airline industry analysis
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Airline Industry AnalysisTRANSCRIPT
What’s Happening?What’s Happening?
We are catching up to the schedule on the course syllabus.
ISMA meeting scheduled for today has been postponed for a week—Jan 28, 4:30 to 5:30 College 8, room 240. Speaker is JP LeBlanc, Director of RAD Development, Borland
Chapter 4 IntroductionChapter 4 Introduction
Airline Industry AnalysisAirline Industry Analysis
Major Chapter TopicsMajor Chapter Topics
Airline Industry analysis using the Porter Competitive Model as a clearly defined industry.
Revisit Business Strategy Model. Lessons Learned from Consistently Profitable
Carriers. Is American Airlines the right standard for the US
industry? Importance of Information Technology to the
Airline Industry.
Consistently Profitable AirlinesConsistently Profitable Airlines
Singapore Airlines– Geographic Location, National Strategies,
Leadership in IT, Competitive Strategies
Southwest Airlines– Aircraft Utilization, Focus on City Pairs, Point-
to-Point Route Structure, Corporate Culture, Cost Savings in Reservation System
American AirlinesAmerican Airlines
• Largest airline in the US versus United while also a contender on the international level.
• A premium service airline with a hub and stoke route structure.
• Has consistently been recognized as an industry leader.
• Currently faces the same financial problems as other major carriers.
• Faces challenge of dealing with strong unions.
Porter Competitive ModelPorter Competitive Model
Intra-Industry RivalrySBU: American AirlinesRivals: United, Delta, US Air,Northwest, Southwest
BargainingPower of Buyers
Bargaining Power
of Suppliers
Substitute Products
and Services
PotentialNew Entrants
Airline Industry Analysis - North American Market
•Travel Agents •Business Travelers•Federal Government•Pleasure Travelers•Charter Service•U.S. Military•Cargo and Mail
•Alternate Travel Services•Fast Trains•Boats
•Private Transportation•Videoconferencing•Groupware
•Aircraft Manufacturers•Aircraft Leasing Companies•Labor Unions•Food Service Companies•Fuel Companies•Airports•Local Transportation Service •FAA•Hotels
•Foreign Carriers•Regional Carrier Start ups•Cargo Carrier Business Strategy Change
Figure 4-2
Europe North American Pacific Rim
MARKETS
Short Haul Long Haul
ROUTES AND ROUTE STRUCTURE
Hub and Spoke Point to Point
FARE STRATEGY
Low Fare Premium Fare
Independent Alliances
COMPANY STRUCTURE
INFORMATION SYSTEMS FOCUS
Figure 4-1
Latin American
Business Strategy Model - Airline Industry
Passengers Operations Logistics Business
PRODUCT/SERVICESScheduled Passengers
Charter Services Cargo
Mail Air Express
Modified compared to the example in the textbook.
Benefits of Information Systems Benefits of Information Systems to American Airlinesto American Airlines
Convenience to CustomersConvenience to Customers– Reservation System, Request hotels, car.Reservation System, Request hotels, car.
Knowledge of CustomersKnowledge of Customers– Frequent-Flyer Program: AAdvantage.Frequent-Flyer Program: AAdvantage.
Providing a Foundation for Other SystemsProviding a Foundation for Other Systems– Yield-Management System.Yield-Management System.
Building a Base for Other BusinessesBuilding a Base for Other Businesses– American designed systems for others.American designed systems for others.
Airline Industry Value ChainAirline Industry Value Chain
INBOUNDLOGISTICS
OPERATIONS OUTBOUNDLOGISTICS
MARKETING AND SALES
SERVICE
PROCUREMENT
TECHNOLOGY DEVELOPMENT
HUMAN RESOURCE
MANAGEMENT
FIRM INFRASTRUCTURE
Adapted with the permission of Michael E. Porter from Competitive Advantage: Creating and Sustaining Superior Performance, copyright 1985 by Michael E. Porter.
-Financial Policy - Accounting -Regulatory Compliance - Legal - Community Affairs
Pilot TrainingSafety Training
Agent Training
In-flight Training
Baggage Tracking System
•Promotion•Advertising•Advantage Program•Travel Agent Programs•Group Sales
•Ticket Counter Operations•Gate Operations•Aircraft Operations•On-board Service•Baggage Handling•Ticket Offices
•Route Selection•Passenger Service System•Yield Management System (Pricing)•Fuel •Flight Scheduling•Crew Scheduling•Facilities Planning•Aircraft Acquisition
Information TechnologyCommunications
Product DevelopmentMarket Research
•Lost Baggage Service•Complaint Follow-up
•Baggage System•Flight Connections•Rental Car and Hotel Reservation System
Computer Reservation System, In-flight SystemFlight Scheduling System, Yield Management System
Baggage HandlingTraining
Flight, route andyield analysttraining
Figure 4-3
ConclusionsConclusions
The Airline Industry is a vivid example of the dynamics of the market that it serves.
