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Airline Industry Net Profit Margins (%): 2001 to 2010F
Porter Competitive Model Intra-Industry Rivalry SBU: American Airlines Network (traditional) Rivals: United, Delta, Northwest, US Air Low-cost Rivals: Southwest, JetBlue, ATA Bargaining Power of Buyers Bargaining Power of Suppliers Substitute Products and Services Potential New Entrants Airline Industry Analysis – U.S. Market
Cargo and Mail
Alternate Travel Services
Aircraft Leasing Companies
Food Service Companies
Local Transportation Service
Regional Carrier Start ups
Cargo Carrier Business Strategy Change
Airline Industry Strategies Markets Routes and Route Structure Company Structure Information Systems Scheduled Flights Chartered Flights Air Freight Mail Products/Services Business Travelers Personal Travelers Seniors Families Government Customers Fare Strategy North America Europe Asia Latin America Independent Alliances Code Sharing Low Fares Premium Fares Short Haul Long Haul Hub and Spoke Point to Point Customer Systems Operational Systems Logistical Systems Business Systems
Airline Industry Value Chain INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS MARKETING AND SALES SERVICE PROCUREMENT TECHNOLOGY DEVELOPMENT HUMAN RESOURCE MANAGEMENT FIRM INFRASTRUCTURE -Financial Policy - Accounting - Regulatory Compliance - Legal - Community Affairs Pilot Training Safety Training Agent Training In-flight Training Baggage Tracking System
Information Technology Communications Product Development Market Research
Lost Baggage Service
Rental Car and
Computer Reservation System, In-flight System Flight Scheduling System, Yield Management System Baggage Handling Training Flight, route and yield analyst training
The U.S. Airline Industry Airline Reservation Systems
The airlines really began using IT in a significant way when American Airlines and United Airlines introduced the first airline reservations systems.
The U.S. Airline Industry Frequent Flyer Programs
Frequent flyer programs are a great example of using IT to alter Porter’s five forces.
They reduced buyer power by making it less likely a traveler would choose another airline.
They reduced the threat of substitute products or services by increasing switching costs.
They erected entry barriers by making a frequent flyer program a practical necessity for any airline to compete effectively.
The U.S. Airline Industry Yield Management Systems
Yield management systems are designed to maximize the amount of revenue that an airline generates on each flight.
Yield management systems are the reason that an airfare you’re quoted over the phone can be $100 higher when you call back an hour later.
The U.S. Airline Industry Yield Management Systems
The U.S. Airline Industry Disintermediating the Travel Agent
Expert surveys have estimated that the number of travel agents in the U.S. will be sharply reduced as a result of disintermediation.
The U.S. Airline Industry Utilizing Emerging Technologies
Permission marketing - when you have given a merchant your permission to send you special offers.
US Airline Industry Must Restructure or Die Aviation Week & Space Technology November 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.
To have a conservative increase growth, capitalize and cutback schedules of other airlines. To continue expanding conservatively in long-haul success
The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. To give ordinary people the opportunity to fly.
To the employees
We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.
How SW strategy is Implemented Passenger related departure Very low ticket prices No seat assignments No baggage transfers No connection with other airlines No meals Short hual,point to point travel Limited Passenger service High aircraft utilization
SW:Anatomy of a 15-minute Turnaround - Planes average 11 hours in air (Industry average = 8.0) - Planes average 10.5 flights per gate (Industry average = 4.5) 7:55 Ground crew chat around gate position 8:08 Boarding call ,baggage loading, refueling complete 8:03:30 Ground crew move to their vehicles 8:07 Passenger off plane 8:04 crew moves towards gate 8:06:30 Baggage unloaded, refueling 8:15 Jet way retracts 8:10 Boarding complete. ground crew leaves 8:15:30 Pushback from backs 8:18 Pushback disengages plane leaves for runway
Southwest Airlines half-fare flights. Every flight between San Antonio and Dallas every day. Only $13
[Irate Male Voice] "Hey! If you people fly Southwest Airlines during this half-price sale, you're gonna have a lonely bus driver on your conscience. Take the bus. It only costs a little more and is just 4 hours longer."
How did Southwest arrive at their initial price of $20?
" Break-Even Analysis ": "Pick a price at which you can break even with load factor that you can reasonably expect to get within a short period of time…the price ought to be as low as you can get it without running out of money"
Break Even Analysis Total revenue $ total costs # of passengers
Break Even Analysis Fixed cost= $670 per flight Variable cost= $2.80 Fixed cost Unit Price – Unit VC BEQ = $ costs revenue
Break Even Analysis Fixed cost= $670 per flight Variable cost= $2.80 Fixed cost Unit Price – Unit VC BEQ = $ costs 39 revenue ??
Break Even Analysis losses from charging intramarginal customers less Additional variable costs (93-39) * $2.80 additional revenue from increased demand $20 $10 39 78 93 -$390 -$150 +$540
Was Demand Elastic with Respect to Price? Price Quantity 1973 (Jan) $26 17 Yes, very elastic !! 1973 (Feb) $13 48 Price Quantity 1972 (June) $20 29 Much more than a previous calculation would imply 1972 (July) $26 26