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Airline industry analysis

The document discusses strategies in the domestic passenger airline industry. It analyzes the strategies of major airlines including mergers for cost leadership, product differentiation through amenities and technology, and hybrid approaches. Southwest Airlines is highlighted as having a sustainable strategy through cost control and differentiated secondary markets and service offerings. A hybrid strategy is concluded to be most valuable as it incorporates the strengths of both cost leadership and product differentiation.

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* STRATEGY 390 – Section 005 Ali Khalil HaeJun Jeon Michael Kondoleon Joanna Lu Will Wang Jason Zhang
* • Business: Transport passengers and cargo regionally, domestically, and internationally • Focus: Domestic passenger airline industry • Five major players with majority market share:
* Pre-flight Operations Pre-flight Logistics Flight Service Post-flight Services -Acquiring aircraft -Scheduling staff -Client transportation -Shuttles/Car rentals -Hiring staff -Setting routes -On-flight services -Partnership deals -Purchasing materials -Setting fares -Baggage handling -Points/membership system Post-flight logistics -Connections -Missed flight support -Lost baggage support
* Threat of Entry Low - High Saturation - High Cost - Gov’t Controls Threat of Suppliers Intra-Industry Rivalry Threat of Buyers Low High Low - Fare Comparison - Passenger Pricing - Boeing, Airbus Power - High Marketing - BP Shell , - No Backwards - Diff Services Integration Threat of Substitutes Medium - Car, Bus, Train - Proximity - Travel Time
* Cost Leadership • Mergers • Financial Restructuring • Conservative Cost-Cutting Product Differentiation • Technology • Regional Market • Price Leadership • Amenities • Operational Efficiency Cost Leadership + Product Differentiation (Hybrid)
* • Reduce costs primarily through M & A • Renegotiate labor contracts, pensions, etc. • Maintain traditional model while cutting costs • Continue offering routes to all destinations • Maintain frequent flier, lounges, perks Product Cost Leadership Hybrid Analysis Conclusion Differentiation
* • Completed: Delta/Northwest (2009) • In Progress: United/Continental (exp. 2012) • Unsuccessful: • US Airways/United • US Airways/Continental • US Airways/Delta Product Cost Leadership Hybrid Analysis Conclusion Differentiation
* US Airways • Forced to cut costs alone • Retired aircraft • Liquidated pensions • Cut routes Product Cost Leadership Hybrid Analysis Conclusion Differentiation
* American Airlines • Only traditional legacy airline • No mergers or bankruptcy restructuring • Cut costs through austerity measures • Eliminate routes/hubs • Negotiate labor costs Labor Cost as % of Total Cost AMR- 31% Legacy Airline average- 25% Product Cost Leadership Hybrid Analysis Conclusion Differentiation
* Cost Leadership • Mergers • Financial Restructuring • Conservative Cost-Cutting Product Differentiation • Technology • Regional Market • Price Leadership • Amenities • Operational Efficiency Cost Leadership + Product Differentiation (Hybrid)
* • Capture market share through differences in product offerings Alaska Airlines • Regional Carrier • Monopolistic market share in Alaska • In-flight meals on most flights • High flight attendant/customer ratio • Complementary wine and other services Product Cost Leadership Hybrid Analysis Conclusion Differentiation
* Cost Leadership • Mergers • Financial Restructuring • Conservative Cost-Cutting Product Differentiation • Technology • Regional Market • Price Leadership • Amenities • Operational Efficiency Cost Leadership + Product Differentiation (Hybrid)
* Southwest Airlines • Cost Leadership • Focus on low unit costs • Short aircraft turnaround time • Mitigation of fuel price risk • Product Differentiation • “Point-to-Point” network model • Secondary markets (BWI, MDW, LGA) • No baggage fees Product Cost Leadership Hybrid Analysis Conclusion Differentiation
In millions Delta US Airways United AMR Alaska LUV Revenue $ 31,755 $ 11,908 $ 23,229 $ 22,170 $ 3,832 $ 12,104 Domestic profits $ 332 $ 291 $ 147 $ (283) $ 226 $ 459 Profit margin 1.05% 2.45% 0.63% (1.27%) 5.90% 3.79% Market cap $ 6,290 $ 692 $ 5,490 $ 543 $ 2,260 $ 6,130 Product Cost Leadership Hybrid Analysis Conclusion Differentiation
* • High market share • High margins • Saturated market • Strictly regional • Point-to-Point • Hub & Spoke • Limited amenities • High amenities • Overall, Southwest strategy more sustainable • Allows for growth potential • Alaska has risk of overreliance on monopolistic position Product Cost Leadership Hybrid Analysis Conclusion Differentiation
* • Long-term strategy is valuable and rare • Hybrid strategy incorporates best of both strategies • Point-to-Point promotes streamlined services, route flexibility • Understanding customer priorities allows for strategic budgetary allocation Product Cost Leadership Hybrid Analysis Conclusion Differentiation
* • Cost leadership firms should find ways to improve service without compromising margins • Hybrid firms must remain adaptable and cognizant of changing consumer needs Product Cost Leadership Hybrid Analysis Conclusion Differentiation
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