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Coursepack #6
Airline Industry
(Southwest and American Airlines)
David Busch
Erica Murray
December 1, 2010
MIE 480
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Table of Contents
Description of Southwest Airlines and American Airlines (Part 1) ......................................................... 2-3
Question 1 .............................................................................................................................................. 2-3
Opportunity (Part II) .................................................................................................................................. 3-5
Question 1 .............................................................................................................................................. 3-4
Question 2 .............................................................................................................................................. 4-5
Industry Analysis (Part III) ……………………………………………………………………………………………………………..... 5-10
Question 1 ……………………………………………………………………………………………………………………………………….5-6
Question 2 ………………………………………………………………………………………………………………………………………….7
Question 3 ………………………………………………………………………………………………………………………………………7-9
Question 4 ……………………………………………………………………………………………………………………………………..9-10
Strength Assessment (Part IV) ……………………………………………………………………………………………………..10-13
Question 1 …………………………………………………………………………………………………………………………………..10-11
Question 2 …………………………………………………………………………………………………………………………………..11-12
Question 3 ………………………………………………………………………………………………………………………………………..12
Question 4 …………………………………………………………………………………………………………………………………..12-13
Works Cited………………………………………………………………………………………………………………………………….14-15
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PART I
1.
Southwest Airlines and American Airlines are two of the most popular and well-known airline
companies that are present in the United States. Southwest Airlines’ corporate address is located at 2702
Love Field Drive in Dallas, Texas. Southwest Airlines Co. was founded in 1971 as Air Southwest.
Southwest Airlines is classified as a low cost airline and is the worlds’ largest low-cost carrier. Data
collected in 2009 shows that Southwest Airlines is the largest airline in the world according to number of
passengers carried per year. Southwest Airlines also controls the fourth largest passenger fleet of aircraft
and accomplishes around 3,200 flights per day. Information provided by the U.S. Department of
Transportation’s Bureau of Transportation statistics shows that Southwest Airlines has flown more
passengers for both domestic and international passengers than any other United States Airline since 2006
and for the 37th consecutive time in January of 2010 posted a profit. According to “The Directors,” a
recent article published in the Fortune magazine, Southwest Airlines was the “only Fortune 500 airline to
land in profitable territory last year with $99 billion in earnings” (Shambora 170). Unlike many other
airlines, Southwest uses only one type of aircraft, the Boeing 737. Southwest Airlines also announced
that it would take over AirTran Airways as of September 27, 2010 (Wiki Southwest)
American Airlines corporate address is located at 4333 Amon Carter Boulevard in Fort Worth,
Texas. American Airlines, Inc. is also a chief airline located in the United States. This airline was
founded in 1930 as American Airways. American Airline ranks as the world’s second largest airline
according to passenger miles transported, passenger fleet size, and operating revenues. American Airlines
is a branch of the AMR Corporation which is also located in Fort Worth, Texas. The AMR Corporation
is located right across from the Dallas/Fort Worth International Airport, which is American Airlines’
largest hub. American Airlines has flights all throughout North American, Latin and South America,
Europe, Asia/Pacific, and the Caribbean. The Fortune 500 list of companies in 2010 listed American
Airlines, Inc. at number 120 (Wiki American Airlines). The article “Airline Profits Taking Off,”
published on October 20, stated “American Airlines posted its first profitable quarter since 2010” (Airline
1).
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Even though Southwest Airlines is considered a low-cost airline they are still a major competitor
of American Airlines. One of these reasons is because Southwest is the world’s largest low-cost carrier.
Other low-cost carriers such as JetBlue and AirTran were considered in the comparison against Southwest
but after further research they did not seem to be as big of competitors. Southwest Airlines actually
announced that it was taking of AirTran only a few months ago and JetBlue does not have that many hubs
in the same locations as Southwest. Southwest Airlines Co. and American Airlines, Inc. have flights in
many of the same places and are two publicly traded business rivals.
