Competition in the Airline Industry: Case Study

Strategic Profile and Case Analysis Purpose

The case of the airline industry gives us insight into the performance of airlines in the airline industry. In the case discussed, it is explained that the key competition among the airline industry  involves; fewer mistakes, more perks, and superior service. However, the key factors can be copied among this industry and they do not deliver a long-standing advantage in the industry. The case references that Southwest Airlines first started as a low-price airline, it maintains this status in addition to providing other services that could not be copied by its competitors. Additionally, Southwest Airlines have capitalized on its resources and capabilities to deliver more efficient and reduce cost services. In this paper, we will discuss the airline industry and factors such as; situation analysis, SWOT analysis, strategy formulation, and a strategic alternative implementation.

Situation Analysis

General Environment Analysis

Currently, the economic depression is influencing every industry, including the airline industry. Besides economic fluctuations, the airline industry has operated well and ever since 1980, it has undergone an average growth rate of five percent and it is anticipated to maintain its growth rate ("PESTLE Analysis of Airline Industry," 2018). However, within any industry there are numerous challenges that the airline industry deals with; i.e., high operational costs, regulatory frameworks and demanding customers ("PESTLE Analysis of Airline Industry," 2018). Nonetheless, a PESTLE analysis can be used as a strategic method for airline companies to evaluate all external factors that have an effect on a business ("PESTLE Analysis of Airline Industry," 2018).

Political Environment

Globally, most countries have strict regulations for the aviation industry, due to the dangers associated with flying that can end in deaths, accidents, and permanent damage ("PESTLE Analysis of Airline Industry," 2018). Numerous policies have been created to protect passengers that utilize the aviation industry. Moreover, insecurity and war factors create high-security threats which lead to a reduction in flight activity ("PESTLE Analysis of Airline Industry," 2018).

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Economic Factors

The economic factors have a major effect on the aviation industry. Currently, the economic recession has decreased the travel market, hence, the economy and premium traveling dropped ("PESTLE Analysis of Airline Industry," 2018). Moreover, the airline industry experienced increasing fuel prices, which, in turn, made it challenging to produce profits ("PESTLE Analysis of Airline Industry," 2018). Furthermore, airlines have witnessed increasing labor demands of employees and an increase in potential bankruptcies, which eventually lead to mergers with other major airline companies ("PESTLE Analysis of Airline Industry," 2018).

Social Factors

Due to the changing demands of consumers, airlines are providing extensive services at low fares. Prior years have shown a decrease in business class traveling has caused an enormous loss for the airline companies ("PESTLE Analysis of Airline Industry," 2018). Additionally, automation has been a factor affecting the airline industry, consumers are using Skype or participate in conference calls as an alternative to traveling ("PESTLE Analysis of Airline Industry," 2018).

Technological Changes

The significance of technological factors can be comprehended from the substantial use of technology in the global airline industry. Moreover, airline passengers now have a preference to approach ticketing and check-in services by the use of cell phones or laptop devices instead of waiting in a long line at the airport ("PESTLE Analysis of Airline Industry," 2018). In addition, the aviation industry has utilized the social platforms that are available to attract more business activity from consumers ("PESTLE Analysis of Airline Industry," 2018). Furthermore, technology has created lighter aircrafts producing speed and fuel economy ("PESTLE Analysis of Airline Industry," 2018).

Legal Issues

Regarding legal issues, there are specific laws developed for air traffic pertaining to the safety and security of passengers ("PESTLE Analysis of Airline Industry," 2018). Also, there are several regulations that expect airlines to provide safe travel and the best quality services ("PESTLE Analysis of Airline Industry," 2018). Notably, airlines are responsible for airline crashes, any type of damage or disaster associated with its services ("PESTLE Analysis of Airline Industry," 2018).

Environmental Aspects

The factors associated with the environmental aspects of the aviation industry are fuel and climate. Fuel is vital in the airline industry and airlines are expected to invest additional funds into environmentally friendly and fuel effective aircraft ("PESTLE Analysis of Airline Industry," 2018). Moreover, climate changes impact the aviation industry, hence, green flying practices in order to protect the environment ("PESTLE Analysis of Airline Industry," 2018).

Industry analysis

The airline industry provides transportation services for consumers which are both convenient and efficient ("DEPEST Analysis - Airline Industry Analysis," n.d.).  The airline companies provide food, drinks, entertainment, flight staff and the fastest and comfortable form of transportation. There are other forms of transportation, but none as fast as airline travel ("DEPEST Analysis - Airline Industry Analysis," n.d.). The airline industry functions not only in the United States but also on a global level ("DEPEST Analysis - Airline Industry Analysis," n.d.).

