Strategic Analysis for American Based Airlines

Strategic Analysis Of Hospitality and Tourism Businesses

U54081

The US Airline Industry

Portfolio

Simon Houston

Jessica McCormack

Mark Surguy

Shuangshuang zhao

Jiaying Zhang

Table Of Contents Page

1.1 Background to the Industry 3

2.0 External Analysis - PEST 4

2.1 Political Factors 4

2.2 Economic Factors 6

2.3 Socio-Cultural Factors 7

2.4 Technological Factors 9

3.0 Porter's Five Forces 11

3.1 Threat of Competitive Rivalry 11

3.2 Threat of New Entrants 12

3.3 Bargaining Power of buyers 16

3.4 Bargaining Power of Suppliers 17

3.5 Threat of substitutes 18

4.0 Predictions For The Future 19

5.0 Key Success Factors 20

6.0 Bibliography 28

7.0 Appendices 31

1.1 Background To The Industry

In 1903 the aviation industry was born: the Wright brother's first successful flight was in Kitty Hawk. By 1927, the first US air transport company formed; American Airways, later becoming American Airlines. Nowadays, they are one of the largest commercial carriers. Soon after, several other airline companies were formed including Boeing and United Airlines. In 1950s, the capacity and comfort of commercial flights had dramatically improved, planes were modernised, and jet service was introduced in 1959, enabling even faster cross-country service.

Over the last 50 years the airline industry has consistently grown at a very fast rate, with dramatic increase in number of passengers, the airline industry generating some $300 billion in revenue, employing about 1.7 million people, and caters for around 1.5 billion passengers a year. (Hanlon, 1999)

The U.S. airline industry is classified by government and is based on the amount of revenue that is generated from operations. This type of industry is categorized in 4 different sections: major, regional, national, and cargo carriers. 'According to the FAA (Federal Aviation Administration), the U.S. commercial fleet included an estimated 7,832 aircraft at the end of 2004, comprising 4,046 mainline passenger jets; 1,630 regional airline jets; 1,182 regional airline props and 974 cargo jets. The regional jet fleet, which has more than doubled since 2000, is expected to expand an additional 56 percent by 2010, reinforcing the need to expand system capacity. All of these categories have ways of displaying and executing services to interested consumers. National airlines are scheduled airlines for the planned consumers and travellers. Like the major airlines, national serve to medium and large size jets. Regional airlines focus mostly on transporting major travellers between major cities and small communities. This class has been seen to have the fastest growing and most profitable segment of the airline industry. Lastly there are the cargo carriers. They are part if the industry that focuses on the passengers and their cargo (FAA Aerospace Forecast Fiscal Years 2006-2017, 2005).

The industry may have a high rated of growth, but not a high rate of profitability, over the last four years, the U.S. airline industry has lost over $ 32 billion, with an additional $ 9 to $ 10 billion loss projected for 2005( 2005 Economic Report).These losses are due to many different factors, which including the economic slowdown, a decline in business travel, the effect of the 9/11 terrorist attacks, the war in Iraq, high fuel prices, the SARS disease, and increased competition form low-cost carriers

2.0 External Analysis - PEST

2.1 Political Factors

2.1.2 Deregulation of domestic air transport:

This was a piece of US legislation turned into a law in 1978. The main purpose was to remove the government control of commercial aviation and expose passengers to market forces.

(1997-1998) Civil Aeronautic Board used to control route entry and exit and fares but didn't control capacity. This caused problems in several areas including delays when applying for new routes or fare changes which were not often approved.

The effects were several:

1. benefits were not evenly distributes and costs fell dramatically for popular longer distance routes than shorter less popular ones.

2. exposure to competition led to heavy losses and conflicts with labour unions. Before 2001, major carriers and over 100 smaller ones had been liquidated or gone bankrupted. This created a group of six mega carriers and oligopolistic conditions.

3. renew operation certificates by the Department of Transportation

4. small airlines forced to make deals with larger airlines to create hub-and-spoke systems

5. threat to industry as new laws become stricter

6. lowered entry barriers therefore new entrants often take market share with lower rates than full service airlines which they then must match.

7. uneven profit amongst most airlines

(Kahn (2006); Holloway, 1998; and Barnum 1998)

2.1.3 US anti-trust law.

Because