PART II.
1.
The airline industry seems to be very interesting yet complex and is in a very competitive market.
“In recent years, there has been an industry-wide shakedown, which will have far-reaching effects on the
industry's trend towards expanding domestic and international services. In the past, the airline industry
was at least partly government owned” (Investopedia p.1). The U.S. Department of Transportation
(DOT) has split the airline industry into four distinct categories. The first category, which is
international, is able to take passengers on planes of 130 seats or more just about destination in the world
and usually have annual revenue of at least $1 billion. The national airlines use planes that can seat
anywhere from 100 to 150 passengers and make anywhere from $100 million and $1 billion every year.
Next is the regional category with companies that focus on short haul flights and have less annual revenue
than $100 million. Lastly is the cargo industry which focuses mainly on transporting goods. Southwest
Airlines and American Airlines can be grouped in the international and national category because they
both fly international and domestic (Investopedia)
There are many other factors that can majorly affect the airline industry that are not always
controllable. Weather is a major factor in the airline industry. As every single person on this earth
knows, weather is unpredictable. Anything from severe heat to severe cold along with fog and snow can
shutdown airports which in turn cancels flights. Canceled flights equal lost revenue for that airline
company. Fuel cost is an airline’s second largest expense according to the Air Transportation Association
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(ATA). Fuel efficiency among airlines will tend to be different though depending on what category that
airline is located. Airlines that travel shorter differences will usually have a lower full efficiency because
large amounts of jet fuel are consumed during landings and take-offs. Other factors include costs to lease
or buy an aircraft, technology, airport capacity, and they way routes are structured (Investopedia)
Below are some interesting calculations found dealing with the airline industry given by Investopedia:
Available Seat Mile = (total # of seats available for transporting passengers) X (# of miles flown during
period)
Revenue Passenger Mile = (# of revenue-paying passengers) X (# of mile flown during the period)
Revenue Per Available Seat Mile = (Revenue) / (# of seats available)
2.
In an article published in July of 2010, Boeing predicts the need for 30,900 new commercial
aircraft over the next two decades. These 30,900 new commercial aircraft will be valued at $3.6 trillion.
The global fleet is predicted to expand 92.2% from the current 18,890 to 36,300. Interestingly enough,
the forecast demand for new aircraft is 6.5% higher than the 29,000 that was predicted last year. Boeing
predicts that the global airline financial performance will be led by Asia/Pacific carriers. 72% of all
commercial air traffic was carried by European or North American airlines in 1990. That number has
decreased dramatically to 58% and is predicted to fall to 45% by 2029. "The Asia/Pacific region shows
the most robust market gains, with China leading the way," Boeing stated. "Today, about one-third of all
airline traffic touches the Asia/Pacific region, and as a result of the growth in this market, by 2029 almost
43% of all traffic will be to, from, or within the region…Half of the world's new traffic added during the
next 20 years will be to, from, or within the Asia/Pacific region” (ATW). The Asia/Pacific airlines will
need 10,320 new aircraft over the next 20 years that is valued at $1.3 trillion. The fleet of Asia/Pacific
airplanes will triple from 4,110 in 2009 to 12,200 in 2029. It has been said that "Rapidly expanding air
service within China and other emerging economies and the spread of LCC business models throughout
the world drive this market segment” (ATW).
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Year 2009
Revenue
Operating
Income
Net Income
Southwest
$11.0 B
$475 M
$178 M
Airlines
American
$19.9 B
$1.0 B
$1.47 B
Airlines
*Southwest Airlines Balance Sheet & Income Statement
*American Airlines Balance Sheet & Income Statement
Total Assets
Total Equity
$14.3 B
$4.95 B
$25.4 B
$3.49 B
PART III
1. According to Porter, a “5-force” analysis helps management “define an industry’s structure and stake
out a position that is more profitable and less vulnerable to attack” (Porter 78). It is important to
understand and evaluate the competitive forces because it “reveals the roots of an industry’s current
profitability while providing a framework for anticipating and influencing competition (and profitability)
over time” (Porter 79). Porter identifies the five competitive forces that drive profitability as suppliers,
buyers, rivalry, substitutes, and threat of entry. The table below illustrates a “5-force” analysis for the
airline industry.
