The airline industry in the United States is an extensive network of companies providing air transportation services for passengers and cargo. It is characterized by a dynamic nature, hence the need for efficient strategic management for companies involved. In particular, Porter’s five forces model is frequently utilized to identify the five competitive forces shaping the industry and determine the corporate strategy aiming to increase competitive advantage.
Rivalry among existing companies is high, which can lead to limited profits, price-cutting, increased costs, and overall slow industry growth. The US airline industry is highly competitive due to a number of factors, such as tight government regulation, the entry of low-cost carriers, and the increasing emphasis on safety which results in high operating expenses (Rivkin & Therivel, 2005). Furthermore, airlines operate in accordance with a somewhat outdated business model, particularly in the context of fast turnover.
The threat of new entrants into the airline industry is low due to high barriers to entry and exit and competitiveness. The appearance of new competitors suggests that they have done sophisticated research on the major players, obtained the necessary qualifications, and provided a substantial infusion of capital, thus, entering the market with up-to-date services, technology, and high-value standards. Moreover, large airlines benefit from economies of scale, while existing companies have performance and cost advantage, as well as established brand identities. Exit barriers are high due to the regulation in the industry, significant losses, and specific assets which cannot be applied in other sectors.
The threat of substitutes can be determined as moderate since available substitute products are mostly characterized by performance and convenience limitations or high prices. For instance, customers going on a short trip are likely to choose alternative modes of transportation, such as train and bus services, which suggests that regional airlines are more affected by substitutes. Furthermore, many Americans prefer traveling by automobile for longer distances. Nevertheless, air transport remains the most viable option offering fast and convenient travel.
The bargaining power of suppliers in the airline industry is high as a result of three inputs affected by the external environment, including aircraft and technology, fuel, and labor. The fluctuation of oil prices, aggravated by geopolitical factors, impacts aviation fuel prices. Moreover, airlines depend on two leading aircraft manufacturers, such as Airbus and Boeing. The labor force comprises high-level professionals, and companies aim at hiring and retaining experts in the field.
The bargaining power of buyers can be described as moderate to high due to the spread of online ticketing and the entry of low-cost carriers, which benefit the fliers. Minimal effort and cost are required to change the airline, and the availability of booking websites prevents travelers from contacting the airline directly and resulting in low customer loyalty. Furthermore, the balance of supply and demand power is tilted in favor of passengers due to the airline industry regulations.
Overall, Porter’s five forces model indicates that the airline industry is marked by a low threat of new entrants, a moderate threat of substitutes, a moderate to high bargaining power of buyers, and high rivalry and bargaining power of suppliers. The analysis of the drivers and impact of the five forces shows that fierce competition and tremendous fuel, labor, and technology cost are the primary reasons why most airline firms have not been able to achieve profitability, forced to compete in prices to retain customers. Furthermore, external factors such as security threats, safety costs, and global economic uncertainty pose additional risks for the airline industry leading to losses.
Differences in the Strategies and Value Chain Activities of Legacy and Low-Cost Airlines
The financial performance of low-cost carriers such as Southwest and JetBlue and legacy airlines such as Delta Airlines and Continental Airlines, which eventually merged with United Airlines, was remarkably different in the early 2000s. An analysis of the differences in the strategies and value chain activities is necessary to understand why large companies were characterized by a poorer performance than their low-cost counterparts within the same industry environment.
It is evident that low-cost carriers target specific customer segments and have a clear strategy focusing on cost reduction, compared to network airlines which place emphasis on excellent customer service. Porter’s value chain framework allows for determining activities implemented by Southwest to deliver competitive advantage. They include short-haul flights, the no hub strategy, all Boeing 747 fleet, point-to-point operating structure, minimum turnaround time due to the lack of meals, seat assignments, and baggage transfers, internet ticketing, and friendly service culture (Rivkin & Therivel, 2005). As a result, Southwest is an example of a steady and profitable business, ranking high in customer satisfaction and marked by flight safety and punctuality.
In turn, legacy airlines do not appeal to clear customer segments and do not have a specific strategy. For instance, Delta Airlines is marked by brand legacy and extensive flight service, which comprise the differentiation strategy. It focuses on broad marketing campaigns emphasizing brand awareness and the company’s reputation. At the same time, the entry of low-cost carriers posed a significant challenge to the airline’s profitability and performance and indicated the need for a comprehensive response (Rivkin & Therivel, 2005). Delta shares its infrastructure with low-cost subsidiaries, whose costs are difficult to control. Moreover, strong unions prevent legacy carriers from cutting costs in salary payments. Work rules do not encourage employees’ enthusiasm and creativity, while ticketing policy is less appealing to customers than that of low-cost airlines. As a result, the balance shifted towards fliers, who benefit from regulations and the availability of suppliers, rather than airlines, who need to provide incentives to maintain customers. The difference in competitive advantage and performance results from fundamentally different strategies and value chain activities of low-cost and full-service airlines.
Legacy Airlines’ Failed Attempts to Imitate the Success of Low-Cost Competitors
There are examples of legacy airlines’ failed attempts to launch low-cost subsidiaries and imitate the success of their competitors. For instance, Delta Express was established in 1996 as a low-fare company to compete with Southwest and similar airlines (Rivkin & Therivel, 2005). The cost savings resulted from higher utilization of aircraft, lower labor rates, and reduced onboard menu. Remarkably, Delta Express still operated as part of its parent company, Delta Airlines. According to Rivkin and Therivel (2005), “all decisions concerning routing, flight frequency, and pricing were made centrally, and maintenance, pilots, flight attendants, and ground services were shared” (p. 9). As a result, lack of independence and specifically developed strategy led to a failure.
Low-cost carriers introduced a successful business model in the industry. For instance, Southwest clearly defined the segment to focus on and aligned all value chain activities in accordance with its strategy. Furthermore, the airline emphasized the importance of human resources for successful strategy implementation, which created a sustainable competitive advantage. JetBlue emphasized new technology, low costs, and brand awareness, aiming to make air travel accessible for more people. Furthermore, the company encouraged flexibility among employees and offered different job packages. As can be seen, legacy airlines’ subsidiaries such as Delta Express did not consider the primary success factors of low-cost airlines and operated within the parent firm, which resulted in a faulty strategy and internally-induced self-destructive behavior. To succeed, the company should not be bound by the mainline business; instead, it should be offered independence and the ability to operate in its own interest.
The Most Effective Strategy for Delta
Out of four strategic options, Delta Express is likely to benefit the most from being modified in some manners since the current strategy of the firm-within-the-firm proves to be ineffective. The subordinate company does not compete successfully with low-cost airlines such as JetBlue and Southwest, which indicates that the continuation of the status quo would be unreasonable. Furthermore, reintegrating Delta Express with the primary Delta brand can further aggravate the situation since the subsidiary’s main failure factor is its close dependence on the parent firm, which affects the decision-making and prevents it from operating in its best interest. Finally, launching a new low-cost subordinate company would require intense investment and justified reasoning for stakeholders. Furthermore, Delta would bear additional costs to build a new brand image. Hence, the most effective strategy for the firm is to modify Delta Express by allowing it to operate separately from the parent company and implement more flexible work rules. It is necessary to focus on a particular market segment and customer needs to differentiate the brand. Such an approach would allocate resources efficiently and support the compliance of value chain activities with strategic objectives.
Reference
Rivkin, J. W., & Therivel, L. (2005). Delta Air Lines (A): The low-cost carrier threat. HBS No. 9-704-403. Web.