Shows that establishing strategies dictated by the market is critical.
Once the right strategies have been identified, information systems can play an important supporting role.
Chapter 4Chapter 4
Porter Competitive Model Porter Competitive Model
and and
the Airline Industrythe Airline Industry
2003 - A Hundred Years of 2003 - A Hundred Years of FlightFlight
Aviation is celebrating its centennial year. From its first brave beginnings the civil aviation industry remains dynamic and although some of the priorities have changed, the spirit and passion remain.
Some priorities are not new: safety, the need for efficient operations, adequate capacity to meet growth and, of course, customer satisfaction. Other priorities have gained prominence in recent years – security, war risk insurance and environmental concerns – and will remain important in the coming years.
This industry is always in the This industry is always in the
grip of its dumbest competitors.grip of its dumbest competitors.
Robert CrandallFormer CEOAmerican Airlines
We must look at the world as it We must look at the world as it is versus how airlines would is versus how airlines would like it to be.like it to be.
Robert L. CrandallRobert L. Crandall
And as government officials, politicians and consumers would like it to be.
Airline Industry GoalsAirline Industry Goals
Public Service. (Service to Customers)Public Service. (Service to Customers)
Return to Investors.Return to Investors.
Country Strategic Resource.Country Strategic Resource.
Are these consistent or in frequent conflict?
Airline ProfitabilityAirline Profitability
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.
Profitability = [yield X load factor] - cost
United Flight 815 United Flight 815 Chicago to LAX, October 31, 2001
204 tickets were sold and 186 people showed up.
68 passengers originated in Chicago and 118 were from connecting flights.
97 passengers terminated at LAX, 89 continued on another flight.
Of the 33 passengers that were only Chicago-LAX there were 27
different fares:
• A frequent flyer passenger paid nothing.
• A 1st class passenger paid $1,248.51 on the day of the flight.
• A coach passenger paid $102.26 on the day of the flight.
• A cash fare passenger paid $87.21 twenty-nine days in advance .
The National Commission to Ensure a The National Commission to Ensure a Strong Competitive Airline IndustryStrong Competitive Airline Industry
Change, Challenge and Change, Challenge and CompetitionCompetition
A Report to the President and CongressAugust 1993
Airline Industry ReportAirline Industry Report
The air transportation system has The air transportation system has
become essential to the economic become essential to the economic
progress for the citizens and progress for the citizens and
businesses of this nation.businesses of this nation.
The commission questioned some of the most The commission questioned some of the most basic assumptions that have formed the basic assumptions that have formed the foundation of policy toward this industry--and foundation of policy toward this industry--and behavior within it--for the past half century.behavior within it--for the past half century.
It also questioned whether the It also questioned whether the
airline industry has basic structural airline industry has basic structural
problems or if it is just a collection problems or if it is just a collection
of poorly managed companies.of poorly managed companies.
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 To return their balance sheets to respectability, most airlines would respectability, most airlines would have to achieve profit margins that have to achieve profit margins that are almost unprecedented in their are almost unprecedented in their history, and sustain those margins history, and sustain those margins for years.for years.
September 11 ImpactSeptember 11 Impact
An absolute disaster for the industry.
1990-1993 Was a Disaster!1990-1993 Was a Disaster! The Gulf War.The Gulf War. The general decline in the world economy.The general decline in the world economy. Aircraft fuel price increases.Aircraft fuel price increases. Wages, work rules and work patterns. Wages, work rules and work patterns. Chapter 11 bankruptcy airlines.Chapter 11 bankruptcy airlines. Excess capacity.Excess capacity. A very capital intensive business. A very capital intensive business. Too many years as regulated airlines.Too many years as regulated airlines.
Airline IndustryAirline Industry
The shock of September 11th has forced airlines to face an awkward fact: in some respects, aviation is a declining industry.
Nov. 22, 2001
The Economist
Decline in Air TravelDecline in Air Travel
At Thanksgiving in 2000 a record 2.2 million Americans took a flight to spend the holiday with family and friends.
Air traffic in October and November 2001 was down by about 25% compared to the previous year in the world's biggest aviation market, thanks to a combination of recession and the attacks on September 11th.
International TravelInternational Travel
International travel from America has been hit even harder: the number of Americans flying across the Atlantic is down by over 30%.
