EWMBA 299 – Competitive Strategy
The domestic US airline industry has been intensely competitive since it was deregulated in 1978. In a regulated environment, most of the cost increases were passed along to consumers under a fixed rate-of-return based pricing scheme. This allowed labor unions to acquire a lot of power and workers at the major incumbent carriers were overpaid. After deregulation, the incumbent carriers felt the most pain, and the floodgates had opened for newer more nimble carriers with lower cost structures to compete head-on with the established airlines. There were several bankruptcies followed by a wave of consolidation with the fittest carriers surviving and the rest being …show more content…
The minimum efficient scale was not very high since airlines could choose to compete in a few markets, and costs were more or less proportional to the number of flights offered and the number of markets the airline wanted to operate in. The main consideration for profitable entry seemed to be the ability of airlines to fill their airplanes above the breakeven point. In an industry fraught with price competition, brand identity and reputation did not have significant value either. In the airline industry, exit costs are not very high either. Planes could be easily redeployed to other markets, or sold off, and gates and landing rights could be sub-leased to other carriers.
There are a number of substitutes to air travel, especially over short distances. These include taking other modes of transportation such as driving, taking the train etc., or not traveling at all. The use of technology (like WebEx, NetMeeting, video-conferencing etc.) that facilitates remote virtual collaboration is becoming a good substitute for business air travel as well.
The primary inputs to the airline industry include airplanes, labor and fuel. There are only two major manufacturers (three at the time of the case – Boeing, Airbus and McDonnell Douglas) for large commercial aircraft. This, along with the relationship specific
Sankar Ram Sundaresan
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EWMBA 299 – Competitive Strategy
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The threat from substitution is moderate for Jetstar because though advances in technology like internet and video conferencing lessens the need for business travelling, there are still some matters that are difficult to be discussed or overseen over the internet (Rahman, Joha, 2010). Moreover, Jetstar has international carriers, thus the threat from substitution is relatively lower as compared to domestic or regional carriers. This is because the likelihood of train and cars being able to reach the destinations of non-neighbouring countries is low and sometimes, travelling by sea is not always convenient.
This section will examine each of the five competitive forces that are active in the European Airline Industry. In this instance the buyers in the industry will be taken as passengers. Fuel companies, aircraft manufacturers and employees are the suppliers. Substitutes stem from modes of transport that fall under land and sea transit. Potential entrants are any airlines based outside of Europe or newly founded airlines based in Europe.
There are several substitutes to air travel, but over long distances and flying between continents, there are no real substitutes that can bring humans face to face with speed. The decision to use automobiles or trains is influenced by time, money, personal preference and convenience. Video conferencing takes away the one on one human contact and socialization that air travel allows you to reach.
Although there was a deregulation of the airline industry, the one significant component that did not change was the infrastructure of the airline industry. Constrained by the limitations of the airports and the air traffic control system, airlines did not see significant increases in profits despite the large growth and operations. As the airlines increased the number of flights and structure, the air traffic control system did not experience the same increase. Because the ATC system was still controlled and owned by the government, growth was, and continues to be slow.
I was once asked, if I thought the decision to reorganize of the state was right. Specially taking about creating the JDOC command structure, I said, “who else is going to do what we are doing?” The job of domestic operations has always been an additional duty, with very little time for planning or preparing for upcoming events. We are a reactive organization and I can see how that can kill us in the end. Our focus in the past 15 years has been on how prepare to go to war, which is our federal mission, and we have forgotten how to take care of our citizens in our own back yard which is our state mission. This reorganization has forced us to look to our left and right, and view the Oregon National Guard a one force both Army and Air. We as an organization are learning each other’s capabilities, strengths, weaknesses, and how we can better support each other in the
After deregulation, the work of the labor unions began to crash down. New low cost carriers like Southwest, started taking large market shares. The labor unions had less bargaining power. To maintain profitability,
The risk of entry into the airline industry by potential competitors is low due to the “liberalization of market access, a result of globalization. According to the IATA (International Air Transport Association), about 1,300 new airlines were established in the last 40 years,” (Cederholm, 2016). The cost structure of businesses in an industry is a determinant of rivalry. In the Airlines Industry, fixed costs are high, because before the organization can make any sales, they must invest in air crafts, fuel and service employees. These items come attached with hefty price tags. Industries that require such enormous amounts of start-up capital as predicted by many analysts
The research I did on the company Visa was the historical background of the company. I also looked into the industry and how Visa deals with outside forces. I used Porters Five Forces to look at the industry. I examined how the industry has high rivalry, along with a lot of substitutes to the services offered by major providers. It’s hard to enter the credit card industry due to the high capital requirements. When going international you need to understand other countries have different styles of payments already put in place. Banks, Credit Unions, and Retail stores play a role when deciding which cards to use.
1. There are a few trends in the US airline industry. One is consolidation, wherein existing players merge in an attempt to lower their costs and generate operating synergies. The most recent major merger was the United Continental merger, which is still an ongoing affair, but has created the largest airline in the United States by market share (Martin, 2012). Another trend is towards low-cost carriers. In the US, Southwest has been a long-running success and JetBlue a strong new competitor, but in other countries this business model has proven exceptionally successful. The third major trend is the upward trend in jet fuel prices, and the increasing importance that this puts on hedging fuel prices and capacity management (Hinton, 2011).
Oligopoly Behavior in the Airline Industry. Case Analysis This case illustrates the pricing behavior of firms that are oligopoly whose market is characterized by the relative few participating firms offering differentiated or standardized products or services. Such firms in an oligopoly have market power derived from barriers of entry that wards off potential participants. As seen in the case, it is clear that because there are a small number of US Airlines firms competing with each other, their behavior is mutually interdependent – thus, the strategies and decisions by one airline management affect managements of the other airlines whose subsequent decisions then affect the first airline. In the airline industry, such oligopolistic
The airline industry has always been a fiercely competitive sector. Since the invention of low-cost carriers, also known as no-frills or
The main reason for the low-cost subsidiaries’ failure is the airlines’ corporate strategy. By launching a LCC as a unit inside the same corporate structure (e.g., single scheduling and pricing centre for United Airlines’ and Shuttle’s low–cost flights), traditional airlines limited the LCC’s flexibility and independence. By building a low-cost carrier on top of a traditional carrier cost-structure, the parent company was also tempted to think low-cost when setting ticket prices, but not trying (or being able) to reduce traditionally high costs: the airline had now two unsustainable business models instead of one!
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
Nowadays, the commercial competition has surpassed the limits of the previous era in which dominant markets are protecting their set market shares. Mega commercial activity back then was completely regulated by the government. The United States has privatized a lot of sectors related to energy, telecommunication, and transportation sectors. In response, the USA introduced the deregulations in the aviation industry to increase the competition in the aviation market.