Airline Industry Analysis the Past Term Paper
Excerpt from Term Paper :
S. are seeing modest improvements in economic indicators.
The social environment is favorable for air travel. The mode still holds tremendous cachet with consumers and is favored when consumers can afford it. There is some consideration that the airline business is a major contributor to greenhouse gases and therefore global warming, but as of yet the industry has not come under serious public pressure as it is generally viewed by the public as a necessity rather than a luxury in this regard.
The technological environment is favorable, and the airline industry has typically responded well to technological change. While some developments are in the form of new airplane technology, for airlines the more important developments are those that reduce back-end costs. For example, the use of online reservation and check-in has been a core strategy for discount airlines to reduce costs (Starmer-Smith & Alleyne, 2009). Information technology has also facilitated other developments such as large airline code-sharing groups.
The legal environment concerning airlines is complex. The industry is highly regulated and in some cases -- such as security - that regulation is shifting. Because airlines often fly between different countries, they are subject to the laws governing multiple nations. Airlines in general have little difficulty navigating their legal environments but the complexity of these environments can occasionally be a threat to a route or its profitability.
The airline industry has a heavy impact on the environment. This places it at risk with regards to sanction or legal action in future. However, the industry's environmental impacts have yet to come under significant scrutiny and no talk of economic sanction has resulted from the environmental impacts of the airline business. As a result, this environment does not yet have a strong impact on the airline industry, even if it has the potential to do so.
The different environments paint a picture of an industry that is generally favorable. The economic environment presents the most significant challenge to the airline industry, with the political environment also having a strong impact. The other environments are generally favorable, at least for the time being. The airline industry has been able to dodge the major threats in most of its environments, with the notable exception of the economy, to which the fate of the industry is inextricably tied.
The resource-based view is a means of analyzing a firm in the context of the resources or tools it has at its disposal (Wernerfelt, 1984). The resources must be either valuable, rare, inimitable or non-substitutable in order for the firm to be able to use it to gain competitive advantage or preferably sustainable competitive advantage. Resources can be any of assets, capabilities, processes, firm attributes, knowledge that the firm controls.
The best way to analyze the airline industry from a resource-based perspective is to analyze the most successful companies in the industry to understand from where they draw their sources of competitive advantage. Critical resources that have been identified are systems, routes, corporate culture and strategic alliances.
Airlines can succeed by developing systems that have a lower cost structure than similar systems at competing airlines. For example, many discounters operate with a system that emphasizes online booking, and Ryanair has extended this to include online check-in (Starmer-Smith & Alleyne, 2009). This has allowed the company to have a lower cost structure than many of its competitors, who cannot do away with manual check-in gates.
Pricing systems can also allow an airline to gain competitive advantage. Unlike some other operating systems, pricing systems have more potential to be proprietary and therefore be considered "rare." Airline pricing strategy is based on complex algorithms. These algorithms both help the airline forecast demand and set prices. The result is that they should deliver to the airline the optimal combination of ticket sales and ticket prices to maximize revenue (Knapp, 2003). The airline with the best algorithm should in theory have the best revenue optimization.
Airlines also derive competitive advantage from the route they hold. The routes can range from valuable to non-substitutable depending on the route's distance and exclusivity. This resource arises from the limited capacity of airports and the fact that some major markets consistently bump up against this capacity. For many airlines, access to key airports is a
critical success factor. In many cases, an airline can have a dominate position at a given airport, arising from either competitive strength or from government decree. Such access allows the airline to extract higher rents for flights to and from that airport. Access to transcontinental routes is also considered valuable, since those routes are not readily substitutable. Airlines with exclusive access to those routes can charge higher rents, effectively subsidizing operations on more competitive routes. Qantas, for example, used the Sydney-London and Sydney-Los Angeles routes to help it compete domestically against carriers unable to service those highly profitable routes.
