MNG93002 Strategy and Case Analysis
Due Date: 9:00 am (AEST) April 16, 2018
Value: 40% (marked out of 40)
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)
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,
iers such as United, Delta, and American have been hurt by low-cost budget
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.