STRATEGY 390 – Section 005
Ali Khalil
HaeJun Jeon
Michael Kondoleon
Joanna Lu
Will Wang
Jason Zhang
*Airline Industry
*Industry Overview• Business: Transport passengers and cargo regionally,
domestically, and internationally
• Focus: Domestic passenger airline industry
• Five major players with majority market share:
*Value Chain
Pre-flight Operations-Acquiring aircraft
-Hiring staff-Purchasing materials
Pre-flight Logistics-Scheduling staff-Setting routes-Setting fares
Flight Service-Client transportation
-On-flight services-Baggage handling
Post-flight logistics-Connections
-Missed flight support-Lost baggage support
Post-flight Services-Shuttles/Car rentals-Partnership deals
-Points/membership system
*Industry AnalysisThreat of Entry
Threat of Buyers
Threat of Suppliers
Intra-Industry Rivalry
Threat of Substitutes
Low
LowLow High
Medium
- Fare Comparison
- High Marketing- Diff Services
- High Saturation
- High Cost- Gov’t
Controls
- Boeing, Airbus- BP, Shell
- Passenger Pricing Power- No Backwards Integration
- Car, Bus, Train- Proximity- Travel Time
*Strategic Directions
Cost Leadership • Mergers• Financial Restructuring • Conservative Cost-Cutting
Product Differentiation • Technology• Regional Market• Price Leadership• Amenities• Operational Efficiency
Cost Leadership + Product Differentiation (Hybrid)
*Mergers
• Reduce costs primarily through M & A• Renegotiate labor contracts, pensions,
etc.
• Maintain traditional model while cutting costs• Continue offering routes to all
destinations• Maintain frequent flier, lounges, perks
Cost LeadershipProduct
Differentiation
Hybrid Analysis Conclusion
*Mergers
• Completed: Delta/Northwest (2009)
• In Progress: United/Continental (exp. 2012)
• Unsuccessful: • US Airways/United• US Airways/Continental• US Airways/Delta
Cost LeadershipProduct
Differentiation
Hybrid Analysis Conclusion
*Financial Restructuring
US Airways• Forced to cut costs alone
• Retired aircraft • Liquidated pensions• Cut routes
Cost LeadershipProduct
Differentiation
Hybrid Analysis Conclusion
*Conservative Cost Cutting
American Airlines• Only traditional legacy airline
• No mergers or bankruptcy restructuring• Cut costs through austerity measures
• Eliminate routes/hubs• Negotiate labor costs
Labor Cost as % of Total Cost
AMR- 31%Legacy Airline average- 25%
Cost LeadershipProduct
Differentiation
Hybrid Analysis Conclusion
*Strategic Directions
Cost Leadership • Mergers• Financial Restructuring • Conservative Cost-Cutting
Product Differentiation • Technology• Regional Market• Price Leadership• Amenities• Operational Efficiency
Cost Leadership + Product Differentiation (Hybrid)
*Product Differentiation
• Capture market share through differences in product offerings
Alaska Airlines• Regional Carrier• Monopolistic market share in Alaska• In-flight meals on most flights• High flight attendant/customer ratio• Complementary wine and other services
Cost LeadershipProduct
Differentiation
Hybrid Analysis Conclusion
*Strategic Directions
Cost Leadership • Mergers• Financial Restructuring • Conservative Cost-Cutting
Product Differentiation • Technology• Regional Market• Price Leadership• Amenities• Operational Efficiency
Cost Leadership + Product Differentiation (Hybrid)
*Hybrid
Southwest Airlines• Cost Leadership
• Focus on low unit costs• Short aircraft turnaround time• Mitigation of fuel price risk
• Product Differentiation• “Point-to-Point” network model• Secondary markets (BWI, MDW, LGA)• No baggage fees
Cost LeadershipProduct
Differentiation
Hybrid Analysis Conclusion
In millions Delta US Airways United AMR Alaska LUVRevenue $ 31,755 $ 11,908 $ 23,229 $ 22,170 $ 3,832 $ 12,104Domestic profits $ 332 $ 291 $ 147 $ (283) $ 226 $ 459Profit margin 1.05% 2.45% 0.63% (1.27%) 5.90% 3.79%Market cap $ 6,290 $ 692 $ 5,490 $ 543 $ 2,260 $ 6,130
Cost LeadershipProduct
Differentiation
Hybrid Analysis Conclusion
*Southwest v. Alaska Airlines
• High market share• Saturated market• Point-to-Point• Limited amenities
• High margins• Strictly regional• Hub & Spoke• High amenities
• Overall, Southwest strategy more sustainable• Allows for growth potential• Alaska has risk of overreliance on
monopolistic positionCost Leadership
Product Differentiatio
nHybrid Analysis Conclusion
*Southwest’s Best Strategy
• Long-term strategy is valuable and rare• Hybrid strategy incorporates best of
both strategies• Point-to-Point promotes streamlined
services, route flexibility• Understanding customer priorities
allows for strategic budgetary allocation
Cost LeadershipProduct
Differentiation
Hybrid Analysis Conclusion
*Summary
• Cost leadership firms should find ways to improve service without compromising margins
• Hybrid firms must remain adaptable and cognizant of changing consumer needs
Cost LeadershipProduct
Differentiation
Hybrid Analysis Conclusion
*Questions?