Airlines analysis

70
What’s Happening? What’s Happening? We are catching up to the schedule on the course syllabus. ISMA meeting scheduled for today has been postponed for a week— Jan 28, 4:30 to 5:30 College 8, room 240. Speaker is JP LeBlanc, Director of RAD Development, Borland

Transcript of Airlines analysis

Page 1: Airlines analysis

What’s Happening?What’s Happening?

We are catching up to the schedule on the course syllabus.

ISMA meeting scheduled for today has been postponed for a week—Jan 28, 4:30 to 5:30 College 8, room 240. Speaker is JP LeBlanc, Director of RAD Development, Borland

Page 2: Airlines analysis

Chapter 4 IntroductionChapter 4 Introduction

Airline Industry AnalysisAirline Industry Analysis

Page 3: Airlines analysis

Major Chapter TopicsMajor Chapter Topics

Airline Industry analysis using the Porter Competitive Model as a clearly defined industry.

Revisit Business Strategy Model. Lessons Learned from Consistently Profitable

Carriers. Is American Airlines the right standard for the US

industry? Importance of Information Technology to the

Airline Industry.

Page 4: Airlines analysis

Consistently Profitable AirlinesConsistently Profitable Airlines

Singapore Airlines– Geographic Location, National Strategies,

Leadership in IT, Competitive Strategies

Southwest Airlines– Aircraft Utilization, Focus on City Pairs, Point-

to-Point Route Structure, Corporate Culture, Cost Savings in Reservation System

Page 5: Airlines analysis

American AirlinesAmerican Airlines

• Largest airline in the US versus United while also a contender on the international level.

• A premium service airline with a hub and stoke route structure.

• Has consistently been recognized as an industry leader.

• Currently faces the same financial problems as other major carriers.

• Faces challenge of dealing with strong unions.

Page 6: Airlines analysis

Porter Competitive ModelPorter Competitive Model

Intra-Industry RivalrySBU: American AirlinesRivals: United, Delta, US Air,Northwest, Southwest

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Airline Industry Analysis - North American Market

•Travel Agents •Business Travelers•Federal Government•Pleasure Travelers•Charter Service•U.S. Military•Cargo and Mail

•Alternate Travel Services•Fast Trains•Boats

•Private Transportation•Videoconferencing•Groupware

•Aircraft Manufacturers•Aircraft Leasing Companies•Labor Unions•Food Service Companies•Fuel Companies•Airports•Local Transportation Service •FAA•Hotels

•Foreign Carriers•Regional Carrier Start ups•Cargo Carrier Business Strategy Change

Figure 4-2

Page 7: Airlines analysis

Europe North American Pacific Rim

MARKETS

Short Haul Long Haul

ROUTES AND ROUTE STRUCTURE

Hub and Spoke Point to Point

FARE STRATEGY

Low Fare Premium Fare

Independent Alliances

COMPANY STRUCTURE

INFORMATION SYSTEMS FOCUS

Figure 4-1

Latin American

Business Strategy Model - Airline Industry

Passengers Operations Logistics Business

PRODUCT/SERVICESScheduled Passengers

Charter Services Cargo

Mail Air Express

Modified compared to the example in the textbook.

Page 8: Airlines analysis

Benefits of Information Systems Benefits of Information Systems to American Airlinesto American Airlines

Convenience to CustomersConvenience to Customers– Reservation System, Request hotels, car.Reservation System, Request hotels, car.

Knowledge of CustomersKnowledge of Customers– Frequent-Flyer Program: AAdvantage.Frequent-Flyer Program: AAdvantage.

Providing a Foundation for Other SystemsProviding a Foundation for Other Systems– Yield-Management System.Yield-Management System.

Building a Base for Other BusinessesBuilding a Base for Other Businesses– American designed systems for others.American designed systems for others.

