Whats Happening?

We are catching up to the schedule on the course

syllabus.

ISMA meeting scheduled for today has been

postponed for a weekJan 28, 4:30 to 5:30
College 8, room 240. Speaker is JP LeBlanc,
Director of RAD Development, Borland

Chapter 4 Introduction
Airline Industry Analysis

Major Chapter Topics

Airline Industry analysis using the Porter

Competitive Model as a clearly defined industry.
Revisit Business Strategy Model.
Lessons Learned from Consistently Profitable
Carriers.
Is American Airlines the right standard for the US
industry?
Importance of Information Technology to the
Airline Industry.

Consistently Profitable Airlines

Singapore Airlines
Geographic Location, National Strategies,
Leadership in IT, Competitive Strategies

Southwest Airlines
Aircraft Utilization, Focus on City Pairs, Pointto-Point Route Structure, Corporate Culture,
Cost Savings in Reservation System

American Airlines
Largest airline in the US versus United while
also a contender on the international level.
A premium service airline with a hub and stoke
route structure.
Has consistently been recognized as an industry
leader.
Currently faces the same financial problems as
other major carriers.
Faces challenge of dealing with strong unions.

Porter Competitive Model

Airline Industry Analysis - North American Market
Aircraft Manufacturers
Aircraft Leasing Companies
Labor Unions
Food Service Companies
Fuel Companies
Airports
Local Transportation Service
FAA
Hotels

Bargaining
Power
of Suppliers

Alternate Travel Services

Fast Trains
Boats
Private Transportation
Videoconferencing
Groupware

Potential
New Entrants

Foreign Carriers
Regional Carrier Start ups
Cargo Carrier Business Strategy Change

Intra-Industry Rivalry
SBU: American Airlines
Rivals: United, Delta, US Air,
Northwest, Southwest

Substitute
Products
and Services

Bargaining
Power of Buyers
Travel Agents
Business Travelers
Federal Government
Pleasure Travelers
Charter Service
U.S. Military
Cargo and Mail

Business Strategy Model - Airline Industry

Scheduled
Passengers

PRODUCT/SERVICES
Charter
Cargo
Services

Mail
Air Express

MARKETS
Europe

North American

Pacific Rim

Latin American

ROUTES AND ROUTE STRUCTURE

Short Haul
Hub and Spoke

Long Haul
Point to Point

FARE STRATEGY

Modified compared
to the example in
the textbook.

Low Fare

Premium Fare

COMPANY STRUCTURE

Independent

Alliances

INFORMATION SYSTEMS FOCUS

Passengers

Operations

Logistics

Business

Figure 4-1

Benefits of Information Systems

to American Airlines

Convenience to Customers
Reservation System, Request hotels, car.

Knowledge of Customers
Frequent-Flyer Program: AAdvantage.

Providing a Foundation for Other Systems

Yield-Management System.

Building a Base for Other Businesses

American designed systems for others.

Airline Industry Value Chain

FIRM
INFRASTRUCTURE
HUMAN
RESOURCE
MANAGEMENT
TECHNOLOGY
DEVELOPMENT

-Financial Policy - Accounting -Regulatory Compliance - Legal - Community Affairs

Flight, route and
yield analyst
training

Pilot Training
Safety Training

Baggage Handling
Training

Computer Reservation System, In-flight System

Flight Scheduling System, Yield Management System

Agent
Training
Product
Development
Market Research

In-flight
Training
Baggage Tracking
System

Information Technology
Communications

PROCUREMENT
Route Selection
Passenger Service
System
Yield Management
System (Pricing)
Fuel
Flight Scheduling
Crew Scheduling
Facilities Planning
Aircraft Acquisition

Ticket Counter
Operations
Gate Operations
Aircraft
Operations
On-board Service
Baggage Handling
Ticket Offices

Baggage System
Flight
Connections
Rental Car and
Hotel Reservation
System

INBOUND
LOGISTICS

OPERATIONS

OUTBOUND
LOGISTICS

Promotion
Advertising
Advantage
Program
Travel Agent
Programs
Group Sales

Lost Baggage Service

Complaint Follow-up

MARKETING
AND SALES

SERVICE

Adapted with the permission of Michael E. Porter from Competitive Advantage: Creating and Sustaining Superior
Performance, copyright 1985 by Michael E. Porter.

