About the Industry:

The case is about the US Airline Industry where several airline companies provide
flights inside the premises of USA. These flight helped the travelers to cover long
distance between the states in a shorter period of time. But this airline industry had to
face such losses which turned many companies go bankrupt. For the first time after
the loss, the year 2006 had gone into the profit line in US Airline Industry. From then
the price war and competition between the giants and low-liner companies started for
their existence.

Goal of the case:

From the study of the case our goal would be to the maintain the increasing
profitability of the industry through minimizing price wars among the companies,
reducing the operating cost of flights and by ensuring low priced tickets.

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Porters Five Forces

Risk of Entry by Potential Competitors:

Taking the current situation of the US airlines industry into consideration, we can say
that the risk of entry by potential competitors is low. The first and foremost thing for
an airline company is getting the takeoff and landing slot. Some of the major airports
in US such as JFK and La Guardia in New York, Chicago’s O’Hare, and
Washington’s Regan National are now officially congested for takeoff and landing. In
case of a new airline company to get that slot, it has to compete with already
established airline companies with respect to price, passengers’ reliability. Other than
that, existing firms has an extensive cost advantage in terms of high ticket selling.
Most of the passengers feel more secured with the airlines they have been travelling
through. This brand loyalty of passengers give the airlines cost advantage to reduce
per flight fixed cost and thus to get the economies of scale.

Rivalry among Established Companies:

The rivalry among established companies in US airline industry is high because of

competitive ticket price, differentiation in offerings, high entry and exit barriers.
Every company is competing in terms of ticket price for leisure fares. In this
particular segment, every company is targeting a low margin, however, the margin in
the ticket price for business fares is high. All the airlines companies are trying to
differentiate their offered service not to be considered as ‘commodity products.’

The Bargaining Power of Buyers:

The bargaining power of passengers for the US airline industry is high. If the buyers
are not happy with the service of one airline company, the can choose to have their
next trip with another one. They will not incur any cost for switching the company.

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Buyer have many options available. This is the underlying reason why the airline
companies are fighting for price and differentiation to attract different segment of
passengers.

The Bargaining Power of Suppliers:

The bargaining power of suppliers in US airline industry is high. Aircraft, fuel and
manpower are considered as main inputs for airline industry. There are only two
major suppliers available for aircraft, Boeing and Airbus. In terms of fuel price, it is
the most fluctuating cost for airlines. They tend to hedge for the fuel price to prevent
future volatility of fuel price. Also, the efficient and productive labor is scare in US
which increases the demand for efficient labor. The labor union is strong in terms of
wage negotiation because of the higher demand.

Threat of Substitute:

Threat of substitutes for US airline industry is low as there is seemed little chance that
the US would develop high-speed train services similar to those of Europe and Japan.
The bus, train and car take much longer time then air to cover long distance routes
and those cannot compete against airlines in this criteria.

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 PESTLE ANALYSIS
Name of Drivers of change Measuring impact Results
factor

Economical  Fuel price rise  Constant rise of  More loses for small air
 Growing number fuel price increases Travel Company while
of air Travel operating cost their rivals earn profit.
Company where  No economies of  Increase of cost for
the airport number scale airlines.
remains same.

Technological  IT related services  Outsourcing IT  Cost reduction in air

related services travel service
 Better use of IT &  Increase of direct sales
more efficiency using online reservation
and phone calls.

Social  Resizing of travel  De-sizing of travel  A huge change in whole

agents agents has cut distribution channel
down cost of devoid of travel
commissions. agencies.
 Increase in direct sales
more.

Legal  Union rigidity  Strictness in union  Creates scopes to

laws that make it decrease cost throughout
difficult to cut value chain.
down employment  Low cost structure might
cost system has lure more competition
decreased. in.

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Recommendation

 The operating cost of flights to be reduced in order to manage the price per
ticket.

 More fuel efficient airplanes should be engaged

 Price of fuel should be kept at a stable condition via a regulatory body so that
real price elasticity does not affect the market price.

 Intermediaries for selling tickets could be minimized by using online

reservations. This could be huge cost cutting idea through the minimization of
commission

 Employees could be hired on contractual basis for minimizing the risk from
the employees’ position

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