Whats Happening?

We are catching up to the schedule on the course

syllabus.

ISMA meeting scheduled for today has been

postponed for a weekJan 28, 4:30 to 5:30
College 8, room 240. Speaker is JP LeBlanc,
Director of RAD Development, Borland
Chapter 4 Introduction

Airline Industry Analysis

 Major Chapter Topics
Airline Industry analysis using the Porter
Competitive Model as a clearly defined industry.
Revisit Business Strategy Model.
Lessons Learned from Consistently Profitable
Carriers.
Is American Airlines the right standard for the US
industry?
Importance of Information Technology to the
Airline Industry.
Consistently Profitable Airlines
Singapore Airlines
Geographic Location, National Strategies,
Leadership in IT, Competitive Strategies

Southwest Airlines
Aircraft Utilization, Focus on City Pairs, Point-
to-Point Route Structure, Corporate Culture,
Cost Savings in Reservation System
 American Airlines
Largest airline in the US versus United while
also a contender on the international level.
A premium service airline with a hub and stoke
route structure.
Has consistently been recognized as an industry
leader.
Currently faces the same financial problems as
other major carriers.
Faces challenge of dealing with strong unions.
 Porter Competitive Model
Airline Industry Analysis - North American Market
Aircraft Manufacturers Foreign Carriers
Aircraft Leasing Companies Regional Carrier Start ups
Potential Cargo Carrier Business Strategy Change
Labor Unions
Food Service Companies New Entrants
Fuel Companies
Airports
Local Transportation Service
FAA
Hotels
Intra-Industry Rivalry
Bargaining SBU: American Airlines
Bargaining
Power Rivals: United, Delta, US Air,
Northwest, Southwest Power of Buyers
of Suppliers
Travel Agents
Business Travelers
Federal Government
Alternate Travel Services
Pleasure Travelers
Fast Trains Substitute Charter Service
Boats
Private Transportation
Products U.S. Military
Cargo and Mail
Videoconferencing and Services
Groupware
 Business Strategy Model - Airline Industry
PRODUCT/SERVICES
Scheduled Charter
Cargo Mail
Passengers Services
Air Express
MARKETS

Europe North American Pacific Rim Latin American

ROUTES AND ROUTE STRUCTURE

Short Haul Long Haul

Hub and Spoke Point to Point

FARE STRATEGY
Modified compared
to the example in Low Fare Premium Fare
the textbook.
COMPANY STRUCTURE
Independent Alliances

INFORMATION SYSTEMS FOCUS

Passengers Operations Logistics Business

Figure 4-1
 Benefits of Information Systems
to American Airlines
Convenience to Customers
Reservation System, Request hotels, car.
Knowledge of Customers
Frequent-Flyer Program: AAdvantage.
Providing a Foundation for Other Systems
Yield-Management System.
Building a Base for Other Businesses
American designed systems for others.
 Airline Industry Value Chain
FIRM
INFRASTRUCTURE
-Financial Policy - Accounting -Regulatory Compliance - Legal - Community Affairs

HUMAN Flight, route and

RESOURCE
Pilot Training Baggage Handling Agent In-flight
yield analyst
MANAGEMENT Safety Training Training Training Training
training
Product
TECHNOLOGY
Computer Reservation System, In-flight System Baggage Tracking
Development
DEVELOPMENT Flight Scheduling System, Yield Management System System
Market Research
Information Technology
PROCUREMENT Communications

Route Selection Ticket Counter Baggage System Promotion Lost Baggage Service
Passenger Service Operations Flight Advertising Complaint Follow-up
System Gate Operations Connections Advantage
Yield Management Aircraft Rental Car and Program
System (Pricing) Operations Hotel Reservation Travel Agent
Fuel On-board Service System Programs
Flight Scheduling Baggage Handling Group Sales
Crew Scheduling Ticket Offices
Facilities Planning
Aircraft Acquisition

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS AND SALES

Adapted with the permission of Michael E. Porter from Competitive Advantage: Creating and Sustaining Superior Figure 4-3
Performance, copyright 1985 by Michael E. Porter.
 Conclusions
The Airline Industry is a vivid example of the
dynamics of the market that it serves.

Shows that establishing strategies dictated by the

market is critical.

Once the right strategies have been identified,

information systems can play an important
supporting role.
 Chapter 4

Porter Competitive Model

and
the Airline Industry
2003 - A Hundred Years of Flight
Aviation is celebrating its centennial year. From its first brave
beginnings the civil aviation industry remains dynamic and
although some of the priorities have changed, the spirit and
passion remain.

