The report focuses to analyse competitive position of the US airlines industry. US airline industry is facing some challenges in recent times in terms some low profitability, higher fare charged by major airlines, losing investor’s faith, labour crisis. Domestic demand for the air transport is US is high due to geographical distances between major cities (Cederholm 2014). Air fare in US has increased overtime due to increasing demand from both domestic and international sectors. In order to address issues faced by the US airlines, the report makes a competitive analysis; which includes porter’s five forces analysis. This analysis includes bargaining power of the consumers, bargaining power of the suppliers, competitive rivalry in the industry, presence of threats of substitutions and threats of new entry in the market. US airlines have large scale of operation in the global airline industry.
PESTLE analysis highlights the political, economic, social, environmental and legal impact on the airline industry. US airlines have their internal problems, which are discussed trough SWOT analysis. SWOT analysis highlights internal strength, weakness, opportunity and threats in the market. US economy has undergone terrorist attack, financial crisis, economic recession, and rise in fuel price and demand crisis during twenty first century, which has impacted negatively to the US airlines industry (Koenig and Mayerowitz 2015). This report presents a strategic analysis to increase profitability in the airline industry.
An overview of the US airline industry
There are more than 100 certified passenger airlines operating in US with more than 11 million flight departures every year. US airlines transport about 2million passengers and 50,000 tons of cargo every day (airlines.org 2016).
· Price regulations, business regulations, competition policy of government, political instability due to change in government, affect the operation of airlines (Cederholm, 2014).
· Trading agreement with different countries affect the profitability of business.
· Regulations in labour market affect the cost of operation in the airline industry.
· Pattern of consumer spending, demand for air travel from both domestic and international passengers affect the profitability of airline industry.
· Rising inflation, fluctuation in exchange rate, decreasing consumer spending due to economic recession affect the business of airlines (airlines.org 2016).
· Rise in fare of each airline depends on the respective demand and capacity of each aircraft.
· Monetary policy affects the interest rate, which further affects investment in airline operation and infrastructure (Orphanides 2012).
· Federal open market committee has long term goal such as maximising employment, moderate rate of inflation rate. As inflation has inverse relation with the interest rate. Therefore, rise in inflation reduces inflation rate in US facilitating the investment in airline industry (federalreserve.gov 2016).
· Lorenzetti (2015) argued that global financial crisis at inflation have resulted into greater economic instability, high inflation and slower growth of economy leading to low profitability in US airlines industry.
· US airlines contribute significantly to the domestic economy in terms of share in GDP, employment.
· Technological advancement improves airline operation in terms of cost reduction. Advanced air craft engine technology, IT solution, mobile technology has improved US aviation industry significantly (Aguirregabiria and Ho 2012). Technological up gradation enhances the capacity of the aircraft, enhances the comfort of travelling, creates better connectivity and reduces fuel consumption. All these factors positively influence the consumer demand.
· Environmental and work place safety law affects the business operation of airlines. US airlines are regulated industry.
· US airlines needs to maintain energy security regulations and aviation safety law (airlines.org 2016)
· Global recession of 2007-08 and 2013-14 have great impact on US economic. US economy has been slowed down after the global recession. Therefore, consumer spending on travel and tourism has reduced after 2011, which has negative impact on the profitability of US airline industry (Dai, Liu and Serfes 2014).
· High fuel cost is a reason of low profitability.
· Use of renewable energy and low fuel consumption are growing issue sin airline industry. The airlines such as Delta, United, American, Southwest, and Jet Blue have been replacing the old aircraft with new fuel efficient ones in order to reduce impact on climate change (Puller and Taylor 2012).
A competitive forces analysis of the airline industry
· Large number of employees and technological innovation are strength of US aviation industry.
· Variety of planes gives opportunity to passengers for the choosing aircraft as per their choice. Product differentiation gives competitive advantage to the companies of different companies of US airline (Dai, Liu and Serfes 2014).
· High domestic demand for the fleet of 330 + mainline jet aircraft and rising demand from international travellers. These factors are contributing factors for rising revenue.
· Koenig and Mayerowitz (2015) stated that merger of nine large US airlines to four has reduced global competition in the airline industry by raising monopoly power of the US airlines.
· Rising labour cost in the US economy is an important concern for the airline industry as it raises cost of operation. Rising labour cost creates pressure on airline service and hence on the profitability of the company (Barla 2013).
· US airlines have leased some of the planes, for which large amount of money have been spent. Most of the planes have not been utilised properly (Zou et al. 2014).
