Airline Industry - Functions, Strategic Management Structures, and Competition - Term Paper Example

Analysis Report on the Airline Industry “The Strategic Management process” Table of Contents Abstract............................................................................................................................3 Introduction.....................................................................................................................4 Report reliability..............................................................................................................5 Industry overview Introduction..........................................................................................................5 Industry profile (1970-1980 the Deregulation Era)............................................6 Industry profile to date.........................................................................................7 Present Industry trends........................................................................................7 Industry challenges.........................................................................................................9 Analyzing the International Airline Industry Using Porter 5 Forces Model..............................................................................10 Using PEST Model..............................................................................................12 Industry forecast............................................................................................................13 Conclusion......................................................................................................................13 Bibliography...................................................................................................................14 Appendices.....................................................................................................................15 Abstract This is a report on the Airline Industry globally, the report shows the emphasis on the industry functions and how it affects the competition within the industry functions and the competing companies in it. Strategic Management structures are used to analyse the nature of the Industry. Most of the focus would be on growth trends, revenue and significant industry statistics in conjunction with highlighting the logistic and supply chain factors as a strategic means to accomplishing competitive success in the industry. Strategic management tools like PESTEL, Value chains (to mention a few) are fully utilised in the report. Strategic options would be used to evaluate the growth and expansion of the industry to establish if the industry has a competitive edge or not and if it measures up with its competitions. . This report employs a methodological approach with huge implications for the reliability of findings while a whole lot of secondary data provides for all the analytical views and conclusions of this paper. The prime reason behind preparing the report is to gain insights into the development of airline industry internationally amidst economic and political turbulences. Airline industry is a growth factor for tourism industry and accounts for the lion’s share of the GDP of many nations (Page 2009:218). Delving deep into the airline sector could throw much light on how economies are developing and what solutions and means are available to them to handle increased competition, globalization and financial downturn. The findings of the report have presented us with favourable results that could motivate the airline carriers and could pave the way for future practices to be developed in airline industry. Introduction This paper seeks to present a very clear view in enabling the reader to have a better understanding of the global airline industry’s environmental business climate. In doing this various firms and regional markets that make up the industry are looked into, by examining the competition between the airline operators (service providers), consumers, regulatory implications, weakness of different sectors and regions involved, homogenous threats, the negative and positive trends coming up in the industry and a forecast for the future, if there would be growth or reduction. Importantly, it views the challenges a new provider (entrant) could face within the present industry condition. For ages, the airline industry was mainly handled or partly owned by governments, but nowadays most airlines are owned by corporations so as to maximise shareholders value. The international airline industry is made up of combination of hyper competitive markets. The industry on its own forms an important part of the tourism industry. The industry at the moment is passing through a period of change caused by revolutionary restructuring in the industry, this occurs because of three major factors which are interconnected; tough regulatory requirements, huge competitive environment for service providers and to crown it all customers’ demand decreasing due to the global economic situation. It has been figured out that those service providers who can establish the most effective networks are more likely to have success in lowering their costs and delivering the required service that the broader process of trade would need. A good look at the functions that back-up the industry on the whole reveals certain issues on the strategically inputs and outputs towards the need to seek for better innovation to increase productivity and growth. In compiling this report the use of secondary data was extensively used; industry reports, specialist newspapers, industry journals and the internet. Report reliability This paper has been compiled only by using and analysing secondary data sources that are current and credible. The choice of the methodology data sources used to provide an insight into the industry is duly backed up by authors of business and management research and report writing like; Bell(2001), Bryman & Bell(2000,2007), Denzin(1978),Horn(2009), Hussey&Hussey(1997) ,Janesick(2000), Sekaran and Stake(1995) The use of secondary data sources is restricted by the following; It could be unclear and general and may not necessarily help corporations or service providers with decision-making. The data could be outdated and old. The company putting up such data may not be reliable?