Page 9: Airlines analysis

Airline Industry Value ChainAirline Industry Value Chain

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

MARKETING AND SALES

SERVICE

PROCUREMENT

TECHNOLOGY DEVELOPMENT

HUMAN RESOURCE

MANAGEMENT

FIRM INFRASTRUCTURE

Adapted with the permission of Michael E. Porter from Competitive Advantage: Creating and Sustaining Superior Performance, copyright 1985 by Michael E. Porter.

-Financial Policy - Accounting -Regulatory Compliance - Legal - Community Affairs

Pilot TrainingSafety Training

Agent Training

In-flight Training

Baggage Tracking System

•Promotion•Advertising•Advantage Program•Travel Agent Programs•Group Sales

•Ticket Counter Operations•Gate Operations•Aircraft Operations•On-board Service•Baggage Handling•Ticket Offices

•Route Selection•Passenger Service System•Yield Management System (Pricing)•Fuel •Flight Scheduling•Crew Scheduling•Facilities Planning•Aircraft Acquisition

Information TechnologyCommunications

Product DevelopmentMarket Research

•Lost Baggage Service•Complaint Follow-up

•Baggage System•Flight Connections•Rental Car and Hotel Reservation System

Computer Reservation System, In-flight SystemFlight Scheduling System, Yield Management System

Baggage HandlingTraining

Flight, route andyield analysttraining

Figure 4-3

Page 10: Airlines analysis

ConclusionsConclusions

The Airline Industry is a vivid example of the dynamics of the market that it serves.

Shows that establishing strategies dictated by the market is critical.

Once the right strategies have been identified, information systems can play an important supporting role.

Page 11: Airlines analysis

Chapter 4Chapter 4

Porter Competitive Model Porter Competitive Model

and and

the Airline Industrythe Airline Industry

Page 12: Airlines analysis

2003 - A Hundred Years of 2003 - A Hundred Years of FlightFlight

Aviation is celebrating its centennial year. From its first brave beginnings the civil aviation industry remains dynamic and although some of the priorities have changed, the spirit and passion remain.

Some priorities are not new: safety, the need for efficient operations, adequate capacity to meet growth and, of course, customer satisfaction. Other priorities have gained prominence in recent years – security, war risk insurance and environmental concerns – and will remain important in the coming years.

Page 13: Airlines analysis

This industry is always in the This industry is always in the

grip of its dumbest competitors.grip of its dumbest competitors.

Robert CrandallFormer CEOAmerican Airlines

Page 14: Airlines analysis

We must look at the world as it We must look at the world as it is versus how airlines would is versus how airlines would like it to be.like it to be.

Robert L. CrandallRobert L. Crandall

And as government officials, politicians and consumers would like it to be.

Page 15: Airlines analysis

Airline Industry GoalsAirline Industry Goals

Public Service. (Service to Customers)Public Service. (Service to Customers)

Return to Investors.Return to Investors.

Country Strategic Resource.Country Strategic Resource.

Are these consistent or in frequent conflict?

Page 16: Airlines analysis

Airline ProfitabilityAirline Profitability

In order to survive and profit in this tough environment, airlines attempt to manipulate three main variables:

Cost, calculated as total operating expenses divided by available seat miles (ASM)

Yield, calculated as total operating revenues divided by the number of revenue passenger miles (RPM)

Load Factor, calculated as the ratio between RPMs and ASMs, which measures capacity utilization.

Profitability = [yield X load factor] - cost

Page 17: Airlines analysis

United Flight 815 United Flight 815 Chicago to LAX, October 31, 2001

204 tickets were sold and 186 people showed up.

68 passengers originated in Chicago and 118 were from connecting flights.

97 passengers terminated at LAX, 89 continued on another flight.

Of the 33 passengers that were only Chicago-LAX there were 27

different fares:

• A frequent flyer passenger paid nothing.

• A 1st class passenger paid $1,248.51 on the day of the flight.

• A coach passenger paid $102.26 on the day of the flight.

• A cash fare passenger paid $87.21 twenty-nine days in advance .