Figure 4-3

Conclusions

The Airline Industry is a vivid example of the

dynamics of the market that it serves.

Shows that establishing strategies dictated by the

market is critical.

Once the right strategies have been identified,

information systems can play an important
supporting role.

Chapter 4
Porter Competitive Model
and
the Airline Industry

2003 - A Hundred Years of Flight

Aviation is celebrating its centennial year. From its first brave
beginnings the civil aviation industry remains dynamic and
although some of the priorities have changed, the spirit and
passion remain.
Some priorities are not new: safety, the need for efficient
operations, adequate capacity to meet growth and, of course,
customer satisfaction. Other priorities have gained
prominence in recent years security, war risk insurance and
environmental concerns and will remain important in the
coming years.

This industry is always in the

grip of its dumbest competitors.
Robert Crandall
Former CEO
American Airlines

We must look at the world as it

is versus how airlines would
like it to be.
Robert L. Crandall
And as government officials, politicians
and consumers would like it to be.

Airline Industry Goals

Public Service. (Service to Customers)

Return to Investors.

Country Strategic Resource.

Are these consistent or in frequent

conflict?

Airline Profitability
Profitability = [yield X load factor] - cost
In order to survive and profit in this tough environment,
airlines attempt to manipulate three main variables:
Cost, calculated as total operating expenses divided by
available seat miles (ASM)
Yield, calculated as total operating revenues divided by
the number of revenue passenger miles (RPM)
Load Factor, calculated as the ratio between RPMs and
ASMs, which measures capacity utilization.

United Flight 815

Chicago to LAX, October 31, 2001
204 tickets were sold and 186 people showed up.
68 passengers originated in Chicago and 118 were from
connecting flights.
97 passengers terminated at LAX, 89 continued on another
flight.
Of the 33 passengers that were only Chicago-LAX there were 27
different fares:
A frequent flyer passenger paid nothing.
A 1st class passenger paid $1,248.51 on the day of the flight.
A coach passenger paid $102.26 on the day of the flight.
A cash fare passenger paid $87.21 twenty-nine days in advance .

The National Commission to Ensure a

Strong Competitive Airline Industry

Change, Challenge and

Competition
A Report to the President and Congress
August 1993

Airline Industry Report

The air transportation system has
become essential to the economic
progress for the citizens and
businesses of this nation.

The commission questioned some of the most

basic assumptions that have formed the
foundation of policy toward this industry--and
behavior within it--for the past half century.

It also questioned whether the

airline industry has basic structural
problems or if it is just a collection
of poorly managed companies.

Commission Findings
The Airline Industry is more competitive than before
deregulation in 1978.
Travelers and shippers are charged less than in 1978.
The Airline Industry has never made a sustained,
substantial return on investment.
It lost huge amounts of money from 1990 to 1993.
It canceled many aircraft orders shortly after an
unprecedented buying binge.
Its freedom to compete in international markets is
uncertain because of government restrictions.

Commission Conclusions
For the U.S. to prosper in a global marketplace
the airline industry must:
Be efficient and technologically superior.
Have the financial strength to respond to rapid
change and opportunity.
Efficiently move people, products and services
to markets, wherever they exist.

Recommendations
Efficiency: Reinvent the FAA.
Financial Health: Deal with factors that impact
the financial health of the industry.
Access to Foreign Markets: Replace the current
bilateral system with a multi-national regime.

To return their balance sheets to

respectability, most airlines would
have to achieve profit margins that
are almost unprecedented in their
history, and sustain those margins
for years.

