Analytical Techniques Essay
Using macro and micro environment analytical techniques provide a comparative analysis of leadership and the external environment for the following four airlines: AirTran, Delta, WestJet and Air Canada.
The drive for lower operational costs and increased efficiency has forced many companies of the world to turn towards mergers and acquisitions. However, even then when companies realize that cost cuts cannot be born out of “corporate marriages”. Instead a new trend in strategic management emerged to achieve similar objectives - forming alliances. Among the industries, alliances and networking are dominant in the airlines industries with North America securing the leadership position followed by European carriers. Both the Canadian and the US airlines industries account for a market approximately $4.5 billion and $5.5 billion respectively (Factsheet from WestJet Website 2005), offering widespread opportunities for airlines to exploit and explore. Yet one observes many airlines have been filing for bankruptcy protection; others constrained for profit margins; and there are some that are enjoying greatly the benefits of these vast markets. There are a host of reasons macro and micro factors responsible for the diversified operational outcomes of airlines. In the following discussion the researcher offers an overview of the North American airline industries through a macro and micro environmental analysis of the four of the leading airlines in the US and Canada - namely AirTran, Delta, WestJet and Air Canada with the hope to identify the key strategic areas that companies can explore by exploiting opportunities inherent therein without compromising capital invested and resources on hand. The purpose is to offer an overview of the airlines industry by comparing and contrasting these airlines and allow readers to understand how even in a downturn economy companies can, through strategic management exploit opportunities for its own benefit.
- Company Profile(s)
Delta Air Lines, Inc. is an air transportation provider for both freight and passengers in the United States and around the world. The company serves 243 domestic destinations spanning from North America to the Gulf of Mexico to cities like Puerto Rico and the U.S. Virgin Islands and international cities located in 37 countries of the world. Delta's main product line is its domestic and international service which it delivers through brand names like Song, Delta Shuttle, Delta Connection, Delta SkyTeam and Worldwide Partners. With 7660 flights each day to cover 502 cities daily Delta is not only a major name in the full service industry but also a formidable competitor. The Delaware based corporation shifted its headquarters to Atlanta, Georgia when Delta has decided to change its strategic position against rivals.
Though its roots can be traced to Huff Daland Dusters in 1924 as the first aerial dusting organization, Delta right from its inception has been an airline that offers full service to its passengers whether they are flying from Dallas, TX to Jackson, MS or from Washington to Atlanta. The vision had been and still is to be the source of safe and reliable airline service provider through exceptional customer service and hospitality management. Its management's special attention to service base delivery has enabled the company to establish leadership position in the airline business for decades.
Today Delta is the world's second largest airline, passenger wise and the US' leading Atlantic carrier. It offers customers with regular service like full service flights as well as low-cost passage with value added services for frequent flyers, and alliances to allow customers access to an extensive network of worldwide flight network and services. As of 2004 the company claims to have 52000 plus employees working to deliver daily flights.
The company also boasts a host of partnerships and alliances across the world and in the US such as through SkyTeam Alliance; Codeshare Partners; Major US hubs and International gateways allowing it to capture as much as 109,999,636 passengers (est. 2004) (Delta Official Website 2005).
AirTran is a subsidiary of AirTran Holdings, a public limited company that is also the world's largest Boeing 717 operators. As a result the AirTran has been able to secure Boeings on its fleet to add value to customer service deliverance. AirTran Airways categorizes itself among low-fare airlines. Among the low cost carriers, it is one of the largest employing companies with about 6700 members to operate 500 flights daily to 40 destinations. Using the hub and spoke system, AirTran prides itself in being able to secure Atlanta as its hub for operation to compete against giants like Delta Airlines. Being a low-fare airline designed for business travellers and low budget travellers does not however stop AirTran from creating value added services for its customers. Frequent fliers program along with new planes, radios, mix low-fare option and excellent customer service all contribute to the overall public appeal. Fully aware of the need for safe and comfortable flight AirTran Airways continues to maintain a steady pace and continuous growth based on its values of total commitment to safety in every aspect of its operations; compliance to regulations and technical excellence; valuing its people for their honesty, trust and integrity and respect for personal responsibility and conflict resolution.
Despite its brief history AirTran through rapid development has been able to capture the market by basing itself at one of the busiest airports high in passenger traffic. As a result the company today profits from trading stocks at in the NYSE with revenue estimated at 1,041 million for the current year and boasts of a growth rate of 15 plus percent (AirTran Official Website 2005).
After its restructuring, ACE Aviation Holdings became Air Canada's holding parent company, with a vision to share price, financial status, business and operating activities. Air Canada continues to focus on creation of simple, transparent and value driven approach service offerings to consumers. One of the unique factors that distinguish Air Canada from industry leaders is that Air Canada instead of focussing only at home has spread its network to capitalize on routes in both North America and the international arena. The company's management believes high profits are expected to drive economies of scale and discipline in profitability at the international level. While locally the company has forged alliances with US Airways and America West airline with the aim to form strategic access to the US airline industry.
Air Canada has also been working fast in realizing the importance of newer aircrafts for better services and customer response by taking delivery of Embraer 175, Bombardier 705, Boeing 777s and Boeing 787s. Currently however, it only has 26 new small jets for its daily operations but the company hopes to increase its capacity with new aircrafts to create a niche in the North American market.
With a new corporate image, revamp of the internal management system and programs, the company aims to pursue opportunities across Asia and Latin America along with exploiting opportunities inherent in the North American continent. Air Canada's parent company hopes to create bilateral agreements with these regions to maximize on the potential opportunities for Air Canada's services and business model.
For the year 2004 the company reported revenue of C$ 2062 millions despite restructuring costs. For the coming years the company has changed its business strategy, redesigned its processes, and plans to “i) solidify its domestic market position through a superior product offering at a competitive cost; (ii) provide a solid foundation for its growing international markets; and (iii) maximize the value inherent in ACE's non-airline subsidiaries.” (Air Canada Official Website 2005).
Founded in 1996 WestJet has been the brain child of Clive Beddoe and three other Calgary entrepreneurs. The basic premise for the formation of WestJet had been to provide low-fare air travel across Western Canada. However, soon the founders realized the high potential of low cost carriers across the continent and soon followed the prime example of Southwest Airlines and Morris Air by expanding and exploiting beyond its local market. With only 220 employees in 1996 and three aircrafts covering 5 cities of Canada today the company has expanded significantly to become one of the most formidable competitors in the low cost carriers industry. Today the company has earned the reputation and respect for second most respected corporation by Ipsos-Reid. With a fleet of next generation 737 aircrafts, more legroom and leather seats the company boasts of being innovative and in tune with the consumer needs. Destinations it serves include Los Angeles, San Francisco, Phoenix, Fort Lauderdale, Tampa, Orlando, and New York, and Palm Springs began in January 2005.
Revenue for the year 2004 has been C$ 1058 millions and it is projected to continue to grow as the company is proud of its cost advantage of 33 percent below main competitors. With a growing fleet and 5000 employees the company aims to become even more efficient in its operations in the years to come by the acquisition of latest aircrafts, emphasizing on its low cost technology, maximizing aircraft utilization, developing strategic human resources, and simplifying its operational structure to maintain a lean organizational structure. As a result it is expected to gain competitive advantage in the low cost carriers with premium performance and service level (WestJet Official Website 2005).
- SWOT Analysis
One of the key features of operating in the airline industry is to have a strategic management team that is able to react to rapid change. A company needs to have an efficient and effective internal management system in order to sustain in the dynamic airline industry (Ferrier and Lyon 2004). All four of the airlines demonstrate that they are aware of this trend. AirTran perhaps dominates in this regard as it has within its new management team the leadership of Joseph B. Leonard who is a visionary, able to foresee the needs for building liquidity, abandoning money-losing routes, introducing discount campaigns and perusing online ticketing (Pascual 2000). Leonard and his team in the past years have also realized that to be able to pull the company out of its previous low position and secure top ranking in the region, it needs to continuously keep a low operating budget despite phenomenon growth rate (Pascual 2000). AirTran has also been quick to identify the key to the company's success is in its fleet and crew. For this reason it has been driving hard to secure and replace aircrafts with new ones and training its crew so that they would help in delivering smoother, timely and efficient flight programs for customers. Such efforts help in building customer base, a tactic usually required for sustaining long term growth and profitability.
WestJet follows the same track as the company realizes the need for effective management to lead its company out of the economic downturn that has affected the North American region. As a no-frills airline with premium services WestJet not only acquired efficient top management but also at the lower staff level. For the purpose of having a strategic team the company has the expertise of the three founding entrepreneurs and Clive Beddoe (Macklem 2005) who have been the brains behind the company's success so far. At the staff level, one of the advantages that WestJet has over the others is its non-unionized workforce which helps the company to keep personnel cost low. At the same time the company also ensures that it maintains next generation fleet by having small but efficient fleet of Boeing 737 aircrafts (Newman 2005).
On the other hand Air Canada may be a late bloomer nevertheless with the help of bankruptcy protection the company has restructured significantly in its management and aims to join in the competition. To begin with it has hired Sean Menke former chief operating officer at Frontier as its VP and chief commercial officer. Similarly, it has also hired industry veterans like Joshua Koshy former senior VP information technology at Emirates as its new CFO; David Tait, former Virgin Atlantic executive as its senior VP customer service. It is clear that these three new management leaders have been hired with the view to set Air Canada into the main stream of the airline competition. Whether, Air Canada would be able to achieve the desired objectives or not remains to be seen (Lott 2005).
Despite its low performance and setback Delta Airlines also has a set of competitive advantage over its rivals as it not only serves the no-frills and low cost market but it also has access to the full service market. Internally its management is geared to deal with variant market type and management operations. But among its most prevalent plus point is that Delta is among the oldest carriers that has survived several economic downturns and upheavals within the airline business. This not only makes it equipped in handling all kinds of management crises and problems but also a leader in identifying problems before they emerge (Hibbard 2005).
As opposed to above strengths, the airlines industry is characterized by cost challenges. Not only is the industry highly vulnerable to tight margins but it is also constrained for operating costs and productivity problems in terms of wages, regulations, fleet and overall cost structure that tend to hinder companies from competing effectively. Delta Airlines for example has been struggling to remain afloat with various tactics but have failed in meeting financial and organizational objectives due to the weak financial system. Its failure to meet cost challenges has compromised the company's competitive position, evident in the bankruptcy protection filing that Delta has announced recently and its failed attempt to compete within the low cost arena under the Song flagship (Hibbard 2005).
