Airline Industry: Environment Responsive Strategy
1. How did various environmental factors affect the airline industry pre-9/11? Fully explain.
Due to globalization, the airline industry became an important service supplier. It serves the important role of linking the business ventures of trans-national and multi-national corporations by carrying people and cargo from one place to another. Without the airline industry, the internationalization of business activities would stand still. (1995) As much as the airline industry greatly influences domestic and international environments, these environments also largely affects the viability and the persistence of the industry so that any event or circumstance in these environments would influence the industry beneficially or adversely and the individual airline businesses comprising the industry. There are four distinct environments that have an impact on the airline industry prior to the 9/11 terrorist attacks, which are the economic, political and technological environments.
The most prominent demand factor influencing the airline industry is income, with income derived from the vibrancy of economic activities engaged in by potential passengers. In the international arena, the growth in aggregate world gross domestic product implies that countries are moving towards growth. Growth means that business firms and households are engaged in economic activities and gainful employment providing them with income. Income earned exceeding the value of the day-to-day needs of households and the expenditures of business firms means that there are potential savings. People and business firms with savings have the option to place their earnings in banks to support investment loans, invested in business ventures or spend for wants. Whichever option households and business opt to engage in translates to a multiplier effect on the economy leading to further growth. In terms of savings deposited in banking or financial institutions, money received from depositors translates to loans accorded to business firms to support expansions and innovations. The airline industry is one of the industries that benefit from loans obtained from financial institutions to support the expansion of the business through the purchase of new aircraft or innovations such as the introduction of improved services. Savings invested directly to the industry through the purchase of shares in the airline industry comprise another effect of the economic environment to the industry. Savings spent on wants affects the industry in terms of the increase in tourism activity necessitating engagement in airline transportation. The economic environment of increasing world gross domestic product positively affects the airline industry by providing financial support for industry innovations and increasing demand for aircraft transportation services.
However, immediately prior to 9/11, the economic environment was in dire mood as industries are still at the stage of recovering from the economic impact of the bursting of the dot-com bubble in 2000 causing stock market collapses reducing the size of operation and financial viability of many industries, including the insurance and airline industries. Immediately prior to 9/11, the airline industry was trying to keep afloat amidst the economic environment of stock market crashes, shrinkage of industries, and the demise of individual business firms.
Government policies directly or indirectly directed towards the airline industry constitutes the political environment influencing the viability and direction of the industry and policies change overtime implying constant changes in industry. Policies affect the airline industry through the imposition of limitations or regulations to its operations such as the imposition of taxes affecting the motivation to invest in the industry or statutory provisions limiting the dynamics of industry players. Early policies resulting to the thriving atmosphere in the airline industry is deregulation. This political factor created an industry environment that removed barriers to entry, allowed airline business firms to choose their specific routes, and fostered free competition within industry players. Deregulation removed some important business limitations to the expansion of the industry (1999). With the saturation of the domestic market with a sizable number of business firms, the need to expand internationally heightened so that deregulation allowed industry players to look towards cooperation-based operations in order to expand internationally and achieve higher levels of efficiency. Initially, the strategy utilized by industry players was market concentration, where the entire market was divided among the players, with each industry player having a market of its own. This still did not address the inevitable shift towards internationalization so that industry strategy shifted focus towards alliances in order to take advantage of economies of scope. However, despite deregulation in the domestic economy, the US airline industry still had to contend with international regulations so that at most industry efforts towards internationalization only achieved regional domination.
Prior to 9/11, technological innovations relating to the airline industry focused on facility and service improvements such as the modernization of the aircraft fleet in order to enhance the comfort of passengers as well as techniques in aircraft travel services in order to provide fast and hassle free service to customers. However, these efforts were subject to the availability of funds, influenced by the economic and political environments. Thus, technological environment prior to 9/11 influenced the airline industry depending upon the concurrent effects of the economic and political environments.
Overall, the business environment immediately following 9/11 placed the airline industry on shaky ground due to the stock market crash, inability to achieve hoped for levels of international expansion, and technological development limited by economic and political factors.
2. How did various environmental factors affect the airline industry post 9/11? Fully explain.
Environment factors after the 9 /11 terrorist attacks radically changed in airline industry in terms of the demand factor of income and the supply factor of cost-revenue relationship and investments, the political war waged against terrorism, and the technological fixation towards the enhancement of airline and airport security.
The 9/11 terrorist attacks created an economic environment not at all conducive to the airline industry in terms of losses. Immediately after the 9/11 attacks, the US government stopped outbound flights, redirected or diverted incoming flights and conducted thorough security checks on incoming passengers. Within the three- day grounding of flights, the airline industry suffered losses totalling US $300 million equivalent to €250 million. This implies that on the supply side, the cost-revenue relationship negatively weighed in favour of costs resulting to losses on the part of all airline businesses with small airline companies experiencing the brunt of the economic effect of the 9/11-influenced grounding of flights. Due to these losses from the grounding of flights together with demand factors, major industry players suffered declines in share prices. Continental Airlines previously deemed the strongest company in the industry suffered share price decline of 49 percent, American Airlines by 39 percent, United Airlines by 43 percent, Delta Airlines by 46 percent, and Southwest Airlines by 34 percent. This implies that investors, banking institutions, business firms and individuals were discouraged by the great risk involved in entrusting their money to airline companies knowing that positive results for the business prospects of these industries were dim. (2004)
The demand factor of income resulted to the decline in passengers. The 9/11 attacks created an atmosphere of fear in the country resulting to the instantaneous decline in flights reservations. This means that while the industry is trying to deal with its losses, it also faced other losses in terms of the decline in passengers. As an effect of losses, airline companies needed to cut-costs. Part of the cost-cutting activities involved the retrenchment of bulk of their employees since the decline in passengers meant the need for lesser number of employees. Retrenchment has a negative impact on income translated into the ability of business and leisure travellers to spend for airline transportation. On the part of leisure travellers, the loss of income of retrenched employees means that their families may not be able to gain savings for allocation to investment or spending on tourism activities. This also means that the number of families affected by the major retrenchments have to contend with a limited budget. A limited budget of households in turn translates into the decline in the revenue generation of other industries that consider the families of retrenched employees as customers. The decline in business activity of other businesses means an aggregate decline or negative economic growth. Decline in business activity also means the lack of opportunity for the international expansion of businesses resulting to the lack of need for airline transportation for people and cargo. The economic cycle goes on resulting to a worsening condition for the airline industry. Thus, the economic environment of high-risk investment opportunities in the industry, shrinkage in other business activity, and loss of income caused the further decline of the airline industry as the 2000 stock market crash was worsened by the concurrent stock market crash prior to the 9/11 terrorist attacks.
Policy implications after the terrorist attacks comprise the political environment that affected the airline industry. Post 9/11 political environment covered the war against terrorism propelled to the fore by the Bush government. Although this constituted a political move, this policy had strong economic implications influencing the airline industry. The war against terrorism translated into the ongoing military attacks on Iraq and Afghanistan. War meant that the government had to allocate funds for military and logistic plans. Despite the allocation of US $15 billion in emergency assistance to the airline industry, total losses totalled US $18 billion even with the bailout funds (2004). This means that the industry still had to undergo further rehabilitation to recover fully from its losses. This was the plight of the airline industry in the context of the heavy spending to support the war on terrorism. With burgeoning budget deficit, the policy of waging war on terrorism developed a political environment focused towards the forwarding of the political statement of the zero condonation of terrorist attacks. The government became so focused and intent on bringing the stability of the United States as a leader in the international arena that it was not able to support substantially the recovery of the airline industry. By 2003, the industry started to recover more through on its own by hedging on its business and service advantages rather than through the greater effort of policy support. The importance of air transportation to the domestic and international community was the biggest factor that kept the industry afloat and persisting. In addition, the policy of waging war on terrorism had economic implications adverse to the recovery of the airline industry. Political instability in the Middle East resulted to the rise in the price of fuel. Since the airline industry is largely dependent on fuel, airline businesses had to deal with rising cost in fuel acquisition. Thus, the political environment of political instability in the international arena and the global war on terrorism primarily adversely affected the industry in terms of cost adjustments and secondarily helped the industry recover from the impact of the attacks.
Technological environment after 9/11 involved innovations in surveillance and other security measures in aircrafts and airports and the enhancement of security training of airplane and airport personnel. These positively influenced the re-establishment of a secure environment for passenger resulting to greater motivation for passengers to acquire airline services.
3. Suppose you are asked, based on the above analysis, to devise a competitive strategy that a US airline (United Airlines, for instance) should seek to follow. Justify your choice of the strategy you devise.
The individual business firms comprising the airline industry are necessarily interrelated because they share the same airport facilities and offer the same basic services. The industry also subsists through the collective contribution of industry members. However, as business firms, it is also imperative that airline companies develop a competitive advantage in order to realize better business prospects.
The airline industry is a cohesive business so that the dynamics of the relationship among industry members affects the viability of the industry (2004). This is because of the inevitable links among airline businesses in the industry since airline service comprise the only factor that differentiates the individual airline businesses and other operational considerations are shared with other airline business firms. Different airline businesses share the same airport facilities and airport personnel services so that the differentiating factor is only the leg of the passenger trip inside the plane. (1997) This implies that need for business-to-business relations. Currently, airline companies have already established business-to-business links through the code sharing, marketing arrangements and procurement arrangements with other airline companies. Code sharing refers to an airline partnership involving the selling of airplane tickets for a flight in another airline using its own airline code. Code sharing allows airline companies expand their operations in markets around the world where they have not been able to establish a company base or purchase aircrafts. This benefits airlines by allowing them to provide flight links in a leg of a passenger’s flight. ( 2003) A passenger coming from Asia going to the United States can purchase a ticket from an airline operating in the Asian country with the flight comprised of two legs—from the Asian country to an international airport such as Hong Kong and then a transfer flight to a US airline from Hong Kong to the destination in the United States. This arrangement benefits the Asian airline not operating direct flights to the United States to acquire passengers going to the United States while US airline not operating in the Asian country acquires passengers from a pick-up point where the airline can operate. As a competitive advantage, US airlines seeking to expand into the international market but with limited resources to establish a company base or purchase additional planes can widen their network of business relations with local or domestic airlines in order to reach out to these markets. The visibility of the US airline improves in the international market through code sharing while enjoying increases in sales.
Due to code sharing, international airlines also benefit from engagement in marketing alliances, including Star Alliance, SkyTeam and Oneworld, with the general objective of boosting the benefits derived from cooperative marketing efforts. Star Alliance consists of the largest marketing alliance in the world involving a uniform marketing strategy for all members of the alliance. Marketing activities includes 1) frequent flyer program linked to code sharing agreements, 2) airline customer access to the airport lounges of other allied airlines, 3) coordinated flight schedules among allied airlines, 4) special fares and discounts for bookings made for flights involving allied airlines, 5) harmonized customer service processes in order to provide a uniform flying experience for customers of the allied airlines, and 6) development of a common information technology structure or format. SkyTeam comprise the second largest airline alliance described through the marketing strategy developed around customer needs. Oneworld is the third largest airline alliance but it is the first alliance to implement centralized management. (2003) Marketing alliances is a competitive advantage for airlines when they choose the alliance with which to align the company. The decision depends upon the marketing thrust and direction targeted by the company. In effect, the alliance with which the airline aligns itself enhances the definition of the company to the international market.
Another business-to-business relationship arising in the airline industry involves procurement arrangements. Most airlines operate similar planes so that these companies benefit from the establishment of uniform maintenance and engineering practices allowing for the purchase of plane parts in bulk and the sharing of parts. Airlines benefit through savings from additional costs and efficiencies derived from the sharing of expertise on maintenance schedules and practices and engineering feats. Apart from this, airline alliances also offer the opportunity for airlines to gain bargaining power through the procurement of fuel, planes and technology as a group. (Hanlon, 2003) As a competitive advantage, an airline optimizes the benefits derivable from business-to-business relations through the strategic alliance with airline partners able to positively build-up the company.
The nature of the industry of linking individual airlines means that in terms of service, alliances provide uniform service offerings, marketing strategies and support services to all the customers of the allied members so that the competitive advantage of the individual firms rests upon their decisive alliances with their chosen partners and the manner that these alliances build up the company to the international market.