Competitive Forces
Suppliers
Buyers
Rivalry
Substitutes
Threat of Entry
Power of Threat
Low
High
High
Moderate
High
Suppliers: Low Power of Threat
Suppliers are not concentrated within the airline industry and Boeing and Airbus dominate a large
proportion of the airline supply business. In addition, the relationship specific investment that airlines
make in the form of trained mechanics, existing stock of aircraft, etc, is likely to give the aircraft
manufacturers some supplier power” (Sundaresan 2).
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Buyers: High Power of Threat
There is little differentiation among products and buyers can choose between more than two sellers.
Buyers are often price sensitive and seek “lower cost alternatives” (Datamonitor 16). Overall, customer
satisfaction and loyalty is generally low because airlines often “raise fares and add fees” (Datamonitor
16).
Rivalry: High Power of Threat
Competition has intensified over the past decade and “any US air carrier deemed fit by the US
Department of Transportation is free to operate scheduled passenger services between any two points
within the US and its possessions” (Samadi 25). Competition has increased for several reasons, including
low-cost carriers, price incentives, internet booking, and online check-in (Samadi 25). Several major
airline companies also control roughly the same size market share. For example, AMR Corporation’s
market share is 9.5%; Southwest Airline’s market share is 8.4%; and U.S. Airway’s market share is 6.8%
(Samadi 28).
Substitutes: Moderate Power of Threat
Substitutes for airline travel include other forms of transport such as road, rail, and marine travel.
Substitutes are more practical with shorter travel distances because of factors such as cost and time (15).
As technological developments increase, “competition from substitutes such as video conferencing is on
the rise” (Samadi 16). However, “competition from ground and sea transport poses a weak threat to the
industry because the convenience and competitive price of air travel experiences low levels of
competition with substitutes” (Samadi 25).
Treat of Entry: High Power of Threat
According to IBIS World, threat of entry in the airline industry is high because “costs to purchase aircraft
and specialist machinery, hangar and other airfield space, skilled labor and to satisfy stringent safety
requirements are very high” (Samadi 26). Costs are extremely high and funding is hard to secure in a
competitive environment (Samadi 26).
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2.
Using the information from above, there is one low power force identified in the 5-force analysis.
According to the lecture notes, zero to one low force indicates, “expected profitability on a business
average on all key success factors will be less than cost of capital.” In addition, high power of threats
“forces reduction in the average expected profitability of the seller who has no particular strengths or
weaknesses.” A greater profitability can produce a positive financial impact for businesses. For example,
Southwest Airlines strategic principle to “meet customer’s short-haul travel needs at fares competitive
with the cost of automobile travel” has helped the company generate net profits over the past few years
(Porter 111). As a result, Southwest can provide more flexibility to employees and customers and reflect
their earnings through increased wages, higher stock prices, and larger dividend payments.
3. The lecture notes define key success factors as “specific resources and activities any competing
company must be good at if they are going to be profitable satisfying demand and defending against highpower competitive threats.” The airline industry has several key success factors, including:
PEOPLE/STAFF: In a service oriented business, a high quality and devoted staff can make all of the
difference. Airlines that have training programs that deal with communication with customers and
problem solving skills with other employees and people in management will find this to be a major key
success factor. Those customers who fly a certain airline that are pampered and shown respect are most
likely to stay with that same airline. Flying on an airplane is pretty much the same across all companies if
you sit in the same class. The one major thing that can make a difference is the staff working on that
plane and whether or not they provide you, the flyer, with a good experience. A good staff can quickly go
through the pre-flight requirements that we are all accustomed to (fastening the seatbelts, emergency
exits, etc.) and get people seated at a faster pace. All of this means less time spent on the ground and
more flights on schedule and on time (Fulton, Airline Industry).