Delta is not the only airline that is compromised by the failure to meet industry challenges. Even cross border Air Canada had been following the same pattern as the company through its announcement of financial performance indicate that Air Canada's management is not geared for its dynamic industry challenges (Lott 2005). Like Delta, Air Canada largely depended on the subsidies and financial protection from the government to boost revenue but the fact remains that the company has an inefficient and inflexible organizational structure that cannot withstand the dynamics of its industry. Issues like labour disputes and costly personnel have made its resources redundant and decreased efficiency (Vu 2005).
WestJet, although does not currently have major labour issues but with its current drive for low cost and tight budget is likely to drive discontent workers to proliferate industrial relation conflict. This is because WestJet's attempt to at cost cuts and marginalized operations pays its employees less than the median salary for the industry. For a young workforce this may work out for a while nevertheless the fact remains in the long run it would have to have better compensation in order to prevent high turnovers, and follow the others (Newman 2005).
Likewise, AirTran has also been challenged with the fact that its employees are paid less than their peers working with major carriers. AirTran admits they not only contribute to the company's current success but also responsible with the task of keeping the company afloat in the coming years. However, the risk in paying low wages to workers with high loyalty is that they may turn to competitors for better packages and better work environment (Pascual 2000).
Given these vulnerabilities, AirTran, Air Canada, Delta and WestJet are prone to competitive threats from new or more capital intensive carriers.
The problems inherent in the airline industry have evolved over the decades and not a new phenomenon. In the US the industry has been characterized by deregulation and nationalization alternatively, resulting in inadequate infrastructure capacity, poor labour relations and low customer satisfaction. The players within the industry not only have to face economic upheavals reflective of the US economy but also have to comply with the industrial challenges such as trends in mergers and acquisitions, alliances and network operations. Significant changes have both compromised and elevated revenue opportunities for airlines in North America. For example the cost factor has motivated carriers new and old to form network operations whereby capacity generation is through alliances and passenger shifts. Carriers that recognize capacity for operation have been able to capitalize on the inherent customers in the market. This tactic has been adopted by AirTran which has been able to capitalize on the loss of customers from United Airways and Delta Airlines as a result of hub and spoke operations at Atlanta (”Lowest of the low” 2003).
AirTran is unique in its kind. Other airlines on the other hand are not such opportunists as the majority of the airline industry is predominated by either full service or no-frills. Consequently, companies do not have a choice but to operate in their respective competitive spheres. Delta in this regard has an added advantage of having both kind operations in the full service and no-frills (as Song). However, recently Delta has found out that it is rather difficult to operate in both areas because operation costs can be severely high to maintain (”Delta to discontinue Song” 2005).
Furthermore, the airline industry due to its dynamic structure allows only few players to evolve and adopt various management tactics to compete effectively. Alliances and networks formed across region, states, borders and continents are the only alternatives that allow players to experiment and explore opportunities locally as well as internationally. WestJet has done just that by exploiting opportunities born out of network airlines while Air Canada adopted a network strategy that enjoy the benefits of regional and across the border opportunities.
The volatile airline industry structure exposes major airlines in the North American continent to a variety of external threats. Government regulations and strict laws predominate the industry as everyone is governed by the international and national aviation regulations. Any kind of deviation results in lawsuits and industrial relation conflict. For example before Air Tran's emergence, ValuJet had been the low cost airline that had been subjected to financial regulations due to a crash at Everglades (Pascual 2000). This event had the company face legal actions and financial crisis thereby dislodging its customer's trusts and competitive position in the market forcing it to shutdown. The company then re-emerged as AirTran, by relocating and restructuring its business model. This strategy has been common among airlines in order to avoid subjection to regulations and legal consequences.
Apart from the above, players are also subject to economic environment among which fuel is one of the most important economic factors that affect the bottom-line profitability. The recent rising fuel prices has not only crippled profit margins for many airlines but also responsible for the filing of bankruptcies of many companies including Independence, US Airways and American Airlines etc. From this research's perspective, Delta Airlines and Air Canada have not been indifferent (Pascual 2000; Bond 2004). Both companies despite efforts have been engaged in efforts to upgrade services, filed for bankruptcy and sleeked protection from the government. Cannibalization do not really exist for these airlines but the structure of the industry is such that it does not allow even for minimal cost disadvantage otherwise the companies tend to die out as a result of shrinking customers. Hence, for companies that do not have the cost or competitive advantage, they tend to faze out of the competition. Air Canada and Delta Airlines in the past have been challenged several times as they not only have to constantly change their product and services but also adopt financial strategies to remain afloat. Yet the profiles of these two companies are not among the most impressive as they remain exposed to industry threats.
On the other hand the nature of threats exposed to WestJet is different. Among the four, WestJet has been one of the most successful airlines that have been able to sustain growth, remain differentiated from its counterparts and aloof from the above threats. However, like any other airlines WestJet is vulnerable to the nature of the international airlines industry as this is based on networks and strategic alliances. Alliances such as these are prone to domino effect and vulnerable to the economical environment prevalent within and outside the country. Thus it is not surprising to learn that WestJet despite its success has also been affected by the 9/11 and high oil prices events (Newman 2005), factors that are responsible for setting back WestJet against its counterparts.
