US Airline Industry

Question: Discuss about the US Airline Industry. Answer: Introduction US airline industry is known to be one of the largest industries in the field of aircrafts. There are approximately 86 airports in allover USA handling almost 1 Million passengers. The US airport is considered to be one of the busiest airports due to high connectivity with almost every country. The industry has witnessed supremacy of airline like United, Delta, and American airlines. The recent flux is created by the low budgeted airlines. These airlines have altered the functioning of the prior airliners. It is witnessed that the people in USA are following a high standard of living. They are using airlines to travel a distance of 300 miles or above. These airlines are contributing consistently towards the GDP and form around 8 percent of the total contribution. The recent industry has witnessed a decline in the scheduled domestic flights due to the disturbance created by the low budgeted airlines. The country has recently seen the consolidation of the previous airline company as th ey were incurring consistent loss. The US airline industry: An overview The US airline industry as per case study has struggled hard to receive consistent profit. The country has recently witnessed a flux in the profit due to entry of cheap airlines. The low budgeted airline like southwest airline, jet blue, Virgin airlines entered the US market with an aim to achieve sustainable growth with the low budgeted technique. These airliners have changed the overall techniques of conducting business the way it was earlier being done. The current industry is facing a price war. The majority of company is coming up with a huge price margin which is causing extreme competition in the industry. They are using differentiated price strategy to attract the customers. Moreover the introduction of online reservation sites has created a tense atmosphere as the passengers can compare the price of tickets in advance. This has proven to be a boon for the passengers as they can compare the price which they were unable to do previously (Carter, Rogers, and Simkins, 2006). There were tremendous changes in the market due to a rise in the price of fuel in the year 2001. This price rise has affected the overall profits of the previous airliners. This was a period when the major Airliners become bankrupt. US industry at current stage is depicting a consistent growth but it is difficult to judge the changes that can be seen in the future date (Aguirregabiria and Ho, 2012). A competitive forces analysis of the industry Porters five forces model This model is used to analyze the external environmental factors which affect the working of the organization. Porters five forces help in analyzing the effects of market forces to the particular industry. The following report describes the factors that have affected the US airline industry. There are certain external environmental factors like rise in fuel price, operative expenses, declining passengers and a high level of burden on managing the airlines. There is a price war among the current airline company due to lesser price margin. The companies are competing against each other for seeking more customers. They are introducing highly competitive strategies to attract more customers. The airline industry is witnessing crises largely in United States (Tsoukalas, Belobaba and Swelbar, 2008). Many airliners were liquidated due to heavy loss they incurred due to adverse market condition. Individual component in the porter five forces help in understanding the effects of macro environ mental factors to the airline industry. Buyer power The power of the buyer is MODERATE to HIGH. The rising market needs of the individual customer are satisfied through the online ticketing and allocating procedures. The low budget airliner has led to major price wars. Price war among the airliner has helped the passengers in seeking cheap prices. This procedure has helped in keeping a check on the airline prices. The regulatory body is functioning in the favor of the customers. They make policies in the favor of the customers while keeping a check over the functioning of the airliners. Consumers are more likely to be involved in using online portals to book flight tickets. They are using online website to compare prices charged by different airliner (Forbes and Lederman, 2007). Supplier power The supplier power as per the Porters five forces is HIGH The power of supply is very high as the cost of input is very high. Airline industry is affected by the prices of fuel, labor and aircrafts. The external supplier force has affected the growth of the airline industry is affected by the political environmental factors. The employee union has caused an adverse effect on the existence of the airliner industry. Employers are causing extreme level of tension by involving themselves in pricey discussions. There are multiple external parties that affect the growth of the industry. All these abovementioned factors have affected the suppliers power. The power is classified into three important macro environmental factors including (energy, employment and aircrafts. The external factors have showcased a high level of competition (Morrison and Winston, 2010). Entry and exit barriers The entry and exit in the industry is HIGH It is very difficult for an individual to enter into the airlines industry due to very high barriers. The industry requires heavy capital and requires fulfilling heavy norms at the time of exit. There is difficulty in entry and exit in case of an aircraft industry due to heavy regulations. Moreover it is necessary for an individual