September 11 Impact
An absolute disaster for the industry.

1990-1993 Was a Disaster!

The Gulf War.

The general decline in the world economy.
Aircraft fuel price increases.
Wages, work rules and work patterns.
Chapter 11 bankruptcy airlines.
Excess capacity.
A very capital intensive business.
Too many years as regulated airlines.

Airline Industry
The shock of September 11th has forced airlines to
face an awkward fact: in some respects, aviation is a
declining industry.
Nov. 22, 2001
The Economist

Decline in Air Travel

At Thanksgiving in 2000 a record 2.2 million
Americans took a flight to spend the holiday with
family and friends.
Air traffic in October and November 2001 was down
by about 25% compared to the previous year in the
world's biggest aviation market, thanks to a
combination of recession and the attacks on
September 11th.

International Travel
International travel from America has been hit even
harder: the number of Americans flying across the
Atlantic is down by over 30%.
Never mind that more people are killed on America's
roads every three months than have died in the entire
history of commercial aviation.

Fatalities by Transportation Mode

Airline

12

Railroad

530

Passenger Car

20,818

5000 10000 15000 20000 25000

Load Factors
Despite cutting capacity, the big American airlines are still
flying with planes barely 60% fulla figure that would be
much lower were it not for hefty discounts.
Boeing and Airbus, the two manufacturers of large jetliners,
are offering airlines special financing deals to pay for their
purchases in order to stave off outright cancellations.
The last time the airlines were in such straits, during the
Gulf war and recession in 1990-92, it took them four years
to return to profit, even though traffic recovered within a
year.

European Airlines
The situation in Europe is no better.
Two flag carriers, Swissair and Sabena, have
collapsed since the terrorist attacks.
Other big carriers, such as British Airways (BA) and
KLM, are in major financial trouble.
Traffic within Europe fell by over 10% in September
and October 2001, while traffic from Europe to
America and Asia fell by 35% and 17% respectively.

Financial Picture
Although air travel, measured by number of passengerkilometers flown, has long risen faster than economic
growth, airline revenues have lagged world GDP growth
for the past 20 years in real terms,
Revenues and profits per seat have been falling because of
greater competition springing from deregulation, first in
America and then within Europe and across the Atlantic.
Even before the latest slump only a third of mainstream
airlines in Europe, America and Asia earned enough to
cover their cost of capital, which is 8% on average.

Looking for Options

In most industries, such a situation would quickly lead to
mergers. But this is not so easy for airlines, hemmed in as they
are by national ownership rules and rigid international
regulation of routes.
America's airlines are retreating to their strongholds in the hub
airports they dominate, such as Dallas-Fort Worth (American)
and Atlanta (Delta). Most airlines have cut at least one wave
of coordinated flights in and out of their hubs. If additional
security checks are introduced for transferring passengers
before they board their outbound flights, and the handling of
such travelers thus slows down, some observers expect the
airlines to switch to fewer flights in larger aircraft.

Dropping Point-to-Point Flights

The biggest effect has been for airlines to drop non-stop
point-to-point flights rather than those that go through
hubs.
The network economics of hubs becomes more attractive
for big carriers when times are tough.
A study of America's changed airline-route map shows that
large carriers are cutting non-stop flights to cities where
they do not operate hubs by more than they are trimming
hub flights.

Unions and Vendors

The industry's woes will also force airlines to get tough
with unions and suppliers over restrictive practices that
raise their costs.

European Changes
In Europe, where the failure of Swissair and Sabena has
shown that there is room for only a handful of mainstream
carriers rather than today's 14, a shake-out is already under
way.

Airlines: How Ugly?

The outlook is either bad or outright ugly.
Two problems: Post 9/11 fears and increased
hassles based on new security measures.

