US Airline Industry - Essay Example

?US Airline Industry Background of the case The US Airline Industry is one of the most renowned industries in the world. As it continuously gain familiarity, it is highly considered one of the best areas to understand business especially using the international business trade theories. Recently, the industry suffered poor level of profitability. There are various factors that could substantially explain this and the bottom line of doing it would mean understanding the external and internal business environment of the US Airline Industry. In this paper, the proponent tries to critically evaluate the US Airline Industry using the key frameworks of International business. PESTLE Analysis The US Airline Industry substantially needs a macro-environmental analysis from time to time. The PESTLE analysis could sufficiently provide macro-environmental understanding of the business environment of this industry. As a macro-environmental analysis, the PESTLE analysis is composed of important factors such as politics, economic, social, technological, legal and environmental which have the capacity to affect and alter business at a significant level (Haberberg and Rieple, 2008). Politics The US Airline Industry belongs to a highly political scenario. The very proof was the revolution from regulation to deregulation scenario in the industry. It is highly political in the sense that competitors are trying to influence the government’s decision in order to come up with their competitive advantage in the industry. Competition was a central focus in this case because the industry is substantially composed of varying investors who would want to try to reach specific level of competitive advantage. However, the government’s political power also has important implication on the prevailing US Airline Industry. For instance, for security reason after the September 11 attack, the US Airline Industry was grounded by the US government which would mean ongoing expenses for air carriers without achieving significant income (Coyle et al., 2010). This is another remarkable proof how political considerations have remarkably played a significant role in today’s prevailing scenario at the US Airline Industry. Economics Apart from intense competition, high fixed costs and price-sensitive customers, based on the case, poor economic condition of the country substantially affects the prevailing status of the US Airline Industry. This resulted to poor achievement of profit within the industry. Deregulation resulted to the formation of many airlines which also finally end up with overcapacity and eventually net losses for the industry (Vasigh et al., 2008). However, economic downturns have proven effective contributing factor that substantially affect the profitability of the US Airline Industry. In 1990s the US experienced downturn and this was further aggravated by political uncertainty due to the Gulf War and surging fuel costs (Vasigh et al., 2008). This resulted to poor economic performance within the US Airline Industry. In 2008 to 2009, passenger volumes around the globe dropped as an upshot of the economic crisis associated in these years (Rosenberg, 2010). This substantially proves that the US Airline Industry could be highly affected by the prevailing economic condition of the country and it could be severely hurt at some point for as long as the financial stability of passengers is concerned. Social Another important factor affecting poor profitability within the US Airline Industry is the existence of price-sensitive customers. However, this can only be just among of the major drawbacks of other important factors such as economic in particular. It is also important to understand profitability within the context of social understanding and the prevailing status of the US Airline Industry within individual organization. The US Airline Industry is one of the highly unionized industries in the US with more than 70% eligible employees of major airlines belonging to union (Belobaba et al., 2009). This has substantial implication and in particular employees have strong market power to demand for their respective share from how much the company is earning. As a result, the US Airline Industry and in particular the major airlines in the US have been constantly challenged by increasing price-sensitive customers due to tight competition and the prevailing culture within the workforce in it. Technology Technology is just the effect of existing regulation created by the US government in order to maximize safety and ensure high quality standard in the US Airline Industry. This would mean operating new philosophies, procedures, standards, and substantial crew trainings (Ben-Yosef, 2005; Norsworthy, 1999). In order to effectively align these with the government’s regulation, new technology for aviation is highly recommended. The challenges would now come in as the industry would specifically adhere to the government’s ruling in order to pass the required standard within the industry. This would mean incurring additional cost as the Airline Industry should replace old existing aircrafts with something new which has to be mandated and required by the government. Legal As mentioned, the prevailing regulations within the US Airline Industry are all covered with certain level of legality. Thus, the US Airline Industry without hesitation and resistance should abide by existing rules and regulations. Competition was opened up in the industry when the US government decided to liberalized or put the entire Airline Industry under deregulation law. This opened up substantial opportunities to new entrants and as a result, intense competition was developed which was considered one of the major reasons of poor profitability within the US Airline Industry. New entrants are willing to initiate price control which would eventually cater to those price-sensitive customers. Environmental Due to substantial environmental concerns, in the US delays of runaway expansion at 50 of the busiest airports are remarkable (Belobaba et al., 2009). This is another major important factor that can be clearly interlinked with the recent profitability performance of the US Airline Industry. Four Ps Another name for four Ps is the marketing mix which substantially involves Product, Price, Place (distribution) and Promotion (advertising, public relations) (Boone and Kurtz, 2006). The intersection of these four would create a substantial determination of the target market, in order to make