Eco 601 Final Paper

‘A Tale of Two Airlines’ written by Christopher Elliot explores the realm of no-frill discount airline carries which are both highly successful while using completely separate tactics. While Elliot does a decent job of providing backing evidence for each point made in his “argument” he never really takes a defiant stance against one airline carrier or the other. In the following paragraphs I will analyze both his arguments against Southwest airlines and Spirit Airlines and try to give my interpretation on how his arguments could have been improved as a whole.

The Risk of Entry by Potential Competitors – Since the deregulation of the airline industry in 1978 over 1,300 new airlines have opened for business. However, most now are bankrupt or merged with the other carriers to stay workable. The established giants were Delta (merged with Northwest), American Airlines (merged with U.S. Airways), United Airlines (merged with Continental), and now Alaska Airlines (merged with Virgin America). Now the Low-Cost Carriers (LCCs) are posing a massive threat which includes Southwest Airlines (merged with Air Tran), and JetBlue.

This combined with the increased list of destination cities are the reason why United and Delta can charge more than airlines such as say Southwest or Virgin Airlines and still blow away the

American airline industry is steadily growing at an extremely strong rate. This growth comes with a number economic and social advantage. This contributes a great deal to the international inventory. The US airline industry is a major economic aspect in both the outcome on other related industries like tourism and manufacturing of aircraft and its own terms of operation. The airline industry is receiving massive media attention unlike other industries through participating and making of government policies. As Hoffman and Bateson (2011) show the major competitors include Southwest Airlines, Delta Airline, and United Airline.

* Contracts with competition. Their maintenance facility in Tulsa has started receiving other company’s planes for contracted repair. This is an opportunity to increase and build another addition onto American Airlines family.

In the opinion of Dr. Grace S. Thomson, “a heterogeneous mix of long and short-haul in very thing segments, passenger, density, and per capita income at end points gives [Southwest Airlines] competitive advantage. The way to establish a company in such a market as the airline industry would be to strategically expand in to airports with less competition. Southwest Airline capitalized on this fact to become a national airline (Keller 2008). Southwest Airlines satisfies what were once negligible markets. Southwest serves “64 cities in 411 non-stop city pairs” (Thompson 2008). Saturating these markets has allowed Southwest Airlines to expand without putting a strain on its pocket book (Keller

When they didn’t, the airline retaliated by offering deep cuts in fares on several routes flown by its competitors. Northwest airline responded with a $198 round-trip fares with connections on routes for which American airline’s average fare was $1,600. American’s response was to offer $99 one way fairs in 10 markets flown by each of the other competitors except that of Continental Airlines which had followed and matched the leader’s (American Airline) original changes in all markets. With respect to the concept of strategic behavior exhibited by firms in an oligopolistic setting, some firms may try to achieve a dominant strategy that yields them better results and do not flip-flop, no matter what strategies other industry participant follow. This was illustrated in the case, when, in 2004, Continental Airlines raised its fares to mitigate rising cost of aviation fuel. Firms in an oligopoly may differ in terms of their cost structure and the airline industry is no exception and participants do exhibit strategies that enable them not to follow price increases driven by aviation fuel cost.

This new growth presents American Airlines to a new pool of customers, the untapped international community that has little knowledge of American Airlines and with the recent disasters of Air Asia and Malaysian Airlines the safety record of American is an advertising point that any flyer will greet with open arms. A complex marketing mix must be researched before entering a foreign market to ensure conditions like lifestyles, consumer behavior and political/legal environments can grant competitive position in the local market. (Peter

Being the largest airline in the world comes with some significant advantages, one of the most important is a physical presence in the locations that passengers want to travel. As part of the anti-trust settlement, American Airlines agreed to sell approximately 15% of their takeoff and landing slots in Washington D.C. and New York . Even with this sale of slots, American Airlines is still able to offer flights to over 250 destinations daily. Just by their sheer size, American Airlines should be capturing a significant share of the market.

American Airlines had been the largest airline in the United States for a long time. In 1990 and 1991 due to a recession and the Gulf War, demand for air travel dropped drastically, for this reason, fare wars started and all the airlines incurred massive losses.

The threat of new entrants in the airline industry is very low for Virgin Atlantic, this is because the barrier for both high entry and exit barrier is very high. These barriers can stop new airlines not to enter into the industry. The entry and exit can be difficult for Virgin because there are a number of regulatory factors. For new airlines to enter, there must be large capital investment human resources that are skilled

Low-cost carriers pose a serious threat to traditional "full service" airlines, since the high cost structure of full-service carriers prevents them from competing

Barriers to Entry: The threat of new entries in this industry is equally low as the threat of substitutes. There are few major players involved here, and it shows that for a new one to even exist they would need to have the capability of covering a large amount of cities in the United States. In order to have a main convenient center of business, as well as aircraft and an extensive amount of vehicles calls for a high capital investment. This would be extremely difficult for any new entries to be accountable for and would take years of hard work and sustainability

The years since regulation have been rocky for the airline industry. Airline after airline has declared bankruptcy and either ceased existence or emerged as a weaker airline. The surviving airlines have done so by merging and protecting their territory with tactics not even dreamed of in most industries. Robert Crandall said it best when he noted, "This is a nasty, rotten business (Petzinger,1995)." You would think that with the competition allowed by deregulation that a large number of new names would exist, but that does not seem to be the case. Most Americans still travel on American, Delta, United, US Airways, or Continental (Kane, 2003). The only true champion of deregulation is Southwest Airlines, whose success is paving the way for others such as JetBlue, but the obstacles are enormous. Initially, the airlines went after each other by slashing fares and driving competitors out of business. The industry quickly learned that although this tactic was effective, it was not profitable, and it was more economical to focus on controlling the air out of a few cities (hubs) than to attempt to directly compete in every single market. Since most of the major airlines already had key cities in which they controlled most of the takeoff and landing slots, airlines could charge higher fares and take in greater profits without any real head to head

Although there are pros to ‘value pricing’, their are many cons as well. For American Airlines, the price sensitive customers will be highly discontented by the new ‘value pricing’ and they will be encouraged to switch to low cost airlines. American Airlines will no longer benefit from the business travelers that were typically price insensitive but time sensitive and so prepared to pay the higher costs. This will have effects on yield and profitability as the high fixed costs of airlines previously depended on business travelers to buy higher priced tickets. For air travel demand, which in turn creates the lack of customer brand loyalty to airlines, a 38% reduction in American Airline prices in theory would cause customers to switch to American Airlines. However, American Airlines has failed to consider competitors reaction in their value pricing, therefore competitor 's reactions will prevent American Airlines from reaching their estimated revenue for 1992. Lowering the prices to match American Airline prices to guarantee the consumer the lowest