US Airline Industry Must

Restructure or Die
Aviation Week & Space Technology
November 2002
Low-Cost Airlines, Not September 11, Have
Transformed Industry Fundamentals
"When people say the traditional industry model is broken,
they are moving their jaw without putting their brain in gear,"
responds former American Airlines CEO Robert Crandall. He
added that he is skeptical that the industry will ever be
competitive as long as there are so many carriers selling what
has evolved into a commodity product.

Aviation Week Contentions

A collapse in pricing power and a fundamental shift in the
buying behavior of business travelers, coupled with fierce
competition from low-cost airlines, is forcing U.S. major huband-spoke carriers to restructure their operations or face the
prospect of eventually going out of business.
Airline executives and industry analysts note that the
September 11 attacks, while devastating, are not the root cause
of the financial crisis gripping major network carriers.
The crux of the problem is a combination of excessive costs in
relation to carriers' current and projected revenues, an
imbalance between the supply and demand for available
airline seats, and an inability to boost air fares.

Corrective Actions
U.S. airlines have axed more than 70,000 jobs. In addition,
some unions representing many of the industry's employees
have made a commitment to work with management to help the
carriers compete more effectively with low-cost rivals.
It will take much more than concessions by labor for major
U.S. airlines to solve their financial problems.
The financial problems carriers are suffering could actually
worsen in coming months if the U.S. goes to war with Iraq. The
U.S. airline industry cannot take another major hit. A brief war
doesn't qualify but a messy, extended war or another significant
domestic terrorist attack does.

Airline Industry US Market

Share
Based on current trends, the domestic market share held by
the six major US airlines (American, Continental, Delta,
Northwest, United and US Airways) plus Alaska Airlines
will drop from 75% in 2002 to 62% in 2010and 45% by
2020, according to an industry projection.
Southwest could pass American to become the largest U.S.
airline by 2013, and JetBlue could pass Delta to become the
third largest by 2020.

Industry Structure Problems

The fact that low-cost carriers have been able to mature this
far says as much about what's wrong with the majors as it
does about what's right with their low-cost counterparts,
and begs the question: does the underlying strategy or
business model employed by the large hub-and-spoke
airlines still work?
Analysts and other industry observers believe it does, but to
function properly carriers must reduce their costs and
restore the balance between supply and demand.

A Sobering Fact
Before September 11, 2001, the global industry was
showing a net loss on international services of
around $3 billion.

Corrective Actions
Reduced capacity.
Older aircraft may never return to service.
Reduced wage pressures.
Continued joint agreements.
Discounted tickets and more travel packages.

Code Sharing Agreements

The US Transportation and Justice Departments approved a pact
Friday that will let Delta Air Lines, Continental Airlines and
Northwest Airlines share access to each other's routes.
The code-share agreement allows each carrier to market the
others' routes as its own. One Northwest flight, for instance,
might also have a Continental flight number and a Delta flight
number.
The agreement will be the biggest in the industry. US Airways
and United Airlines have a similar agreement and Continental
have some shared routes in a deal that dates to 1998.

Code Sharing Agreements

It's an especially appealing arrangement to frequent fliers who
prefer to build up miles on one airline while flying all three.
The government placed several conditions on the deal.
Specifically, the DOT said 60 percent of any new code-sharing
routes must serve those areas of the country that are considered
under-served. It also bans anti-competitive practices like
coordinated pricing or shared decisions about route planning and
capacity.

American Airlines
American Airlines asked its employees to come to the aid of
the carrier, saying they have no time to waste if they want to
keep the financially strapped airline in business.
The plea comes as two major unions at the world's largest
carrier consider a company request to freeze their wages and
another union is trying to hammer out a new contract.
Company management says carriers that have reduced costs
through bankruptcy protection have put even more pressure
on AMR.

