SkyWest Airlines' corporate strategy and competitive positioning in the regional airline industry
The company was founded with a vision to be able to connect passengers to smaller airports and smaller routes. It objectives were to maintain a high level of customer service, develop and maintain a strong safety image, maximize on-time arrivals and acquire new aircraft in order to service their customers without compromising their ‘scope' contracts. The company sought to achieve this vision by using strategies, and having alliances and partnerships with other major airlines, and to this end was successful in doing so. Currently, the company envisions itself serving emerging markets such as China, Brazil and Mexico. Corporate Strategy The company, SkyWest has been looking at a variety of strategies concerning with how the business environment has been. Initially with the set up of the business in 1972 the company was looking at stability and expansion in terms of alliances, increasing internal capabilities at the same time. The initial step it took was to acquire a company by the name of Sun Aire, which was an external expansion, followed by an alliance with Western Airlines, and then internal expansion by going public and expanding its ownership strength.
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Skywest Case
What are the Company's Vision/Mission and Objectives?
Corporate Strategy
Business (Or Competitive) Strategy
Industry Analysis
Competition from Rival Sellers
Competition from Potential New Entrants to the Industry
Competition from Producers of Substitute Products
Supplier Bargaining Power
Customer Bargaining Power
Company Situation Analysis
Strengths
Weaknesses
Opportunities
Threats
What are the Company's Vision/Mission and Objectives?
The company was founded with a vision to be able to connect passengers to smaller airports and smaller routes. It objectives were to maintain a high level of customer service, develop and maintain a strong safety image, maximize on-time arrivals and acquire new aircraft in order to service their customers without compromising their 'scope' contracts.
The company sought to achieve this vision by using strategies, and having alliances and partnerships with other major airlines, and to this end was successful in doing so. Currently, the company envisions itself serving emerging markets such as China, Brazil and Mexico.
Competition from Rival Sellers
The five regional rivals are Mesa Air Group, ExpressJet, Republic Airways and Pinnacle Airlines. However the operating revenue of SkyWest is nearly thrice as much as its second largest rival Republic Ariways (exhibit 5).
Competition from Potential New Entrants to the Industry
This threat is low, as the airline industry is pressured due to high fuel costs and many of the airline companies are making losses, or are barely surviving. Economically, this is not a feasible time to enter as the world is in a recession other reasons for the threat of new entrants being low is that there is a high sunk cost required for setting up airlines, and competition is severe in the mature market which can prove to be a deterrent.
Competition from Producers of Substitute Products
Substitute products for air travel are either through the sea of by road, both of which are tedious, making air travel as a genre not being substitutable in the long run for its convenience and speed.
But as far as substitute categories of domestic air travel are concerned, there are networks, regional and low cost carriers and competition among these is high as there are many companies that operate under each category.
Supplier Bargaining Power
Suppliers have a high bargaining power, as there are two major players, Boeing and Airbus. As far as fuel is concerned, here too suppliers have influence as fuel is a highly demanded commodity, and the demand for fuel tends to be inelastic, making companies very dependent on the fuel suppliers.
Customer Bargaining Power
Customers are plenty in number, but as they have a large amount of choice, as an aggregate customers have power in the sense that the company needs to know their requirements before setting out any particular route or service. However individual customers don't exert any strong influence.
Company Situation Analysis
Strengths
The current ratio of SkyWest for 2008 is strong, being 24 times, indicating that the current liabilities are well covered by current assets for the company.
Interest cover is also strong at 2.4 times, indicating that the company is well set to be able to pay its immediate liabilities.
Gearing Ratio is 1.8 times, which is also a strong indicator of the fact that the firm has a healthy ratio of debt vs. equity financing.
Weaknesses
The ROCE (Return on Capital Employed) is 6%, which is not very high, as banking investments and deposits give better returns.
2008 Operating profit margin is 7.3% and has fallen from the 2007 Operating profit margin which was 10.2%.
Return on Assets went down to 2.8% from 3.9 in the previous year, as did Earnings per share, which decreased from 2.54 to 1.95
Opportunities
Business travel is on the rise, as people are looking at all avenues for profits and they are the most profitable travelers for the airline industry as they need to be on time and consider reliability a priority.
Threats
The air travel industry is cyclical and the recent recession has caused travel to go down for three consecutive years as reported by IATA (Pg 199)
Fuels costs are increasing prices of air travel as compared to driving
Safety and security is a major concern and any man-made or natural disasters can cause huge disruptions.
The major issues with the company now are expansion and market penetration, as the domestic airline industry in America has reached its maturity. Followed by the fact that the company is in a sound financial condition as indicated by the financial ratios, however, as indicated by the ROCE, and by the fall in operating margin, ROA and EPS it needs to have more profit avenues.
Recommendations
Looking at the company situation and the industry analysis, the company has a strong financial standing but its profits are not yielding a high enough return on capital. Given the fact that the balance of debt and equity is adequate, and that the position of the company is better than that of its rivals, the company needs to seek more avenues of growth so that it can be more profitable and can engage in better scope contracts in order to utilize its aircrafts better. This will only be possible in new markets, therefore market development is needed.
The market development strategy can be carried out in emerging countries, where there are small towns and villages that are dispersed throughout the region, keeping in line with the company's vision to connect passengers to smaller airports and routes.
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