Industry Analysis Airline Industry

							Industry Analysis
  Airline Industry



       Group 2:
         Jessica Drab
      Michael White Bear
         Terry Pruiett
       Ashley Turkett
       Daniel McDuff
               Airline Companies:
                       Fortune 500

   American Airlines           Southwest Airlines
   United Airlines             Alaska Air Group
   Delta Air Lines             SkyWest
   Continental Airlines        Jetblue Airways
   Northwest Airlines          Airtran Holdings
   US Airways Group            ExpressJet Holdings
                                 Agenda

■   Industry Characteristics
■   Porter’s Five Forces
■   Environmental Scan
■   American Airlines
■   Organizational Structure
■   Company Capability Profile
■   American vs. Southwest
■   Southwest
■   Wrap-up!
        Questions to be answered
   What are the chief business and economic
    characteristics of the industry environment?
   What forces are driving changes in the industry
    and how important will these changes be?
   What competitive forces are at work in the
    industry and how strong are they?
    Chief Characteristics of the Airline
                Business
   Service Industry
   Capital Intensive
   High Cash Flow
   Labor Intensive
   Highly Unionized
   Thin Profit Margins
   Seasonal
         What is changing the airline
                  industry?
   Deregulation
   Fuel Prices
   Recession
   Terrorism Threats
   Recent Environmental Changes
       “Going Green”
      Porter’s Five Forces for Airline
                  Industry
   Threat of New Entrants
   Power of Suppliers
   Power of Buyers
   Availability of Substitutes
   Competitive Rivalry
               Environmental Scan
   Economic Factors:
     Recession
     Price of crude oil
           In March 2008 cost of crude oil was $105/barrel
     Interest rates
     Unions
     Start-up cost
         Buying plans
         Employees
         Certifications
              Environmental Scan
   Political Factors:
     Deregulation
     Safety Standards

     Certificates
         Airplane Certificates
         Operating Certificates

         Certificates for Airline Personnel

         Airport Certificates

       FAA
            Environmental Scan
   Environmental Factors:
     Contrails
     Engine Emissions

     Airport Noise

     Compatibility Planning



   FAA Environmental Policies
                Environmental Scan
   Competitive Factors:
       Power of Suppliers              Low
            Dominated by Boeing and Airbus
       Competitive Rivalry             High
          1) The economy is bad therefore it is harder to draw in
           customers
          2) Demand for air travel is inelastic because there are
           many different airlines to choose from
       Ex: Southwest vs. American Airlines
                Environmental Scan
   Geographical Factors:
       4 Categories
            International, National, Regional and Cargo
     Virgin Atlantic
     Does “Going Global” mean being profitable?

     Southwest



       Cargo Facilities
                Environmental Scan
   Technology Factors:
     Internet as a way to book flights, check-in, and
      check flight status
     Always new and improved software for airlines
            Shepherd Business Intelligence
       New technology for airline employees
            ID90.com
     New pilot training courses
     New security technology
            Airport-technology.com
Environmental Scan Conclusion
   Our economy is always changing, therefore
    industry factors are always going to be changing
    and modifying to fit with our current economic
    well-being.
   Right now it is obvious that the Environmental,
    Technological and Economic factors are going
    to be the most crucial and have the most impact
    on the airline industry today.
              American Airlines
   AMR Corporation is the
    parent company of
    American Airlines and
    American Eagle Airlines
   Headquarters is in Fort
    Worth
   Serving 260 cities with
    more than 670 planes
                American Airlines
   Strengths
     World’s Largest Airline
     Largest Market Share in the Airline Industry

     Good Customers Service

     Strong Image Brand

     Innovation
         Technology
         AAdvantage Programs
                   American Airlines
   Weaknesses
     Low Satisfaction Rating
     Customer Segmentation
            Business or Pleasure
       Financial Situation
            Over Expansion
       Human Resources Trouble
            Unions
                   American Airlines
   Opportunities
       Customer Service
            Airline Satisfaction Index
   Threats
       Competitors
            Delta and Northwest Merger
       New Regulations “FAA”
                   American Airlines
   Problems to address
       Customer Service/ Flight Problems
          Lost Luggage
          Worst On Time Record

