The commercial passenger airline business got to $118.2 billion in the year 1999 and it has continued growing much faster compared to the economy. From the time of deregulation in the year 1978, the commercial airline industry has been repeated with periods of time of where there is excessive capacity in the number of passengers and the complementary pressures of pricing. In a few past decades the airline travel industry has benefited from high profits and continuous development. The recent hikes in the prices of fuel and also the increase in prolonged labor and business concerns have raised various questions on the maintainability of these current profits. This report will clearly focus on the numerous challenges that are presently facing the airline travel industry and also the strategic reactions of various airlines and also some recommendations on what ways the concerned companies should do in order to address these prevailing challenges. Some of the challenges and elements that the report will touch on include; labor problems and the strained relationships between mechanics and pilots that cause work to decelerate, technology such as e-commerce and the internet open up new business opportunities for airlines. Infrastructures such as air traffic systems have become obsolete and have thus added to the problems at are already in the industry. The report will also touch on consolidation or airlines’ proposed mergers and regulations. In assessing these details, the report will concentrate on two airlines, namely, the Delta Airline and the United Airlines.
Social influences
Most UK travelers who fly have many travel choices and are also informed on key world issues and events which thus influence their travel selections. For instance, the outbreak of Severe Acute Respiratory Syndrome (SARS) terrorism acts causes a great fall in the number of persons travelling. Even with all these factors influencing the travel business, the people’s willingness to travel by planes has to come into play and thus, the travel agents and companies ought to do everything that can help in regaining and maintain the travelers’ confidence in the destinations they visit and also in this particular mode of transport that they may have temporarily deserted.
Legal influences
Just as all other airlines, United airline has to observe the rules and the regulations given by travel authorities such as the USA’s Federal Aviation Authority (FAA) and the UK’s Civil Aviation Authority (CAA). For instance, under the current USA and UK Aviation Authority agreements, only four main airlines are allowed to land at Heathrow on any direct flights between the two nations. The four airlines are the United Airlines, British Airways, the American Airlines and the Virgin Atlantic. Since the European legislation focuses on opening up the travel market, any kind of antitrust law could cause an increase in competition.
Economic influences
All governments are usually under pressure to make up open skies and also force down the prices on the high traffic course like the Heathrow. Recently, many airlines had to meet the heightened landing charges and also other additional taxes that were enforced on the air-travelling persons. Global occurrences such as the SARS epidemic, the Iraq and Afghanistan war and other terrorist happenings also cause a direct economical influence on many airlines’ activities.
Political influences
A political environment can be determined by the governments and decision makers’ ability to make laws, rules and codes. The transatlantic aircraft carriers search Heathrow landing slots and the USA landing rights. The American politicians are however under a lot of pressure to guard the profitable interior USA flights from the abroad competition because as travelers reach the key hubs then travel within the USA. Politicians are involved in the European and United States dialogues on bi-lateral accords and they may also be responsible for framing and enforcing the anti-trust laws and the minimum wage laws.
Technological influences
The passengers’ and crew’s safety is still a key business concern for every airline. With the rapid progression in technologies, United airline is aware of the need not to be left behind and the need to invest in advanced aircraft technologies while at the same time giving more and enhanced customer service profit in flight and on the ground.
Analysis of the first company
UNITED AIRLINES
United airline has suffered a many direct and indirect backlashes. United airline has definitely suffered low capital and reduced business effects brought about by traveler trepidation and also a set of unique effects. Diagnosing of the United airline’s competitive setting is demonstrate and explained by the Michael Porter’s Five Force Model.
Industry structure: Porter’s Five Forces Model Industry driving forces KSFs
Force 1: Barriers to entry
Entry barrier assesses how hard or how easy it can be for new competitors to get into the travel industry. This involves things like the; cost advantages, such as savings and economies of scope; access to inputs of production and investment, taxation and policies of the government, the production cycle and graphical record, investment necessities and distribution channels’ access. Others that fall in this category are branding and company.