Some priorities are not new: safety, the need for efficient
operations, adequate capacity to meet growth and, of course,
customer satisfaction. Other priorities have gained
prominence in recent years security, war risk insurance and
environmental concerns and will remain important in the
coming years.
This industry is always in the
grip of its dumbest competitors.

Robert Crandall
Former CEO
American Airlines
We must look at the world as it
is versus how airlines would
like it to be.

Robert L. Crandall

And as government officials, politicians

and consumers would like it to be.
 Airline Industry Goals
Public Service. (Service to Customers)
Return to Investors.
Country Strategic Resource.

Are these consistent or in frequent

conflict?
 Airline Profitability
Profitability = [yield X load factor] - cost

In order to survive and profit in this tough environment,

airlines attempt to manipulate three main variables:

Cost, calculated as total operating expenses divided by

available seat miles (ASM)

Yield, calculated as total operating revenues divided by

the number of revenue passenger miles (RPM)

Load Factor, calculated as the ratio between RPMs and

ASMs, which measures capacity utilization.
 United Flight 815
Chicago to LAX, October 31, 2001

204 tickets were sold and 186 people showed up.

68 passengers originated in Chicago and 118 were from
connecting flights.
97 passengers terminated at LAX, 89 continued on another
flight.
Of the 33 passengers that were only Chicago-LAX there were 27
different fares:
A frequent flyer passenger paid nothing.
A 1st class passenger paid $1,248.51 on the day of the flight.
A coach passenger paid $102.26 on the day of the flight.
A cash fare passenger paid $87.21 twenty-nine days in advance .
The National Commission to Ensure a
Strong Competitive Airline Industry

Change, Challenge and

Competition

A Report to the President and Congress

August 1993
Airline Industry Report

The air transportation system has

become essential to the economic
progress for the citizens and
businesses of this nation.
The commission questioned some of the most
basic assumptions that have formed the
foundation of policy toward this industry--and
behavior within it--for the past half century.
It also questioned whether the
airline industry has basic structural
problems or if it is just a collection
of poorly managed companies.
 Commission Findings
The Airline Industry is more competitive than before
deregulation in 1978.

Travelers and shippers are charged less than in 1978.

The Airline Industry has never made a sustained,

substantial return on investment.

It lost huge amounts of money from 1990 to 1993.

It canceled many aircraft orders shortly after an

unprecedented buying binge.

Its freedom to compete in international markets is

uncertain because of government restrictions.
 Commission Conclusions
For the U.S. to prosper in a global marketplace
the airline industry must:

Be efficient and technologically superior.

Have the financial strength to respond to rapid

change and opportunity.

Efficiently move people, products and services

to markets, wherever they exist.
 Recommendations

Efficiency: Reinvent the FAA.

Financial Health: Deal with factors that impact

the financial health of the industry.

Access to Foreign Markets: Replace the current

bilateral system with a multi-national regime.
To return their balance sheets to
respectability, most airlines would
have to achieve profit margins that
are almost unprecedented in their
history, and sustain those margins
for years.
 September 11 Impact

An absolute disaster for the industry.

1990-1993 Was a Disaster!
The Gulf War.
The general decline in the world economy.
Aircraft fuel price increases.
Wages, work rules and work patterns.
Chapter 11 bankruptcy airlines.
Excess capacity.
A very capital intensive business.
Too many years as regulated airlines.
 Airline Industry

The shock of September 11th has forced airlines to

face an awkward fact: in some respects, aviation is a
declining industry.

Nov. 22, 2001

The Economist
 Decline in Air Travel
At Thanksgiving in 2000 a record 2.2 million
Americans took a flight to spend the holiday with
family and friends.

Air traffic in October and November 2001 was down

by about 25% compared to the previous year in the
world's biggest aviation market, thanks to a
combination of recession and the attacks on
September 11th.
 International Travel
International travel from America has been hit even
harder: the number of Americans flying across the
Atlantic is down by over 30%.

Never mind that more people are killed on America's

roads every three months than have died in the entire
history of commercial aviation.
 Fatalities by Transportation Mode

Airline 12

Railroad 530

Passenger Car 20,818

0 5000 10000 15000 20000 25000

 Load Factors
Despite cutting capacity, the big American airlines are still
flying with planes barely 60% fulla figure that would be
much lower were it not for hefty discounts.

Boeing and Airbus, the two manufacturers of large jetliners,

are offering airlines special financing deals to pay for their
purchases in order to stave off outright cancellations.

The last time the airlines were in such straits, during the
Gulf war and recession in 1990-92, it took them four years
to return to profit, even though traffic recovered within a
year.
 European Airlines
The situation in Europe is no better.

Two flag carriers, Swissair and Sabena, have

collapsed since the terrorist attacks.

Other big carriers, such as British Airways (BA) and

KLM, are in major financial trouble.

Traffic within Europe fell by over 10% in September

and October 2001, while traffic from Europe to
America and Asia fell by 35% and 17% respectively.
 Financial Picture
Although air travel, measured by number of passenger-
kilometers flown, has long risen faster than economic
growth, airline revenues have lagged world GDP growth
for the past 20 years in real terms,

Revenues and profits per seat have been falling because of

greater competition springing from deregulation, first in
America and then within Europe and across the Atlantic.

Even before the latest slump only a third of mainstream

airlines in Europe, America and Asia earned enough to
cover their cost of capital, which is 8% on average.
 Looking for Options
In most industries, such a situation would quickly lead to
mergers. But this is not so easy for airlines, hemmed in as they
are by national ownership rules and rigid international
regulation of routes.

America's airlines are retreating to their strongholds in the hub

airports they dominate, such as Dallas-Fort Worth (American)
and Atlanta (Delta). Most airlines have cut at least one wave
of coordinated flights in and out of their hubs. If additional
security checks are introduced for transferring passengers
before they board their outbound flights, and the handling of
such travelers thus slows down, some observers expect the
airlines to switch to fewer flights in larger aircraft.
Dropping Point-to-Point Flights
The biggest effect has been for airlines to drop non-stop
point-to-point flights rather than those that go through
hubs.

The network economics of hubs becomes more attractive

for big carriers when times are tough.

A study of America's changed airline-route map shows that

large carriers are cutting non-stop flights to cities where
they do not operate hubs by more than they are trimming
hub flights.
 Unions and Vendors

The industry's woes will also force airlines to get tough

with unions and suppliers over restrictive practices that
raise their costs.
 European Changes

In Europe, where the failure of Swissair and Sabena has

shown that there is room for only a handful of mainstream
carriers rather than today's 14, a shake-out is already under
way.
 Airlines: How Ugly?
The outlook is either bad or outright ugly.
Two problems: Post 9/11 fears and increased
hassles based on new security measures.
 US Airline Industry Must
Restructure or Die
Aviation Week & Space Technology
November 2002
Low-Cost Airlines, Not September 11, Have
Transformed Industry Fundamentals

"When people say the traditional industry model is broken,

they are moving their jaw without putting their brain in gear,"
responds former American Airlines CEO Robert Crandall. He
added that he is skeptical that the industry will ever be
competitive as long as there are so many carriers selling what
has evolved into a commodity product.
 Aviation Week Contentions
A collapse in pricing power and a fundamental shift in the
buying behavior of business travelers, coupled with fierce
competition from low-cost airlines, is forcing U.S. major hub-
and-spoke carriers to restructure their operations or face the
prospect of eventually going out of business.
Airline executives and industry analysts note that the
September 11 attacks, while devastating, are not the root cause
of the financial crisis gripping major network carriers.
The crux of the problem is a combination of excessive costs in
relation to carriers' current and projected revenues, an
imbalance between the supply and demand for available
airline seats, and an inability to boost air fares.
 Corrective Actions
U.S. airlines have axed more than 70,000 jobs. In addition,
some unions representing many of the industry's employees
have made a commitment to work with management to help the
carriers compete more effectively with low-cost rivals.
It will take much more than concessions by labor for major
U.S. airlines to solve their financial problems.
The financial problems carriers are suffering could actually
worsen in coming months if the U.S. goes to war with Iraq. The
U.S. airline industry cannot take another major hit. A brief war
doesn't qualify but a messy, extended war or another significant
domestic terrorist attack does.
 Airline Industry US Market
Share
Based on current trends, the domestic market share held by
the six major US airlines (American, Continental, Delta,
Northwest, United and US Airways) plus Alaska Airlines
will drop from 75% in 2002 to 62% in 2010and 45% by
2020, according to an industry projection.

Southwest could pass American to become the largest U.S.

airline by 2013, and JetBlue could pass Delta to become the
third largest by 2020.
 Industry Structure Problems

The fact that low-cost carriers have been able to mature this
far says as much about what's wrong with the majors as it
does about what's right with their low-cost counterparts,
and begs the question: does the underlying strategy or
business model employed by the large hub-and-spoke
airlines still work?
Analysts and other industry observers believe it does, but to
function properly carriers must reduce their costs and
restore the balance between supply and demand.
 A Sobering Fact

Before September 11, 2001, the global industry was

showing a net loss on international services of
around $3 billion.
 Corrective Actions
Reduced capacity.
Older aircraft may never return to service.
Reduced wage pressures.
Continued joint agreements.
Discounted tickets and more travel packages.
 Code Sharing Agreements
The US Transportation and Justice Departments approved a pact
Friday that will let Delta Air Lines, Continental Airlines and
Northwest Airlines share access to each other's routes.