Based on this industry background, competitive advantage on the part of the individual airline company pertains to the enhancement of brand equity linked to the direct interaction of the airline with its customers. Brand equity refers to the value accorded by customers to airline companies due to the distinct or preferred service features of the company. Service features may cover customer service, low cost services, operational scope of the company, and other sources of differentiation.
4. How might airlines better plan for disruptive events such as 9/11?
Airline planning for disruptive events involves a two-fold effort. On one hand, planning involves airline cooperation with government efforts to secure airports and other the other hand, airlines also have to establish security measures on the plane and in relation to airline personnel.
Cooperation with government efforts mean that airlines have to be knowledgeable of improvements in airport security measures in order to ensure compliance by airline personnel and their passengers. Security breaches in airports are likely to be due to human error so that security planning in airports is directed towards technological innovations that address the problems of human error so that these comprise non-invasive technologies that augment the limitations of human perception. Airport planning is also a holistic process covering the entirety of airport environment design. Airport security design involve strategically placed intelligent technological gadgets that would detect a wide array of harmful and possibly threatening things that humans may not be able to easily detect. (2003) Some of the technological security equipment being considered for use in airports in the near future is x-ray machines for people that would detect objects which may look unsuspicious to the normal visions, biometric identification systems that check identity through the unique features of individuals, computer systems able to automatically detect suspicious activity as this is captured on video, and thermal imaging to detect chemical substances which are not components of the human body. These technological innovations would minimize opportunities for threatening situations and create a secure environment for passengers. (2003) Airline preparation for disruptive events such as 9/11 would be enhanced through their knowledge of environment security design and the alignment of their security plans with airport security measures.
Security planning for individual airlines involves a consideration of the context of interdependence among airlines and between airlines and airport management in their security measures. An appropriate planning method for airlines belonging to an industry characterized by interdependent security measures is enterprise risk management. The basic tenet of enterprise risk management is that every entity in the business firm exists in order to provide value for stakeholders. Although every business firm and venture involves certain amounts of risk, the important consideration for the company is the determination of the degree of risk that the company should take in achieving growth in stakeholder value. Enterprise risk management allows the airline company to manage uncertainties and balance the risks and opportunities associated with uncertainty in order to enhance value. Thus, enterprise risk management is defined as the process implemented by management throughout the strategy setting of the company with the purpose of identifying potential scenarios that could affect the company, manage risks according to the abilities of the company, and provide reasonable assurance with regard to the achievement of company objectives amidst uncertainties. Through this process, airlines become better prepared for different disruptive scenarios. ( 2003)
Through enterprise risk management, an airline categorizes its objectives into strategic objectives—high-level goals aligned to supporting company mission, operations objectives—involving the effective and efficient utilization of resources, reporting—covering reliability of reporting, and compliance objectives—dealing with statutory provisions and industry regulations. The use of these categorizations enables the airline to focus on the separate aspects of enterprise risk management so that all aspects of preparatory activities are covered. Due to uncertainties, airlines may face risks. However, through effective reporting, the company is warned of the possible effects of uncontrollable and unforeseeable risks so that the company is able to conceptualize solutions in these instances. ( 2002)
Enterprise risk management involves eight interrelated components necessarily integrated in the management process. These components are 1) internal environment—comprised of the perspective of the company towards risk, 2) objective setting—a necessary process to ensure that objectives are consistent with the mission and risk appetite of the company, 3) event identification—involving the determination of the internal and external events providing both risks and opportunities to the company that serves as basis for objective setting, 4) risk assessment—in terms of likelihood and impact to support management strategies, 5) risk response—covers actions that link risks with the risk tolerance and appetite of the company, 6) control activities—policies and procedures for the effective implementation of risk responses, 7) information and communication—applied through the form and time frame that promotes efficiency, and 8) monitoring—evaluations resulting to adjustments as needed. (2002)
Through enterprise risk management, airline companies are able to prepare better for disruptive events by apprising the company of risks relative to the ability of the airline to absorb risks. This is achieved through the alignment of objective or what the company wants to achieve and the components or the factors needed to achieve these objectives [See the figure above].
[Word Count: 3,500 excluding title and questions]
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