CALCULATION: Investment in training per employee / Employee Turnover Rate
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PROMOTIONS: Promotions such as frequent flier miles can lead to success among airline companies.
Airlines are able to offer rewards such as free flights or free hotel stays once a customer has accumulated
a certain amount of airline miles. This will make customers want to keep flying with that specific airline
so they are able to gather enough points go reap the rewards. This is especially importance for those who
travel frequently for business. An airline can create loyalty and a repeat customer by offering promotions
and gaining their business on a consistent level (Fulton, Airline Industry).
CALCULATION: # of miles or credits to receive benefit
AIRLINE ROUTE SYSTEM: This could easily be the most important key success factor in the airline
industry. Scheduling the times of when to fly, where to fly, and what aircraft to be used is very critical.
Airlines must be able to match customer demand with how they plan their route system. By scheduling
too many flights with too large of aircraft, an airline company will lose large portions of money with all
of the empty seats that are left open on each of those flights. If an airline is able to figure out customer
demand then they will be able to fill flights and not lose that money (Fulton, Airline Industry).
CALCULATION: # of flights scheduled per day / Total U.S. flights per day
COST CONTROL: In order to be profitable, an airline must have competitive prices that will attract
customers and keep them loyal. They must be able to have high enough prices to where they can make a
profit but also low enough to where they can be competitive. This is very difficult to do when an airline
does not always know what demand will be coupled with the fluctuating cost of fuel (Fulton, Airline
Industry).
CALCULATION: Avg. price of flight / Industry Avg. price of flight
BRAND RECOGNITION: This is a very good key success factor with all of the competing airlines out
there. With so many different options of airlines to fly, companies must differentiate themselves from the
others in order to attract customers. Many airlines have catch phrases that are played on commercials that
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seem somewhat annoying at first but somehow get stuck in a person’s head. For examples, Southwest
Airlines has the catchphrases “You are now free to move about the country” and “Grab your bag…It’s
on.” American Airlines has the catchphrase “We know why you fly.” These slogans and catchphrases
has been embedded in the minds of flyers over the past years and when they are planning a business trip
or vacation it is very likely that they will book a flight on either of those airlines. I know, for instance,
when I was planning a trip to New York this past summer that two of the first two places I looked up
flights for were Southwest and American Airlines because I was so used to hearing their slogans and
seeing their commercials on television. This means that their plan of brand recognition has worked on
me.
CALCULATION: % of people influenced by commercials / Avg. # of people on flights
*Studies show that 8% of people exposed to ads are influenced by them.
ON-TIME FLIGHTS: Not a single person on this earth wants to be on a flight that is delayed or
canceled. Customers that fly frequently with an airline that has delayed and canceled flights will most
likely rethink the next time before they book a flight. On-time flights are critical for many reasons. First,
on-time flights will keep customers happy. Many fliers have family, friends, or even car services waiting
at the airport for them to pick them up. When a flight is delayed or canceled this can cause all sorts of
problems and leave customers unhappy. Also, a delayed flight is like a chain reaction because once that
first flight is delayed then a majority of the following will also be delayed because of the late arrival to the
next airport. Lastly, delayed flights can cost airlines bundles of money. Delayed flights can cause
customers to switch their flights and means more time the aircraft spends on the ground. Airline
companies want more time in the air, not on the ground. On-time flights can lead to customer loyalty and
saving money for the airline that is able to accomplish it.
CALCULATION: (% of planes late) x (% of airline’s fault)
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4.
