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 United Airlines Delta Air Lines Continental Airlines Northwest Airlines US Airways Group       Southwest Airlines Alaska Air Group SkyWest Jetblue Airways Airtran Holdings 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 High Dominated by Boeing and Airbus  Competitive Rivalry  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 ID90.com   New technology for airline employees  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 Over Expansion Unions  Financial Situation   Human Resources Trouble  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 Nearly bankrupt  Financial Situation  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 Average  Bargaining Power of Suppliers   Entry of new firms Virtually impossible  Requires a lot of capital  Too many competitors  Organizational Structure Legislature Continental Airlines Management & Operations Committee Finance Committee Planning & Environment 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 Airport Insurance Information Systems (IS) Finance & Purchasing Audit Data Resources Safety  Administrative Services       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 fossilfuel-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. database-driven view of aircraft maintenance data.  Illustrated Parts Catalog (IPC) - Issued by manufacturers, provides a more graphical and 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 Quality / product performance Reputation / image Raw material access / cost Technological skills Marketing / distribution Financial strength Relative cost position AA 9 8 7 8 8 6 8 SW 8 10 10 7 9 10 10 Ability to compete on price Total 9 63 9 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 Strength (FS) 6 Conservative 5 4 Aggressive Company’s Competitive Advantage (CA) Low -6 -5 -4 -3 -2 3 2 1 1 2 3 4 5 6 High -1 -1 -2 -3 -4 Defensive -5 -6 Competitive Industry Strength (IS) 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 destinationsincreasing 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?