Closing CasePlain Wreck: The Airline Industry in 2001-2004

Question#1 Use the competitive forces model to analyze the structure of the airline industry during 2001-2004. How well does this analysis explain the low profitability of the industry?

Answer: The competitive forces model focuses on five forces that shape competition within an industry. These five forces are: the risk of entry by potential competitors, the intensity of rivalry among established companies within an industry, the bargaining power of buyers, the bargaining power of suppliers, and the closeness of substitutes to an industry’s products.

The first factor, risk of entry by potential competitors, was a major factor for airlines during 2001-2004. The airline industry took a big hit when oil prices went up and the want to fly due to 9/11 had gone down severely. Airlines needed to stay ahead of their competition to survive and several companies found themselves filing for bankruptcy protection, etc. to keep themselves established. If new competitors were to come in at this time the main airline companies could go out of business since the demand to fly was down and prices were skyrocketing for oil. This explains the low profitability of the industry by showing how h0w potential competitors would bring down the profits of the other companies in the industry since the demand for flying was low at the time.

The second factor, the intensity of rivalry among established companies within an industry, was also vital during this time. Price wars started between the companies instead of quality. Consumers were now demanding for lower price tickets then the quality of their seat due to the fact that oil prices went up therefore ticket prices went up. The companies who focused only on quality was devastated because they had to react to price wars and started to become competitive with the airlines that were already focused on price. This reflects the low profitability of the industry because all of the companies were fighting over price so they were all lowering their prices and trying to remain competitive with each other and most of the companies were not gaining a profit.

The third factor, the bargaining power of buyers, is illustrated through the budget airlines. Their target was only consumers because they were cost driven and focused on getting the consumers the flight they want at a good price. This is also shown by network carriers who were more for business travelers who paid for tickets at last minute and were more concerned for the quality of their flight not the price. This shows low profitability because they were trying to bargain with the buyer and give them the cheapest deal possible which was lowering the profits.

The fourth factor, the bargaining power of suppliers, is also shown through the budget airlines when they moved into the coast-to-coast markets, which were high fare prices. The budget airlines were able to control the consumers because they knew that they were going to get consumers so they directed them towards buying higher priced tickets to make money. This affected low profitability because when they went for coast-to-coast markets the tickets were higher but the cost of oil was higher so they were still not making much of a profit due to the fact of their cost variable demand to travel the long distances went down.

The fifth factor the closeness of substitutes to an industry’s product, this was represented by the budget airlines that suddenly appeared in the scenario and started taking the consumers away from the network airlines by lowering the price of their tickets, which resulted in low

profitability because the tickets for the major airlines were cheaper and they were also taking consumers away from other companies which were putting them into debt.

Question#2 Are the budget airlines in a different strategic group than the major network airlines? Answer: Yes there are different strategies between budget airlines and the major network airlines. The six major airlines are built on a “hub and spoke” system, while the budget airlines are on a point to point system. Also most budget airlines don’t serve food and also have employees use multiple roles in the airports.

Question#3 Compare and contrast the different strategic approaches of the network and budget airlines. What are the strengths and weaknesses of each approach?

Answer: Network airlines designed their route in such a manner like direct their flights through significantly larger cities where the hubs are more dominating. This strategic approach is called the "hub and spoke system". High gas prices have resulted in the customers paying a lot more money to fly. There are also a lot of in-flight services that have made flying more costly. Budget airliners fly out of secondary hubs rather than the more dominating hubs. This is a lot cheaper. They have also hired nonunion workers who learn and multi task different jobs. They don't have any complementary foods or drinks and this result in cheaper tickets. People might be more comfortable and satisfied if they were able to grab a bite to eat or a drink when they're thirsty and not having in house services could turn the customer away. They also only offer one type of plane which my analysis shows isn't a bad idea because the workers can develop some sort of consistency as far maintaining these planes.

Question# 4 What is required for the industry to return to profitability?

Answer: For the industry to return to profit they need to be able to compare their flight distance with the price of barrels of gasoline. The price of the tickets should be adjusted considering the operating cost as well. The laws of aviation can also be altered so that major airlines do not become bankrupt so easily.

Question#5 What must the major network airlines do to respond to the competitive threat posed by the budget airlines? Have they taken steps in this direction? Have they done enough?

Answer: For beginners the larger airlines began to reduce prices in order to remain competitive to hold customer loads in the face of declining demand, however it didn’t work. Their second plan was to leave the aircrafts in the desert. This step would eliminate maintenance as well as few other legal fees. However the network airlines have also responded by adding more flights in an attempt to squeeze its competition from the market. It has been reveal that between 2001 and 2004 the network airlines cut costs by 13.4 billion and reduced payrolls by 100,000; however it is just not enough to rebound from this major market shift.

My analysis shows the large airlines should either use their inherited position to attract and keep loyal customers. As it is impossible to offer their service in the way they used to. So adapting by downsizing and focusing their money and efforts toward a certain demographic such as business class, or first class, I would say they would still have a chance to claim their niche in the market.