Competitor analysis

Porter’s five forces model displays the five forces that shape industry competition; i.e., the threat of new entrants, bargaining power of buyers, the threat of substitutes, bargaining power of suppliers, and competitors.

Bargaining power of Buyers

The airline industry provides exceptional service. Every airline in the industry has its own marketing strategy and perks that they form to appeal to consumers. Many airlines place an emphasis on cost, in contrast, others concentrate on offering the best features and services ("Porter's Five Forces - Airline Industry Analysis," n.d.). The bargaining power of buyers in the airline industry has an extremely low threat ("Porter's Five Forces - Airline Industry Analysis," n.d.).

Bargaining Power of Suppliers

The major suppliers in the airline industry are airplane manufacturers. The main manufacturers presently are Boeing and Airbus ("Porter's Five Forces - Airline Industry Analysis," n.d.). Currently, airline business manufacturers are attempting to make their planes more ecofriendly. However, airline companies are not able to just switch suppliers, hence, many have long term contracts with their suppliers ("Porter's Five Forces - Airline Industry Analysis," n.d.). Moreover, airline companies are the main source of income for the airline manufacturers. As a result, the bargaining power of suppliers contains a low threat ("Porter's Five Forces - Airline Industry Analysis," n.d.).

The Threat of New Entrants

The threat of new entrant’s aspects contains a low threat to the airline industry. However, there are two aspects that increase the threat level; i.e., 1. extremely low switching costs and, 2. there are no proprietary products or services included ("Porter's Five Forces - Airline Industry Analysis," n.d.). The time and money involved in opening an airline company avert many people from entering the industry ("Porter's Five Forces - Airline Industry Analysis," n.d.).

Threat of Substitutes

The airline industry does contain substitutes. Moreover, there is an array of transportation for consumers; i.e., automobile, bus, train, and boat ("Porter's Five Forces - Airline Industry Analysis," n.d.). However, some forms of the listed transportation other than that of a plane can be costly and time-consuming. As a result, airlines are the best selection for consumers when it comes to cost, accessibility, and service ("Porter's Five Forces - Airline Industry Analysis," n.d.). Conversely, there are some consumers who will not fly or because of the cost of a flight choose a different form of transportation if the time frame for arrival to their destination is not a factor. Therefore, the airline industry has a medium substitute risk level ("Porter's Five Forces - Airline Industry Analysis," n.d.).

Rivalry/Existing Players

The airline industry is at the present time extremely stagnant ("Porter's Five Forces - Airline Industry Analysis," n.d.). Additionally, the amount remains the same, hence, not under or overcapacity in the industry ("Porter's Five Forces - Airline Industry Analysis," n.d.). Also, fixed costs are exceptionally high, making an exit from the industry difficult due to long term loan agreements in order to continue in business ("Porter's Five Forces - Airline Industry Analysis," n.d.).  Furthermore, the market share appears to be evenly distributed, hence, each business has its own area of the market ("Porters Five Forces Analysis of the Airlines Industry in the United States," n.d.). Therefore, the rivalry in the airline industry is very high ("Porter's Five Forces - Airline Industry Analysis," n.d.).

Internal Analysis

In reference to the internal analysis has to do with the strengths and weaknesses of the airline industry. The major areas in which the airline companies should look at are in-flight comfort, baggage handling, the excellence of airline employees, internet use, airport proximity, added services, number of destinations that are accessible, and safety (Dostaler & Flouris, 2006, p. 40). For that reason, carriers practicing the best-cost provider strategy should offer lower rate fares than their direct competitors, and superior service (Dostaler & Flouris, 2006, p. 40). In order to achieve a successful business strategy, both strategic and financial aspects for the company must be assessed. There are two aspects:

1. The airline companies who present lower fares than their competitors, in addition to higher-quality travel services (Dostaler & Flouris, 2006, p. 40). These companies tend to attain greater financial and strategic performance over their rival companies (Dostaler & Flouris, 2006, p. 40).

1. The airline companies who present lower fares than their competitors, in addition to a greater quality air travel services; but, attain a decreased financial and strategic performance over their rival companies are in an indeterminate state (Dostaler & Flouris, 2006, p. 40).

Identification of Environmental Opportunities and Threats and Firm Strengths and Weaknesses (SWOT) Analysis

A SWOT analysis displays the strengths, weaknesses, opportunities, and threats in any company. However, each airline analyzes its own business and formulate decisions based on their own positions (Fulton, n.d.)