- PEST Analysis
A firm's business environment comprise of its external influences that affect internal decisions and performances. Depending on the environmental conditions, managers and executive decision makers are greatly influenced by the industry's framework such as political, economical, social, and technological factors. To prevent negative influences companies engage in environmental scanning to identify desirable and undesirable factors to retain cost effectiveness and reduce inefficiency (Grant 2005). More importantly the purpose of environmental analysis is to distinguish one's business from the others by analyzing resources; unique products and service differentiation opportunities; factors for creating value chain and means to dissociate from competitors. The airline industry thus can be analyzed from the following perspectives:
Political and Legal
Operating in a cross border network of alliances and partnerships, North American airlines like multinational companies are subject to international and national regulations in terms of assignment of routes and destinations; international aviation regulations; partner's legal standing as well as local laws. These constraints not only leave little room for airlines to operate in but are also the sources for its highly efficient value chain. From top management to the suppliers and the customers every one in the value chain has access and rights to legal assistance. These constraints actually help in maintaining smooth operations and in inducing efficient network of various nations' airlines (Pascual 2000).
Another aspect is industrial relations. Personnel in the airlines industry from pilots to cabin crew to technicians everyone work in the capacity and provisions given by the laws prevalent globally. For this reason, everyone is cognizant of their rights to legal aid if required. Since most of the airline personnel in the world have associations and unions they tend to have an upper hand over management. The management therefore has to comply with their demands if it is within the capacity of the law. In the low-cost carrier industry however, this is rather difficult to comply with especially if the nature of the demand is monetary such as salaries, benefits or sharing of profits which compromise profitability. For this reason management try to avoid or refuse engaging in labour disputes as it is rather difficult for low cost carriers such as Delta, Air Canada, WestJet and AirTran to give in to labour demands.
Not only is this but the airlines also subject to strict safety, hygiene and efficient regulations. Airlines that do not deliver services according to international standards do not only lose out in the competition but are also subjected to aviation penalties. Hence, a crash into the Everglades by ValuJet could severely compromise its position from the legal and political perspective as well as from the customers.
Apart from the above, ad hoc events like 9/11 and terrorist attacks in the US as well as across the world have had great impacts on the airlines. Political war resulting in emergencies not only affects the airline industry but also its consumers. Fearful consumers are not keen on travelling by air any more despite discounted sales prices and premium services. Even if players restructure and revise strategies to lure customers, it is rather difficult to convince a psychological fear. Customers have only started to travel by air recently with the assurance that airport security and airlines have taken precautions for preventing such events from happening again.
One of the most important aspects that have greatly affected the world's transportation system is the high fuel prices. Rising fuel prices has increased jet fuel prices even more than crude oil prices according to David Field of Airline Business (2005). Apart from taxes experts are of the opinion that jet fuel prices have become more costly than crude oil costs which has greatly affected the bottom-line for many airlines. Hurricane Katrina has not only increased the prices by manifolds but also been responsible for the closure of many airlines. Delta Airlines for example which has been barely floating above cost when increased fuel prices have forced it into bankruptcy (Hibbard 2005).
However, Hurricane Katrina and 9/11 lone events cannot be held responsible for the downturn of the industry. The airline industry according to experts (Spartacus 2005) may have paved way for mature transportation industry the world over but the fact remains that the industry has been evolving for the worse over the past decades. New airlines emerged such as Pan American, Pacific Southwest, and Air Inter etc. to impress upon regional airlines and take over the market share and at the same time result in shutdowns and high turnovers evidence in the statistics for the year 2005 in which the airline industry is expected to post a total of $8 to 10 billion loss due to high fuel prices and lessened air travellers. The major airlines have been hard hit as they have widespread fleets, staffs and investments in technologies which are costly to the companies' bottom-line profit and investments. Sparaco (2005) is of the opinion that the US airlines industry has not been a consistent or profitable industry due to low revenues, economic downturns, inefficient players and oil crises that have greatly stressed on the losses therein.
The backbone of the airline industry is people. Individuals in the management, technical and crews all are responsible for undertaking the task of serving their customers with the utmost care and excellence. These individuals are trained and tailored to the industry's needs before they are allowed to work. They need to meet certain standards of service and technical knowledge designed to satisfy the customers. For this reason the players invest millions of dollars to improve the knowledge of their workers. These costly trainings are critical for the airlines' success and allow them to achieve stakeholders and shareholders targets. But when airlines such as WestJet, AirTran, Delta and Air Canada are low cost carriers they have a difficult time to gauge how much they should invest in their people before they could reach the desired customer satisfaction and profit level (Flint 2004). Traditionally airlines do not incorporate training programs for its people as the majority of the companies cannot afford to or do not have the infrastructure to serve the required training. Instead they turn to custom training programs offered by third party vendors in order to fulfil that need. Such tactics not only result in inappropriate and non-desirable training but also the knowledge acquired is standardized and not different from the industry. Hence, the airline industry had been characterized by low and redundant knowledge workers that cost their companies a fortune.
From the customer's perspective, the airline industry in the recent years especially after the events of 9/11 proves to be a source for fear. People are no longer willing to fly airlines as they are fearful of the repetition of terrorist attacks. Others are of the opinion that the quality and service that are delivered by the airlines locally are no longer commendable. Instead they prefer to travel by road or train so the airlines industry has been subject to a long period of low traffic that proved to be detrimental to the company's performance. Major airlines turn towards national and regional customers to meet the desired traffic to achieve profitability targets.
Customers are also fickle in this industry. One observes that though some of the customers prefer not to pay extra for meals or special privileges on air nevertheless they do like to have the extra edge that other airlines do not offer at the same cost. For example at WestJet's insertion of TVs for entertainment on its low cost carriers have earned it great reviews from customers and critics alike (Macklam 2005).
This factor is perhaps one of the most important and critical one in the airlines industry as it is the source for business potential and customer satisfaction. Airlines in the US and Canada alike invest in their aircrafts, pilots and information technological systems to improve efficiency in the long run. Air Canada for example uses only 737 next generation planes while its competitors uses older planes which are fast being replaced by newer aircrafts. According to Newman (2005) the newer the fleet the better the service as it lessens maintenance, inventory, parts and training costs but at the same time increase efficiency. Thus technological improvement plays a sustainable role by allowing airlines to revive from losses.
Furthermore, airlines today have to focus on being online. For most of the companies websites represent customer and employee portals whereby the management can gauge the performance of the company at a click of a button. WestJet and Air Canada for example invest in websites that allow their employees to access internal information online at any time they want. Similarly, Air Canada has invested in creating a cost efficient network that would allow the company to operate its operations from online including consumer support system for customers in North America and Europe (James 2005).
Others like AirTran takes this technological development a step further by investing in infrastructure building by improving its reservation system and online check-in system and printable boarding passes which reduce time and increase efficiency in the booking and consumption process. The company estimate that in 2002, 56 percent of its customers used online booking indicating that the potential for a wholly online systematic process attract customers as it allows ease of access and minimize client time wastage whenever they want to make a journey through airlines (”Lowest of the low” 2003).
- Porter's Five Forces
Given the above analysis, it can be observed that the four airlines under study are not only constrained by the internal but also by the external industry environment. Organizations within the low cost industry whether in the United States or in Canada largely depends on the company's position within the industry and its competitive edge to be able to counteract dynamicism surrounding it. Hence, one must understand the customers, their needs for the airline services and how they, the firms can deliver it on time. This business relationship of supplier and customers can be gauged by analyzing the competitive framework. Michael Porter's five forces (1985) help one to study the variables that influence the structure of competition and profitability. These are discussed in the following sections (Grant 2005).
Competition for substitutes
Substitutes for a product or services influence the price structure. Depending on how close the substitute product is, demand will be elastic with respect to price meaning customers are more sensitive to price whenever there is price change. They are most likely to switch over to the alternative products or services to satisfy their needs. In the travel industry competition is inherent in substitutes. Cars, trains and water transport are close substitutes to air travel which expose it to high risk of substitutes. Airlines are forced to keep one price or around it to be able to survive the competition as a deviation in the price level is likely to push the customers to alternatives that are easily available and accessible (Grant 2005). Thus a traveller from New York to Washington can have similar fares by air, train or bus thereby decreasing consumer vulnerability to price hikes and at the same time have several options to choose from. Operating within such a competitive environment is not only difficult but it also forces one to be extremely price conscious especially when deciding the prices of the category of services the company wants to target. AirTran, WestJet, Air Canada and Delta Airlines all offer low cost and one class service at similar price range. However, to differentiate each of these companies have offers of sales discount to be able to secure more passengers. Hence a commuting ticket of $30 is appealing for a train traveller but an airline ticket of $25 would be most appealing as it is fast, efficient and involves less hassle (if the airline is keen on differentiation). Failure to lower prices and meet industry standards not only pose difficulty in performance but also in operations as it lessen the company's viability for the customer's choice (Grant 2005). AirTran in this regards have been unique in its approach. Having realized that, the company has not decreased its price but rather focused on superiority of service like including fast booking and check-in systems to appeal to the consumers. Others like WestJet focus on luxuries like leather seats and TVs to ease the consumer's travel discomfort. Delta Air and Air Canada however, do not really focus on price competition which exposes them to substitute risks. In the long run they have to make decisions to lower prices or adopt strategic product differentiation in order to retain their customers from shifting to competitors.
Threat of Entry
The low cost competitors are facing high level of costs associated with operating their airlines as fleet slowly ages, workforces expand and competition intensifies (Jonas 2004). But at the same time the low cost airline industry is expanding rapidly in terms of revenue. In 2002 the industry has increased revenue $20 million in net profit despite a deep loss a year earlier. The fact is that the low cost carriers industry is not only filled with intense competition but also financial vulnerabilities. Consequently, one observes quick players entry and departure. It is not a new phenomenon for new airlines to enter the industry for a short while, dwindle and die out as they are not competitive enough. What this feature of fast entry and fast exit does to the industry is that it intensifies the competition keeping players on their toes and be wary of their competitors from all aspects of operations. The cases on hand include WestJet against Air Canada which has always been the source for West Jet's decision to change, alter and implement new strategies in order to stay abreast with its rival.
