Airline industry analysis

STRATEGY 390 – Section 005

Ali Khalil

HaeJun Jeon

Michael Kondoleon

Joanna Lu

Will Wang

Jason Zhang

*Airline Industry

*Industry Overview• Business: Transport passengers and cargo regionally,

domestically, and internationally

• Focus: Domestic passenger airline industry

• Five major players with majority market share:

*Value Chain

Pre-flight Operations-Acquiring aircraft

-Hiring staff-Purchasing materials

Pre-flight Logistics-Scheduling staff-Setting routes-Setting fares

Flight Service-Client transportation

-On-flight services-Baggage handling

Post-flight logistics-Connections

-Missed flight support-Lost baggage support

Post-flight Services-Shuttles/Car rentals-Partnership deals

-Points/membership system

*Industry AnalysisThreat of Entry

Threat of Buyers

Threat of Suppliers

Intra-Industry Rivalry

Threat of Substitutes

Low

LowLow High

Medium

- Fare Comparison

- High Marketing- Diff Services

- High Saturation

- High Cost- Gov’t

Controls

- Boeing, Airbus- BP, Shell

- Passenger Pricing Power- No Backwards Integration

- Car, Bus, Train- Proximity- Travel Time

*Strategic Directions

Cost Leadership • Mergers• Financial Restructuring • Conservative Cost-Cutting

Product Differentiation • Technology• Regional Market• Price Leadership• Amenities• Operational Efficiency

Cost Leadership + Product Differentiation (Hybrid)

*Mergers

• Reduce costs primarily through M & A• Renegotiate labor contracts, pensions,

etc.

• Maintain traditional model while cutting costs• Continue offering routes to all

destinations• Maintain frequent flier, lounges, perks

Cost LeadershipProduct

Differentiation

Hybrid Analysis Conclusion

*Mergers

• Completed: Delta/Northwest (2009)

• In Progress: United/Continental (exp. 2012)

• Unsuccessful: • US Airways/United• US Airways/Continental• US Airways/Delta


Differentiation


*Financial Restructuring

US Airways• Forced to cut costs alone

• Retired aircraft • Liquidated pensions• Cut routes


Differentiation


*Conservative Cost Cutting

American Airlines• Only traditional legacy airline

• No mergers or bankruptcy restructuring• Cut costs through austerity measures

• Eliminate routes/hubs• Negotiate labor costs

Labor Cost as % of Total Cost

AMR- 31%Legacy Airline average- 25%


Differentiation


*Product Differentiation

• Capture market share through differences in product offerings

Alaska Airlines• Regional Carrier• Monopolistic market share in Alaska• In-flight meals on most flights• High flight attendant/customer ratio• Complementary wine and other services


Differentiation


*Hybrid

Southwest Airlines• Cost Leadership

• Focus on low unit costs• Short aircraft turnaround time• Mitigation of fuel price risk

• Product Differentiation• “Point-to-Point” network model• Secondary markets (BWI, MDW, LGA)• No baggage fees


Differentiation


In millions Delta US Airways United AMR Alaska LUVRevenue $ 31,755 $ 11,908 $ 23,229 $ 22,170 $ 3,832 $ 12,104Domestic profits $ 332 $ 291 $ 147 $ (283) $ 226 $ 459Profit margin 1.05% 2.45% 0.63% (1.27%) 5.90% 3.79%Market cap $ 6,290 $ 692 $ 5,490 $ 543 $ 2,260 $ 6,130


Differentiation


*Southwest v. Alaska Airlines

• High market share• Saturated market• Point-to-Point• Limited amenities

• High margins• Strictly regional• Hub & Spoke• High amenities

• Overall, Southwest strategy more sustainable• Allows for growth potential• Alaska has risk of overreliance on

monopolistic positionCost Leadership

Product Differentiatio

nHybrid Analysis Conclusion

*Southwest’s Best Strategy

• Long-term strategy is valuable and rare• Hybrid strategy incorporates best of

both strategies• Point-to-Point promotes streamlined

services, route flexibility• Understanding customer priorities

allows for strategic budgetary allocation


Differentiation


*Summary

• Cost leadership firms should find ways to improve service without compromising margins

• Hybrid firms must remain adaptable and cognizant of changing consumer needs


Differentiation


*Questions?

Airline industry analysis

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