Page 18: Airlines analysis

The National Commission to Ensure a The National Commission to Ensure a Strong Competitive Airline IndustryStrong Competitive Airline Industry

Change, Challenge and Change, Challenge and CompetitionCompetition

A Report to the President and CongressAugust 1993

Page 19: Airlines analysis

Airline Industry ReportAirline Industry Report

The air transportation system has The air transportation system has

become essential to the economic become essential to the economic

progress for the citizens and progress for the citizens and

businesses of this nation.businesses of this nation.

Page 20: Airlines analysis

The commission questioned some of the most The commission questioned some of the most basic assumptions that have formed the basic assumptions that have formed the foundation of policy toward this industry--and foundation of policy toward this industry--and behavior within it--for the past half century.behavior within it--for the past half century.

Page 21: Airlines analysis

It also questioned whether the It also questioned whether the

airline industry has basic structural airline industry has basic structural

problems or if it is just a collection problems or if it is just a collection

of poorly managed companies.of poorly managed companies.

Page 22: Airlines analysis

Commission Findings

• The Airline Industry is more competitive than before deregulation in 1978.

• Travelers and shippers are charged less than in 1978.

• The Airline Industry has never made a sustained, substantial return on investment.

• It lost huge amounts of money from 1990 to 1993.

• It canceled many aircraft orders shortly after an unprecedented buying binge.

• Its freedom to compete in international markets is uncertain because of government restrictions.

Page 23: Airlines analysis

Commission Conclusions

For the U.S. to prosper in a global marketplace the airline industry must: • Be efficient and technologically superior.

• Have the financial strength to respond to rapid change and opportunity.

• Efficiently move people, products and services to markets, wherever they exist.

Page 24: Airlines analysis

Recommendations

Efficiency: Reinvent the FAA.

Financial Health: Deal with factors that impact the financial health of the industry.

Access to Foreign Markets: Replace the current bilateral system with a multi-national regime.

Page 25: Airlines analysis

To return their balance sheets to To return their balance sheets to respectability, most airlines would respectability, most airlines would have to achieve profit margins that have to achieve profit margins that are almost unprecedented in their are almost unprecedented in their history, and sustain those margins history, and sustain those margins for years.for years.

Page 26: Airlines analysis

September 11 ImpactSeptember 11 Impact

An absolute disaster for the industry.

Page 27: Airlines analysis

1990-1993 Was a Disaster!1990-1993 Was a Disaster! The Gulf War.The Gulf War. The general decline in the world economy.The general decline in the world economy. Aircraft fuel price increases.Aircraft fuel price increases. Wages, work rules and work patterns. Wages, work rules and work patterns. Chapter 11 bankruptcy airlines.Chapter 11 bankruptcy airlines. Excess capacity.Excess capacity. A very capital intensive business. A very capital intensive business. Too many years as regulated airlines.Too many years as regulated airlines.

Page 28: Airlines analysis

Airline IndustryAirline Industry

The shock of September 11th has forced airlines to face an awkward fact: in some respects, aviation is a declining industry.

Nov. 22, 2001

The Economist

Page 29: Airlines analysis

Decline in Air TravelDecline in Air Travel

At Thanksgiving in 2000 a record 2.2 million Americans took a flight to spend the holiday with family and friends.

Air traffic in October and November 2001 was down by about 25% compared to the previous year in the world's biggest aviation market, thanks to a combination of recession and the attacks on September 11th.

Page 30: Airlines analysis

International TravelInternational Travel

International travel from America has been hit even harder: the number of Americans flying across the Atlantic is down by over 30%.

Never mind that more people are killed on America's roads every three months than have died in the entire history of commercial aviation.

Page 31: Airlines analysis

Fatalities by Transportation Mode

0 5000 10000 15000 20000 25000

Passenger Car

Railroad

Airline 12

530

20,818

Page 32: Airlines analysis

Load FactorsLoad FactorsDespite cutting capacity, the big American airlines are still flying with planes barely 60% full—a figure that would be much lower were it not for hefty discounts.

