CASE 2.

The US Airline Industry in 2009

1) Assess the overall financial performance of the US airline

industry during the past 20 years.
In general, major US airlines companies have suffered large revenue
losses over the last 20 years. From 1999 to 2001, the airline industry saw
two prosperous years. Up to 2006, companies were steadily making profits.
However, when the economic recession hit the industry in 2008, the airline
industry suffered more losses than had been anticipated. The world
economic recession meant that there were fewer passengers, leading to
fewer profits. Not only did they suffer losses in profits from flights, but they
also suffered from operating costs, restructuring and debt and erosion.
Major airlines struggled to compete with the influx of budget airline
companies offering cheaper prices for the same routes.

2) To what extent can the industrys low average profitability

during this period be attributed to the structure of the industry?
Which of Porters five forces has had the biggest impact in
depressing industry profitability?
Low profitably is very much so attributed to the industry itself and
some external factors too. For example, the price of fuel is determined by
the price of oil which affects airlines. Also with the advent of the internet,
face-to-face business meetings were reduced and online conferences meant
that business customers were using the airline service less.
Although the industry has suffered from external factors such as
terrorist attacks (sept 11), and the economic credit crunch, it has been
found that the extent to which the losses occurred are mainly caused by the
nature of the industry itself. Certain factors from within the industry
worsened the external situation.
Porters five forces

Threat of entry. Due to deregulation in the 1980s, barriers of

entry and exit were lowered. Although it was easy to start up
an airline, running the airline service proved more difficult due
to the Major airlines that were already established in the
industry dominating landing slots and routes. Saying this, it
was still a very attractive and easy industry to enter. This
created more competition which led to higher barriers of exit.
One factor was employee contracts which would lead to large
closure costs and the other factor being Chapter 11 of bankrupt
code allowing companies to continue with their service on

credit. This means that airlines can enter bankruptcy and yet
never actually liquidate causing the airline to leave the market
which would have then reduced competition.

Industry rivalry. Following on from the deregulation and

barriers of entry and exit being lowered. This allowed budget
airlines to enter the market which in turn created very little
concentration of companies, leading to fierce competition in
the industry. Whats more, there was very little diversity of
competitors. Airline companies are all offering the same
service. This meant that companies were unable to gain loyal
customers. Intense competition lead to wide cost reductions
within the industry. Another factor is cost conditions. Fixed
prices on seats meant that companies were often unable to
break even due to operating costs when there were unsold
seats on flights. This resulted in companies cutting prices to
attract customers.
It must be noted that companies that offer the same service,
air transportation, can be divided into different segments of the
market. There is no rivalry between companies offering the
same service, either focusing on business customers or leisure
customers.
Buyer and bargaining power. Due to the variety of
scheduled flights and routes, customers have the buyer power
as they have a wide choice of airlines and routes. The advent of
the internet meant that airlines lost commission from travel
agencies as customers were buying flights directly from the
internet using flight comparison websites. This resulted in
airlines losing control of flight sales leading to customers
gaining bargaining power. Because of high competition and
lack of product differentiation, customers were sensitive to high
prices. Essentially, leisure customers are only influenced by
price. Although Major airlines try to differentiate on in-flightmeals, entertainment and service, leisure customers care more
about the low price and opt for a budget airline. Although major
airlines intend to consolidate prices, there is very little
consolidation throughout the whole industry.

3) Are there any strategies that the airlines have deployed which
have influenced industry structure and moderated the intensity of
price competition? Are there strategies that the airlines could use
to improve future industry profitability?
Airlines have deployed several strategies in order to moderate price
competition.
Legacy airlines

They separate their customers into two categories, leisure

customers and business customers. They identify that leisure
customers are not loyal as they are influenced by price so they
do not invest in online service with this segment. In saying this,
they are able to create differentiation with their business
customers by offering a better online service than budget
airlines. They gain loyalty with this segment by introducing
flyer-schemes which awarded loyal customers with upgrades
and points.
Major airlines consolidated their prices with each other in order
to reduce competition within each other
They formed mergers and acquired smaller airlines in order to
make the industry more concentrated and reduce competition.
They also formed alliances with local airlines
They reduced the number of routes in order to gain greater
efficiency
They used yield management to provide flexible price
determination

Budget airlines

Used low flight prices in order to compete with the major

airlines
They made money from charging for online services like meals
and baggage handling
They invested in new planes as they had a stronger financial
position meaning they were able to cope with the increase in
the price of fuel more easily

Legacy airline companies must consolidate their prices together and focus
their strategy on differentiation in the service they offer in order to gain
advantage over budget airlines.

Group 5: Maitane Garrido, Rachel Boyd, Francesco Urselli and Ana GarcaDenche