Strengths

The airline industry provides air travel, publicly known to be afast and safe way to travel, a staff of exceptionally trained individuals,and can segment the market (Fulton, n.d.).

Weaknesses

The airline business has ahigh spoilage rate, an empty seat is lost revenue,airplanes are expensive, return on investment can fluctuate, a large workforce spread over large geographic areas, needs continued communication and monitoring (Fulton, n.d.).

Opportunities

The opportunities for the airline market growth offer frequent expansion opportunities, technology advances creating cost savings; i.e., fuel-efficient aircraft to more automated processes, increased revenue due to customer service improvements such as onboard Internet access (Fulton, n.d.).

Threats

The threats in the airline industry involve; a global economic downturn adversely affects travel, an increase in fuel prices can disrupt the business model, a plague or terrorist attack can shut down travel, and government intervention can create costly rules and regulations (Fulton, n.d.).

Strategy Formulation

Strategic alternatives

In the past couple of decades, airlines have been implementing new strategies to make their company more profitable (MacLennan, 2014). In this case study, several airlines were discussed, one that stands out is Southwest airlines. I would like to expand on their strategic alternatives in this discussion. There are two alternatives in which I would propose:

Product Development

1. Southwest Airlines must spread out into ancillary products and services; i.e., car rentals, hotels, and accommodations. Strategically, this would allow them to compete with Hotwire, Priceline, Expedia and, etc. The potential services should coincide with its corporate strategy regarding the best value and lowest prices.

Diversification

1. In prior years, Southwest Airlines have been known as a highly competitive, stayer, and best value for the money company. The company can use its brand equity to expand into related diversification; i.e., catering and hospitality business.

Alternative evaluation

The alternatives are both good ideas, but one is more approachable than the other for Southwest Airlines. The first strategic alternative involving branching out to the hotel and accommodations and car rental area would not only expand its business but increase revenue for the company (Rodrigo, 2016). Moreover, the creation of a one-stop shopping arena has never been successful in any airline business, but with the Southwest Airlines’ reputation, they would have a great chance at success. The second alternative for Southwest Airlines’ diversification into the catering and hospitality industry would not be a beneficial diversification strategy, hence, it would be a drastic shift from the company’s core competencies (Rodrigo, 2016).

Alternative

The choice involving the strategic alternative plan for Southwest Airlines was plan #1. The growth and diversification in this plan must be limited to those businesses that produce synergy. Moreover, synergy transpires when the performance of several products and services or businesses equals more than the sum of its parts (Rodrigo, 2016).  Therefore, it relates to the creation of economies of scales, hence, two or more products, services or businesses can reduce their costs by linking operations or manufacturing facilities (Rodrigo, 2016).

Strategic Alternative Implementation

Action items

The marketing department will oversee creating the campaign and advertising for Southwest Airlines in different locales (Rodrigo, 2016). The research and development will oversee the research aspect to access consumer needs as related to strategic alternatives.

Action plan

The strategic alternative plan #1 will take place in the United States, Mexico and Canada (Rodrigo, 2016). The strategic alternative should follow once the research process is finished is completed. The estimated time of implementation is one to three years.

References

• DEPEST Analysis - Airline Industry Analysis. (n.d.). Retrieved from https://sites.google.com/site/admn703ai/project-definition
• Dostaler, I., & Flouris, T. (2006). Stuck in the Middle Revisited: The Case of the Airline Industry. Journal of Aviation/Aerospace Education & Research. doi:10.15394/jaaer.2006.1502
• Fulton, J. (n.d.). Airline Industry SWOT Analysis. Retrieved from https://getawaytips.azcentral.com/airline-industry-swot-analysis-12208038.html
• MacLennan, A. (2014, February 4). 3 Business Strategies Reshaping the Airline Industry. Retrieved from https://www.fool.com/investing/general/2014/02/04/3-business-strategies-reshaping-the-airline-indust.aspx
• PESTLE Analysis of Airline Industry. (2018, May 5). Retrieved from https://www.marketingtutor.net/airline-industry-pestle-analysis/
• Porter's Five Forces - Airline Industry Analysis. (n.d.). Retrieved from https://sites.google.com/site/admn703ai/the-team
• Porters Five Forces Analysis of the Airlines Industry in the United States. (n.d.). Retrieved from https://www.managementstudyguide.com/porters-five-forces-analysis-of-airlines-industry-in-united-states.htm
• Rodrigo. (2016, October 12). Strategic Evaluation of South West Airlines – The WritePass Journal. Retrieved from https://writepass.com/journal/2016/10/strategic-evaluation-of-south-west-airlines/