A typical commercial jet.
Performing a strategic analysis of the airline industry involves some thinking not just about the airlines but the factors that impact them, both directly and indirectly. The best approach to lay out the strategic implications is to map them by factor type. Once you've gone through the exercise, then the strategic issues become apparent and potential directions for the airlines in the future become clearer.
Assess the Marketplace
The airlines' marketplace is their bread and butter. The ups and downs of the economy directly affect these companies' bottom lines. Both short-term and long-term implications have direct impact on cash flow and profits. The trick is to determine how and when the economy will rear its head with impacts.
Use Porter's Five Forces Template
A clean, simple way of assessment for the airlines is to use Michael Porter's five categories of market force in an industry. These include the substitute problem, suppliers, buyers, new players and competition. Combined, all five categories create the roller coaster environment an airline must function in. Some categories will be stronger than others, depending on the company and its own strengths and weaknesses.
Supplier Power
Look at the resources that the airlines need to function, aside from personnel. These could include repairs, equipment and consumables. When oil prices shot up in 2007, suppliers had significant power over airlines that had to buy jet fuel on the open market. Alternatively, airlines like Southwest that locked in prices with long-term contracts suffered little impact from such suppliers.
Buyer Power
Clearly the airlines have to jockey for buyers in ongoing price wars. However, buyers have strengths and weaknesses depending on how the airline industry is structured. Some airlines dominate certain regions and types of trips. Others only deal with long-range travel and charge expensive prices for having to arrange short hops. Buyers will only be as strong as an airline is weak in a particular area.
The Risk of New Players
In the airline industry, almost all the players are well-established. So the risk of a new entry is minimal. While small regional carriers will try to expand to bigger status, few survive long enough to matter. Only two have been able to function in recent years as new players: Jet Blue and Virgin Airlines. As a result, an analysis should be looking for new players with significant cash flow to pay for high entry costs, otherwise it's a moot point.
Substitution
For the airline industry as a whole the substitution factor is almost nil. An analysis would have to compare the practical benefit of car, boat and train vs. plane. In most cases beyond 500 miles, the plane wins out on every factor: cost, distance, speed, and efficiency.
Competition
An industry analysis could spend chapters on the airline industry's competition issues. Price battles are stiff and fierce. Well-developed airlines constantly encroach on each others' turf. Millions of dollars are spent on marketing and advertising, particularly on holidays and toward business clients. There are plenty of statistics available on consumer flow and comparisons between players in different regions, cities, markets and distances.
Conclusion
A strategic analysis of the airlines should, at a minimum, cover the above factors. Plenty of data and research is available both from the press, industry reports, and from the airlines' trade industry association. A good analysis will use all of these resources and then anticipate issues outside of the conventional projections for the industry.
Tags: airline industry, airline industry, cash flow, five categories, strategic analysis, strengths weaknesses