Boeing and Airbus, the two manufacturers of large jetliners, are offering airlines special financing deals to pay for their purchases in order to stave off outright cancellations.

The last time the airlines were in such straits, during the Gulf war and recession in 1990-92, it took them four years to return to profit, even though traffic recovered within a year.

Page 33: Airlines analysis

European AirlinesEuropean AirlinesThe situation in Europe is no better.

Two flag carriers, Swissair and Sabena, have collapsed since the terrorist attacks.

Other big carriers, such as British Airways (BA) and KLM, are in major financial trouble.

Traffic within Europe fell by over 10% in September and October 2001, while traffic from Europe to America and Asia fell by 35% and 17% respectively.

Page 34: Airlines analysis

Financial PictureFinancial Picture

Although air travel, measured by number of passenger-kilometers flown, has long risen faster than economic growth, airline revenues have lagged world GDP growth for the past 20 years in real terms,

Revenues and profits per seat have been falling because of greater competition springing from deregulation, first in America and then within Europe and across the Atlantic.

Even before the latest slump only a third of mainstream airlines in Europe, America and Asia earned enough to cover their cost of capital, which is 8% on average.

Page 35: Airlines analysis

Looking for OptionsLooking for OptionsIn most industries, such a situation would quickly lead to mergers. But this is not so easy for airlines, hemmed in as they are by national ownership rules and rigid international regulation of routes.

America's airlines are retreating to their strongholds in the hub airports they dominate, such as Dallas-Fort Worth (American) and Atlanta (Delta). Most airlines have cut at least one “wave” of coordinated flights in and out of their hubs. If additional security checks are introduced for transferring passengers before they board their outbound flights, and the handling of such travelers thus slows down, some observers expect the airlines to switch to fewer flights in larger aircraft.

Page 36: Airlines analysis

Dropping Point-to-Point FlightsDropping Point-to-Point Flights

The biggest effect has been for airlines to drop non-stop “point-to-point” flights rather than those that go through hubs.

The network economics of hubs becomes more attractive for big carriers when times are tough.

A study of America's changed airline-route map shows that large carriers are cutting non-stop flights to cities where they do not operate hubs by more than they are trimming hub flights.

Page 37: Airlines analysis

Unions and Vendors Unions and Vendors

The industry's woes will also force airlines to get tough with unions and suppliers over restrictive practices that raise their costs.

Page 38: Airlines analysis

European ChangesEuropean Changes

In Europe, where the failure of Swissair and Sabena has shown that there is room for only a handful of mainstream carriers rather than today's 14, a shake-out is already under way.

Page 39: Airlines analysis

Airlines: How Ugly?Airlines: How Ugly?

The outlook is either bad or outright ugly.

Two problems: Post 9/11 fears and increased hassles based on new security measures.

Page 40: Airlines analysis

US Airline Industry Must US Airline Industry Must Restructure or DieRestructure or Die

Aviation Week & Space TechnologyAviation Week & Space TechnologyNovember 2002November 2002

Low-Cost Airlines, Not September 11, Have Transformed Industry Fundamentals

"When people say the traditional industry model is broken, they are moving their jaw without putting their brain in gear," responds former American Airlines CEO Robert Crandall. He added that he is skeptical that the industry will ever be competitive as long as there are so many carriers selling what has evolved into a commodity product.

Page 41: Airlines analysis

Aviation Week ContentionsAviation Week Contentions

A collapse in pricing power and a fundamental shift in the buying behavior of business travelers, coupled with fierce competition from low-cost airlines, is forcing U.S. major hub-and-spoke carriers to restructure their operations or face the prospect of eventually going out of business.

Airline executives and industry analysts note that the September 11 attacks, while devastating, are not the root cause of the financial crisis gripping major network carriers.

The crux of the problem is a combination of excessive costs in relation to carriers' current and projected revenues, an imbalance between the supply and demand for available airline seats, and an inability to boost air fares.