The code-share agreement allows each carrier to market the

others' routes as its own. One Northwest flight, for instance,
might also have a Continental flight number and a Delta flight
number.

The agreement will be the biggest in the industry. US Airways

and United Airlines have a similar agreement and Continental
have some shared routes in a deal that dates to 1998.
 Code Sharing Agreements
It's an especially appealing arrangement to frequent fliers who
prefer to build up miles on one airline while flying all three.

The government placed several conditions on the deal.

Specifically, the DOT said 60 percent of any new code-sharing
routes must serve those areas of the country that are considered
under-served. It also bans anti-competitive practices like
coordinated pricing or shared decisions about route planning and
capacity.
 American Airlines

American Airlines asked its employees to come to the aid of

the carrier, saying they have no time to waste if they want to
keep the financially strapped airline in business.
The plea comes as two major unions at the world's largest
carrier consider a company request to freeze their wages and
another union is trying to hammer out a new contract.
Company management says carriers that have reduced costs
through bankruptcy protection have put even more pressure
on AMR.
 American Airlines
American asked union leaders to start holding weekly
meetings, as early as next, week with company management
in a collaborative process.
The move comes as United Airlines is trying to squeeze large
wage cuts from its employees as it undergoes restructuring
under bankruptcy protection.
About a month ago, American asked its employees to forgo
pay increases. The union that represents flight attendants at
American said it is taking a close look at the company's
finances and may decide at the end of this month whether to
forgo pay increases scheduled for this year.
 Continuing Concerns

1. Fuel costs
2. Decisions regarding passenger services like
whether to charge for food, the need for more
electronic capabilities.
3. Upgrading aircraft.
4. Route strategies.
5. Union relations.
6. Relations with travel agents.
 Porter Competitive Model
Airline Industry Analysis - North American Market
Aircraft Manufacturers Foreign Carriers
Aircraft Leasing Companies Regional Carrier Start ups
Potential Cargo Carrier Business Strategy Change
Labor Unions
Food Service Companies New Entrants
Fuel Companies
Airports
Local Transportation Service
FAA
Hotels
Intra-Industry Rivalry
Bargaining SBU: American Airlines
Bargaining
Power Rivals: United, Delta, US Air,
Northwest, Southwest Power of Buyers
of Suppliers
Travel Agents
Business Travelers
Federal Government
Alternate Travel Services
Pleasure Travelers
Fast Trains Substitute Charter Service
Boats
Private Transportation
Products U.S. Military
Cargo and Mail
Videoconferencing and Services
Groupware
Figure 4-2
 Business Strategy Model - Airline Industry
PRODUCT/SERVICES
Scheduled Charter
Cargo Mail
Passengers Services
Air Express
MARKETS

Europe North American Pacific Rim Latin American

ROUTES AND ROUTE STRUCTURE

Short Haul Long Haul

Hub and Spoke Point to Point

FARE STRATEGY
Modified compared
to the example in Low Fare Premium Fare
the textbook.
COMPANY STRUCTURE
Independent Alliances

INFORMATION SYSTEMS FOCUS

Passengers Operations Logistics Business

Figure 4-1
 Airline Industry Value Chain
FIRM
INFRASTRUCTURE
-Financial Policy - Accounting -Regulatory Compliance - Legal - Community Affairs

HUMAN Flight, route and

RESOURCE
Pilot Training Baggage Handling Agent In-flight
yield analyst
MANAGEMENT Safety Training Training Training Training
training
Product
TECHNOLOGY
Computer Reservation System, In-flight System Baggage Tracking
Development
DEVELOPMENT Flight Scheduling System, Yield Management System System
Market Research
Information Technology
PROCUREMENT Communications

Route Selection Ticket Counter Baggage System Promotion Lost Baggage Service
Passenger Service Operations Flight Advertising Complaint Follow-up
System Gate Operations Connections Advantage
Yield Management Aircraft Rental Car and Program
System (Pricing) Operations Hotel Reservation Travel Agent
Fuel On-board Service System Programs
Flight Scheduling Baggage Handling Group Sales
Crew Scheduling Ticket Offices
Facilities Planning
Aircraft Acquisition

