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MA722AssgntThree(3) MNG93002 Strategy and Case Analysis Assessment 2 Due Date: 9:00 am (AEST) April 16, 2018 Value: 40% (marked out of 40) Instructions You have been asked to read the short account of...

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MA722AssgntThree(3)

MNG93002 Strategy and Case Analysis
Assessment 2
Due Date: 9:00 am (AEST) April 16, 2018
Value: 40% (marked out of 40)
Instructions
You have been asked to read the short account of the US airlines industry (please refer to the
file Assessment 2 – Background Information.pdf, which is available on MySCU) and prepare
a 2500-word report that addresses the following:
• With the aid of a clearly drawn diagram conduct a competitive forces analysis of the
U.S. airline industry. What does this analysis tell you about the causes of low
profitability in this industry? What are the principal advantages and disadvantages of
using the five forces framework?
• The economic performance of the airline industry seems to be very cyclical. Why do
you think this is the case?
• Given your analysis, what strategies do you think an airline should adopt to improve
its chances of being persistently profitable?
This assessment focuses on Strategic Position. In preparing your report, you should
demonstrate understanding and application of the strategic concepts that are outlined in Part I:
Strategic Position of the textbook.
Your report must be structured as follows:
• Introduction (3 marks)
• Overview of the US airline industry (5 marks)
• Five forces analysis of US airline industry
o Diagram (2 marks)
o Components (8 marks)
o Advantages and disadvantages (5 marks)
• Economic performance (5 marks)
• Identifying strategies for airline profitability (5 marks)
• Discussion (5 marks)
• Conclusion (2 marks)

MA722AssgntThree(3)

MNG93002
Strategy and Case Analysis
Assessment 2 – Background Information
US airlines – Case Study
The United States Airline Industry
The U.S. airline industry has long struggled to make a profit. Analysts point to a number of
factors that have made the industry a difficult place in which to do business. Over the years,
larger ca
iers such as United, Delta, and American have been hurt by low-cost budget
ca
iers entering the industry, including Southwest Airlines, Jet Blue, AirTran Airways, and
Virgin America. These new entrants have used nonunion labor, often fly just one type of
aircraft (which reduces maintenance costs), have focused on the most lucrative routes,
typically fly point-to-point (unlike the incumbents, which have historically routed passengers
through hubs), and compete by offering very low fares. New entrants have helped to create a
situation of excess capacity in the industry, and have taken share from the incumbent air-
lines, which often have a much higher cost structure (primarily due to higher labor costs).
The incumbents have had little choice but to respond to fare cuts, and the result has been a
protracted industry price war. To complicate matters, the rise of Internet travel sites such as
Expedia, Travelocity, and O
itz has made it much easier for consumers to comparison shop,
and has helped to keep fares low.
Beginning in 2001, higher oil prices also complicated matters. Fuel costs accounted for 32%
of total revenues in 2011 (labor costs accounted for 26%; together they are the two biggest
variable expense items). Many airlines went bankrupt in the 2000s, including Delta,
Northwest, United, and US Airways. The larger airlines continued to fly, however, as they
eorganized under Chapter 11 bankruptcy laws, and excess capacity persisted in the industry.
The late 2000s and early 2010s were characterized by a wave of mergers in the industry. In
2008, Delta and Northwest merged. In 2010, United and Continental merged, and Southwest
Airlines announced plans to acquire AirTran. In late 2012, American Airlines put itself under
Chapter 11 bankruptcy protection. US Airways subsequently pushed for a merger agreement
with American Airlines, which was under negotiation in early 2013.
Answered Same Day Apr 13, 2020 MNG93002 Southern Cross University