· US airlines have been affected by terrorist attacks various times. These incidents have hampered the scale of operation making loss for the airlines.
· Most of the companies of US airlines have good infrastructure and opportunity to increase profits.
· Merger and acquisition gives US airlines an opportunity to dominate market (afacwa.or 2015).
· US airlines have opportunity to us point to point flying instead of hub-spoke flight pattern. Profitability in point to point flying is more than the later one (Belobaba, Odoni and Barnhart 2015).
· There is immense opportunity to make a partnership with a financially stable company
· Economic turmoil and political unrest in domestic economy has negative effect on airlines’ profitability.
· Entry of new company is always there in the airline industry of UK.
· Oil price fluctuation has impact on the fuel price and hence on the demand for air transport as there is alternative transportation route for domestic travel (Johnston and Ozment 2013).
· There is always a possibility of terror attack in future to affect airline business.
Five forces of Porter
Power of supplier: Supplier in US airline has immense power to bargain over inputs such as fuel, labour and aircraft. Airlines companies are potential buyers of the inputs and there is rising competition in this industry. Competition among buyers gives suppliers sufficient power to bargain over the price of each input (Borenstein and Rose 2014). Fluctuation in oil price in the international market, rise in wage through the bargaining power of labour union, increase in the price of aircraft affects the input cost of the US airlines.
Power of buyer: Online ticketing system facilitates the buyers so that they no longer need to depend on the agent and intermediaries. Entry of low cost carriers and price war among the airline companies in provides the scope of bargaining to the consumers (Grant 2016). This is the form of indirect bargaining. A consumer generally fills the ticket for low cost carrier. Hence, it is hard to raise fare above competitive price as the consumer may search for alternatives. Hence, power of buyers is said to be high in this industry. However, Aguirregabiria and Ho (2012) mentioned that recent mergers of large airline companies of US give them a monopoly power to charge a higher fare to the consumers.
Entry barrier: Any potential firm can enter into this industry due to presence of positive profits. However, entry is not easy, as a company needs huge start up capital in order to operate and establish business in this industry. The scale of operation in this industry is large. Moreover, knowledge, skill and huge investments are required to run the business (Brueckner, Lee and Singer 2013). Hence, it can be said that entry in airlines in restricted.
Threats of substitutes: Close substitute is available for US airlines. Rail, road and waterways are available for transportation within different provinces of US. Waterways are available for international transport. Threats of substitute is high for domestic transport, however, it is low for international travel.
Intensity of rivalry: Intensity of rivalry is high in this industry. There are around 100 of passenger airlines in US economy. Therefore, competition in this industry has at high level. Tight regulations, high operating expenses, rapid rate of turnover make the industry more competitive (Ciliberto and Williams 2014).
Economic performance analysis
Airline industry has significant impact on the US GDP. This industry contributes more than 10 million jobs every year. This industry also contributes 5% of each dollar of GDP of this country. This sector supports other allied sector such as tourism and hotel industry to help the economy to boost. All these factors contribute to economic growth of this economy. US passengers and cargo carriers in the airline industry employ more than 682000 employees worldwide. Along with recruitment opportunity, this industry provides security, handsome payment and benefits to employees. Average wage of the employees of US airline is $67,000 compared to national private sector average $45000 (airlines.org 2016). Therefore, it can be said that the standard of living of the family of airline industry is better compared to other sectors. There are several types of job opportunity and thus numerous skills of employees are required. Hence, this industry encourages government investment in the education sector more for human capital formation (Borenstein and Rose 2014).
Contribution to local economies
Airlines influence other domestic sector through backward and forward linkages. Airlines connect different geopolitical regions easily increasing economic cooperation and trade agreements. This sector facilitates businesses, direct and indirect commerce. Investment in airline infrastructure facilitates cargo transport, which further facilitates export and import in US economy with rest of economies (airlines.org 2016). Growth in export- import contributes in economic growth. Moreover, this sector indirectly acts for growth of the economy by facilitating the tourism sector and hotel industry. Moreover, suppliers of aircraft and aircraft parts are benefitted for the growth of this industry.
Demand for airlines comes for business purpose and for tourism. Demand comes from several business sectors, students and families. However, demand for passenger transport is high from the business organisations for international meeting. During 2015-16, revenue of the airlines has decreased. Demand in this industry falls during economic recession as people cut their expenses on travel and tourism. The causes of decreasing revenue in recent times are foreign exchange pressure and lower surcharges in the international market (Lorenzetti 2015).