(reputable) The sample to which the data is generated could be small. The data must be duly checked, that is, information and data may not be accurate. Industry overview Introduction The airline industry has been structured in such a way that it has so many aspects and involves plenty of characteristics that make up a very complex structure (Ferreira, 2009). According to Ferreira (2009), the industry is sub-divided into three main classifications namely; Majors: as it suggests they deliver airline services to national and international customers alike which bring up huge amounts accrued by them as income(revenue)examples are; British airways, Air France, Fly emirates, just to mention a few. Nationals: which give service to different regions in a country using medium and large size airplanes with minimal revenue received compared to the “majors”, examples include Easyjet, Ryanair et cetera and the third, Regionals: as their name suggests are attached only to a particular region with usually small planes suggesting much lower revenue is made by them. It should be well noted that the cargo carriers also make an important part of the industry (Investopedia n.d). Industry Profile (1970-1980 the Deregulation Era) The airline industry started emerging as a major player in the economy in the 1970s, this was when the manufacturers of airplanes started to construct big and massive jets to maximise passenger output which have become the standard of international travel today. In those years, airplanes like the Concorde where brought into commercial travel and also the airbus was created, this planes main objectives were not for speed, but were intended to increase passenger capacity payload and range with modernised cockpits to aid pilots to be able to fly different planes. The period from 1970-1980 was the period of deregulation of the airline industry of the economies. The deregulation act of 1978 lowered barriers of entry for new airlines, it helped in the air cargo deregulation, gave airlines freedom to function on any route and charge the amounts they wanted to, this created a situation where carriers provide tailor-made services to individuals and charge consequently (Brander & Zhang 1990). Soon after, the aspect of passenger airline industry was also deregulated and the international industry followed thereafter (Ferreira 2009). The deregulation of the industry brought about the emergence of a new model which is known as Hub and Spoke model (Investopedia 2009, Ferreira 2009), it was first used by the FedEx Company who took advantage of the concept and it revolutionised the airline industry (Evans & Kessides 1993). It is a system which makes transportation much easier by greatly simplifying a network of routes (Appendix 1). According to Ferreira (2009), other characteristics brought about by the deregulation where innovations like the frequent flyer programs, computer reservation system and code-sharing flights where established as industry practices. The major advantage of it was that it brought about competition and relationships amongst airlines and encouraged new entrants into the industry and the number of airline carriers has further increased subsequently over the years. Industry profile to date Airline industry is the cornerstone to globalization and economic prosperity to many of the economies and is the backbone for tourism industry as well. The past decade has seen heightened governmental attention in improving upon the infrastructure needed for airline industry, seeing an upsurge in demand for business and leisure travel. With the introduction of Boeing 747 and Airbus, it was much easier to travel to exotic locations. Business travel has also presented growth opportunities to the international airline industry, owing to augmented world trade and movement of goods and services. Europe and North American regions are already developed in their airline sector and are forecasted to grow by 4-6 percent, unlike Asia/Pacific region which holds potential of over 6 percent growth rate. The profitability aspect of airline industry is also brighter due to the gone days of recession and Gulf War. Airline industries and carriers have realized the need for radical change and have adopted cost control and sustained growth measures (Stanford n.d). Decreased governmental regulations, enhanced customer services, customized interface and booking systems- all these have favoured the growth of airline industry in the last few decades. The industry has turned more of service oriented than of profit inclined. Though faced with threats of severe competition from low cost small carriers, airline industry still proceeds towards development with a very fast speed. Developing alliances and mergers further propel the growth of carriers by building upon their customer base (Brueckner 