Never mind that more people are killed on America's roads every three months than have died in the entire history of commercial aviation.
Fatalities by Transportation Mode
0 5000 10000 15000 20000 25000
Passenger Car
Railroad
Airline 12
530
20,818
Load FactorsLoad FactorsDespite cutting capacity, the big American airlines are still flying with planes barely 60% full—a figure that would be much lower were it not for hefty discounts.
Boeing and Airbus, the two manufacturers of large jetliners, are offering airlines special financing deals to pay for their purchases in order to stave off outright cancellations.
The last time the airlines were in such straits, during the Gulf war and recession in 1990-92, it took them four years to return to profit, even though traffic recovered within a year.
European AirlinesEuropean AirlinesThe situation in Europe is no better.
Two flag carriers, Swissair and Sabena, have collapsed since the terrorist attacks.
Other big carriers, such as British Airways (BA) and KLM, are in major financial trouble.
Traffic within Europe fell by over 10% in September and October 2001, while traffic from Europe to America and Asia fell by 35% and 17% respectively.
Financial PictureFinancial Picture
Although air travel, measured by number of passenger-kilometers flown, has long risen faster than economic growth, airline revenues have lagged world GDP growth for the past 20 years in real terms,
Revenues and profits per seat have been falling because of greater competition springing from deregulation, first in America and then within Europe and across the Atlantic.
Even before the latest slump only a third of mainstream airlines in Europe, America and Asia earned enough to cover their cost of capital, which is 8% on average.
Looking for OptionsLooking for OptionsIn most industries, such a situation would quickly lead to mergers. But this is not so easy for airlines, hemmed in as they are by national ownership rules and rigid international regulation of routes.
America's airlines are retreating to their strongholds in the hub airports they dominate, such as Dallas-Fort Worth (American) and Atlanta (Delta). Most airlines have cut at least one “wave” of coordinated flights in and out of their hubs. If additional security checks are introduced for transferring passengers before they board their outbound flights, and the handling of such travelers thus slows down, some observers expect the airlines to switch to fewer flights in larger aircraft.
Dropping Point-to-Point FlightsDropping Point-to-Point Flights
The biggest effect has been for airlines to drop non-stop “point-to-point” flights rather than those that go through hubs.
The network economics of hubs becomes more attractive for big carriers when times are tough.
A study of America's changed airline-route map shows that large carriers are cutting non-stop flights to cities where they do not operate hubs by more than they are trimming hub flights.
Unions and Vendors Unions and Vendors
The industry's woes will also force airlines to get tough with unions and suppliers over restrictive practices that raise their costs.
European ChangesEuropean Changes
In Europe, where the failure of Swissair and Sabena has shown that there is room for only a handful of mainstream carriers rather than today's 14, a shake-out is already under way.
Airlines: How Ugly?Airlines: How Ugly?
The outlook is either bad or outright ugly.
Two problems: Post 9/11 fears and increased hassles based on new security measures.
US Airline Industry Must US Airline Industry Must Restructure or DieRestructure or Die
Aviation Week & Space TechnologyAviation Week & Space TechnologyNovember 2002November 2002
Low-Cost Airlines, Not September 11, Have Transformed Industry Fundamentals
"When people say the traditional industry model is broken, they are moving their jaw without putting their brain in gear," responds former American Airlines CEO Robert Crandall. He added that he is skeptical that the industry will ever be competitive as long as there are so many carriers selling what has evolved into a commodity product.
Aviation Week ContentionsAviation Week Contentions
A collapse in pricing power and a fundamental shift in the buying behavior of business travelers, coupled with fierce competition from low-cost airlines, is forcing U.S. major hub-and-spoke carriers to restructure their operations or face the prospect of eventually going out of business.
Airline executives and industry analysts note that the September 11 attacks, while devastating, are not the root cause of the financial crisis gripping major network carriers.
The crux of the problem is a combination of excessive costs in relation to carriers' current and projected revenues, an imbalance between the supply and demand for available airline seats, and an inability to boost air fares.
Corrective ActionsCorrective Actions
U.S. airlines have axed more than 70,000 jobs. In addition, some unions representing many of the industry's employees have made a commitment to work with management to help the carriers compete more effectively with low-cost rivals.
It will take much more than concessions by labor for major U.S. airlines to solve their financial problems.
The financial problems carriers are suffering could actually worsen in coming months if the U.S. goes to war with Iraq. The U.S. airline industry cannot take another major hit. A brief war doesn't qualify but a messy, extended war or another significant domestic terrorist attack does.
