Classic Airlines Case in the Early 20th

Classic Airlines Case

In the early 20th century two young men by the names of Orville and Wilbur Wright made what some argue as the greatest transportation invention ever discovered outside of the automobile. This 50 pound glider with a wingspan of approximately 17 feet would revolutionize the manner in which humans across the world would travel. In fact, this 12 second flight was so instrumental, that the Wright brothers will be forever remembered for their contributions to both aviation and society (Wright Brothers - First Flight of an Airplane, 2011). Now, fast forward 100 years into the future and a very different era has risen in the aviation industry. This era has been marred by excessive bankruptcies, mass consolidation, and national security concerns. Recently the issue of airport security has risen to the forefront. During the aftermath of the September 11th attacks and constant concern regarding Middle Eastern regimes to national security, many contentious policies have arisen. One such policy is that of airport security and the extent to which it is implemented. In addition, due primarily to security concerns, airlines required an extensive overhaul of their business practices. Reward programs were restructured, customer incentives heightened, costs lowered, and entire companies merged. With the context of this strategic inflection point, Classic Airlines underwent fundamental change. It is my belief, that many of the policies and procedures regarding the airline are warranted considered the immense threat to our nation's national security. It is also my position that these new concepts will create a new operating environment in which Classic Airlines must adapt to. As such, the 9 step process mentioned below describes, how I believe Classic Airlines should navigate this tumultuous and contentious company reorganization in regards to marketing.

Describe the situation

To begin, since the Wright Brothers first flew at Kitty Hawk, the airline industry has ballooned. Currently the airline industry includes about 600 companies which, in aggregate, earn $170 billion dollars (Airline Industry Profile from First Research, 2011). As can be inferred by these statistics many individuals use aviation as their primary means of travel. How customers choose their online however is the fundamental focus of Classic Airlines. As can be seen from the chart, passenger traffic of the last ten years has risen in a linear fashion. However, the customer traffic for Classic Airlines has declined substantially. Many more individuals are electing to fly than they are with other mode of transportation. This could reflect a change in preference, or this could be a result of the reduction in airline fees to popular destinations. Irrespective of why more individuals elect to fly over other forms of transportation, companies now must defend against a larger number of threats both from within and without the company. Classic has seen is market share decline over consecutive years while the industry overall has realized modest growth. As the number of individuals increases, so too does the need to properly market and position Classic Airlines as a viable travel solution. As such, it is imperative that airline companies go to extreme lengths to ensure that they can differentiate themselves relative to competitors within the industry. This problem is compounded further by the global nature of American business.

Airlines today are more global in nature. Competition is everywhere. Classic Airlines must be position itself in a manner that attracts, retains loyal and established customers. As such the company must revamp its overall marketing efforts to reflect a more cohesive, and service oriented company.

In the midst of rising demand for commodities such as gas, the airline industries must contend with lower margins and more intense competition. (NOTE: In many instances airlines use financial instruments called derivatives to combat rising commodity prices. In essence the airline industry "locks in" a particular price for fuel for a corresponding amount of time. Thus the company is guarded against price fluctuation. However margins are still on the decline.) When margins are slim and there are many options for the customer, consumers tend to benefit at the expense of the business. What was once a very lucrative and growing industry has now itself become a commodity. Many companies simply compete on price and timely service which ultimately harms the overall profitability of the industry. Unfortunately Classic Airlines does not have the resources to compete in a meaningful way on price. Therefore it must differentiate relative to peers.

As the case illustrates, the business component of profits is highly correlated to safety and service. Why, because as a commodity industry competing on merely price, consumer sentiments play an integral role of determining overall industry profitability. Much like the stock market, negative sentiments can have an adverse effect on the overall business operations of aviation firms. Nothing can be more detrimental to consumer sentiments than customer service issues regarding flight or passenger safety. When sentiments become negative the industry suffers. As such the company must create a differentiation strategy that will generate larger margins while also commanding premium prices (Traffic and Capacity Analysis, 2011).

Frame the right problem

The problem facing Classic airlines is cost and cost containment as it relates to marketing. The company must make a relatively quick decision as to how it will cut costs while also marketing to a now more fickle consumer. Next, the airline must figure out how it intends to differentiate itself it determines that it does not want to compete on cost.