1991). Present Industry trends The airline industry in the international scenario has faced much of ups and downs and now is on an upsurge (Appendix 7). However, if we were to examine the trends in airline industry more closely, it would emanate out of the following components: Recession- recessionary clouds are now over and passenger volume as well as consumer spending power has increased (Appendix 5). Not as favourable as forecasted before the downturn, the passenger volume still raises the brows of many established airline carriers and would keep them in financial turbulences for some more time. The elite business travel segment will be affected primarily and airline firms have to revamp their pricing strategies to allure the passengers. Long term growth- globalization and booming tourism industry offers long term growth prospects for airline industry. Especially for passenger travel and leisure and vacation flights, the profitability aspects are greener. Congestion- though air deregulation is getting more and more stimulated congestion in the availability of slots and hub airports operating at full capacity restrict the entry of potential players (Appendix 3). An evident example is the recent conflict between Virgin Atlantic and British Airways to gain landing rights at the London Heathrow airport. Privatisation- legacy of being owned by states granted an obvious monopoly to the market leaders. But tides have shifted and carriers like British Airways, Lufthansa, et cetera have been privatised, getting more customer and service oriented and ensuring cost cutting to achieve efficiency (Eckel & Singal 1997). Parting away with state support has further complicated the competitive structure of airline industry by granting flexibility, globalization and expansion opportunities (Botten & McManus 1999:255). Technology- both the advancements in aero space technology and customer reservation systems have impacted the airline industry to much extent. Carriers now have to devise ways to achieve trade-off between price sensitive consumer preferences and ever changing pace of technology. Security- international terrorism has given vent to dire need for security and safety measures. This has become all the more important after the 26/11 incident, compelling airline firms to invest aggressively in safety and control measures. Overcapacity- increased globalization and burgeoning population has overburdened the airlines of passenger load (Graham, Kaplan & Sibley 1983). This will necessitate the need for more strategic alliances and mergers where most of the global routes will be dominated by a handful of carriers in the coming decade (OECD 1998:108). Industry challenges Technology and costs of lease- airline industry is investment driven and high technology component facilitated. It would be very difficult for small players to replicate the technical expertise of established players as they neither possess the requisite financial standing, nor the support of skilled labour to handle the advanced technology (Borenstein 1989). Weather- weather fluctuations like extreme hot or cold, fog and stormy conditions make the flights vulnerable to be cancelled or postponed which costs airlines money. Even airports could be shut down for several days. Fuel costs- rising speculation in fuel costs adds up to the operating costs of airlines, which gets reflected in the form of hiked fare prices. Rising fuel cost does not get compensated in reducing other operational costs and the airlines are hit directly by this factor (Global Times 2009). Labour- labour is yet another crucial component of cost in airline industry where companies thrive if they have talented and professional pilots, attendants and dispatchers. Pollution- one of the factors gaining prominence nowadays is the rising level of carbon pollutants added into the atmosphere by airlines (Best sample resume n.d). Stringent regulations are getting implemented which need to be adhered to by the firms and carriers while exercising control over ever changing technology. Analysing the International Airline Industry Using Porter 5 Forces Model In looking at the international airline industry it is very important to look at the external factors (macro-economic environment) that have an impact on the industry and how they affect it. In doing this a major environmental framework like the Porter 5 forces must be employed in explaining this, that is, factors like rivalry amongst existing firms, potential of new entrants into the industry, power of supplies, threat of substitutes, et cetera. Rivalry amongst existing firms Rivalry in the international airline industry is very intense due to the prevailing price war in the realm of global economic recession and competition for securing slots for airport departure and landing. Though regulation barriers have decreased considerably, ownership rules offer a sort of shield to protect the airline firms. Most of the competition in the airline industry is being presented by established firms in a single aviation market by replicating the technologies and pricing policy. To grab the customers, various privileges have been offered to the market like frequent flying clubs, different services, fare cuts and similar other benefits. Because of competition cost being high, returns for airlines firms decreases. Threat of substitutes Potential threats for established airline firms arise from the cause of substitution primarily. Even though being the fastest mode to travel, there are chances of surface transport, especially rail, in domestic airline route. If the city to