Demand for US airlines is high during boom period, when production of goods and services in domestic economy is sufficient. The excess amounts of products are exported to diversified global market. As US airlines are important medium of cargo transport, demand for important airlines in US are high at economic boom and recovery period. However, decline in oil price has helped the airlines to take cost saving initiatives and reduction in ticket price. Rising incumbent in this industry over the years has created excess capacities in this industry and rising competitiveness. As stated by Schmidt (2015), increase in capacity in the airlines was more than the demand during 2014-15 in US.
Strategies for airline profitability
Despite huge growth of passenger demand, airlines of US face decreasing revenue in recent days. Increasing labour cost, increasing competition, weak industry profit margin is main cause of decreasing profitability. Major airlines of US have merged with each other during previous decades to raise market power. However, new entry in the market is still creating excess capacity in the industry, which is creating pressure on the existing airlines such as Delta Air Lines, United Continental, American airlines, JetBlue Airways (Aguirregabiria and Ho 2012). One strategy of the airlines to increase profitability may be investment in ancillary services of airlines such as early boarding, Wi-Fi, baggage and premium seating.
Cost leadership gives competitive advantage to the airlines. Use of low cost fuel and low cost- technology enabled air carriers can reduce cost of operation. Collaboration with the suppliers and proper negotiation with the labour union can mitigate the problem of increasing input cost. Cost leadership helps to keep price low compared to the competitors. This strategy creates barriers to the entry of new firm in this industry (Puller and Taylor 2012). Split between luxury and economic seating classes give passages opportunity to choose according to their choice and demand. Price discrimination along with product discrimination can be effective strategies.
Lease of airlines
Many of the US airlines have faced debt burden after their merger with other airlines. American Airlines had $16.8billion of debt after its merger with US Airways. Debt burden has put burden on the profitability of this airline. Debt burden and low profitability are reflected both on the balance sheet and cash flow statement. During that time, the lease value of American Airlines was $8.7 billion. Levine-Weinberg (2016) stated that leasing is equivalent to debt as it requires long term stream of payment. However, Delta Airlines on the other hand chose to use capital spending for reduction of debt burden instead of leasing.
The above analysis shows that the cause of low profitability in US airlines is increasing cost, rising pressure of exchange rate, rise in excess capacities and increasing competitiveness. Traditional hub-and spoke airline model is barrier for increasing profit. As there is number of substitutes of airlines in US economy for domestic transport, rise in fare shifts the demand from airlines to other mode of transport (Johnston and Ozment 2013). The hub and spoke airline model is not competitively sustainable as this requires extensive physical infrastructure, complex aircraft fleet, and large number of labour. Point to point flying model is more effective as it provides short trip facilities. US airlines have experienced major loss in revenue several times due to bankruptcy, global recession, and financial crisis.
Nine large airlines have been merged up to become four major airlines such as American, United, Delta and South West to increase market share and to reduce cost of operation before 2010. During the same period, airfare has risen more than the inflation rate due to decrease in competitive pressure. The merger has been seemed to be successful that US airlines made $19.7 billion profit. Koenig and Mayerowitz (2015) mentioned that demand has increased despite rise in fare due to investment in capacity enhancement such purchase of new jets and improvement of airport facilities. Moreover, collusion strategy has been taken to increase fare and decrease number of available flights and seats.
Another concern in recent times in US airlines is violation of competition rules. Lorenzetti (2015) mentioned that employees of major US airline such as Southwest airlines. Delta is facing problems with upper management in terms of better pay, rejection of labour contract. Decreasing stock price is another major concern for low profitability. As a consequence, the investors are losing faith from airlines and uncertainty in the investment opportunity is increasing in this industry (Grant 2016). Therefore, it is recommended that change in business strategy, cost leadership policy, coloration with strong financial company can be beneficial for the airlines. It can be said from the study that economic condition of US airlines can be said to be cyclical as the fluctuations in profitability move in the line with business fluctuation. Recession, boom period both have their respective effect on the airline industry of US.
The report has highlighted different aspects of US airline industry such as competitive strategy, economic contribution on local and global economy. The study has found different reasons of fluctuations in revenue and profit in the airline industry. Increasing capacities due to technological improvement has increased demand for airlines. Merger of nine big airlines in US has created monopoly market in US aviation industry. Therefore, airfare has increased in US significantly due to decrease in competitiveness. Moreover, enhancement of capacities, increasing number of jets is contributing factors for rising demand. Increase in demand raises revenues of US airlines. Despite that profitability of the airline industry has fallen due to increasing labour and other operating costs. Cost leadership may be a strategy to overcome the challenges in the US airline industry.
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