Force 2: Substitutes threat
The top decision makers in every organization have to understand the ease of substituting the company’s product or service. The administrators should assess how much it would cost the client substitute their product and services to the competing products or services, the likelihood of the clients to make the switch, the price-performance swapping with the replacement. If they conclude, that their product is easy to substitute, then there exists a threat to the company.
Force 3: Buyers’ bargaining power
This is the measure of a buyer’s strength. For instance, if clients can come together and order large products’ volumes to lessen the organizations’ profit margins, the volume and concentration of buyers, the knowledge base of buyers, negotiations ability of buyers, customers loyalty, substitutes’ availability and products’ differentiation. One key problem is the presence of clients who have the power to dictate the products’ prices.
Force 4: Suppliers’ bargaining power
This concerns how suppliers work in your relationship with them. Thus determining factors such as; the seller’s positions and strengths, the number of potential suppliers, the presence of the absence of a monopoly, the seller’s ability to switch suppliers and the effect of switching suppliers on the cost and differentiation of products. Another factor that should also be determined is the threat of forward incorporation.
Force 5: Existing players’ rivalry
Analyzing the competition level between existing industry players; it should be determined whether one of the industry players is more dominant or all players are equal in strength, whether there are any exit barriers, the speed of the industry’s growth, the surplus or shortage within the industry, the industry’s concentration and product differentiated.
History and mission
Walter Varney began airmail services in 1926, basically initiating business air travel and United Airlines. In 1930, Boeing, the forerunner of United initiated the stewardesses concept by introducing nurses to serve coffee and sandwiches and reassured the nervous passengers. In1936, United opened up an in-flight kitchen to provide flight food. Between 1941 and 1945, United trained 7000 ground-service crew of the Army air force and the Navy units to deal with the war threats. Approximately 1500 United workers also joined the military. United began 1947 flying to the Hawaiian Islands and another San Francisco-Honolulu flight. In the same year, United launched the first flight magazine. In 1947, Denver was recognized as the main hub for United Airlines. United introduced its executive flights for men in 1953 up to 1970. These executive flights constituted of free cocktail, steak, business magazines and cigars. The United’s Fly the Friendly Skies slogan was instigated in 1965, and remained as United’s marketing brand up until 1996. In its attempt into international operations, United applied for a Japan approval in 1966 but it was not approved until 1983. However, United was able to fly to Toronto Canada in 1967.
United has severally been hit by hard times. For instance, in 1970, United had a huge loss then it went on to overhaul its leadership; changing of its name, logo and the earlier color scheme. The Mileage Plus program was introduced in 1981 and after the international flights’ approval came in 1983, the Airline went ahead to buy the PanAm’s Pacific routes 1986 and buying the largest of PanAm route to London. United became worker-owned in 1994 and consequently recorded good profits in three consecutive years.
Strengths
The biggest advantage of United over other airlines is that it is a first mover in adopting high safety cautions on its aircrafts. In 2001, United Airlines was the first main airline to set up advanced hi-tech Taser weapon tool in the cockpits of their aircrafts (Nov. 15, 2001- United Press Release). United airlines also implemented a security training program for all flight attendants so as to equip them with skills and knowledge for self-protection and for assisting its clients in panic situations. The Senior Vice President for aboard services, Sara Fields said, “We have worked diligently to create a program that provides our flight attendants with the knowledge and skills required to ensure their security and safety. (Nov 15, 2001- United Press Release).
Unanimity voting in choosing Mr. Creighton makes everyone to see that United has great unity and also that the business skills of amount Mr. Creighton are trusted by the stakeholders. Mr. Creighton immediately focuses on restoring United’s financial stability and he also collaborated with governments and monitoring agencies to offer the security highest level to its clients (Oct 28, 2001-United Press Release). The Internet service division of United is strength and the division’s year 2000 new ventures has huge success with a sales growth of about 50% compared to 1999. United should continue to support this great strength so as to recapture its financial stability ell over the company (Times100. (n.d).