Similarly, AirTran which had originally been ValuJet another low cost airline not only has emerged as Delta's rival but also the source for its low traffic. Whenever Delta fails to deliver services, AirTran is more than able and glad to take over.
Newer airlines are also constantly entering the industry such as Jet Blue, Independence, Ryanair etc. all of which find entry into the no-frills industry nowadays much easier than entering the full service industry whereby the cost for operation is higher; characterized by few monopolistic players; and customer level is low for each airline to secure significant revenue.
Thus, without any barriers to entry the prices and profits tend towards competitive level without any regard for firms within the industry. Hence, competitiveness becomes inherent in the firms' ability to absorb sunk costs, value-added services and also the company's ability to reap profits from invested capital resources (Grant 2005). It is however, hard to imagine the US airlines industry or the Canadian one for that matter to achieve all of these three elements without compromising one over the other. Despite this fact however, the airlines compete to establish their position and competitive level against entrants through economies of scale, product differentiation, access to channels of distribution and legal barriers.
Rivalry between established competitors
The airline industry is unique in the sense that the overall competition and profitability is dependent on competitive pricing which push below costs operations so that there is industry wide losses. On the other hand, the industry is also focussed on innovations and non-price competition. Concentration in the number of airlines competing against each other enables firms to combine market share through strategic alliances and leadership. For example Delta airline had previously been among the lead players. However, with the emergence of low cost and no-frills airlines, AirTran, Air Canada and WestJet have dominated the industry to distributed the market share for each of these companies so that Delta no longer have a monopoly over others. Across the North American region however, one can observe that the concentration of the industry is divided among full service and low-cost carriers but within each of these industry segments monopoly and duopoly are common. diversity in competitors however do exist among players as groups compete in terms of cost, services, fares, hub and spoke network, alliances or through route dominance. AirTran and Delta airlines for example compete against each other in terms of routes while WestJet and Air Canada challenge each other on services through product differentiation.
The airline industry is also characterized by exit barriers. When barriers to exit are high the result is that players have to share a single market of certain number of customers and profits are low as the consumption capacity cannot be increased with variety. For this reason a lot of airlines tend to fight for a limited number of consumers in the airline business. This factor is detrimental for the growth of the industry as it gear players towards cannibalization which Delta's Song had done (”Delta to discontinue Song” 2005).
Bargaining power of buyers
Firms operate on the basis of consumer demands and market inputs. Market inputs may comprise of labour, financial resources and technological skills. Consumers pay certain price for the services sold to them by the firms in the form of outputs. Such transactions create value to the buyers and the sellers because the benefits depend on the relative economic power of the two. When buyers are sensitive to price change by firms they are considered to have a bargaining power over the firm. This can be due to the importance of the total cost or the differentiated products or services that the industry is supplying (in excess or less). The buyer tends to switch to alternative suppliers if the price of a certain product or services increases and they are not willing to pay for it. In the airline industry the buyers have a bargaining power as the consumers are price conscious. A change in the price of Delta Airlines not only shies consumers away from Delta but also from other players.
Alternatively, the airlines consumers are price conscious because of competition as well. The more intense the competition the more consumers are sensitive to price change. Thus when airlines decide to push down prices due to competition they are actually allowing the consumers to have an upper hand over the firms and subject them to pressures for lower prices, high quality service and faster delivery. The relative bargaining power thus rest on the balance of power among the players who effectively set prices that govern the market and the consumers. Since the concentration and size of the buyers in the airlines industry is relatively lower than the number of suppliers it is not difficult to observe that buyers are more aware of the price, product, and services and discounts available at their disposal.
Bargaining power of suppliers
On the other hand supplier's determinants depend on the analogous relationship between the producers and the buyers. Since the airline industry is service base as such there are no suppliers. The firms are the suppliers of services to the consumers and the bargaining power is gauged by the firms' ability to produce outputs required by the consumers. The key issues here is that firms tend to be slow in reacting to the consumer demand as they are relatively low in their bargaining power over the consumers. There are a host of factors responsible for the slow exchange between the two as the companies are subjected to government regulations, market conditions, economy, consumer's social and cultural influence and the environment changes. Consequently, even if the airline companies in North America are efficient it is not surprising that they still have a weak hand where bargaining with the consumers are concerned.
- Strategic Leadership and value chain
Strategic leadership for any firm or industry involves strategic vision and statement of the mission. Organizations that have clear vision foresee the future by outlining objectives before endeavouring to carry out strategic planning and implementation. This process involves anticipating the customer's needs, target market, outlining company's competencies and weaknesses. More importantly at the end of the process the strategist needs to think how value can be created for the stakeholders (Rhodes ). However, strategic management is not only about vision and missions. Depending on the nature of the business and the industry in which the company exist strategic management vary accordingly. In the airline business for example high operational cost and highly competitive environment steer the direction of the industry. Cost structures and spheres of influence have great impact on the outcome of the strategic plans. Consequently, one of the most important factors in most of the airlines companies is to cut down cost and decrease operational bottom-line. The “leaner” a company is the better it is positioned among competitors. AirTran for instance (Flint 2005) considers it highly successful in the past few years and attributes its ability to secure a competitive position within the industry against leading Southwest Airlines to being lean. For an industry that is characterized by high fuel prices, personnel salaries and latest technologies, being lean means to ensure low cost in these three areas. Consequently, the majority of the companies compete at eliminating fuel cost through hedging future contracts; cutting down personnel cost; and operating with current aircrafts wherever possible to secure leadership position in the industry tend to lag in the competition.