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS AND SALES

Adapted with the permission of Michael E. Porter from Competitive Advantage: Creating and Sustaining Superior Figure 4-3
Performance, copyright 1985 by Michael E. Porter.
 Benefits of Information
Systems
to American Airlines

1. Convenience to Customers.
2. Knowledge of Customers.
3. Providing a foundation for other
systems.
4. Building a base for other businesses.
Four Three Consistently Profitable
Airlines
1. Singapore Airlines

2. Cathay Pacific

3. British Airways

4. Southwest Airlines
 Singapore Airlines
Consistently profitable but experiencing profit pressures.
Winner of multiple awards for airline excellence.
An extension of the country strategy to be the business and
travel gateway to Southeast Asia.
An impressive travel infrastructure.
Leader of the Orient Airlines Association (OAA)
Abacus reservation system.
Price collusion on major routes.
Nervous regarding U.S. carrier price competition.
 Why SIA is So Good!
Clarity and Commitment (to customer service).

Continuous Training.

Internal Communications.
Consistent External Communications.

Connection with Customers.

Benchmarking.

Rewards and Recognition.

Professionalism, Pride and Profits.

 Southwest Airlines
A U.S. carrier success story.
Commuter airline that concentrates on city pairs. (Average
flight is 400 miles or less and takes less than one hour)
CEO Herb Kelleher, a Connecticut attorney turned Texan,
had the best labor relations in the industry and an excellent
company culture.
Lowest cost structure in the industry.
Company vision was to provide low cost airline service to
an increasingly larger number of people.
Objective to minimize reservation costs.
 A Strength of Southwest
Airlines
1. Focus.

2. Focus.

3. Focus
Best Airlines for Business Travelers
1. Singapore Airlines 11. Finnair
2. Swiss Air 12. British Airways
3. Cathay Pacific 13. Alaska
4. Midwest Express ** 14. Air France
5. Japan Airlines 15. Varig
6. Quantas 16. Aer Lingus
7. ANA 17. Kiwi
8. Virgin Atlantic
18. Air Canada
9. Lufthansa
19. American **
10. KLM-Royal Dutch
20. Delta**
Source: Zagat Survey of Frequent Flyers
Deregulated But Very Regulated
Safety factors.
Air traffic controllers.
Impact on constituents.
International routes.
Computer Reservation System:
Business Traveler Choice?

Personal Traveler Choice?

Ticket-less Versus No Reservation?

 Airline Alliances
The Star Alliance is the largest of the major groupings.
Consisting of 15 airlines led by United Air Lines and
Lufthansa. Star serves about 815 destinations in more than
130 countries.

Oneworld, which is eclipsed by only Star among the major

airline alliances, is led by British and American Airlines.
Eight airlines offer service to 550 destinations in more than
130 countries.

SkyTeam is quickly becoming a major alliance player by

serving more than 450 destinations in nearly 100 countries.
Led by Air France and Delta, SkyTeam has also consolidated
cargo services.
Interplay among government regulations,
airline strategies, and airplane capabilities
shapes the evolution of world aviation.

Boeing Corp.
 Barriers to Entry
Access to airports continues to be impeded
by:

(1) Federal limits on takeoff and landing

slots
at the major airports in Chicago, New York,
and Washington

(2) Long-term, exclusive-use gate leases

(3) Perimeter Rules prohibiting flights at

New Yorks LaGuardia and Washingtons
National airports that exceed a certain
 US Industry Strength
Fifteen major US carriers represent the following
significance in the world-wide airline industry:

29% of the aircraft

46% of the employees
32.5% of the the 2000 passenger miles

Based on a number of years of operating in a deregulated

environment within the US that forced them to compete in
a very tough market.
 The Bad News
Cumulative Net Profit of Scheduled US Airlines:

Started in 1938
1999 15.6 billion profit
1970 2.2 billion profit
1980 5.8 billion profit 2000 18.1 billion profit

1989 8.2 billion profit 2001 12 billion profit

1994 4.8 billion loss
1997 5.4 billion profit
1998 10.3 billion profit
Airline Industry Conclusions
It is a vivid example of the dynamics of the
markets that it serves.
Establishing strategies dictated by the market is
critical.
Once the right strategies have been identified,
information systems can play an important
supporting role.
 Possible Exam Questions
1. Identify an industry where information systems act as a
significant barrier to entry and explain the significance of this
barrier.
2. Identify and explain the two basic strategies and three
supporting strategies used by intra-industry rivals.
3. What is the primary benefit to be derived through the use of
the Porter Value Chain?
4. Explain the logic and growth as a competitive strategy and
provide two company examples where this was a key
strategy.