In addition, certain geographies can be used to competitive advantage. In the United States, many airlines tend to fly a hub-and-spoke system. This means that for most airlines, finding a supportive and low-cost hub or handful of hubs, each with strong geographic location, is crucial to the development of the business. Central hubs such as Dallas-Fort Worth or O'Hare are particularly strong bases of operations from which to build networks that span the entire country. Similarly, international airlines use this model to gain competitive advantage. Taiwanese airlines such as EVA and Air China use this model to drive trans-Pacific business from a range of Asian cities and the Pacific coast of the Americas, often in conjunction with code-sharing agreements. The Gulf-based carriers have used their geographic location to develop route networks that match up cities in Europe with cities in Asia, including small and mid-sized airports. As an example, a consumer flying between two major cities such as Istanbul and Kuala Lumpur might have been required in the past to make multiple plane changes; today, one change in the Gulf can make such a route happen. This has been a tremendous source of competitive advantage for the Gulf-based airlines as there are no geographic competitors between Europe and Asia due to the large number of unstable countries in that corridor.
Corporate culture can also be a source of competitive advantage. This firm specific attribute can be duplicated by other airlines, but not easily. Perhaps the best example of building corporate culture to a source of competitive advantage in the airline industry is Southwest Airlines. This company's culture was forged in part by the vision of early leadership and the need to acquire strong employee buy-in for the firm's strategies, and partly as a response to the genuine threats the firm faced from larger competitors. The Southwest corporate culture delivers consistently higher levels of customer service and high commitment to cost reduction, each of which supports the company's two main strategies. As a result, Southwest has been the most consistently profitable airline in North America. In the Gulf, the culture of excellence has been cultivated at Etihad, to drive the high levels of service that differentiate that airline. These examples show how culture has been used to foster both a low-cost strategy and a differentiated strategy.
Strategic alliances also form a source of competitive advantage in the airline industry. For many airlines, a means to increase capacity is code-sharing, often in large industry blocs. These blocs can help airlines to increase their capacity, by sending customers of other airlines to their airlines. The Star Alliance is one such bloc, comprised of airlines around the world. These alliances also allow for improved marketing synergies between the members of the group.
Because the resource-based view is internally-focused, it allows for insights that the design school models leave out. The airline industry is complex, so there are a number of different factors from which success can be generated. The design school models, such as the PESTLE and Five Forces, are useful in describing the external environment in which the airlines operate. For a specific airline, the SWOT analysis can provide some insight into the potential strategic directions going forward. These tools are useful in that they compel the manager to consider a broad range of variables that can impact on the business.
Compared with the design-school models, the resource-based view allows the manager to understand which of the company's assets and systems can be used in order to gain competitive advantage, and to what degree that competitive advantage exists. Managers can easily analyze the success factors for competing airlines and weigh these against their own strategy. The resource-based view is perhaps most analogous to the "strengths" component of a SWOT analysis, but is more in-depth because it focuses the manager on a wider range of variables. When undertaken on an industry-wide basis, the resource-based view can shed light on resources utilized by all competitors, not just the one firm.…
Sources Used in Documents:
Adapted from Porter, M. (2007). Porter's Five Forces. QuickMBA. Retrieved March 30, 2010 from http://www.quickmba.com/strategy/porter.shtml
No author. (2006). Rising jet fuel prices hamper airline industry's extraordinary cost-cutting efforts. Air Transport Association (ATA). Retrieved March 30, 2010 from http://www.airlines.org/news/releases/2006/news_4-11-06.htm
Shane, J. (2004). American Bar Association 2004 annual meeting aircraft financing subcommittee. U.S. Department of Transportation. Retrieved March 30, 2010 from http://ostpxweb.dot.gov/s-3/data/aba%20finance%20subcomte%20speech%20%20%288-6-04%29.pdf
Cote, J-P., Marcotte, P., Savard, G. (n.d.) A bilevel modeling approach to pricing and fare optimization in the airline industry. Universite de Montreal. Retrieved March 30, 2010 from http://www.iro.umontreal.ca/~marcotte/ARTIPS/RevMan2.pdf
Cite This Term Paper: