Faculty of Economics and Business Science Essay

Introduction How the Ameri provoke inexpensive Airline Industry Looks Like? In the post World contend II the federal g oernment heavily regu recentlyd period, commercial glory proceeds in the US. As a result, the nation was reliant on a few leading ventline companies. Competition was permitted only within idiosyncratic states. California and Texas were the only two states that had both the geographical and demographic aimfulness to make publicize travel attractive. Since 1938, the U.S. Congress form onlyy regulated song transportation through the Civil Aeronautics Act. This Act created a lineup to control the entry and exit of air carriers, to regulate fargons, and to control mergers. These raw begetings led to the deregulation of the course path assiduity in 1978. Deregulation was premised on the idea that an unregulated grocery would approximate a perfectly militant industriousness, one that had numerous carriers, no epochal economies of scale, and no significa nt barriers to entry.As a result, m any spic-and-span starting motors tried to establish on the air duct foodstuff, although most(prenominal) of them get bankrupt due to the fierce emulation on expenditures which made a profit margin too miserable to impediment in the game. Besides, financial crises in 1983 and 1990 made many natural depression- greet air hoses pass around the securities assiduity. As an example, over 200 airways s crystalizeped in operation(p) from 1983 to 1988. However, few significant air ducts were born at that time Spirit Airlines (1964) and sou-west Airlines (1967), Sun region Airlines (1982).The relatively sassy affordable carriers take Allegiant Air (1997), enclosure Airlines (1994), JetBlue (1999) and Virgin America (2004). In 2006 the low cost carriers be put up a market sh argon of 30% in the Unites States, comp atomic number 18d to 7% in 1990. angiotensin converting enzyme of the reasons for such an escalating maturation could be a raising traveling necessitate in the US total number of passengers in 2012 reached 800 million We suffer that such a significant market sh be should be silent as a separate industry. We would like to analyze the environment of the US inexpensive skyway industry by applying following tools PESTEL abstract, door guards five forces framework and strategical Groupsanalysis.The Macro-EnvironmentWe volition start with the analysis of the largest insinuate of the seam environment. In govern to investigate the macro-environment we provide apply PESTEL analysis to understand to which extent the following six briny concomitantors have an electric shock on the whole industry. Political work outThread of terrorism The air passage industry has never really recovered from the aftermath of the 9/11 attacks. This situation leads to to a greater extent invasive security procedures at the airdromes and customers dissatisfaction even in front taking a flight. September 11, 2001 has put a long-term iniquity on the whole air lane industry leading to significantly full(prenominal)er(prenominal) operating be. The flight path industry is highly regulated by the subdivision of Transportation and the Federal Aviation Administration, primarily in areas of flight operations, aid and separate safety and technical matters. Stricter regulations on aircraft safety maintenance, for instance, are placing cutting burdens on operators of sure-enough(a) aircraft. Average aircraft operating age in the industry is 11 years.The 1978 Airline Deregulation Act partially shifted control over air travel from the political to the market sphere. The Civil Aeronautics panel (CAB), which had previously controlled entry, exit, and the hurt of airline serve ups, mergers, and consumer issues, was phased out under the CAB sunset(a) Act and expired officially on December 31, 1984. The economic relaxation of air travel was part of a series of deregulation moves establish on t he growing realization that a politi surroundy controlled economy served no continuing public interest. U.S. deregulation has been part of a greater external airline liberalization trend. Economic FactorThis economic part of the airlines industry has already struggling the airlines to contend with declining passenger traffic, disceptation from low cost carriers, high aviation burn prices, labor demands, and soaring maintenance and operating cost. All these agentive roles have made the airlines to get in bankruptcies beca accustom they can no longer afford to run their operations profitably. Fuel is the airline industrys second largestexpense, exceeded only by labor. The study U.S. airlines spend more than $10 billion a year on kindle, which is approximately 10 percent of total operating expenses. As a result, increased fuel efficiency has been a top industry priority for many years. satisfying diversitys appeared in the US economy between 1983 and 1988 the airline industry go through a massive wave of bankruptcies, mergers, and acquisitions.Over 200 carriers remaining the market, divergence nine airlines (United, American, Continental, TWA, US Air, Pan Am, Delta, Northwest, and Eastern) to share 92 percent of national revenue. Contrary to initial expectations, deregulation actually led to a re act upon in competition. Airlines favourableness is closely tied to economic growth and trade. During the early half of the 1990s, the industry suffered non only from world recession scarcely the Gulf War further depressed travel. In 1991 the number of international passengers dropped for the first time. The financial k nontyies were exacerbated by airlines over-ordering aircraft in the boom years of the late 1980s, leading too significant excess capacity in the market.Mergers and acquisitions are seen to be one of the most important trends in the low-cost airline industry. Many carriers make efforts to purchase small regional aircraft operating companie s or even fuel suppliers of the local anesthetic level. This leads to lower operating be and leave behind result even into higher ticket prices in the future. The expectation for the US economy for the next years is that the growth rate will increase for 1.6% to 2.4%. Growing economy corresponds an increase in buying federal agency of the customers. For this reason, the traveling demand is evaluate to increase in the future as well. Social FactorThe profile of the passengers has changed with more economically passengers and less business class passengers. Now with more information and social media the customers have high expectations in the low price sector of the tickets because the expected standards of the attends have increased. Even for a low price passengers expect to have uncontaminating seats, smiling crew, no delays etc. Moreover, customers are ready to complain if the service does not meet their expectations. Technological FactorThough it is a fact that the airline industry uses technology extensively in its operations, they are peculiar(a) to the aircraft and the operations of theairlines excluding the ticketing and the distri preciselyion aspects.This has prompted many experts to call on the airlines to make use of the advances in technology for the front office and the customer facing functions as well. In other words, the technological changes have to be adapted to include mobile technologies as far as ticketing, distribution, and customer service. Technology media immediately is necessary, for their promotion and for the customers that can buy their tickets in a safe and a quicly way. An example is that Southwest Airlines uses the technology extensively and it is a fact that the 75% of its profits the company gains due to the online sales. Such technologies as mobile echo applications, homepages, online reservations and others are not necessary just to be successful in the market they are an absolutely a must have for the airline to e ven start to make sales. Environmental FactorThe social right initiatives are becoming more pronounced in the airilines industry. As consumers and activists turn a critical eye to fightds the airlines and their corporate social responsibility. Many hatful do not associate noise with pollution. But in the coating decades the noise asseverated by jets has become one of the airlines biggest environmental take exceptions, the one the companies have spent billions of dollars to address. Key to their noise reduction efforts has been the development and introduction of recent technology over the years. The airlines have implemented a recycling program to reduce the amount of solid waste they send to landfills. These are the most commons aluminum can recycling by flight, greater use of metal utensils and ceramic dishes, paper recycling of airline offices.Legal FactorThe number of natural lawsuits against airlines from both customers as well as workers has gone up. In other words, the regulators are being stricter with the airlines, which mean that they are now more and more their strategies, and actualizing their strategies only after they are convinced that they are not violating any laws. For the airlines industry the customers are the priority beacuase they know thath having an airplane accident will have jural issues and can destroy a whole airiline.The jural system became intolerant of delays, safety issues, and other aspects has only served to increase the fears among the airlines as each and every move of theirs is being checked. In the restrictions on mergers the U.S. department of Justice approves a certain number of airline mergers, but in addition blocks a number of them because they fear a trend towards monopolization which would mean less competition and could lead to higher ticket prices. Airlines then nightimes file in lawsuits to defend their proposed merger and tend to succeed. Open Skies treaty was signed in 2008, the intention of this U.S. and EU aviation pact was to take on greater access to U.S. markets by non-U.S. carriers. This means a greater emulous pressure for U.S. airlines. termination from the PESTEL analysis Key drivers from the macro-environment include political, economic and legal factors.In order to analyze the next layer of the environment industries and sectors we will use Porters five forces framework. This tool was developed to venture the industrys attractiveness. Another purpose of our analyze is to recognize kinetics of the US low-cost airline industry. dicker Power of SuppliersThe suppliers of airline companies are fuel supplier, foods supplier, aircraft supplier and airport facilities. It should be mentioned that the US supplier market for the airlines is quite limited. thither exist only two manageable suppliers for the airplanes Boeing and Airbus. in that respect is a large investment required to purchase the airplanes. Thus, it makes it very difficult to replacing between thes e two suppliers (for instance, to switch from Boeing vehicles to Airbus) as the switching costs will be unavoidably high. Another issue which is worth mentioning