American Airlines
American asked union leaders to start holding weekly
meetings, as early as next, week with company management
in a collaborative process.
The move comes as United Airlines is trying to squeeze large
wage cuts from its employees as it undergoes restructuring
under bankruptcy protection.
About a month ago, American asked its employees to forgo
pay increases. The union that represents flight attendants at
American said it is taking a close look at the company's
finances and may decide at the end of this month whether to
forgo pay increases scheduled for this year.

Continuing Concerns
1. Fuel costs
2. Decisions regarding passenger services like
whether to charge for food, the need for more
electronic capabilities.
3. Upgrading aircraft.
4. Route strategies.
5. Union relations.
6. Relations with travel agents.

Porter Competitive Model

Airline Industry Analysis - North American Market
Aircraft Manufacturers
Aircraft Leasing Companies
Labor Unions
Food Service Companies
Fuel Companies
Airports
Local Transportation Service
FAA
Hotels

Bargaining
Power
of Suppliers

Alternate Travel Services

Fast Trains
Boats
Private Transportation
Videoconferencing
Groupware

Potential
New Entrants

Foreign Carriers
Regional Carrier Start ups
Cargo Carrier Business Strategy Change

Intra-Industry Rivalry
SBU: American Airlines
Rivals: United, Delta, US Air,
Northwest, Southwest

Substitute
Products
and Services

Bargaining
Power of Buyers
Travel Agents
Business Travelers
Federal Government
Pleasure Travelers
Charter Service
U.S. Military
Cargo and Mail

Figure 4-2

Business Strategy Model - Airline Industry

Scheduled
Passengers

PRODUCT/SERVICES
Charter
Cargo
Services

Mail
Air Express

MARKETS
Europe

North American

Pacific Rim

Latin American

ROUTES AND ROUTE STRUCTURE

Short Haul
Hub and Spoke

Long Haul
Point to Point

FARE STRATEGY

Modified compared
to the example in
the textbook.

Low Fare

Premium Fare

COMPANY STRUCTURE

Independent

Alliances

INFORMATION SYSTEMS FOCUS

Passengers

Operations

Logistics

Business

Figure 4-1

Airline Industry Value Chain

FIRM
INFRASTRUCTURE
HUMAN
RESOURCE
MANAGEMENT
TECHNOLOGY
DEVELOPMENT

-Financial Policy - Accounting -Regulatory Compliance - Legal - Community Affairs

Flight, route and
yield analyst
training

Pilot Training
Safety Training

Baggage Handling
Training

Computer Reservation System, In-flight System

Flight Scheduling System, Yield Management System

Agent
Training
Product
Development
Market Research

In-flight
Training
Baggage Tracking
System

Information Technology
Communications

PROCUREMENT
Route Selection
Passenger Service
System
Yield Management
System (Pricing)
Fuel
Flight Scheduling
Crew Scheduling
Facilities Planning
Aircraft Acquisition

Ticket Counter
Operations
Gate Operations
Aircraft
Operations
On-board Service
Baggage Handling
Ticket Offices

Baggage System
Flight
Connections
Rental Car and
Hotel Reservation
System

INBOUND
LOGISTICS

OPERATIONS

OUTBOUND
LOGISTICS

Promotion
Advertising
Advantage
Program
Travel Agent
Programs
Group Sales

Lost Baggage Service

Complaint Follow-up

MARKETING
AND SALES

SERVICE

Adapted with the permission of Michael E. Porter from Competitive Advantage: Creating and Sustaining Superior
Performance, copyright 1985 by Michael E. Porter.

Figure 4-3

Benefits of Information
Systems
to American Airlines
1. Convenience to Customers.
2. Knowledge of Customers.
3. Providing a foundation for other
systems.
4. Building a base for other businesses.

Four Three Consistently Profitable

Airlines
1. Singapore Airlines
2. Cathay Pacific
3. British Airways
4. Southwest Airlines

Singapore Airlines

Consistently profitable but experiencing profit pressures.