Page 42: Airlines analysis

Corrective ActionsCorrective Actions

U.S. airlines have axed more than 70,000 jobs. In addition, some unions representing many of the industry's employees have made a commitment to work with management to help the carriers compete more effectively with low-cost rivals.

It will take much more than concessions by labor for major U.S. airlines to solve their financial problems.

The financial problems carriers are suffering could actually worsen in coming months if the U.S. goes to war with Iraq. The U.S. airline industry cannot take another major hit. A brief war doesn't qualify but a messy, extended war or another significant domestic terrorist attack does.

Page 43: Airlines analysis

Airline Industry US Market Airline Industry US Market ShareShare

Based on current trends, the domestic market share held by the six major US airlines (American, Continental, Delta, Northwest, United and US Airways) plus Alaska Airlines will drop from 75% in 2002 to 62% in 2010—and 45% by 2020, according to an industry projection.

Southwest could pass American to become the largest U.S. airline by 2013, and JetBlue could pass Delta to become the third largest by 2020.

Page 44: Airlines analysis

Industry Structure ProblemsIndustry Structure Problems

The fact that low-cost carriers have been able to mature this far says as much about what's wrong with the majors as it does about what's right with their low-cost counterparts, and begs the question: does the underlying strategy or business model employed by the large hub-and-spoke airlines still work?

Analysts and other industry observers believe it does, but to function properly carriers must reduce their costs and restore the balance between supply and demand.

Page 45: Airlines analysis

A Sobering FactA Sobering Fact

Before September 11, 2001, the global industry was showing a net loss on international services of around $3 billion.

Page 46: Airlines analysis

Corrective ActionsCorrective Actions

Reduced capacity.

Older aircraft may never return to service.

Reduced wage pressures.

Continued joint agreements.

Discounted tickets and more travel packages.

Page 47: Airlines analysis

Code Sharing AgreementsCode Sharing Agreements

The US Transportation and Justice Departments approved a pact Friday that will let Delta Air Lines, Continental Airlines and Northwest Airlines share access to each other's routes.

The code-share agreement allows each carrier to market the others' routes as its own. One Northwest flight, for instance, might also have a Continental flight number and a Delta flight number.

The agreement will be the biggest in the industry. US Airways and United Airlines have a similar agreement and Continental have some shared routes in a deal that dates to 1998.

Page 48: Airlines analysis

Code Sharing AgreementsCode Sharing Agreements

It's an especially appealing arrangement to frequent fliers who prefer to build up miles on one airline while flying all three.

The government placed several conditions on the deal. Specifically, the DOT said 60 percent of any new code-sharing routes must serve those areas of the country that are considered under-served. It also bans anti-competitive practices like coordinated pricing or shared decisions about route planning and capacity.

Page 49: Airlines analysis

American AirlinesAmerican Airlines

American Airlines asked its employees to come to the aid of the carrier, saying they have no time to waste if they want to keep the financially strapped airline in business.

The plea comes as two major unions at the world's largest carrier consider a company request to freeze their wages and another union is trying to hammer out a new contract.

Company management says carriers that have reduced costs through bankruptcy protection have put even more pressure on AMR.

Page 50: Airlines analysis

American AirlinesAmerican Airlines

American asked union leaders to start holding weekly meetings, as early as next, week with company management in a collaborative process.

The move comes as United Airlines is trying to squeeze large wage cuts from its employees as it undergoes restructuring under bankruptcy protection.

About a month ago, American asked its employees to forgo pay increases. The union that represents flight attendants at American said it is taking a close look at the company's finances and may decide at the end of this month whether to forgo pay increases scheduled for this year.