Describe the end state and goals

The end state for the airline is to return to profitable growth. In addition, the company wants to take at least 15% of the cost embedded in its operations out. This will occur while at the same time marketing a new, more differentiated company.

Identify alternatives / Develop and Implement the solution

One alternative would be to vehemently cut costs within the organizations through various means. These costs would ultimately drive the marketing strategy into one predicated solely on costs. Derivative contracts to hedge fuel prices, union reorganization, and other value added services would need to be cut in order to accommodate this marketing strategy.

To begin, Unions are a collection of like minded individuals. Entitlement programs and benefits are often the biggest detriment to business operations in the long run (American Airlines, Greece and the state of California are prime examples of this). The power of compounding, particularly for benefits, can erode valuable profits from the company. Thus these aspects would need to be cut in order for the marketing team to effectively implement its price conscious campaign. The power for unions to negotiate larger benefit packages will ultimately be a detriment to the company and the marketing team in the long-term. Guaranteed retirement income, pension plan matching, and so forth all can undermine the overall performance of the company. Finally, if the union is successful in negotiating hire prices and benefits, it is often at the expense of society. Companies to retain adequate returns for shareholders are forced to pass these increased costs to consumers by charging higher prices. This would be counterproductive as the alternative marketing strategy is predicated solely on costs. These prices put further strain on the consumer who may purchase fewer products. Due to the lack of demand, companies are therefore forced to lay off a corresponding amount of employees, thus harming the union. Classic Airlines is in dire positions. Therefore it must lower costs for the sake of the entire company. The thought of lowering wages so that all can benefit is compelling to the union members as a whole. As such, many would simply elect not to unionize in an effort to allow more of their counterparts to become employed (Wright, 1951).

Another alternative is to streamline operations in a similar fashion as Southwest and JetBlue. In this manner, consumers would only pay for services they wanted. With this alternative, Classic could focus on a point-to- point operational system and a low cost pricing strategy. The organization would therefore very centralize due to its point to point emphasis. The centralization of the company would also require very strategic route utilization as it attempts to optimize operations. The company for instance, would select routes to airports with low competition and overall traffic. This allows the company to be more price competitive as competitors are reluctant to venture into less travelled routes. In order to make decisions regarding these routes a centralized organizational structure is warranted. The company could then market this new strategy as a means of differentiation. In this manner, the company could cut costs in the organization while operating in a niche market that is less competitive. Under this alternative, Classic airlines will fly point to point instead of using a hub and spoke system. This will allow the company to reduce turnaround time while also avoiding congestion at the airport. The marketing team could also use this strategy to hone in on point-to-point destinations, thus eliminating the unnecessary stops of its larger competitors, thus enhancing customer service. The marketing team could likewise position the company as a more customer centric organization in that it provides only what consumers truing want. For example, the company would not provide full meals to customers. Instead it would offer snacks such as cookies, crackers, coffee and more, which cost substantially less. Furthermore, the airline had leather seats as oppose to cloth. The leather seats are very expensive on a relative basis, but they lasted twice as long as their cloth counterparts. If for instance, a customer wanted to bring two carry-ons, they would need to pay for both. They would not however, be charged one, overarching fee. As such, the customer pays for what they consume and nothing more. This strategy could then be used to position the company in a more favorable light relative to its peers in the industry.

In addition to the centralized organizational structure of Classic Airlines, the company would want to create committees, teams, and task forces are designed with the sole purpose of reducing waste and cost control. The airline industry is predicated on cost containment, particular those related to fuel and other commodity prices. The Classic Airlines task forces are designed with the purpose of providing a sustainable means of reducing costs without a corresponding decline in customer experience. The centralized nature of the company allows task force recommendations to be implemented throughout the organization in a timely and efficient manner. In addition the centralized nature of the business allows the company to thoroughly evaluate initiative prior to implementation. In regards to fuel prices, Classic Airlines could continue its hedging strategy as it relates to fuel costs. Classic could also use one model of plane to fly a majority of its routes. The airbus 320 for instance can help the company save on maintenance as it was cheaper to service. It was also more fuel efficient. The company will also save on training personnel as they will only have to learn the workings of one airline. Furthermore, using these lower costs, Classic could enter markets that where neglected by larger competitors or were very high traffic areas.