Winner of multiple awards for airline excellence.
An extension of the country strategy to be the business and
travel gateway to Southeast Asia.
An impressive travel infrastructure.
Leader of the Orient Airlines Association (OAA)
Abacus reservation system.
Price collusion on major routes.
Nervous regarding U.S. carrier price competition.

Why SIA is So Good!

Clarity and Commitment (to customer service).
Continuous Training.
Internal Communications.
Consistent External Communications.
Connection with Customers.
Benchmarking.
Rewards and Recognition.
Professionalism, Pride and Profits.

Southwest Airlines

A U.S. carrier success story.

Commuter airline that concentrates on city pairs. (Average
flight is 400 miles or less and takes less than one hour)
CEO Herb Kelleher, a Connecticut attorney turned Texan,
had the best labor relations in the industry and an excellent
company culture.
Lowest cost structure in the industry.
Company vision was to provide low cost airline service to
an increasingly larger number of people.
Objective to minimize reservation costs.

A Strength of Southwest
Airlines
1. Focus.
2. Focus.
3. Focus

Best Airlines for Business Travelers

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Singapore Airlines
Swiss Air
Cathay Pacific
Midwest Express **
Japan Airlines
Quantas
ANA
Virgin Atlantic
Lufthansa
KLM-Royal Dutch

11. Finnair
12. British Airways
13. Alaska
14. Air France
15. Varig
16. Aer Lingus
17. Kiwi
18. Air Canada
19. American **
20. Delta**
Source: Zagat Survey of Frequent Flyers

Deregulated But Very Regulated

Safety factors.

Air traffic controllers.

Impact on constituents.

International routes.

Computer Reservation System:

Business Traveler Choice?

Personal Traveler Choice?

Ticket-less Versus No Reservation?

Airline Alliances
The Star Alliance is the largest of the major groupings.
Consisting of 15 airlines led by United Air Lines and
Lufthansa. Star serves about 815 destinations in more than
130 countries.
Oneworld, which is eclipsed by only Star among the major
airline alliances, is led by British and American Airlines.
Eight airlines offer service to 550 destinations in more than
130 countries.
SkyTeam is quickly becoming a major alliance player by
serving more than 450 destinations in nearly 100 countries.
Led by Air France and Delta, SkyTeam has also consolidated
cargo services.

Interplay among government regulations,

airline strategies, and airplane capabilities
shapes the evolution of world aviation.

Boeing Corp.

Barriers to Entry
Access to airports continues to be impeded
by:
(1) Federal limits on takeoff and landing
slots
at the major airports in Chicago, New York,
and Washington
(2) Long-term, exclusive-use gate leases
(3) Perimeter Rules prohibiting flights at
New Yorks LaGuardia and Washingtons
National airports that exceed a certain

US Industry Strength
Fifteen major US carriers represent the following
significance in the world-wide airline industry:
29% of the aircraft
46% of the employees
32.5% of the the 2000 passenger miles
Based on a number of years of operating in a deregulated
environment within the US that forced them to compete in
a very tough market.

The Bad News

Cumulative Net Profit of Scheduled US Airlines:
Started in 1938
1970 2.2 billion profit

1999 15.6 billion profit

1980 5.8 billion profit

2000 18.1 billion profit

1989 8.2 billion profit

2001 12 billion profit

1994 4.8 billion loss

1997 5.4 billion profit
1998 10.3 billion profit

Airline Industry Conclusions

It is a vivid example of the dynamics of the

markets that it serves.
Establishing strategies dictated by the market is
critical.
Once the right strategies have been identified,
information systems can play an important
supporting role.

Possible Exam Questions

1. Identify an industry where information systems act as a
significant barrier to entry and explain the significance of this
barrier.
2. Identify and explain the two basic strategies and three
supporting strategies used by intra-industry rivals.
3. What is the primary benefit to be derived through the use of
the Porter Value Chain?
4. Explain the logic and growth as a competitive strategy and
provide two company examples where this was a key
strategy.