Page 51: Airlines analysis

Continuing ConcernsContinuing Concerns

1. Fuel costs

2. Decisions regarding passenger services like whether to charge for food, the need for more electronic capabilities.

3. Upgrading aircraft.

4. Route strategies.

5. Union relations.

6. Relations with travel agents.

Page 52: Airlines analysis

Porter Competitive ModelPorter Competitive Model

Intra-Industry RivalrySBU: American AirlinesRivals: United, Delta, US Air,Northwest, Southwest

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Airline Industry Analysis - North American Market

•Travel Agents •Business Travelers•Federal Government•Pleasure Travelers•Charter Service•U.S. Military•Cargo and Mail

•Alternate Travel Services•Fast Trains•Boats

•Private Transportation•Videoconferencing•Groupware

•Aircraft Manufacturers•Aircraft Leasing Companies•Labor Unions•Food Service Companies•Fuel Companies•Airports•Local Transportation Service •FAA•Hotels

•Foreign Carriers•Regional Carrier Start ups•Cargo Carrier Business Strategy Change

Figure 4-2

Page 53: Airlines analysis

Europe North American Pacific Rim

MARKETS

Short Haul Long Haul

ROUTES AND ROUTE STRUCTURE

Hub and Spoke Point to Point

FARE STRATEGY

Low Fare Premium Fare

Independent Alliances

COMPANY STRUCTURE

INFORMATION SYSTEMS FOCUS

Figure 4-1

Latin American

Business Strategy Model - Airline Industry

Passengers Operations Logistics Business

PRODUCT/SERVICESScheduled Passengers

Charter Services Cargo

Mail Air Express

Modified compared to the example in the textbook.

Page 54: Airlines analysis

Airline Industry Value ChainAirline Industry Value Chain

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

MARKETING AND SALES

SERVICE

PROCUREMENT

TECHNOLOGY DEVELOPMENT

HUMAN RESOURCE

MANAGEMENT

FIRM INFRASTRUCTURE

Adapted with the permission of Michael E. Porter from Competitive Advantage: Creating and Sustaining Superior Performance, copyright 1985 by Michael E. Porter.

-Financial Policy - Accounting -Regulatory Compliance - Legal - Community Affairs

Pilot TrainingSafety Training

Agent Training

In-flight Training

Baggage Tracking System

•Promotion•Advertising•Advantage Program•Travel Agent Programs•Group Sales

•Ticket Counter Operations•Gate Operations•Aircraft Operations•On-board Service•Baggage Handling•Ticket Offices

•Route Selection•Passenger Service System•Yield Management System (Pricing)•Fuel •Flight Scheduling•Crew Scheduling•Facilities Planning•Aircraft Acquisition

Information TechnologyCommunications

Product DevelopmentMarket Research

•Lost Baggage Service•Complaint Follow-up

•Baggage System•Flight Connections•Rental Car and Hotel Reservation System

Computer Reservation System, In-flight SystemFlight Scheduling System, Yield Management System

Baggage HandlingTraining

Flight, route andyield analysttraining

Figure 4-3

Page 55: Airlines analysis

Benefits of Information Systems

to American Airlines

1. Convenience to Customers.

2. Knowledge of Customers.

3. Providing a foundation for other

systems.

4. Building a base for other businesses.

Page 56: Airlines analysis

Four Three Consistently Profitable Four Three Consistently Profitable AirlinesAirlines

1. Singapore Airlines1. Singapore Airlines

2. Cathay Pacific2. Cathay Pacific

3. British Airways3. British Airways

4. Southwest Airlines4. Southwest Airlines

Page 57: Airlines analysis

Singapore AirlinesSingapore Airlines

Consistently profitable but experiencing profit pressures. Winner of multiple awards for “airline excellence.” An extension of the country strategy to be the business and

travel gateway to Southeast Asia. An impressive travel infrastructure. Leader of the Orient Airlines Association (OAA)

– Abacus reservation system.

– Price collusion on major routes. Nervous regarding U.S. carrier price competition.

Page 58: Airlines analysis

Why SIA is So Good!Why SIA is So Good!

• Clarity and Commitment (to customer service).

• Continuous Training.

• Internal Communications. • Consistent External Communications.

• Connection with Customers.

• Benchmarking.

• Rewards and Recognition.

• Professionalism, Pride and Profits.

Page 59: Airlines analysis

Southwest AirlinesSouthwest Airlines A U.S. carrier success story. Commuter airline that concentrates on city pairs.

