Case Study on

The US Airline Industry in 2007

Group : 02
 Course: Strategic Management [Mgt489]
Section: 10
Semester: Summer 2017

Prepared for: Mr. Bobby Hajjaj

Date of Submission: 27th July, 2017

Prepared By

Name ID
Gourab Kumar Das 133 1151 630
Rashik Zulker Nain 1410098030
Saad Bin Hossain 1130756030
Sabil Sarhan 1410810030
Md. Sazzad Hossain 1220295030
Quazi Afzalul Haque 1310419030
Tahsinur Rahman 1221159030
Anwar Abedin Piash 1210542030
 The US Airline Industry in 2007
Vision Framework
What: This is an Airline industry.

Why: The US airline industry is looking for Expansion of routes by achieving economies of
capacity utilization. The industry is also keen to avoid destructive price competition and
continue profitability in the long run.

Strategic Intent: Airline industry wants to be the best in providing world class transportation
facility and build customer loyalty by differentiating their offerings.

Vision: To establish the industry in a sustainable position by the virtue of high customer loyalty
and to provide faster transportation.

Key Issues
- Choosing between cost reduction offer and differentiation service.
- Making a fair treatment between long-suffering shareholders and customers.
- The rise of fuel prices after the 9/11 attack.

Goals
- To hold on to the period of profitability that came after 5 years (2001-5) by achieving high
load factor.

- To earn as much revenue as possible on each flight through proliferation of pricing categories
and surplus of special deals.

PESTEL Analysis (Macro Environment Analysis)

Industry: US Airlines Industry, Time Frame: 2003-2007 (5 Years)

Political Factors
The condition is stable.

Economic Factors
The incident of 9/11 had suffered a great overall loss which caused the oil prices go up. And
for this the airlines industry had suffered a lot.

Sociocultural Factors
Over the years, there has been a lot of spending on infrastructures and for this people tend to
go for other means (bus, trains) to travel long distance. However, some forecasts predicted the

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growth of demand for air travel will grow in near future as increase in population will result in
higher demand.

Technological Factors
The advancement in engineering of producing high fuel efficient aircrafts has made airline
companies cut down cost. Besides that, the addition of using sophisticated computer software
has made the communication much more easy.

Environmental Factors
There is specifically no environmental factor to consider.

Legal Factors
According to the chapter 11 of the bankruptcy code which allowed to seek protection from
their creditors and continue operation under supervision of the court.
Airline Deregulation Act (giving pricing power to airline companies), Removal of Civil
Aeronautics Board, Establishment of Federal Aviation Administration were the key
institutions, which set the rules of the industry. However, the new agreement EUUS Open
Skies Agreement (EU and US sharing their sky with each other) might bring upon a vital
change by encouraging competition.

Analysis
- Airline companies are more concerned with buying fuel efficient planes.
- Airline companies can control their own pricing strategy.

Porters Five Forces Analysis

Competitive Rivalry (High)
The four-firm concentration ratios in table 3.5 represents the ratio has decreased from 1935 to
2005 from 88% to 55.4%. This means that competition is going up due to abundance of new
competitors. When the ratio increases, the trend is to move from monopoly to oligopoly. We
noticed that in 1987, the ratio has increased, this might be explained by the consolidation in the
US airline industry in the eighties.

The spectrum of airline industry shows that competition is intense which is explained by the
low entry barriers and the high exit barriers. Exit barriers induced by government enable
bankrupt airlines to compete with financially stable airlines through artificially lowered costs.

Threat of substitutes (Low)

Low probability of US to develop high speed train travel facility, which means there is a very
low chance of replacing the air transport.
Business/First Class travelers can easily switch to economy class with little payoff, if the price
of luxury class tickets faces an upsurge.

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Barriers to entry (Moderate)
The capital requirement of setting up and airline can be low but the expenses leading to
comprising gates, airline and aircraft certification, takeoff and landing slots, baggage handling
services are high.

At several airports the dominance of gates and landing slots by a few major carriers made entry
into particular routes difficult and forced startup airlines to use secondary airports.
International airlines were also potential entrants to enter the industry.

Bargaining power of buyer (Moderate)

Air travel have no viable substitutes for long distance travel and the economy class become a
commodity. Price competition among the companies gives customers upped hand. On the
other hand, business class service is differentiated. Beside these facts, customers can buy
tickets online through online agents and by websites.

Supplier power (High)

Supplier power is high because there is a lot of monopoly and duopoly upstream. The Labor
unions and the airports are effectively monopolists. The fuel and equipment providers are also
fall under this. The labor unions have used this power to keep their wages and benefit high and
impose restrictive working practices which keep the productivity low. When the plane
manufacturers are suffering from excess capacity, bargaining power is with the airlines they
can easily delay buying and extend the lives of their planes.

Analysis
The industry is not attractive as the completive rivalry and supplier power is high whereas
others factors are moderate.

Key success factors

Capacity reduction. The financial woes of 20015 encouraged cutbacks in schedules and the
substitution of smaller for larger planes on many routes which was cost effective.

Product differentiation. The differentiation strategy for frequent flier schemes has been
immensely successful. These have encouraged customer loyalty and provided incentives for
alliances, as well as creating an additional revenue scheme for the airlines.

Regional concentration. Much more successful than mergers and acquisitions at controlling
competition has been the concentration by each airline on a few major airports which
consolidated the capacity and routes at a few airports.

Forward integration. The airlines have increasingly taken power from retailers (especially
travel agents) by expanding their own direct sales and reservation services (both telephone and
internet based) and creating specialized online ticket agencies.

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US airline industrys lifecycle
After post consolidation, the industry has become matured as things have become standardized
and there is less scope for differentiation. So ultimately, the companies which are prevailing
continue going for cost efficiency.

Recommendations
1. Keep on going for consolidation strategy which will eventually lead to lower competition.
2. Lock in prices (oil) to avoid fluctuation.

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