounges. While flying, they will be served with variety of steak and seafood from Morton’s Steakhouse. Upon arrival at the San Francisco International airport, they will be brought to the Marriott Marquis San Francisco Hotel (Moscone Center, Union Square) by a limousine. The luggage will be delivered to the hotel and a Dollar Rent A Car will be waiting for them to explore the compact town of San Francisco. While on their trip, the customer can rent ipad or itouch from Apple (can pick it up from their airport town and return it in the same location). The customer is also given a one night free dinner in Morton’s Steakhouse located in the heart of the city’s most extraordinary downtown of San Francisco. Day 02: Tour and Leisure... Day 03: In the afternoon, the customer will be picked up by a limousine back to the airport for its roundtrip airfare with AA. Important Reminders: All items that are strictly personal will not be included in the package deal such as car rental, airport charges, tips and gratuities, and other fees from direct services. “Packages have become the preferred way to purchase almost anything today” (Smith, 2003). They are among the ways that industries of today are using for the purpose of encouraging people to avail their services at discounted prices. Usually, an all-inclusive deal involves airlines, hotel chains and rental-car companies wherein prices are set to be much lower than individual purchased. Generally, the bundled services at a reduced cost are the result of negotiations or expense-sharing arrangements between all the partners (companies and travel providers) that form part of the package deals. This is usually done by keeping their own records of earnings and details of specific expenses so that in the allocation of costs, all will be in accordance with what has been agreed. Today, the most effective way of sharing information is through the internet and it is also the real way for package deals to get maximum exposure. Many people are now using the internet and this is the reason why companies of today are having their own websites in promoting their product/services. Orbitz.com, Expedia and Travelocity are among the best travel agencies that market these packages, but it would be an advantage for all the allies if they will advertise through the use of their own branded sites like AA Vacations website. References Airline Fleet Management. (2011). Ready for take-off: start-up airlines and lessors. Feel Airline, pp. 11-17. Retrieved from http://www.feelair.com/about/airline_fleet_management.pdf Beamish, K., & Ashford, R. (2005). CIM coursebook: marketing planning. Burlington, MA: Elsevier Butterworth-Heinemann. Gasson, S. (2004). The impact of e-commerce technology on the air travel industry. In M. Khosrow-Pour (Ed.), Annals of cases of information technology (pp. 234-242). USA: Idea Group Publishing. Hubbard, G. (2004). Strategic management: thinking, analysis & action. Australia: Pearson/Prentice Hall. Knorr, A., & Zigova, S. (2004). Competitive advantage through innovative pricing strategies: The case of the airline industry. World Economics and International Management. Retrieved from http://www.iwim.uni-bremen.de/publikationen/pdf/b093.pdf Manning, T. (2009). The convergence of brand and human resources management. Customer Thinking. Retrieved from http://www.customerthink.com/article/convergence_brand_human_resources OneWorld. (2009). Fact sheet: caring for our world - oneworld airlines and the environment. OneWorld. Retrieved from http://www.oneworld.com/ow/news-and-information/fact- sheets/details?objectID=35&tempURLParam Oum, T. H. (1997). Challenges and opportunities for Asian airlines and governments. In C. Findlay, C. L. Sien, & K. Singh (Eds.), Asia Pacific air transport: Challenges and policy reforms (pp. 1-12). Singapore: Institute of Southeast Asian Studies. Oz, K. (2009). Management information systems (6th ed.). Boston, Massachusetts: Cengage Course Technology. Porter, M. (1998). Competitive advantage: creating and sustaining superior performance. Texas: Free Press. Price, C., & Novak, A. (2002). The medical practice performance management manual: How to evaluate employees (2nd ed.). Englewood, CO: Medical Group Management Association. Smith, R. (2003). Offer a package deal. Smithfam.com. Retrieved from http://www.smithfam.com/news2/mar03a.html Subbarao, P. S., & Murthy, K. G. K. (2005). Cases in management. New Delhi: Discovery Publishing House. Williams, A. (2009). Contemporary issues shaping China’s civil aviation policy: balancing international with domestic priorities. England: Ashgate Publishing Ltd. Read More