US Airline Industry Analysis - Literature review Example

Running Head: US Airline Industry US Airline Industry [Institute’s US Airline Industry Executive Summary The airline industry is at the heart of US economy because of the direct and indirect GDP and employment it generates. The paper explores application of international business theories on the US airline industry. Although the core service is of air travel, the augmented service that includes secondary benefits such as food, entertainment, comfort and other have been in the spotlight lately. US airline industry actively uses dynamic pricing to ensure that it could squeeze maximum possible revenue from the customer, which they are willing to pay. The promotional mix used by the industry includes advertising, public relations and active sales promotion. Agents also engage personal selling and direct marketing to the big clients as well. In light of the Porter Five Forces Model, it appears that the US airline industry faces heightened competitive pressures with increasing bargaining power of customers, threat of substitutes and supplier power. The rivalry might decrease a bit due to the recent wave of mergers and acquisitions. The macroenvironmental analysis reveals that the airline industry will continue to face political legal pressures because of its economic and security importance. The economic recession is far from over and with the recent European Sovereign Debt Crisis and fears of double dip recession; the consumer confidence is still shacking. Introduction According to the recent estimates, commercial aviation industry directly contributes to 9 percent of the GDP of the US. Over 100 certified airlines operate in the industry with over 13 million flight departures annually. Almost a billion passengers travel by airlines in US every year and the industry generated nearly 190 billion in revenues in the year 2010. The fact is that the US airline industry is an extremely important industry to the US economy not only because of its contribution to the GDP, direct employment, and value addition. However, because of the fact that many other industries such as tourism, hospitality and many businesses rely on the industry as well (Shaw, 2011, p. 254; Rugman and Collinson, 2012, pp. 96-98). This paper is an attempt to understand the US airline industry from the perspective of international business theories. This would include a political, legal, and economic perspective. Porter Five Forces Model and four Ps of marketing would also be used. Discussion Four Ps of Marketing Product/Service The service provided by the airline industry is of air travel. However, over the years, the scope of the service provided by the airline has widened and now it is only about air travel or the core service but it about the augmented service as well. These include food, internet, TV, comfortable seats, business-class travel experience, and other benefits. Consider the example of JetBlue, which has emerged as a serious player in the industry in almost 12 years. The airline is following the same business model of low cost as introduced by Southwest and followed by Frontier Airlines, Horizon Airlines, Air Tran and others. However, JetBlue has been doing one thing different, which is that, unlike other low cost players, it has extended its augmented product to include many other amenities, which has attracted thousands of customers to JetBlue (Vasigh et al., 2008, pp. 105-106). Promotion As mentioned earlier, airline industry also faces a seasonal demand pattern where there are more passengers during the vacations and holidays to specific destinations, therefore, airlines engage in aggressive promotional activities in order to ensure that they capture the most share of the pie. Furthermore, slowing growth, saturating market and high fixed also force the airline industry to engage in active and aggressive advertising. This is also the reason why that sales promotion is common within the airline industry in an attempt to attract customers (Belobaba et al., 2009, pp. 52-54). Direct marketing and personal selling are more likely to take place in case of business customers and organisation which are ready to provide high revenues to the airlines on a consistent basis in return for more benefits and services. For example, when Gordon Bethune took the charge of Continental Airlines in the year 2004, he made a team of sales people who had the task to meet all the business clients and persuade them to use the services of Continental Airlines again (Rugman and Collinson, 2012, pp. 96-98). From using humour in the advertising like Southwest and JetBlue to creating more sophisticated and elegant ads as done by Continental and United Airlines, Airlines use all possible mechanisms to appeal to their customers. Pricing Pricing in the airline industry has certainly been the most interesting of all four Ps. Different airlines based on their business model, low cost or differentiation, go for different pricing strategies. Furthermore, prices for flights also change with the time of the booking, which means that two passengers sitting within the same airline would have paid much different fares based on the degree to which they are price sensitive or not. People that book early flights may get lesser fares and last minute bookings, reservations and options for cancellations may end up paying fares that are three times greater than the former fares (Cento, 2008, pp. 41-42). Marketers refer this as dynamic pricing which does not depend on cost, profitability margin by the willingness of each customer to pay for a certain flight. With internet booking and other mechanism, airlines ensure that customer do not get the chance. Furthermore, depending on the airlines, customer may end up paying for the amenities, benefits, and services provided to him/her during the flight or it may be a part of the air ticket itself (Vasigh et al., 2008, pp. 105-106). Place Airlines have shifted their booking options to internet and a minority percentage of flight booking take place through the offices now. Furthermore, in terms of place, many airlines also hire sales people and agencies to get the passengers and then they pay the commission to those booking agencies. Strategic Framework In order to understand the US airline industry from a strategic perspective, Porter Five Forces and PESTEL analysis serve as the best possible framework. Porter Five Forces model believes that any industry faces competitive forces, which could put a lid on the profitability of the industry, from suppliers, customers, rivals, substitute products or services and new entrants. First, the threat of competitive rivalry in the industry is very high due to the presence of many players of similar sizes, high fixed costs, seasonal demand