Competition in the Airlines Industry

For many years, the airline industry was highly regulated which resulted in most
airlines acting like each other by definition. However, the similarities among the
large airline companies remained after the industry was partially deregulated
more than 30 years ago. These similarities– in services, routes, and
performance–have persisted even to the present time. For example, airlines
often offer a new service (e.g., Wi-Fi availability on flights), but these services
are easily imitated, therefore, any differentiation in offerings is only temporary.

In recent times, consolidation has occurred in both European and U.S. airline
industries. In particular, poor performance led U.S. Air and America West to
merge. Additionally, much for the same reasons, Northwest Airlines and Delta
Airlines merged. Likewise United Airlines and Continental merged to create the
largest airline in the industry. More recently, American Airlines and U.S. Air
have been approved to merge. Much of the consolidation was approved because
several of the airlines went through bankruptcy proceedings (e.g., Continental
and United both went through bankruptcy before their merger). All of these
mergers, however, have not created highly differentiated services (or prices).
All of airlines largely provide the same type of services, and prices do not differ
greatly among the large “full-service” carriers.

In fact, it seems that the primary competition is in trying to make fewer

mistakes. In fact, industry statistics that report positive accounts, announce such
outcomes as a reduction in lost bags, fewer cancellations of flights, and fewer
delays. What this suggests is that all of these areas still likely represent major
problem areas. It seems pretty bad when the most positive statement one can
make is that fewer bags have been lost in recent times. Although profits have
been up more recently, this is primarily due to lower fuel costs and stronger
demand because the economy is growing, something that is not controlled by
those in charge of the strategy.

Obviously, there are differences between airlines across time. United, the
largest airline, merged with Continental to create more financial efficiencies and
to offer greater travel options to customers.

However, it has had significant problems making the merger of the two systems
work effectively. In fact, it announced a major net loss for 2012 because of its
problems. For example, in November 2012, a computer malfunction (software
problem) caused the delay of 250 of United’s flights globally for almost two
hours. Its reservation system failed twice during 2012, which shut down its
website, stranding passengers as flights were then delayed or cancelled.
United’s on time performance suffered and was once of the worst in the
industry for 2012. The number of customer complaints for United was much
higher than in the past. In short, it is relatively easy to determine why the airline
suffered a serious net loss in 2012. Yet, Delta, which performed very poorly a
few years earlier, performed better in 2014. It made a net profit for the third
year in a row. Its on-time performance was about 10 percentage points higher
than United’s. And, while United is eliminating flights and furloughing
employees to cuts costs (trying to make a profit), in 2012 Delta purchased a 49
percent share of Virgin Atlantic to gain access to the highly valuable New
York–London routes and gates in both locations. Delta was also one of the first
airlines to introduce Wi-Fi to passengers during flights, although most other
airlines have duplicated this service. Interestingly, the one program most
airlines have used to establish some differentiation is their loyalty programs.
However, benefits of these loyalty programs have been decreasing over time
with less availability and more miles deducted.

Furthermore, research shows that airlines attrack brand switching customers

who tend to move to the brand with the most perks for them at the time.
Certainly, some reduced-service airlines have fared much better in most of the
categories noted above (e.g., profits, on-time flights, customer complaints).
Among these is Southwest Airlines. Interestingly, while it started as a low-price
airline (and has maintained this feature), it also has generally offered superior
service compared to the full-service airlines. The large airlines tried, but were
unable, to imitate Southwest. In effect, Southwest developed its resources and
capabilities which over time allowed it to provide service much more
effectively and at a lower price than its full-service rivals. However, JetBlue has
duplicated much of Southwest’s strategy, although it is focused on business
travellers.

Case Discussion questions:

1. How important is the environment to the performance of airlines in the

airline industry?

2. Why is there a lot of imitation in the airlines industry, and how does this
affect firm performance?