the target customers use or purchase the firm’s product or service offerings (Ivanko and Kivirist, 2008). Product Due to intense competition, product and service offerings within the US Airline Industry are highly differentiated, leaving remarkable wide array of choices for the customers. Price The increasing number of price-sensitive customers obliged the US airlines to substantially lower their prices just to cater a wide number of passengers. Place Place is another important point to target customers to use and purchase the firm’s product or service offerings. US airlines have created various strategies in order to create profit while ensuring meeting the needs of the passengers. One basic example is in line with re-routing programs. The bottom line of this strategy is to substantially cater highly essential and profitable market while ensuring reduction of cost and increase of efficient operation. Promotion Promotion has become so tough for US airlines. As a result, they created substantial packages including customer loyalty program to those who are on frequent travels even to the extent it would mean reduction of their profit. However, based on the case, these customer loyalty programs have become also major sources of US airlines’ profit in the event that loyal customers would fail to avail of them. Competitive strategies Every potential player in the US Airline Industry is aiming to be a cut above the other. The very reason is that they want to substantially increase their market share, increase profitability and eventually achieve their competitive advantage. This is the very reason why competitive strategies are necessary. Cost and price are important components of these competitive strategies. In addition, differentiation is another point in obtaining competitive advantage. According to Porter, there are three generic competitive strategies and these include cost leadership, focus and differentiation. It is clearly stated in the case that the US Airline Industry substantially involves different key players aiming to differentiate their product or service offerings. Thus, the industry substantially created highly differentiated service or product offerings which paved the way for wide array of choices for the customers. Furthermore, the increasing number of price-sensitive customers obliged the major US airlines to reduce their final price of the offerings. This initially allowed them to reduce the cost in the creation of their service or product offering. Porter’s Five Forces Model This model tries to explain the intensity of rivalry among existing firms by understanding the threat of substitute products or services, bargaining power of suppliers, threat of new entrants, and bargaining power of buyers (Porter, 1998). Based on the case, the reasons why profitability was so low in the US Airline Industry were due to intense competition, high fixed costs, price-sensitive customers and according to experts this was also probably due to poor strategies and inept cost management of the business leaders in this industry. Whatever the reasons would be, one of the clear points includes understanding of various significant forces that were able to affect the industry at a significantly high level. In Porter’s five forces model, new entrants have important role in the creation of competitive rivalry. New entrants specifically in the case of US Airline Industry have the potential to influence the price. They substantially want to promote their image based on the price of their product or service offerings. However, new entrants at some point do not essentially hold the economies of scale due to the fact that the existing firms have high capacity to acquire new developing airlines for their advantage of monopolizing the whole industry. However, for as long as the passengers have strong market power due to their high level of price-sensitivity, airlines offering low prices for their products and services could remarkably enjoying to the fullest how they might expand their business. Due to highly differentiated offerings in the US Airline Industry, the threat of substitute products or services is high. This means US airlines needs to substantially promote innovation from time to time in order to make a difference in the US Airline Industry. Finally, as the US Airline Industry is recently still on the process of recovering substantial losses from economic downturn in 2008 to 2009, the makers or manufacturers of new airlines could not push themselves much. However, as they are being backed up by the government’s regulation for high standard aviation and other technical standards, they are also obliged to create high technologically advanced specifications which at some point they have control over the major US Airlines. Conclusion The case of the US Airline Industry based on the framework of International Business only shows that competition is a major key reason why the customers are highly benefited in the long run. As a whole, even though there seems to be low profitability in the US Airline Industry, there is stability in it considering that there are major key players in the industry that are trying to recreate possibilities from time to time. The bottom line of this all is to substantially provide customers a potentially high value they deserved. References Belobaba, P., Odoni, A., and Barnhart, C. (2009) The Global Airline Industry. West Sussex: John Wiley & Sons. Ben-Yosef, E. (2005) The evolution of the US airline industry: theory, strategy and policy. Dordrecht: Springer. Boone, L. E., and Kurtz, D. L. (2006) Contemporary Marketing. 12th ed. Mason, OH: Cengage Learning. Coyle, J. J., Novack, R. A., Gibson, B. J., and Bardi, E. J. (2010) Transportation: A Supply Chain Perspective. 7th ed. Mason, OH: Cengage Learning. Haberberg, A., and Rieple, A. (2008) Strategic Management: Theory and Application. Oxford: Oxford University Press. Ivanko, J. D., and Kivirist, L. (2008) ECOpreneuring: putting purpose and the planet before profits. Gabriola Island: New Society Publishers. Pitt, I. L., and Norsworthy, J. R. (1999) Economics of the United States commercial airline industry. Indiana: Kluwer Academic Publishers. Porter, M. E. (1998) Competitive Strategy. New York, NY: Free Press. Rosenberg, J. M. (2010) The concise encyclopedia of the great recession, 2007-2010. Lanham: Scarecrow Press. Vasigh, B., Tacker, T., and Fleming, K. (2008) Introduction to air transport economics: from theory to applications. Burlington, VT: Ashgate Publishing, Ltd. Read More