pattern, overcrowding of players, slow growth, and a saturated industry (Wensveen, 2011, pp. 24). Although, in the past few years, there have been some mergers and acquisitions, for example, the merger of Continental and United Airways, the acquisition of Northwest Airlines by Delta Airlines and Southwest Airlines acquiring Air Tran and others, which are expected to decrease the rivalry (Griffin and Pustay, 2012, pp. 63-64). Second, the bargaining power of the customers has been rising over the past few years due to the emergence of many different airlines (Rugman and Collinson, 2012, pp. 96-98). Buyers now have many options and lately, many airlines have failed to differentiate themselves. Although, the switching costs of buyers may be high because after booking a particular flight, it may be troublesome to cancel the same (Belobaba et al., 2009, pp. 52-54). Third, the bargaining power of the suppliers is also high. Suppliers here can be divided into two categories of employees (especially crewmembers and pilots) and aircraft suppliers (Shaw, 2011, p. 254). Finding new suppliers or replacing the old ones is not an easy task. Airlines may spend years training their pilots and may revolve all their maintenance, training, and control operations around one particular fleet of aircraft (Griffin and Pustay, 2012, pp. 63-64). Fourth, unlike many other industries, the threat of substitute services and products is also very high (Cento, 2008, pp. 41-42). After the 9/11 attacks, many of the customers switched to other forms of transportation for interstate travel and used ships for travelling to other countries. People may use trains in this regard as well and considering their low fares, excellent infrastructure within United States and availability, the substitute option appear very attractive, except for the fact that they take more time (Griffin and Pustay, 2012, pp. 63-64). Fifth, the threat of new entrants is low within the industry and this may be the only competitive force, which is low (Griffin and Pustay, 2012, pp. 63-64). The requirement in terms of fixed investments is high and it takes many years to break even. The expected retaliation from the competitors, buyer-switching costs and many other factors make it unattractive for entering the airline industry. Therefore, the overall competitive forces in the industry are high enough to put a serious lid on the profitability. This explains why Warren Buffet once said about the airline industry that capitalism would have been better served if someone had shot down the first prototype plane made by Wright Brothers in North Carolina. Quite understandably, Buffet said the same because of the low profitability of the industry (Rugman and Collinson, 2012, pp. 96-98). Political, Economic, Sociocultural, and Legal Forces The airline industry has been the darling of the policymakers and legal authorities since long. This is because of the fact that airline industry is an important part of economy, provides, direct and indirect jobs to millions, it is the easiest target for terrorists, and forces that want to destabilize the US. In fact, after the 9/11 attacks the policymakers have paid great attention to the happenings in the airline industry (Shaw, 2011, p. 254). Airlines have been directed to take prudent measures to ensure security, trainings to their employees, and extensive background checks before employing people, investments in sustainability, and others. Furthermore, after the valentine day’s crisis of JetBlue, the Congress even passed the Consumer Right Protection Bill showing the degree to which the US government intervenes in the US airline industry (Wensveen, 2011, pp. 244). The political environment in the US is stable although, the political forces may affect the airline industry in two possible ways. First, the taxation policies and taxes on fuel may influence the profitability of the airline industry. Different governments have been proposing varying tax plans in this regard. Second, the current tension between US and Iran may end up increasing the prices of oil in the global world and since oil is the biggest cost entity for the airlines, it may create further problems for them in the long term (Cento, 2008, pp. 41-42). The economic forces are, without any doubts, the most influential ones for the airline industry. Much of the growth that airlines enjoyed during the early and mid 2000s was primarily because of the economic boom in that era. Furthermore, the prime reason why most of the airlines have not been able to revive their profitability levels of 2007 or 2006 is due to the economic recession, slow recovery and the shacking consumer confidence due to the fears of European Debt Crisis. During recession, many of the customers that are travelling for enjoyment, holidays, vacations, meetings their families and others are more likely to cancel their trips or look for other cheaper alternatives regardless of the fact that the substitute takes more time (Belobaba et al., 2009, pp. 52-54). Furthermore, even the business customers are more likely to look for low cost airlines, cut back on unnecessary first class travels, and explore other options with videoconferencing. Economic recessions also slow down growth because it puts lid on all the expansion plans of airlines. For example, just before the recession hit, American Airlines and Southwest Airlines were planning to expand their fleet but they delayed their plans due to tight liquidity in the market (Vasigh et al., 2008, pp. 105-106). Conclusion The US airline industry is an extremely competitive industry and it appears that at least in the near future these competitive pressures will continue to rise thus further squeezing the profitability of airlines. Although, if the current wave of mergers and acquisitions continue for a while then it highly likely that it would decrease the competition, rationalize pricing and remove the excess capacity. Nevertheless, smart players are more likely to come with the right marketing mix and positioning strategy and would leverage their strategic positioning to make profits as Southwest airlines has been doing for the past many years. References Belobaba, P., et al. 2009. The Global Airline Industry. John Wiley and Sons. Cento, A. 2008. The Airline Industry: Challenges in the 21st Century. Springer. Griffin, R. W., and Pustay, M. W. 2012. International Business. Pearson Education, Limited. Rugman, A. M., and Collinson, S. 2012. International Business. Pearson Education, Limited. Shaw, S. 2011. Airline Marketing and Management. Ashgate Publishing, Ltd. Vasigh, B., et al. 2008. Introduction to air transport economics: from theory to applications. Ashgate Publishing, Ltd. Wensveen, J. G. 2011. Air Transportation: A Management Perspective. Ashgate Publishing, Ltd. Read More