(Average flight is 400 miles or less and takes less than one hour)

CEO Herb Kelleher, a Connecticut attorney turned Texan, had the best labor relations in the industry and an excellent company culture.

Lowest cost structure in the industry. Company vision was to provide low cost airline service

to an increasingly larger number of people. Objective to minimize reservation costs.

Page 60: Airlines analysis

A Strength of Southwest A Strength of Southwest AirlinesAirlines

1. Focus.

2. Focus.

3. Focus

Page 61: Airlines analysis

Best Airlines for Business TravelersBest Airlines for Business Travelers

1. Singapore Airlines2. Swiss Air3. Cathay Pacific4. Midwest Express **5. Japan Airlines6. Quantas7. ANA8. Virgin Atlantic9. Lufthansa10. KLM-Royal Dutch

11. Finnair

12. British Airways

13. Alaska

14. Air France

15. Varig

16. Aer Lingus

17. Kiwi

18. Air Canada

19. American **

20. Delta**

Source: Zagat Survey of Frequent Flyers

Page 62: Airlines analysis

Deregulated But Very RegulatedDeregulated But Very Regulated

Safety factors.

Air traffic controllers.

Impact on constituents.

International routes.

Page 63: Airlines analysis

Business Traveler Choice?

Personal Traveler Choice?

Ticket-less Versus No Reservation?

Computer Reservation System:

Page 64: Airlines analysis

Airline AlliancesAirline Alliances

The Star Alliance is the largest of the major groupings. Consisting of 15 airlines led by United Air Lines and Lufthansa. Star serves about 815 destinations in more than 130 countries.

Oneworld, which is eclipsed by only Star among the major airline alliances, is led by British and American Airlines. Eight airlines offer service to 550 destinations in more than 130 countries.

SkyTeam is quickly becoming a major alliance player by serving more than 450 destinations in nearly 100 countries. Led by Air France and Delta, SkyTeam has also consolidated cargo services.

Page 65: Airlines analysis

Interplay among government regulations, airline strategies, and airplane capabilities shapes the evolution of world aviation.

Boeing Corp.

Page 66: Airlines analysis

Barriers to EntryBarriers to Entry

Access to airports continues to be impeded by:

(1) Federal limits on takeoff and landing slotsat the major airports in Chicago, New York, and Washington

(2) Long-term, exclusive-use gate leases

(3) “Perimeter Rules” prohibiting flights at New York’s LaGuardia and Washington’s National airports that exceed a certain distance.

Page 67: Airlines analysis

US Industry StrengthUS Industry StrengthFifteen major US carriers represent the following significance in the world-wide airline industry:

29% of the aircraft

46% of the employees

32.5% of the the 2000 passenger miles

Based on a number of years of operating in a deregulated environment within the US that forced them to compete in a very tough market.

Page 68: Airlines analysis

The Bad NewsThe Bad News

Cumulative Net Profit of Scheduled US Airlines:

Started in 1938

1970 – 2.2 billion profit

1980 – 5.8 billion profit

1989 – 8.2 billion profit

1994 – 4.8 billion loss

1997 – 5.4 billion profit

1998 – 10.3 billion profit

1999 – 15.6 billion profit

2000 – 18.1 billion profit

2001 – 12 billion profit

Page 69: Airlines analysis

Airline Industry Conclusions Airline Industry Conclusions

It is a vivid example of the dynamics of the markets that it serves.

Establishing strategies dictated by the market is critical.

Once the right strategies have been identified, information systems can play an important supporting role.

Page 70: Airlines analysis

Possible Exam QuestionsPossible Exam Questions

1. Identify an industry where information systems act as a

significant barrier to entry and explain the significance of this

barrier.

2. Identify and explain the two basic strategies and three

supporting strategies used by intra-industry rivals.

3. What is the primary benefit to be derived through the use of

the Porter Value Chain?

4. Explain the logic and growth as a competitive strategy and provide two company examples where this was a key

strategy.