Another factor that is critical for strategic management is goal and objective setting. Strategic objectives should be based on outlining desired outcomes for the long and short term. The major focus of these objectives should be how to make the business competitive and what is the desired positioning of the business. Delta Airlines, AirTran, WestJet and Air Canada all are aimed at being low cost, no-frills airlines and delivering superior services. As realistic as the objectives of these companies may be it can be observed that some of the airlines are not able to achieve their strategic goals as frequently as they want it to despite efforts. The discourse for achieving low cost and no-frills position initially had been introduced to consumers who wanted to save on flying costs usually comprising of students, budget home travellers and the like. However, as competition increased with each of the airlines vying to secure customer segments, the low fare segment proliferate and shifted to other groups such as business and corporate travellers which changed the strategic objectives of the overall industry. For example AirTran and WestJet so far have been able to beat competitors fast in their own game because of the premium services they provide rival those of full service airlines yet at a significantly low price. AirTran initially aimed at student travellers but their packages attracted business travellers so much that now they have contracts with companies for corporate travellers (Pascual 2000). Thus business in the low fare and no frills airlines is evolving and changing to expand into more lucrative competition. Leadership in such an industry means clear identification of long and short term objectives including the kind of customers the company wants to target and how to diversify in what kind of time span.
Then comes financial objectives. Organizations need to set financial goals to quantify their business activities. Setting profit margins is not the only solution and not the only aspect to strategic financial objectives. Instead, leaders within the industry need to identify which aspects of the operations affect financial outcomes in the form of profit margins, growth, operational income, shareholder's dividends and stakeholders' value etc. These needs to be set in short term such as quarterly objectives; medium and long terms such as two to five years objectives. What is critical about this aspect of strategic planning is that it allows one to gauge the position of the company among competitors and at the same time allows the management to foresee the direction of the company. Envisioning a profitable future would not therefore be termed as successful unless it involves growth, evolution and development of the company. In this regard it can be observe that AirTran and WestJet seems to have the lead position in the sense that the companies have transformed their small businesses into corporations that today serve customers across the borders and allowing them to expand business at phenomenon rates. This has only been possible because the leaders of these organizations have set financial and growth goals of approximately 25 percent. For industry players this objective may seem unrealistic but the reality is that sustaining growth rate is not difficult as long as the top management adheres to initial goals, and ensuring that it is followed at all levels.
As far as implementation is concerned Grant (2005) is of the opinion that strategic management is about identification of key success factors and forming strategic plans that utilizes the key success factors to minimize weaknesses. Industry dynamics, competition among players and firm's rivalry all help in attracting customers and firms to manoeuvre competitive advantage (Grant 2005). However, the key to success is inherent in the management's ability to identify what the customers want and what the firm has that can be used deliver the want. Furthermore, it is about how firms survive in a competition capitalizing on its success factor. In the airline industry as low-cost leaders have found out customers for regional areas do not really need full services provided by the majority of the airlines. Instead they are only interested in getting from A to B at the minimal price possible. The psychology not only opens up avenues of choices but also lead them to perceive that they can substitute air travel for land or water transportation. They may be correct in their perception but it is difficult for an airline to veer their choices towards air travel when the cost is high. Consequently, lowering prices is the first step in securing customers. Delivering customer satisfaction however is an entire different story.
Like any other products and services, air travel consumers are looking for bargains, discounts, sales and the like but at the same time they are also in search of comfort, convenience, efficient processing etc. Hence, opportunities exist for companies to exploit in these arenas by differentiating their services by innovating on existing product model. For WestJet it meant changing its seats to leather; for AirTran it meant more routes on the busiest hub; for Delta it means options; and for Air Canada it means better aircrafts. However, this does not mean that innovating one time would ensure the company's sustainability.
Instead it must be born in mind that companies should engage in regular revision of its goals and objectives; revising strategies in response to market needs and implementing it before it expires. WestJet's success for example has been due to its fast response to the demands for local low-fare carriers. But as soon as it realized that the potential is even more across the border, the company has been able to capitalize on it. AirTran and Delta likewise have been fast in securing their respective position in the low-cost carrier industry. Yet none of these airlines claim that they are satisfied with the current business model. The reason being that upgrading a segment of the value chain in never enough. It is critical that the companies regularly scan its environment to ensure that it identifies new key success factors to innovate and come up with new strategic plans to achieve higher profit margins (Grant 2005).
This is imperative as it would help the organization to differentiate itself from competitors by becoming unique in its services and add value to the buyer's decision. Creation of a value chain is thus critical for securing strategic leadership. AirTran has achieved so by offering customers value added services through multiple programs and product features. Similarly, WestJet is regularly upgrading its programs so that it would be able to offer services that are competitive in price as well as product differentiation. The objective is too different by offering to the customers a range of different opportunities for product choice. This ability not only helps the firm in capturing different niche markets but also identify new markets. As is the case of WestJet which discovered that low fares travel is not only appealing to students but also to business travellers.