One of the key success factors listed above is people, including commitment to employee training
and building strong customer relationships. Southwest Airlines is one of the most profitable companies
because of their dedication to employee motivation. Southwest’s value to employees is shown through
this statement, “To our employees: We are committed to provide our employees a stable work
environment with equal opportunity for learning and personal growth. Creativity and innovation are
encouraged for improving the effectiveness of Southwest Airlines. “
Southwest develops close relationships with their employees and provides in-depth training to
help them translate customer expectations into a valuable experience. With this, the key success factor,
people, protects profit against the high power threat of rivalry. An airline company that can perform well
on training employees and motivating employees will ultimately satisfy customers through their
responsiveness and dedication. With all else being equal, an airline company that can satisfy their
customers is likely to retain these customers and gain a competitive advantage.
Southwest’s strategy to “meet customer’s short-haul travel needs at fares competitive with the
cost automobile travel” is implemented into employee training programs (Porter 114). Employees have a
clear vision and are able to respond to customer needs more quickly. In addition, customers trust
Southwest because they are dedicated and reliable. As customers become more loyal, Southwest can
protect their profits from the high power threat of rivalry because customers are not willing to switch
airline companies. Overall, people is an important key success factor because it builds strong
relationships with both employees and customers. In addition, it can protect against the high power threat
of rivalry because customers will be more loyal to the airline company.
PART IV
1. Southwest Airlines
Key Success Factor
Equation
People/Staff
$270 / .05 = 5,400
Promotions
16 credits or 8 roundtrip tickets
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Airline Route System
3,200 / 27,319 = 11.7%
Cost Control
$114.61 / $236 = 0.486
Brand Recognition
.08 / 74 = .0012
On-Time Flights
.1976 * .1301 = .026
*All numbers found from Southwest airline industry reports on Southwest.com
* The latest available data from 2009
American Airlines
Key Success Factor
People/Staff
Equation
1500 / .06 = 25,000
Promotions
25,000 miles
Airline Route System
3,400 / 27,319 = 12.4%
Cost Control
$205 / $236 = 0.87
Brand Recognition
.08 / 102 = .00078
On-Time Flights
.2149 * .2067 = .045
*All numbers found from American Airline industry reports on AA.com
* The latest available data from 2009
2.
Key Success Factor
People/Staff
Southwest Distinctive
Competency Score
5
American Airlines Distinctive
Competency Score
1
Promotions
3
3
Airline Route System
1
5
Cost Control
5
1
Brand Recognition
1
5
On-Time Flights
5
1
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People/Staff- Southwest was more efficient in employee training programs because their average cost
per person was lower, but their turnover rate was also lower than American Airlines. Therefore,
Southwest is stronger relative to American Airlines.
Promotions- Both Southwest and American Airline received a score of 3 because of the difference in
promotions. Southwest would be good for certain travelers that fly short distances and go roundtrips
because they would receive their rewards much faster. American Airlines promotions would work well
for other fliers that do not fly very often but fly long distances when they do. Depending on the person,
both promotion programs could be considered very strong.
Airline Route System- American Airlines controls a larger percentage of the flights that are offered daily
compared to Southwest Airlines. With this, American Airlines received a stronger score relative to their
competitor.
Cost Control- Southwest offers lower prices than American Airlines and also offers an average price
substantially lower than the industry average.
Brand Recognition- American Airlines is stronger in brand recognition because they have more people
on flights compared to Southwest. This means that there are more empty seats on the Southwest flights
than the American Airline flights.
On-Time Flights- Southwest Airlines has a lower percentage of delayed flights than American Airlines.
In addition, a lower percentage of delayed flights for Southwest are caused by their employees. Taking
all of this into consideration, we gave Southwest a score of 5.
3.
Competitors
Average Score
Southwest Airlines
3.3
American Airlines
3.2
4. Using the strength assessment scores, Southwest Airlines is more likely to create and sustain
competitive advantage. Southwest scored a 5, the strongest score, in three of the six key success factors
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and score a 1 in two of the others. In one of the key success factors they received a score of 3 because we
felt they were very close in that category to American Airlines. The average score was close to that of
American Airlines but was still above them in these competencies.
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