          Discrimination

       Consumer Complaint Index
            Highest among 20 domestic carriers
       Financial Situation
            Nearly bankrupt
                Industry Analysis
   Potential growth rate is 5-6%
   Competition
     Intense competition among competitors
     Continental, Delta, Jet Blue, Northwest, Southwest,
      United, and US Airways
   Dependency
       Airlines are dependent upon oil
                  Industry Analysis
   Bargaining Power of Buyers
       Average
   Bargaining Power of Suppliers
       Average
   Entry of new firms
     Virtually impossible
     Requires a lot of capital

     Too many competitors
                 Organizational
                   Structure        Legislature
                              Continental Airlines
Management & Operations Committee                   Planning & Environment Committee

        Finance Committee                              Affirmative Action Committee

                              Executive Director
                                                  Commercial Management & Airline Affairs

                                                     Air Service Business Development

                                                               Legal Affairs

                                                            Human Resources

                                                          Administrative Services

                                                                Operations

                                                          Planning & Environment

                                                    Labor Relations& Legislative Affairs
    Organizational Structure Cont.
   Human Resources
       Employee Relations
       Human Resources Development / Strategic Planning
       Office of Diversity
   Administrative Services
       Airport Insurance
       Information Systems (IS)
       Finance & Purchasing
       Audit
       Data Resources
       Safety
    Organizational Structure Cont.
   Operations
     Airport Director
     Public Safety

     Reliever Airports

   Planning & Environment
     Environment
     Airport Development

     Building Official
        Company Capability Profile
   Managerial Factors
       Corporate Image, Social
        Responsibility

            Eco-Skies
            Continental is committed to
             using electric rather than fossil-
             fuel-powered ground equipment
             wherever feasible. At the
             Houston hub, they have been
             using electric ground equipment
             since 2002 and will have reduced
             emissions from ground
             equipment approximately 75
             percent by the end of 2007.
Company Capability Profile Cont.
   Aggressiveness in Meeting Competition
       Changing Technology
            General Enhancement through Graphical Illustration – Involves
             the expanded use of manipulable high-resolution photos ,diagrams ,
             or drawings alongside textual information to increase the accuracy of
             instructions.
            Inspection-Related Collaboration - Involves the use of a digital
             camera to perform diagnostic analysis.
            Real-time Instruction - Involves the use of Java-based streaming
             video to provide realtime training and tutorials for technicians.
            Flagging High-Risk Procedures - Involves the use of digital
             photos and/or streaming video to provide a priori alerts to
             technicians when conducting complex or risky procedures.
Company Capability Profile Cont.
   Competitive Factors
      “Tech Ops”
             Aircraft Maintenance Manuals (AMMs) - Issued by manufacturers such as Boeing, GE, and
              Pratt and Whitney, AMMs are extremely large documents that provide all information on how to
              maintain a particular type of airplane, its engines or its subsystem. Primarily text-based, AMMs also
              include illustrations such as parts drawings or wiring diagrams.

             Service Bulletins (SBs) - Issued by manufacturers, SBs also alert airlines to potential technical
              issues; compliance with SBs is at the discretion of the airline.

             Illustrated Parts Catalog (IPC) - Issued by manufacturers, provides a more graphical and
              database-driven view of aircraft maintenance data.

             Engineering Authorizations (EAs) - Issued by an airline to its technicians, EAs specify in detail
              how to perform non-routine maintenance on aircraft and aircraft components (such as work
              related to service bulletins).
    Company Capability Profile Cont.

