Case Analysis of the Us Airline Industry in 2012

Case Analysis of The US Airline Industry in 2012

Lacey J. Barrett

Park University

Abstract

This paper serves to analyze problems that the US Airway Industry faced in 2012. Porter’s Five Forces of Competition Framework will be a major component in analyzing the problems in the US Airway Industry. The five forces include competition from substitutes, threat of entry, rivalry between established competitors, bargaining power of buyers, and bargaining power of suppliers.

A Case Analysis of the US Airway Industry in 2012

Synopsis of the Case

        The US Airway industry originally began as a mail carrying system, and then quickly evolved into transporting people.  With the surge of people needing or wanting to be transported by aircraft, there became a market to produce more airplanes and a need for different flying companies.  The airline industry faced several changes and challenges in the 1980s and 1990s because airlines were looking for new ways to adjust to competitors entering the airway market so that they could gain competitive advantage.  In 2012, airway forecasts pointed toward a continue in growth for air travel, but the margin showed a much slower growth than that of previous years (Baldwin, 2017).

Problems that the US Airway Industry Faced

        Problems that the US Airway Industry faced revolved around the rising costs of labor and fuel.  A key feature in the airway industry’s cost structure is a very high amount of fixed costs due to union contracts. Because of union contracts, reducing employee hours during slow times was nearly impossible, and several employees were involved in at least one of the twelve major unions (Baldwin, 2017).

        Another major problem in the US Airway Industry was the cost of fuel.  The amount of money spent on fuel depended on the age of the aircraft and the distance of the flight.  The price of fuel was and still is the most unpredictable cost item for airlines.  Because of unpredictable fuel prices, there became a need to acquire newer planes and manufacturing long-distance, wide-bodied planes with two engines instead of four to maintain fuel-efficiency (Baldwin, 2017).

Explanation of Problems the US Airway Industries Face

        Using Porter’s Five Forces of Competition, the problems in the US Airway Industry can be analyzed. The five forces can be broken down into two categories—horizontal competition and vertical competition.  Horizontal competition includes Threat of Entry, Industry Rivalry and Threat of Substitutions.  Vertical competition includes Supplier Power and Buyer Power (Grant, 2016).

        Threat of Entry: Many industries make it impossible to new entrants to enter the market on equal terms.  The barrier to entry is the biggest disadvantage that new entrants face (Grant, 2016).  These barriers include capital requirements, economies of scale, absolute cost advantages, product differentiation and legal barriers.  In the US Airway Industry, the five major dominating passenger airlines are United, American, Delta, US Airways, and Southwest. The importance of the leading group was enhanced by its network of alliances with smaller airlines.  In addition, domestic alliances with regional airlines, were also core members of international alliances (Baldwin, 2017).