city travel route time through rail comes down below 3-4 hours, it could pose serious threats to regional and local airlines (Docstoc n.d). Electronic modes of communication namely video conferencing, emailing and teleconferencing make airlines more susceptible to lesser business travel because such channels facilitate communication and interaction without the need to travel. Due to emailing technology, even air freight is losing its share substantially as people do not feel an urgent need to ship the documents. However, people always look for convenience and valued offerings in securing air travel option for themselves in case of leisure and vacation spending. New entry The competitive equilibrium in the airline industry is further disturbed by the threat if new entrants and it arises out of a host of factors. First anticipated barrier to entry is caused by regulatory frameworks but countries like United States and European Union have eliminated almost all stringent rules on entry, thereby easing the task for new players to enter the sector. Availability of resources may also be deemed to be a potential barrier to entry because airline industry is an investment and labour intensive where scarcity or costly resources could prevent players to enter. Gaining access to airport slots also presents a case for entry barrier. Seeing the global downturn, airport slots would mainly be delivered to established firms, making it difficult for new entrants to secure slots. Staff resources come up as another potential barrier to entry in airline industry as without trained and skilled pilots and ground duty-men, firms cannot operate effectively. With “open skies agreement”, things could become grave and competition global (Debbage 1994) where only majority ownership would be there to rescue the firms (Evans 2001). Power of suppliers As opined by Porter, an industry which needs crucial resources from monopoly suppliers, the suppliers are in a position to manipulate the prices to make profits, thereby limiting the profitability of the firms they supply. For airline industry, this has been a grave issue since industry downturn has also not favoured any reduction in the bargaining power of suppliers and airline firms are compelled to pay whatever airport charges and ATC gets levied. A good example to cite here is the introduction of Boeing 747 in 1970 and the Airbus A380, which remain unmatched in their technology and seating capacity, due to which the suppliers exercise monopoly in prices. The GDSs (Global Distribution Systems) have further complicated the airline structure by allowing reservations with agents, tour operators, hotels and rental companies. A consortium of four players- SABRE and Worldspan of US and Galileo and Amadeus of Europe, have been successful in establishing geographical monopolies. For low fare airlines, it significantly reduces their revenue because on each and every booking, they have to part away with a percentage of commission (Shaw 2007:82). Using the PEST Model Political- politically, the airline industry environment had been very turbulent with constant easing of regulations and legislative frameworks. Deregulation has allowed the entry of new players with permission to follow expansion and cost cutting measures, thereby giving vent to economies of scale. Liberalization of the ownership rules have further eased the monopoly of a few carriers where the size of the market is now increasing for other carriers too. Economic- economically the industry has suffered a lot due to decreased number of passengers and increased cost of insurance and safety measures (Appendix 2). Stiff competition from low cost small carriers has led to more intense price wars, reducing the revenues and profit margins. Social- socially, air travel is the preferred mode of travel for far off destinations. However, flying confidence of passengers has been shattered by the September 11 incidence, which needs to be restored to resume the previous passenger turnover. Moreover, better services and customer focus can rebuild the image of airlines in the mind of reluctant flyers. Technical- expanding market size has facilitated economies of scale in production of airlines. Moreover, evolution of e-commerce methods in bookings, reservations and ticket selling has lessened the need for bigger infrastructure, thereby facilitating savings on overheads. Industry Forecast Though the industry has seen some tough times in the last few years, the forecasts for the same are quite impressive. Thawing economy and increasing passenger load gives positive signs of better revenues and growth prospects (Appendix 4). It has been forecasted that a billion passengers will be travelling through air in United States alone within the next 10 years. Increased revenues will support the carriers operating to handle such a juggernaut (FindArticles.com 2010). The IATA forecasts the industry growth to be 6.5 billions USD for the year 2010, as compared to a negative forecasted figure of 3.9 billions USD for 2009 (Appendix 6). The downward trend for 2008 and 2009 was attributed to global economic crisis and increased fuel costs. Conclusion Summing up the findings from the above discussion, it can be said that airlines industry is on a full swing to development; however, many a hurdles block the way. 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The Airline Industry [online] available from < http://adg.stanford.edu/aa241/intro/airlineindustry.html> [accessed 9 May 2010] Appendices Appendix 1 Appendix 2 Appendix 3 Appendix 4 Appendix 5 Appendix 6 Appendix 7 Read More