USairlines – Case Study
The United States Airline Industry The U.S. airline industryhas long struggled to make a profit. Analysts point to a number offactors that have made the industry a difficult place in which todo business. Over the years, larger carriers such as United, Delta,and American have been hurt by low-cost budget carriers enteringthe industry, including Southwest Airlines, Jet Blue, AirTranAirways, and Virgin America. These new entrants have used nonunionlabor, often fly just one type of aircraft (which reducesmaintenance costs), have focused on the most lucrative routes,typically fly point-to-point (unlike the incumbents, which havehistorically routed passengers through hubs), and compete byoffering very low fares. New entrants have helped to create asituation of excess capacity in the industry, and have taken sharefrom the incumbent air- lines, which often have a much higher coststructure (primarily due to higher labor costs). The incumbentshave had little choice but to respond to fare cuts, and the resulthas been a protracted industry price war. To complicate matters,the rise of Internet travel sites such as Expedia, Travelocity, andOrbitz has made it much easier for consumers to comparison shop,and has helped to keep fares low. Beginning in 2001, higher oilprices also complicated matters. Fuel costs accounted for 32% oftotal revenues in 2011 (labor costs accounted for 26%; togetherthey are the two biggest variable expense items). Many airlineswent bankrupt in the 2000s, including Delta, Northwest, United, andUS Airways. The larger airlines continued to fly, however, as theyreorganized under Chapter 11 bankruptcy laws, and excess capacitypersisted in the industry. The late 2000s and early 2010s werecharacterized by a wave of mergers in the industry. In 2008, Deltaand Northwest merged. In 2010, United and Continental merged, andSouthwest Airlines announced plans to acquire AirTran. In late2012, American Airlines put itself under Chapter 11 bankruptcyprotection. US Airways subsequently pushed for a merger agreementwith American Airlines, which was under negotiation in early2013.
With the information above, addresses the followingquestions:
• With the aid of a clearly drawn diagram conduct acompetitive forces analysis of the U.S. airline industry. What doesthis analysis tell you about the causes of low profitability inthis industry? What are the principal advantages and disadvantagesof using the five forces framework?
• The economic performance of the airline industry seems to bevery cyclical. Why do you think this is the case?
• Given your analysis, what strategies do you think an airlineshould adopt to improve its chances of being persistentlyprofitable?