Airline Industry US Market Airline Industry US Market ShareShare
Based on current trends, the domestic market share held by the six major US airlines (American, Continental, Delta, Northwest, United and US Airways) plus Alaska Airlines will drop from 75% in 2002 to 62% in 2010—and 45% by 2020, according to an industry projection.
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.
Industry Structure ProblemsIndustry Structure Problems
The fact that low-cost carriers have been able to mature this far says as much about what's wrong with the majors as it does about what's right with their low-cost counterparts, and begs the question: does the underlying strategy or business model employed by the large hub-and-spoke airlines still work?
Analysts and other industry observers believe it does, but to function properly carriers must reduce their costs and restore the balance between supply and demand.
A Sobering FactA Sobering Fact
Before September 11, 2001, the global industry was showing a net loss on international services of around $3 billion.
Corrective ActionsCorrective Actions
Reduced capacity.
Older aircraft may never return to service.
Reduced wage pressures.
Continued joint agreements.
Discounted tickets and more travel packages.
Code Sharing AgreementsCode Sharing Agreements
The US Transportation and Justice Departments approved a pact Friday that will let Delta Air Lines, Continental Airlines and Northwest Airlines share access to each other's routes.
The code-share agreement allows each carrier to market the others' routes as its own. One Northwest flight, for instance, might also have a Continental flight number and a Delta flight number.
The agreement will be the biggest in the industry. US Airways and United Airlines have a similar agreement and Continental have some shared routes in a deal that dates to 1998.
Code Sharing AgreementsCode Sharing Agreements
It's an especially appealing arrangement to frequent fliers who prefer to build up miles on one airline while flying all three.
The government placed several conditions on the deal. Specifically, the DOT said 60 percent of any new code-sharing routes must serve those areas of the country that are considered under-served. It also bans anti-competitive practices like coordinated pricing or shared decisions about route planning and capacity.
American AirlinesAmerican Airlines
American Airlines asked its employees to come to the aid of the carrier, saying they have no time to waste if they want to keep the financially strapped airline in business.
The plea comes as two major unions at the world's largest carrier consider a company request to freeze their wages and another union is trying to hammer out a new contract.
Company management says carriers that have reduced costs through bankruptcy protection have put even more pressure on AMR.
American AirlinesAmerican Airlines
American asked union leaders to start holding weekly meetings, as early as next, week with company management in a collaborative process.
The move comes as United Airlines is trying to squeeze large wage cuts from its employees as it undergoes restructuring under bankruptcy protection.
About a month ago, American asked its employees to forgo pay increases. The union that represents flight attendants at American said it is taking a close look at the company's finances and may decide at the end of this month whether to forgo pay increases scheduled for this year.
Continuing ConcernsContinuing 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.
Porter Competitive ModelPorter Competitive Model
Intra-Industry RivalrySBU: American AirlinesRivals: United, Delta, US Air,Northwest, Southwest
BargainingPower of Buyers
Bargaining Power
of Suppliers
Substitute Products
and Services
PotentialNew Entrants
Airline Industry Analysis - North American Market
•Travel Agents •Business Travelers•Federal Government•Pleasure Travelers•Charter Service•U.S. Military•Cargo and Mail
•Alternate Travel Services•Fast Trains•Boats
•Private Transportation•Videoconferencing•Groupware
•Aircraft Manufacturers•Aircraft Leasing Companies•Labor Unions•Food Service Companies•Fuel Companies•Airports•Local Transportation Service •FAA•Hotels
•Foreign Carriers•Regional Carrier Start ups•Cargo Carrier Business Strategy Change
Figure 4-2
Europe North American Pacific Rim
MARKETS
Short Haul Long Haul
ROUTES AND ROUTE STRUCTURE
Hub and Spoke Point to Point
FARE STRATEGY
Low Fare Premium Fare
Independent Alliances
COMPANY STRUCTURE
INFORMATION SYSTEMS FOCUS
Figure 4-1
Latin American
Business Strategy Model - Airline Industry
Passengers Operations Logistics Business
PRODUCT/SERVICESScheduled Passengers
Charter Services Cargo
Mail Air Express
Modified compared to the example in the textbook.
Airline Industry Value ChainAirline Industry Value Chain
INBOUNDLOGISTICS
OPERATIONS OUTBOUNDLOGISTICS
MARKETING AND SALES
SERVICE
PROCUREMENT
TECHNOLOGY DEVELOPMENT
HUMAN RESOURCE
MANAGEMENT
FIRM INFRASTRUCTURE
Adapted with the permission of Michael E. Porter from Competitive Advantage: Creating and Sustaining Superior Performance, copyright 1985 by Michael E. Porter.