   Employee Benefits
       Continental airlines distributed a record $158 million
        of profit sharing to coworkers.
          Travel Passes – Reduced rate travel, buddy passes and
           vacation passes
          On-Time Bonus – When Continental meets its on-time
           goals for the month there is a cash bonus plan in place to
           reward the employees for their teamwork and dedication
         Strengths of AA and SW
   American Airlines
     Have the most customers
     Offer the most flights



   Southwest Airlines
     Reputation as a great airline
     Financial strength

     Ability to compete on price
        Weaknesses of AA and SW
   American Airlines
     Financial strength
     Raw materials cost

     Reputation taking a hit lately



   Southwest Airlines
     Not as many customers
     Don’t fly to as many locations
    Comparison of American Airlines
       and Southwest Airlines
Key Success Factor / Strength Measure   AA   SW
Quality / product performance           9    8
Reputation / image                      8    10
Raw material access / cost              7    10
Technological skills                    8    7
Marketing / distribution                8    9
Financial strength                      6    10
Relative cost position                  8    10
Ability to compete on price             9    9
         Total                          63   73
     Southwest Airlines Strategies
   Competitive Scope
       National
            SWA flies coast to coast excluding some mid-north states


   Strategic Intent
       Be among the industry leaders


   Market Share Objective
       Expansion via internal growth
     Southwest Airlines Strategies
   Competitive Position / Situation
       Getting stronger; on the move


   Strategic Posture
       Mostly offensive
            SWA is always coming up with new ideas that lead to benefits for
             themselves and their customers


   Competitive Strategy
       Pursuing differentiation based on service
            SWA’s main objective is to have the best customer service
                 Industry Assessment
   Environmental Stability (ES)
       Rate of inflation is high with the gas prices
       Barriers to entry are high due to capital


   Industry Strength (IS)
       Financial stability is rocky
            Some companies make constant profits and others have losses
       High in capital
            Industry is high in capital so hard for new companies to enter
    Southwest Airlines Assessment
   Competitive Advantage (CA)
       Product quality is high with low prices and good service
       Customer loyalty is high due the treatment they receive from
        SWA


   Financial Strength (FS)
       Return on investment is great with gas contract giving them
        an advantage
       SWA is the only U.S. airline company to make a profit in
        each of the past five years
Industry and SWA Assessment
         Space Chart
                                       High Company’s
                                            Financial
                                     6      Strength (FS)

              Conservative           5                        Aggressive
                                     4
                                     3
     Company’s
                                     2
     Competitive
     Advantage (CA)                  1         1    2     3     4   5      6

   Low                                                                         High
         -6   -5    -4   -3   -2   -1          -1                     Industry
                                                                      Strength (IS)
                                               -2
                                               -3
                                               -4
                         Defensive                      Competitive
                                               -5
                                               -6
                   Environmental
                   Stability (ES)
                                         Low
              Southwest Airlines
   Founded by: Rollin King and Herb Kelleher in 1971

   Four Aircraft and 195 employees

   Begins service between Dallas, Houston, and San
    Antonio
            Need For Direction

   Initial Platform- “If you get your passengers to
    their destinations when they want to get there,
    on time, at the lowest possible fares, and make
    darn sure they have a good time doing it, people
    will fly your airline”
    Expanding Through Strengths
   Strengths
    -Short Turn Times
    -Rapid Expansion
    -Self Ticketing
    -Lowest Fair Provider

    The next 30 or so years provided Southwest an
    expanding market with more airport destinations-
    increasing market share
        Improving On Weaknesses
   Weaknesses
     Small Startup
     Limited Destinations

     Cutthroat Industry

     Customer Satisfaction

     Lowering Cost

     Eliminating Unnecessary Practices
     Coordination and Production
   Year 2006
       Southwest celebrates 35th Anniversary

       Over 96 million customers

       Offers one-stop flights throughout U.S.

       Non-Stop flights expected by 2014
               A Look Forward
   Current Mission-“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.”
        Capitalizing on Opportunity
   2008 Financial Record
       Gross Revenue=$9.9 Billion
       Net Income=$645 Million

        Southwest has been steadily out performing other airlines
        financially as well as in market share. This solidifies the fact
        that Southwest is a strong company that employs a sound
        strategic plan. This niche market has carried Southwest
        through hard times despite facing the soft economies that can
        ruin an airline.
The End!
 Questions?