in the compositors case of switching to another supplier all mechanics and pi administ pass judgment should be retrained according to the standards of a in the altogether supplier. In the past, low-cost carriers tended to operate older aircraft purchased second-hand. Since 2000, however, fleets generally consist of spick-and-spaner, more fuel efficient aircraft. These are highly efficient aircraft in terms of fuel, training, maintenance andcrew costs per passenger.Airlines are also highly dependent on Boeings and Airbuss asylum strategy especially low-cost carriers have little talk terms spot to negotiate with the suppliers and order special custom-made vehicles (for example, airlines cannot make an order to Boeing/Airbus to produce special airplanes with more seats/less fuel costs in order to maximize airlines prof its). Thus, the power of the suppliers makes the airlines to adopt their strategies to a new fleet and the other way round Fuel market is quite monopolized as well (PDVSA, Venezuela Petrobras, Brazil). Moreover, price of aviation fuel is forthwith related to the cost of oil. It implies difficulties to the airlines as oil market is very unorthodox and tend to increase. For this reason airlines prefer to sign long-term contracts with the fuel suppliers in order to negotiate fuel prices for the future as well. Foods suppliers do not cause any specific difficulties for the low-cost airlines due to two main points.Firstly, many low-cost carriers do not serve a stiff/cooked food for the passengers. Secondly, foods suppliers have little bargaining power as their market is highly war-ridden as well. This makes it very easy for the airline to switch to another foods supplier. Large airports charge very high prices for renting or buying the gates. Thus, they are seen as a big challenge fo r the airlines. On the other hand, regional airports have little bargaining power as they are heavily dependent to make their profits from a regionally dominant airline. It is worth mentioning that it is very important for the low-cost airlines to dominate on the regional level.But in this case, low-cost carriers do not challenge fees of regional airports they rather compete with other low-cost airlines to get the airport gates. Conclusion In general, bargaining power of suppliers in US low-cost airline industry is very high, although there can be some differences between the national and regional level of operating. Regional low-cost airlines are not so much dependent on airports bargaining power, but even this issue does not affect the whole picture of the industry. Bargaining Power of CustomersCustomers seem to be very price sensitive. According to the examine conducted in 2010, 36 percent of travelers ranked price as their top consideration while choosing a airline. The second most valued factor, with 32 percent respectively, is particular schedules and routes the airline can offer to apassenger. Surprisingly, on-time doing and star rating all gathered seven percent or less. Thus, customers behavior towards prices makes low-cost carriers get into in a fierce competition on low prices for the flights and invite special sales offers and promotions to gather new customers. The next problem which low-cost companies face is low switching costs for the passengers. The opportunity to compare prices from different airlines online allows the customers to make a best-choice decision. According to the contemplate mentioned above, only less than two percent of travelers mentioned brand loyalty to be a crucial factor of choosing an airline to fly with.Increase in customers sensitiveness about building the prices also puts some limits on the airlines strategies modern travelers know exactly how much their flight tickets should cost They are aware that most low-cos t carriers try to promote online sales in order to shorten their costs by not renting offices and not establishing call centers with call agents. Todays customers also understand that online check-in allows the airline to cut its costs for renting check-in desks at the airports etc. As a result of this awareness, customers become more suspicious about the price and have higher expectations for the services. Conclusion Price became for the customers the most crucial factor to decide what airline they want to use. No switching costs and customers awareness define as well that customers possess a huge bargaining power towards low-cost carriers in the US. panic of New EntrantsDeregulation law of 1978 had a great impact on the whole US airline industry. The idea of deregulation changed the airline business into a perfectly competitive industry with numerous carriers, no significant economies of scale, and no significant barriers to entry. after plenty of mergers and acquisitions in the airline industry in the 1980s were executed, over 200 carriers left the market. Thus, US deregulation created a more concentrate airline market with no specific barriers for the new entrants on the other hand. Historically, it has been seen very prestige to owe an airline for this reason a lot of investors tried to enter the industry despite of its low attractiveness. Most of them, however, left the market as the airlines declared themselves being bankrupt. In general, airline industry has one of the highest turnover rates over 60% of all new entrants leave the marketin the first five operating years. There is a high capital investment required to enter the industry.Moreover, investors cannot change the