The US Airline Industry - International Business Trade - Case Study Example

International Business 325 BSS Course Work The U.S. Airline Industry A Critical Evaluation Name of Student: Student No: Date: Name of Supervisor: Introduction Eleven years after the twin towers were struck on 9/11, the United States Airline Industry is still coming to terms with the after-effects of that event. In the aftermath of the crashes, and the resultant drop in airline usage, there has been a rash of mergers between airlines to cut costs. Other such cost cutting measures have involved parking of larger airplanes and causing the older, more experienced therefore more expensive pilots to be furloughed. This has led to a drop in airline industry standards because less experienced pilots are flying more sophisticated planes to the detriment of the passengers and the planes being utilised by many local airlines are second hand or of inferior workmanship. Nevertheless, strengths in the industry do persist. These include the fundamental fact that air travel is a growth industry. This is not only because of the increased population and need to cover large distances fast, but also because there is an increased tendency to fly as opposed to other forms of transport. The safety record is also quite good, with the public accepting this mode of travel as relatively safe as well as being an expedient way to cover large distances. This perception is true for both the larger as well as low cost carrier airlines. According to Fraher (2011) there have been six airline accidents that have been fatal since 9/11. 418 people have died as a result of these accidents. However, after an examination of all six accidents, the NTSB found a pattern that showed that pilot or mechanic error was instrumental in causing the crashes. This is significant considering that the airline industry considers that one of its major strengths is the fact that their airline staff are highly trained and experienced (letter from US Airlines, 2011). Another strength listed in the letter is the ability to categorise the market in order to provide different amenity levels even on the same routes with commensurate price implications. This has also been criticised because since the Deregulation Act of 1978 the industry has been operating in an ad hoc manner, with many industry executives having close relationships with FAA officials. This means that complaints against their airlines are not followed up. As a result, many airlines have substandard planes, service, and personnel training. This means that low cost carriers are in some cases a dangerous proposition as can be illustrated by ValuJet that operated between 1993-1996. Their airplanes were second-hand, their crew training was minimal, and they outsourced maintenance to dubious entities. They made a large profit by going public the year after launch despite a rocky safety record, the oldest of planes and numerous complaints to the FAA that were ignored. They only were only grounded permanently after killing 110 people by crashing into the Everglades in 1996 (Fraher, 2011) Thus we see that there are conflicting messages being received about the airline industry. On the one hand, the self-evaluation by the airlines gives a very positive picture of the future of aviation, while records from other researchers raise concerns as to the validity of these claims. This essay will seek to conduct a critical evaluation of the airline industry using theoretical and business frameworks. International Business Trade Theories These theories were incepted in order to deal with issues brought about by having a fragile macro-economy, elevated redundancy, and inflation. When the world is committed to a free market economy, the world economic system will tend to succeed. This has been demonstrated by Adam Smith (1970) when economists proved that economic welfare is a result of free trade. The Deregulation Act of 1978 freed the U.S. airline industry from government control and allowed liberalisation to take over. This has resulted in a lot of growth in the industry but has also led to some problems resulting. These problems include a lack of minimal training standards that have resulted in some low cost carriers providing only extremely rudimentary training to staff or using pilots with only about 250 flight hours on their more sophisticated airplanes. This trend has reduced the safety records of these aircraft and resulted in more fatalities than necessary (Gore, 1996). The Absolute advantage theory applies to countries which have leverage over their trading partners because of the ability to manufacture services or goods of greater or equal amount while utilising fewer resources. In the case of the American airline industry, some airlines are able to apply for bankruptcy protection while still operating. This option is not available to foreign airlines. United Airlines for example filed for bankruptcy protection in 2003, and when they emerged from it in 2006, they rewarded managers with ten million shares which constituted 8% of the company’s shares and whose monetary value was estimated to be 115million dollars (Bailey, 2007). Meanwhile they were competing with other international airlines that did not enjoy the same privilege, giving them an advantage. Foreign Direct Investments Foreign direct investment in the US airline industry is extremely restricted. Although an open skies policy is promoted by the US market, matters on the ground do not reflect this liberalisation. Foreign carriers are not allowed cabotage, which means they cannot carry