1) What important trends have shaped airline industry ?

1. What important trends have shaped this industry?

A. Airline Deregulation Act:

Before the deregulation in 1978, the airline industry was controlled by the Civil Aeronautics Board (CAB). The role of this organization was to ensure the economic health of the business by controlling the entry and the competition. The result of this politic was an inefficient system with monopolies and high costs for the customers.
The industry was operating with a point-to-point system (= direct flight between 2 cities)
The deregulation allows new companies to enter on the market and to create alliance. The average price of the ticket decreases continuously from 600$ in 1980 to 325$ in 2010 so a fall of 50%.
The landscape of the industry changes and some companies acquired small carriers to create hub in the main cities in the USA. They now operate with a hub-and-spoke system (= long-haul flights operated with big airplanes and then smaller airplane for the connections).

B. Hub-and-Spoke:

While the big companies set up this new operation mode, new entrants, which have not enough money to invest in hub, decided to differentiate themselves by using the old point-to-point system. The advantages are that the travel time is reduced, they just need to use one type of plane and it reduces the fixed costs. Operating this way, the new entrants became an alternative to the big companies because they are able to offer attractive destinations for a cheap price. Here is the born of two strategic group: the low cost carriers and the differentiator carriers (which offer comfort, customer services,…).
Between 2000 and 2009, the new entrants took market share from the big companies in 1995 the ratio was 80/10 and in 2009, the ratio was 60/30.

C. Seat capacity:

The arrival of the new entrants created an overcapacity in the industry which is characterized by a price war during which a lot of companies go bankrupt. The others must merged to survive and some of them became stronger thanks to good acquisitions and restructuration.
The increase of the seat capacity which is not connected with the real demand is also due to the delivery time of an aircraft. During economic rebound, forecasts are good and it urges managers to increase the number of seats in order to respond to the demand but between the order and the delivery of the new airplane, the environment changes and the demand should decrease.
To conclude, we might say that the seat overcapacity is based on the arrival of new entrants and on the expansion of the existing companies.

D. Terrorism and wars:

The main fact is the 9/11 but the Irak War and all these facts influence the airline industry. In fact people are suspicious and prefer taking their car to go on holiday.

E. Customers loyalty and price war:

The travelers are indifferent to airline’s offering because of the cheaper substitutes like cars or trains for the leisure travelers and like videoconferences for the business travelers and because there are no switching costs. Even if companies try to retain the customers by offering preferential rate to frequent users, studies show that when cheaper low fares are available, the customers choose this.
Internet do not serve the loyalty at all. In fact, it offers an easy access to information for the customers so they can compare prices and find alternative airline companies.

F. Costs:

The cost structure of the industry is that companies have a lot of fixed cost and less non-operational costs. Airline companies face different types of cost.

First, there are aircraft replacements. In this business, there are 2 aircraft suppliers: Airbus and Boeing. The two companies has decided to speculate on the two different network systems so Airbus base its products on the hub-to-spoke system and Boeing create smaller aircraft to suit the point-to-point system requirements. The range of products offers to the airlines is larger and it give them a bigger negotiating power.

Secondly, they have to face fuel costs so they try to use recent aircrafts and reduce the consumption by reducing the weight of the interior of the aircraft, lowering the cruising speed or by doing smart scheduling. The technology can help to reduce the fuel cost (which is the higher in the operational costs) and can give a cost advantage to the company.

Thirdly, there are labor costs. The employees must be qualified and certified so they cannot be replaced quickly and they must be remunerate to meet their qualifications. It urges the companies to negotiate with unions to find common ground.

Finally, the airport facilities costs. In fact, if you want to have a gate in a high traffic volume airport, you must buy or rent gates and slots or acquiring one airline who has gates and slots in this airport. In the two cases, the costs are really high.

1. Use Porter’s framework to analyze the US domestic airline industry and assess its profit potential. Remember to address each strategic group.

New Entrants: 
Entering the market at a national level is hard because of the investments it requires but also because the airline companies must respect a lot of regulations which involve additional costs and a good knowledge of the environment.

Bargaining power of the suppliers:
There are only 2 aircraft suppliers : Boeing and Airbus. This duopoly give them a lot of power because the airline companies do not have a lot of choice but on the other hand there is a hard competition for the contract because it represents a lot of money.

Bargaining power of the buyers:

There is no switching costs so the most part of the customer is not loyal. Moreover, some routes are exploited by a lot of companies so it is easy for the customers to find alternatives in order to travel at a better price.

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