to have information about the aircraft industry before making an attempt to enter(Shankman,2014). This sector has witnessed tremendous growth and downfall due to fluctuation of prices in the market. The factors like price of fuel, salary for employee and cost of the aircrafts makes it difficult to get an investment into this sector. That is why the barrier of entry and exit are very high as compared to any other sector (Brueckner, Lee and Singer, 2013). Threat of substitutes There are LOW threat of substitutes and complementary mode of transport. The aircraft industry in USA has a very low to negligible threats due to substitutes. US population mostly uses aircraft to travel long distance whereas people in developing countries are using different mode of transport. Bus and train are not the substitutes for aircraft. People are able to cover long distances in a very short period of time. Different type of aircraft services are providing with various services which gives them an added advantage. People are not attracted by the lower fare charged by the alternative transportation services. Moreover the people in USA travel by their own vehicle. The substitutes and complementary in case of airline industry are very fewer (Ben-Yosef, 2006). Intensity of competitive rivalry HIGH intensity of Rivalry Aircraft industry has enormous competition due to low budgeted airlines. The airlines are competing among each other by keeping a very low price. There is an intense rivalry among the industry marked by continuous price war. Customers have a variety to choose among the available options. They make choices according to their preferences. Customer only chooses that airliner who matches their expectations. US airliner companies are consistently fighting among each other due to high amount of rivalry on price. They are likely to see more competitive rivalry in future to top extreme amount of competition (Belobaba, Odoni and Barnhart, 2015). PESTEL model PESTEL model is used to analyze the macro environmental factors that affect an industry. These factors are responsible for the growth of a particular industry. It is advised to understand the local culture in order to compete against each other. Airline industry is a symbol of luxury that provides a comfortable experience to the customers. The industry is affected by the high operating cost and lower margin due to intense competition. The low budgeted airlines are causing extreme competition. Political Political condition of a country is important while analyzing the macro environmental factors. The industry has to follow strict guidelines given by the regulatory bodies. They have to follow the important guidelines and changes as and when introduced. It is obligatory for the airlines industry to follow the rules that are set by the US Aviation authority. There are tighter regulations due to rising risk factors. There is a high amount of competition which is caused due to rising demand. There is accumulated pressure on the operators to function under the given set of rules and guidelines. Economic Economic condition affects the growth of the airline industry. High economic growth has a direct relationship with the buying power. People tend to invest more under the favorable economic condition whereas in the condition of unfavorable economy people tend to invest fewer amounts. Prices of crude oil are affected by the global market condition. Subsequent wars in the gulf countries have affected three prices of crude oil. This has an adverse effect on the aircraft industry. there are several factors that affects the aircraft industry which are high maintenance cost, high operation cost, and ever increasing employees demand. The US aviation industry has seen liquidation of many airliners due to high level of pressure (Weiher,2002). Social There are changes in the needs of the society around the world especially in the USA. The buying power of the customers is very high which has increase overall demand. Low fare airlines have affected the buying power of the customers as they are looking for more economic class. It is due to convenience and the low fare people are opting for airline services. People are getting online portal to make comparison among the existing airliner companies to find out the best. They are more aware about the companies that are providing best service (McAfee and The Velde, 2006). Technological Technology is important for the development of every country. It plays an important role in the aviation industry by making constant contribution towards the growth of the economy. Recent time has witnessed arrival of online ticket system which is giving an idea to the customers about the prices charged by different airliners. These technological changes have helped in creating a transparent environment that has helped in diminishing the role of agents in booking tickets. Technological changes should be incorporated in order to achieve success. Social media is used by the companies to reach potential customers. Recent time has seen a growth in the social media tool. They are providing heavy discount to the customers that is helping in attracting more customers. Online competitions have helped the aircraft industry to seek attention of most of the customers. Majority of airliners are using technology to develop high efficiency aircrafts. These aircrafts provides with a competitive edg e and helped in attaining economies of scales (Hschelrath and Mller, 2013). Legal Airlines industry is affected by the guidelines given by the legal authority. There are end numbers of laws that are pending in the court which are harming the image of the individual company. The legal