EBM3083: Strategic Management (Case Study 1)
Competition in the Airlines Industry
For many years, the airline industry was highly regulated which resulted in most airlines acting
like each other by definition. However, the similarities among the large airline companies
remained after the industry was partially deregulated more than 30 years ago. These similarities–
in services, routes, and performance–have persisted even to the present time. For example,
airlines often offer a new service (e.g., Wi-Fi availability on flights), but these services are easily
imitated, therefore, any differentiation in offerings is only temporary.
In recent times, consolidation has occurred in both European and U.S. airline industries. In
particular, poor performance led U.S. Air and America West to merge. Additionally, much for the
same reasons, Northwest Airlines and Delta Airlines merged. Likewise, United Airlines and
Continental merged to create the largest airline in the industry. More recently, American Airlines
and U.S. Air have been approved to merge. Much of the consolidation was approved because
several of the airlines went through bankruptcy proceedings (e.g., Continental and United both
went through bankruptcy before their merger). All of these mergers, however, have not created
highly differentiated services (or prices). All of airlines largely provide the same type of services,
and prices do not differ greatly among the large “full-service” carriers. In fact, it seems that the
primary competition is in trying to make fewer mistakes.
In fact, industry statistics that report positive accounts, announce such outcomes as a reduction
in lost bags, fewer cancellations of flights, and fewer delays. What this suggests is that all of
these areas still likely represent major problem areas. It seems pretty bad when the most positive
statement one can make is that fewer bags have been lost in recent times. Although profits have
been up more recently, this is primarily due to lower fuel costs and stronger demand because the
economy is growing, something that is not controlled by those in charge of the strategy.
Obviously, there are differences between airlines across time. United, the largest airline, merged
with Continental to create more financial efficiencies and to offer greater travel options to
customers. However, it has had significant problems making the merger of the two systems work
effectively. In fact, it announced a major net loss for 2012 because of its problems. For example,
in November 2012, a computer malfunction (software problem) caused the delay of 250 of
United’s flights globally for almost two hours. Its reservation system failed twice during 2012,
which shut down its website, stranding passengers as flights were then delayed or cancelled.
United’s on time performance suffered and was once of the worst in the industry for 2012. The
number of customer complaints for United was much higher than in the past. In short, it is
relatively easy to determine why the airline suffered a serious net loss in 2012. Yet, Delta, which
performed very poorly a few years earlier, performed better in 2014. It made a net profit for the
third year in a row. Its on-time performance was about 10 percentage points higher than United’s.
And, while United is eliminating flights and furloughing employees to cuts costs (trying to make
a profit), in 2012 Delta purchased a 49 percent share of Virgin Atlantic to gain access to the highly
valuable New York–London routes and gates in both locations. Delta was also one of the first
airlines to introduce Wi-Fi to passengers during flights, although most other airlines have
duplicated this service. Interestingly, the one program most airlines have used to establish some
differentiation is their loyalty programs. However, benefits of these loyalty programs have been
decreasing over time with less availability and more miles deducted. Furthermore, research shows
Competition in the Airlines Industry
For many years, the airline industry was highly regulated which resulted in most airlines acting
like each other by definition. However, the similarities among the large airline companies
remained after the industry was partially deregulated more than 30 years ago. These similarities–
in services, routes, and performance–have persisted even to the present time. For example,
airlines often offer a new service (e.g., Wi-Fi availability on flights), but these services are easily
imitated, therefore, any differentiation in offerings is only temporary.
In recent times, consolidation has occurred in both European and U.S. airline industries. In
particular, poor performance led U.S. Air and America West to merge. Additionally, much for the
same reasons, Northwest Airlines and Delta Airlines merged. Likewise, United Airlines and
Continental merged to create the largest airline in the industry. More recently, American Airlines
and U.S. Air have been approved to merge. Much of the consolidation was approved because
several of the airlines went through bankruptcy proceedings (e.g., Continental and United both
went through bankruptcy before their merger). All of these mergers, however, have not created
highly differentiated services (or prices). All of airlines largely provide the same type of services,
and prices do not differ greatly among the large “full-service” carriers. In fact, it seems that the
primary competition is in trying to make fewer mistakes.
In fact, industry statistics that report positive accounts, announce such outcomes as a reduction
in lost bags, fewer cancellations of flights, and fewer delays. What this suggests is that all of
these areas still likely represent major problem areas. It seems pretty bad when the most positive
statement one can make is that fewer bags have been lost in recent times. Although profits have
been up more recently, this is primarily due to lower fuel costs and stronger demand because the
economy is growing, something that is not controlled by those in charge of the strategy.
Obviously, there are differences between airlines across time. United, the largest airline, merged
with Continental to create more financial efficiencies and to offer greater travel options to
customers. However, it has had significant problems making the merger of the two systems work
effectively. In fact, it announced a major net loss for 2012 because of its problems. For example,
in November 2012, a computer malfunction (software problem) caused the delay of 250 of
United’s flights globally for almost two hours. Its reservation system failed twice during 2012,
which shut down its website, stranding passengers as flights were then delayed or cancelled.
United’s on time performance suffered and was once of the worst in the industry for 2012. The
number of customer complaints for United was much higher than in the past. In short, it is
relatively easy to determine why the airline suffered a serious net loss in 2012. Yet, Delta, which
performed very poorly a few years earlier, performed better in 2014. It made a net profit for the
third year in a row. Its on-time performance was about 10 percentage points higher than United’s.
And, while United is eliminating flights and furloughing employees to cuts costs (trying to make
a profit), in 2012 Delta purchased a 49 percent share of Virgin Atlantic to gain access to the highly
valuable New York–London routes and gates in both locations. Delta was also one of the first
airlines to introduce Wi-Fi to passengers during flights, although most other airlines have
duplicated this service. Interestingly, the one program most airlines have used to establish some
differentiation is their loyalty programs. However, benefits of these loyalty programs have been
decreasing over time with less availability and more miles deducted. Furthermore, research shows