-Financial Policy - Accounting -Regulatory Compliance - Legal - Community Affairs
Pilot TrainingSafety Training
Agent Training
In-flight Training
Baggage Tracking System
•Promotion•Advertising•Advantage Program•Travel Agent Programs•Group Sales
•Ticket Counter Operations•Gate Operations•Aircraft Operations•On-board Service•Baggage Handling•Ticket Offices
•Route Selection•Passenger Service System•Yield Management System (Pricing)•Fuel •Flight Scheduling•Crew Scheduling•Facilities Planning•Aircraft Acquisition
Information TechnologyCommunications
Product DevelopmentMarket Research
•Lost Baggage Service•Complaint Follow-up
•Baggage System•Flight Connections•Rental Car and Hotel Reservation System
Computer Reservation System, In-flight SystemFlight Scheduling System, Yield Management System
Baggage HandlingTraining
Flight, route andyield analysttraining
Figure 4-3
Benefits of Information Systems
to American Airlines
1. Convenience to Customers.
2. Knowledge of Customers.
3. Providing a foundation for other
systems.
4. Building a base for other businesses.
Four Three Consistently Profitable Four Three Consistently Profitable AirlinesAirlines
1. Singapore Airlines1. Singapore Airlines
2. Cathay Pacific2. Cathay Pacific
3. British Airways3. British Airways
4. Southwest Airlines4. Southwest Airlines
Singapore AirlinesSingapore Airlines
Consistently profitable but experiencing profit pressures. Winner of multiple awards for “airline excellence.” An extension of the country strategy to be the business and
travel gateway to Southeast Asia. An impressive travel infrastructure. Leader of the Orient Airlines Association (OAA)
– Abacus reservation system.
– Price collusion on major routes. Nervous regarding U.S. carrier price competition.
Why SIA is So Good!Why SIA is So Good!
• Clarity and Commitment (to customer service).
• Continuous Training.
• Internal Communications. • Consistent External Communications.
• Connection with Customers.
• Benchmarking.
• Rewards and Recognition.
• Professionalism, Pride and Profits.
Southwest AirlinesSouthwest Airlines A U.S. carrier success story. Commuter airline that concentrates on city pairs.
(Average flight is 400 miles or less and takes less than 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. Company vision was to provide low cost airline service
to an increasingly larger number of people. Objective to minimize reservation costs.
A Strength of Southwest A Strength of Southwest AirlinesAirlines
1. Focus.
2. Focus.
3. Focus
Best Airlines for Business TravelersBest Airlines for Business Travelers
1. Singapore Airlines2. Swiss Air3. Cathay Pacific4. Midwest Express **5. Japan Airlines6. Quantas7. ANA8. Virgin Atlantic9. Lufthansa10. 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
Deregulated But Very RegulatedDeregulated But Very Regulated
Safety factors.
Air traffic controllers.
Impact on constituents.
International routes.
Business Traveler Choice?
Personal Traveler Choice?
Ticket-less Versus No Reservation?
Computer Reservation System:
Airline AlliancesAirline 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.
Interplay among government regulations, airline strategies, and airplane capabilities shapes the evolution of world aviation.
Boeing Corp.
Barriers to EntryBarriers to Entry
Access to airports continues to be impeded by:
(1) Federal limits on takeoff and landing slotsat the major airports in Chicago, New York, and Washington
(2) Long-term, exclusive-use gate leases
(3) “Perimeter Rules” prohibiting flights at New York’s LaGuardia and Washington’s National airports that exceed a certain distance.
US Industry StrengthUS Industry StrengthFifteen major US carriers represent the following significance in the world-wide airline industry:
29% of the aircraft
46% of the employees
32.5% of the the 2000 passenger miles
Based on a number of years of operating in a deregulated environment within the US that forced them to compete in a very tough market.
The Bad NewsThe Bad News
Cumulative Net Profit of Scheduled US Airlines:
Started in 1938
1970 – 2.2 billion profit
1980 – 5.8 billion profit
1989 – 8.2 billion profit
1994 – 4.8 billion loss
1997 – 5.4 billion profit
1998 – 10.3 billion profit
1999 – 15.6 billion profit
2000 – 18.1 billion profit
2001 – 12 billion profit
Airline Industry Conclusions Airline Industry Conclusions
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.
Possible Exam QuestionsPossible Exam Questions
1. Identify an industry where information systems act as a
significant barrier to entry and explain the significance of this
barrier.
2. Identify and explain the two basic strategies and three
supporting strategies used by intra-industry rivals.
3. What is the primary benefit to be derived through the use of
the Porter Value Chain?
4. Explain the logic and growth as a competitive strategy and provide two company examples where this was a key
strategy.