Weaknesses
The major weakness in United is the conflicts it encounters with International Association of Machinists Union (IAMU) because this conflict often generates strikes within the company. One such conflict was due to a merger that never happened due to regulations by the government which said that this merger would cause market monopoly (Nov 21, 2001-Wall Street Journal).
Another weakness in the United airlines is financial losses. For instance, in 2001, there was a third quarter loss of about $542 million in that year’s November and greater losses were prediction to happen on December of that same year. Increase in such losses is what leads to more workforce cuts and consequently, leading to possible trimming of the company(Times100. (n.d).
Opportunities
Market opportunity value is the key factor that shapes United Airline’s strategic plans that are due to be implemented. And thus, any strategic opportunity that enables the company to gain incomes can be regarded as a healthy opportunity for the company. In different seasons such as the Spring Season, United has the perfect opportunity to organize special travel packages and deals for their clientele. The United Airline can also use their internet and new ventures division in such seasons together with the special package deals to draw in a many clients. Their recognition as first movers in implementing various services such as the security measures also opens great opportunities for the company to be acknowledged as the safest airline company in the industry (Times100. (n.d).
Threats
United airline faces some major and minor threats in its operations. For instance, one key threat is strikes by the International Association of Machinists Union. This can have a desolating effect, not just on United but on the entire travel industry and the economy as well. Decline in income and employees’ lay off can also lead to another strike by other United employees which could have similar consequences as the previous threat. The emergence of other airlines, small or major is another possible threat to United due to the fear of losing control of the travel market that becomes very flooded. Continued predictions on revenue loss in United’s coming months pose a threat of decline in investors and the threat of United’s possible technology faults can also cause fear in the clients and thus translate to less revenue. United however puts everything that can help curb these threats into action; for Instance, instigating better security technologies and performing continued tests on each device. Key resources and capabilities
Resources are the intangible and the tangible possessions that a company, in this case, the airlines uses to select and carry out its schemes while capabilities can be described as the capacity of a firm to deploy its resources with dynamism. The two are however tied together in most definitions. United airline has both small and huge resources and capabilities. For instance, its financial resources and capabilities which refers to the company’s depth of its financial pockets; United has the ability to yield internal finances and also produce external capital, which is one thing that many airlines have been unable to do. The physical resources and capabilities of United airlines include its various outlets, offices and also its distinct equipment. Other resources of United are its geographical locations of the airline stoppage points. Technological resources and capabilities of United airlines include it skilled personnel and advanced assets that produce and give the airline a cutting edge compared to other competitors.
Core Strategy
The core strategy is the first constituent that makes a business concept. The core strategy’s purpose is to outline the manner in which the company chooses to compete with others of its kind. Thus, the core strategy of United airlines constitutes of three elements, namely; the product or the market scope, the business mission and basis for differentiation.
a) The Business Mission
b) Product/Market Scope
c) Basis for Differentiation
United Airline Value chain
Value chains are activities connecting to develop business value. Examples of these activities are; products manufacturing and distribution activities, purchasing activities, and marketing activities (Lynch, 2003). Value chain is a powerful tool of analysis for strategic planning of any company by maximizing creation of value and minimizing costs. United airline value chain connects the value of the company’s’ activities to the main functional parts of the company. In the creation of United airline value chain, the company is divided into primary activities that are related to production and support activities that give the necessary background for efficiency and effectiveness. Examples of United airline primary activities include; inbound logistics, outbound logistics, marketing and sales and operations while the support activities include; procurement, technology development and Human Resource Management.