paying passengers between two points of a US route. For example, a foreign carrier cannot pick up paying passengers in LA and transport them to New York according to U.S. law. Furthermore, cabotage restrictions are enforced by minimising the amount of foreign investment that can go into airlines flying on the domestic circuit. There is a ceiling placed on how much stock foreigners can hold in a domestic airline; capped at 25% of voting stock or 49% of equity in certain situations. This protection of domestic airlines is causing a problem both locally and overseas. These problems were precipitated when mergers between several major United States carriers in 1998 resulted in demands for closer supervision of competition by the federal government. This was done through legislative means when Sen. Alfonse D’Amato and Rep. Michael Forbes directed the transportation secretary to probe allegations that pricing is rapacious or unfair and thus could result in decreased competition domestically for airlines. Policies that were deemed to be detrimental to the public’s access to ‘widespread, convenient, and efficient’ air transportation were to be blocked by the secretary (Representative Forbes’ bill, H.R. 3704; Senator D’Amato’s companion bill, S. 1977, 1998). There is therefore a tug of war between promotion of fair competition on the domestic front coupled with blockage of foreign direct investment in form of restricted cabotage and other limitations. Casualties of this tug of war were of course the domestic air commuter. Virgin Atlantic, fronted by British entrepreneur Richard Branson, was desirous of launching a low cost passenger airline out of JFK International Airport in 1998. The airline was to serve ten cities within continental United States using twenty new airplanes at competitive rates. These airplanes would also liaise with his transatlantic flights (Jones, 1998). In spite of the rumoured 200 million USD made available for the venture, Mr Branson was forced to abandon the venture due to the law that restricts foreign ownership of domestic airlines to less than a controlling interest (Zuckerman, 1998). Marketing The United States makes up over 40% of the world’s airline industry (Airlines, 2010). This industry is made up of the legacy carriers such as American Airlines, Delta, and United Airlines as well as low cost carriers including Southwest Airlines and JetBlue. After deregulation in 1978, the industry experienced increased competition as the latitude for pricing variations was increased (Gerardi and Shapiro, 2009). The 4ps of marketing are Product, Promotion, Place, and Price. In order to gain competitive advantage, the airline industry must be able to utilise these marketing tools in a productive way. The product that is facilitating air travel can be differentiated amongst the airlines by quality of the experience, the packaging, and the reputation of the brand. Customer care is often a casualty when cutting costs due to poor training of personnel and lowering of benefits which leads to low morale at work. Southwest airlines have managed to maintain a both a good quality customer care service and be a low cost carrier. Delta on the other hand, has suffered from poor quality customer care due to employees experiencing cuts in pay, benefits, and training. According to David (2009) for a product-positioning plan to be effective, two criteria must be met; the first is that it must singularly differentiate a company from its competitors and secondly, it must foster expectations in the customer that are lower than what the company delivers. This is what Southwest has accomplished by not trumpeting the quality of their customer service. Instead the marketing focus is on the competitiveness of its airfare. In fact, Graham & Vowles (2006) aver that the low-cost model was incepted by Southwest Airlines. Thus customers expect to pay low fares for their travel but are also pleasantly surprised when they receive excellent customer care as well. Their expectations are therefore exceeded, leaving a positive impression of the airline. Strategy The best strategy for airlines to maintain their niches in the market in the coming years is for them to consolidate their core services that distinguish them from other players in the industry. One way to do this is to adopt the cost leadership strategy especially among the low cost carriers such as JetBlue and Southwest. Since there is only one other competitor and the probability of new players is fairly low, the point of differentiation is who has the lowest airfare. This is modified by the attempt to balance energy and maintenance costs with provision of amenities such as pillows, etc (Capell, 2006). Another strategy that could be implemented is the vertical integration which involves merging with or partnering with regional competitors. This leads to fewer delays according to a study done by Forbes and Lederman (2010). Conclusion Since deregulation in 1978, the United States airline industry has struggled to find its feet. Even before the events of 9/11, many airlines as seen, were struggling with issues of quality control and cost control. This state of affairs was not helped by the attacks on the twin towers and the subsequent recession in 2008. Although recovery is ongoing, many airliners are still declaring bankruptcy or going out of business altogether as well as merging to consolidate their assets. The ibisworld (2011) focus predicts that this trend is set to improve in the coming five years, but only time will tell. 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