authority grants license if they do not violate any law. An increasing number of regulations have affected the US airline industry. The law suits are very expensive which are causing harm to the image of the brand. People are more cautious about their choices and analyze before opting for one (Gursoy, Chen and Kim, 2005). Increasing legal obligation in the US regulatory industry has affected the overall performance. They are forced to follow the guidelines issued by the government authority. Environmental The recent time has seen climatic change due to increasing environmental pressure. People are becoming more aware about their choices regarding the aircraft. They are opting for those airlines which are following environmental norms. Corporate social responsibility has become an integral part of most of the companies. They are obliged to take care of the environmental needs to seek customer attention. Moreover government has made it mandatory to follow social responsibility and take care of environment while operating (Cento, 2008). US Governing authority follows a strict environmental policies meant to safeguard the environment. The regulatory measures help in keeping a check over the activity of Airliner(Lorenzetti,2015). Economic performance The economic performance of the country affects the buying power of an individual. Airline industry is affected by the shift in the economic needs of individual. There are majority of economic reason like price rise, economic downfall, international issues that have affected the economic performance of this industry. The US economy has faced crises in early 2000 that have caused shut down and consolidation of famous airline companies. The low budgeted airlines has c hanged the complete scenario. These companies are becoming more aware about the price war. Open online platforms have helped in making comparison. It is predicted that airlines industry will dominate the market in coming years which will help in creating more growth opportunities for the industry (Johnston and Ozment, 2013). Strategies for airline profitability The industry is affected by various factors like price of fuel, employees, and cost of operation. The airline industry is marked by advanced market players who understand the market needs. There is a high level of competition among the existing players. Under such an extreme condition it is necessary to keep competitive price. This will increase the opportunity to exist. It is recommended that the companies should keep low prices as it will help in sustainable growth. Moreover it is necessary to provide attractive services which distinguish them from the other airliners (Fischer Elias and Kirk,2008). There should be proper connectivity to provide customers with smooth and convenient travel. Economy of scale is necessary to be achieved by managing both fixed and variable cost. Industry need to move towards optimization in order to attain profitability (Yu, 2012). Discussion The US airline industry has seen a fluctuation in the recent years due to entry of low budgeted airlines. The low budgeted airlines have caused a change in the behavior of the consumers. They are opting for those airlines which are selling tickets at a low price. The international market is facing problems due to shift in the price of the crude oil due to tensions in the gulf countries. This has affected the overall structure of the US airline industry. These companies have caused major threat to their existence. Early 2000 has witnessed downfall of major airliners due to constant losses. Porter 5 forces have helped in distinguishing in between the various five factors in making contribution towards US airline industry. This tool has helped in analyzing the various challenges in the industry and discusses their overall impact on each aspect. PESTLE model help in analyzing the macro environmental factors that affects the growth of the industry. There are majority of factors that affec ts the growth of the individual company in the fluctuating environment (Bilotkach, 2005) US airline industry is currently facing problems due to rising difference in between the employees which is causing problem in running the aircrafts smoothly. Moreover there are fluctuations in the price of the oil in the international market that are causing fluctuation in the profits. Conclusion Aviation industry worldwide has seen majority of fluctuations due to changing economic pattern. US airline industry has shown tremendous changes due to various factors like global depression and rise in the prizes of the fuel. This has created a pressure on the airliners industry to incur sustainable growth. Entry of low cost airliner has caused price war against the previous players. US airline industry is known to be the busiest network due to connectivity with major countries. It is advised to develop a sustainable plan. It is necessary to adopt economy of scales to operate even in adverse market condition. It is advised to keep low prices in order to attain growth. References Aguirregabiria, V. and Ho, C.Y., 2012. A dynamic oligopoly game of the US airline industry: Estimation and policy experiments.Journal of Econometrics,168(1), pp.156-173. Belobaba, P., Odoni, A. and Barnhart, C., 2015.The global airline industry. John Wiley Sons. Ben-Yosef, E., 2006.The evolution of the US airline industry: Theory, strategy and policy(Vol. 25). Springer Science Business Media. Bilotkach, V., 2005. Understanding price dispersion in the airline industry: Capacity constraints and consumer heterogeneity.Available at SSRN Brueckner, J.K., Lee, D. and Singer, E.S., 2013. 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