Analysis of the second company
DELTA AIRLINE
History and mission
Delta rose from Huff Daland Dusters Company that was founded in 1924 in Georgia, by partners like Collett Woolman as the first world’s aerial crop dusting company. In 1928, it was renamed as Delta Air Service in Monroe, Louisiana. Delta began passenger services in 1934 and in 1941 it moved the headquarters from Monroe to Atlanta. In 1972, Delta acquired Northeast Airlines to build up its market share. Delta expanded its territory in 1991 when it purchased the Pan Am’s European routes. Due to its acquisitions, Delta is the largest transatlantic carrier in the U.S. in terms of passengers’ carriage and flight numbers. Delta’s mission is coherent with the company’s goals and objectives (Wikipedia 2010).
Strengths
Being the 3rd largest airline carrier in terms of baggage handling and customer satisfaction; United enjoys the benefits of a well-known name, reputation and global brand recognition. The new CEO of Delta airline, Grinstein, is another key strength because he is well-reputed for resolving labor disputes. Delta airline’s innovative strategic move in business involves implementation of low-fare subsidiaries and participation in global alliances such as the SkyTeam (Corridore 2003). Delta acquisition of Comair has assisted Delta in meeting capacity match demand.
Weaknesses
Delta highly paid have declined to agree on compromise that would lower labor expenses; additionally, the pilots’ retirement will cost the company an extra $140 million loss. Massive lay offs and the executive bonuses have strained Delta’s company’s relationship with its workers. The U.S. Department of Transportation has ranked Delta as the 5th airline in passenger load factor.
Opportunities
With the expected 50 % growth in air traffic over the next decade can help Delta under the pilot labor contract to operate more jets. This will consequently help Delta to compete with companies such as Jet Blue. Delta possesses 40% of WORLDSPAN that operates CRS
(Computer Reservation System) and the company can use the CRS services to better their boking services. Delta can invest in technology that can better its efficiencies.
Threats
Due to threats such as the September 11th, Delta has incurred more costs in their efforts to reinforce their planes’ cockpit doors and to buy better equipment and offer training. The uncertainty of the airline market is another threats facing Delta because in the past, this uncertainty has led some companies into bankruptcy. Delta faces numerous competitors within the industry and due to economic slowdown that started in 2001 caused corporate travel budgets cuts with consumers choosing alternative modes of transportation. The general degradation of services within the airline industry that has caused the lack of quality customer service
Resources and Capabilities
Delta needs to concentrate on successfully exploiting its existing resources and capabilities. For instance, the Delta’s fuel hedging program is a successful resource and needs to be continuously funded in order to cut Delta’s fuel expense. Delta also should improve its operations effective by maximizing on its crew resource (Wikipedia 2010).
Core strategy and detailed strategy
Delta needs to put into place strategies that will enable it to adapt to the industry and achieve its’ mission. Delta pursues a growth strategy focusing on intensive market penetration growth and forward integration. Delta has considered a miles promotion for clients who to obtain their tickets through Orbitz in order to reduce travel agents’ commissions paid to and eliminate the cost of issuing paper tickets. Delta has also intended to the first in using radio-frequency identification tags on luggage especially for bar code labels.
Value chain
Every Delta’s value chain has to be coherently coordinated on the logic underlying the chosen strategy. Value chain activities nature at Delta has undergone numerous changes in the previous two decades. This has mostly been caused by the advancements in technology which has facilitated changes at a fast pace within a business environment. Outsourcing has also contributed to key changes in Delta airline and its value chains. This has also led to substantial managerial implications.
Conclusion (company comparison, challenges and recommendations)
When companies suffer financially and have to deal with the consequent negative publicity, they decide to either amend its current failures or otherwise exit the travel market. Since the travel business is a crisis-ridden business, companies such as United can choose to strengthen and modify their prevailing strategies so as to maintain their situation and also generate financial resources that set the company apart from others. This can also help the company to move up the industry ranking (Thompson and Strickland, 271). Companies such as United can use up their cash and unfettered assets as collateral to borrow funds that can boost them financially (Peltz, 2001). In the short run, companies should cut labor costs so as to avoid most frequent problems such as strikes. They should also implement small reductions in the management staff salaries and consequently increase the mechanics’ wages. This can boost employees’ morale and guarantee a more united workforce.