Solution

Shivagya answered on Apr 14 2020
126 Votes
MNG93002
Strategy and Case Analysis
Table of Contents
Introduction    2
Overview of the US airline industry    3
Five forces analysis of US airline industry    5
Diagram    5
Components    5
Advantages and disadvantages    7
Economic performance    8
Identifying strategies for airline profitability    10
Discussion     11
Conclusion    12
References    13
Introduction
This report will try to give an overview and an understanding of the US airline industry. The competitive dynamic that exists and its analysis giving a view on the causes of profitability. This report will utilize the Porter’s five forces framework to analyse the airline industry, it will also include a discussion on the advantages and disadvantages of using this model.
The economic and social factors affecting the industry will be discussed and analysed to give a holistic view on the problems faced by the industry. The contribution of the economic factors to the low profitability margins and its impact as a whole. The report will also go on to extend a few recommendations to show an understanding of the issues and the recommendations are solely based on the analysis done.
The airline industry has showing a profitability streak for 17 straight quarters, though with the rise of both its major cost centres – fuel and labour – it will be interesting to note the evolution and adaptability of the industry. A few value players are now addressing the issue with added capacity.
Overview of the US airline industry
The key players in the US airline industry are American Airlines, Southwest Airlines, Delta Air, Airlines, United Airlines, Alaska Airlines, JetBlue Airlines with American clenching the highest market share for 2017 at 22.8%. The table below lists the market share for all the major players in the industry:
    Airline
    Market Share
    American Airlines
    22.8%
    Southwest Airlines
    21.5%
    Delta Airlines
    21.0%
    United Airlines
    15.8%
    Alaska Airlines
    4.6%
    JetBlue Airlines
    4%
    Others
    10.3%
The industry reported an operating revenue of $200.41 billion, which was largely driven by dipping passenger yields. The fall of the passenger yields had started in 2014 and had to capacity increases, increased competition & rapidly rising fuel costs. The US airline Industry has reported a revenue growth at a CAGR of 4.6% against the 3.8% for GDP. (Dai, M., Liu, Q. and Serfes, K., 2014)Figure 1 - Network Ca
iers’ Change in Operating Revenue [2016, Q2 - 2017, Q2]
Figure 2 - US Airline Industry revenue V/S GDP [2003, Q1-2017, Q2]
Figure 3 - Value Ca
iers’ Change in Operating Revenue [2016, Q2 - 2017, Q2]
The various metrics taken into account for this purpose of this report include a number of industry revenue drivers as well. The key industry drivers taken into account are:
    Metric
    Explained
    Change (2016-2017)
    Capacity
    Passenger revenue created
    Yield up to 6 cents
    Passenger Yield
    Passenger fare per mile travelled
    Available seat miles (ASMs) up by 2.4%
    Load Facto
    Passenger demand v/s the available capacity
    Percentage of seats filled up by 0.5 points
    Fees/ Othe
    Ancillary such as bags, food, services
    Increase by 53 million dollars
    Cargo
    Freight and mail transported
    Increase in domestic cargo by 22% Y-o-Y
Five forces analysis of US airline industry
Diagram
Components
Bargaining Power of the Suppliers
The airline industry is heavily influenced by the bargaining power of the suppliers simply due to the fact that the three key inputs that drive the industry are in terms of aircraft, fuel and labour. The cost of two of these cost drivers is set to rise and is already on the rise as well. Namely these being fuel & labour, given the set policies these are projected to grow over the next fiscal year as well. Take for example the price of aviation fuel which is subject to the varied and continuous fluctuations of the global oil market, which itself is depends on various geopolitical and social factors.
Similarly labour is largely dependent upon the power of the airline unions who may bargain and at times get unreasonable and costly gains from the airline industry. Both these factors play a major part in their contribution to the bargaining power of the suppliers which is therefore attributed as ‘High’ for the airline industry.
Bargaining Power of the Customers
With the massive advent, penetration and proliferation of online ticketing tools and applications with multiple distribution systems, the airline passengers/customers are no longer dependent on any form of intermediaries or agents or even the airlines for their ticket requirements.
The entry of low cost ca
iers into the market had
ought in a lot of play and had also led to price wars whose key benefactor was the average airline passenger. Alongside that the immense regulations and rules at the airline industry’s side has led to the passengers and fliers being protected and shielded, tipping the balance of power on their side. The consumers also face low switching costs from one airline to another thus giving them further leverage over the airline. The buyers can also engage in price discovery or price aggregation platforms thus most price fluctuations do not deter them. These factors have resulted in the airline ceding power to the customers. The rating to the bargaining power of the customers is ‘Moderate to High’ for these varied reasons. (Rupp, N.G. and Liu, N., 2017)
Ba
iers to Entry and Exit
The ba
iers to entry are quite high...
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