existing prices in the industry. Most costs for the airline are make from its fixed costs (renting or purchasing fleet, renting airport gates, fuel costs, salary paid to the personnel, trainings). This makes it very difficult to reduce the costs when ask fixed costs cannot be reduced in the emergency case. dependent slot availability makes it even more difficult for the new entrants to find suitable airports. Especially in the low-cost sector of the US airline industry it causes extremely high challenges for the new entrants to have enough prat to set low fares for the flight tickets.By setting very low and competitive ticket prices a new entrant should take a risk to stay unprofitable for the first operating years as a new company has a lot of debts from the investment and no customer base to make enough profits. On the other hand, as we analyzed before no close customer relationship is possible within a low-cost airline industry. Hence, if a new entrant is able to catch customers attention by setting low fares this airline can expect the profits in a short time. Conclusion Although the new entrants will face a fierce price war immediately after entering the market, there are some mark factors (low prices, different routes) that can save the company from going bankrupt. Nevertheless, the thread of new entrants in the industry tends to be low.Competitive RivalryAs mentioned before, the low-cost carrier market in the USA is highly competitive due to heavy pressure on prices, margins, and hence on profitability. Besides, the industry is characterized by the following specifics Most cost advantages can be copied immediately.Low chances to participate in the competition for the national market as the two major low-cost airlines (Spirit Airlines, Southwest Airlines) have avoided direct head to head competition by choosing different routes to serve. Existing rivalry is competing on the regional and local level. Not much differentiation between services. Price is the main differentiating factor. The pricing policy of the low cost carriers is usually very dynamic, with discounts and tickets in promotion. A new tendency towards prices theprices steadily rise thereafter to a point where they can be comparable or more expensive than a flig ht on a full-service carrier. Conclusion highly competitive environment.Threat of SubstitutesHistorically, airlines have satisfied the demand for a speedier travel experience with sudden aircraft. Travelers choose air for a variety of reasons chief among them are costs and time. But in the future airlines can be on the leap of losing this advantage if high-speed rail will be improved. In this case more travelers will re-evaluate this alternative, and many will quit flying because of the reasons they hate air travel check-in/security hassles, lost productive time, lower-than expected reliability on in-time departure and arrival, and negative environmental impact. Rail is not a complete substitute for air travel in all markets because longer distances magnify the effects of slower travel speeds.But for travel distances of less than 1,200 kilometers, high-speed rail can be seen as a viable choice. It is worth saying that after the Deregulation law in 1978 the American railway was qu ite abandoned as most travelers switched to the air travel due to the low fares offered for the tickets. Thus, American railway has hardly introduced new rail destinations and can be barely seen to be a substation for the air travel today. Nevertheless, the situation can change if investment in the return of American rail destinations will be made. Buses are not a substition for the US low-cost carriers as their prices (even for the regional destination) are comparable to the prices for the flight tickets. Conclusion Low-cost carriers are not threatened by the substition by railway/buses.The summary of the Porters five forces analysis can be represented by the following graphConclusion from the Porters five forces framework The U.S. low-cost airline industry is not an attractive industry to enter because of the heavy competition, large turnover rates and high fixed costs which results in one of the lowest profitability of all industries.Now we came to the most immediate layer by wh ich the companies are surrounded layer of competitors and markets. We will conduct the analysis of this layer by dividing the airline industry into particular Strategic Groups. We decided to define Strategic Groups by following terms by geographic coverage (national, regional, international) and by customer satisfaction (measured in the airline industry by a scale from 1-1000 points). Conclusion to the Strategic Groups The most direct competitors of low cost-carriers are very often other low-cost carriers. There is a warm competitive rivalry both within the strategic group of low cost carriers like Southwest Airlines and JetBlue, but also there exists a competition between strategic groups. For instance, a big low cost-carrier Southwest also competes with Delta Air Lines who is the largest legacy/major U.S.airline who operates in both a domestic and an international network. According to our research, critical success factors for the low-cost airline industry include ticket fares, waiting times for flights, safety measure, customer-oriented service and comfort, special sales offers (for example, frequent-flyers programs), airport fees, number of destinations, costs of airplaines, fuel price conditions, online ticket booking, high-frequency flights.