On the other hand, organizations that fail to do so will compromise its value chain. They lose out on profit opportunities when they neglect to take advantage of environmental scanning. Delta Air is perhaps one of the airlines which can be characterised in this category. Despite its experience and access to industry operating factors, Delta failed to devise effective strategies for capturing the low cost industry. Its half hearted Song brand not only positioned at the wrong market but has also been marketed in the wrong manner thereby pushing customers away rather than attract them.
Value chain creation is not only about the customers. It must also be born in mind that value chain is also about stakeholders such as employees, suppliers, agents and the whole network that feature the airline industry. All along the way, the value chain can be upgraded, innovated and recreated to achieve the desired strategic effect. In all of the four cases on hand, it has been observed that the companies failed to invest in its people even though they have been keen on investing in fleet and training programs. Issues like labour disputes, low salaries and non-competitive working environment will eventually force employees to move on to better pastures. Consequently, value chain can be improved by these airlines if they improve on their employees programs.
From the above discussion it can be concluded that the airline industry has for a long time been characterized by losses, economic vulnerabilities, customer dissatisfaction and the airlines inability to secure growth rate. Depending on the nature of the operations companies can reverse these vulnerabilities by first identifying the key success factors and scanning the environment regularly before it can come up with strategic planning. Identification of critical success factors is the first step in entering the market with an advantage as it means the company would be differentiating itself and creating a value chain - a key aspect for differentiation. In each of the above airlines studied the companies have been able to secure success (such as WestJet and AirTran) because their management have been fast in adopting the above strategic approach. While on the contrary airlines like Air Canada and Delta have not been so responsive to the environment which resulted in the losses they have to incur. The discussion thus offers the explanation that whichever the condition prevalent in the industry, opportunities does exist for prosperity and profitability for all firms if they adopt strategic planning and management of its resources and market.
Author not available, Mar 2003, Lowest of the low, Airfinance Journal. Coggeshall: pg. 1.
Author not available, Oct 31, 2005, Delta to discontinue Song. Airline Industry Information. Coventry: pg. 1
Bond, D. Nov 1, 2004, Law of the Jungle, Aviation Week & Space Technology. New York: .Vol.161, Iss. 17; pg. 24
Brandenburger, A. and Nalebuff, B. 1996, Co-operation. New York: Currency Doubleday.
Dobson and Starkey, 2004, The Strategic Management: Issues and Cases Blackwell Publishing.
Ferriera, W. J. and Lyonb, D. W. 2004, Competitive Repertoire Simplicity and Firm Performance: The Moderating Role of Top Management Team Heterogeneity, Managerial and Decision Economics. 25: pg 317-327
Field, D. Oct 2005, After the storm, Airline Business. London:.Vol.21, Iss. 10; pg. 28.
Flint, P. Oct 2004, Low Cost, but Not Cheap, Air Transport World. Cleveland: Vol.41, Iss. 11; pg. 50, 3 pgs
Flint, ‘We're not Afraid of Anybody' Air Transport World. Cleveland: Sep 2005.Vol.42, Iss. 9; pg. 68.
Grant, R. M. 2005, Contemporary Strategy Analysis. Blackwell Publishing.
Hibbard, J. Oct 17, 2005, The Sweet Smell Of Chapter 11. Business Week. New York: Iss. 3955; pg. 86
James, C. Aug 5, 2005, All change at last for Air Canada. Travel Weekly: London, Iss. 1781; pg. 32.
Jonas, D. May 24, 2004, LCCs Setting The Pace Of Carrier Competition, Business Travel News. San Francisco: Vol.21, Iss. 9; pg. 24.
Lott, S. Aug 5, 2005, Strong Revenue, Cost Control Deliver Air Canada Profit. Aviation Daily. Washington: .Vol.361, Iss. 25; pg. 2
Lott, S. Jun 17, 2005, Air Canada Rounds Out Team By Wooing Industry Veterans. Aviation Daily. Washington: .Vol.360, Iss. 55; pg. 3.
Macklem, K. Oct 3, 2005, Pulling WestJet out of its dive. Maclean's. Toronto: .Vol.118, Iss. 40; pg. 12.
Newman, D. Aug 1, 2005, Analyst Interview: Canadian Transportation, The Wall Street Transcript, New York: pg. 1.
Pascual, A. M. Oct 23, 2000, Can Airtran Keep Climbing?; ValuJet's successor is thriving–for now, Business Week. New York: Iss. 3704; pg. 102
Porter, M. E. 1985, Competitive Advantage. New York: Free Press.
Ramage, N. Jun 20, 2005, WestJet on the Fly, Marketing. Toronto: Vol.110, Iss. 22; pg. 13.
Sparaco, P. Oct 3, 2005, Endangered Species, Aviation Week & Space Technology. New York: Vol.163, Iss. 13; pg. 47
Vu, U. Jan 17, 2005, Air Canada union irate following collection agency threat. Canadian HR Reporter. Toronto: .Vol.18, Iss. 1; pg. 1.
Source: Dobson and Starkey 2004
Source: Grant 2005
comments powered by Disqus