Mini Case: 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 air- line 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 statis- tics that report positive accounts, announce such out- comes 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 air- lines across time. United, the largest airline, merged with Continental to create more financial efficien- cies 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 mal- function (software problem) caused the delay of 250 of United’s flights globally for almost two hours. Its res- ervation 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 per- formance 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 pro- gram most airlines have used to establish some differ- entiation 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 that airlines attrack brand switching customers who tend to move to the brand with the most perks for them at the time. Certainly, some reduced-service airlines have fared much better in most of the categories noted above (e.g., profits, on-time flights, customer complaints). Among these is Southwest Airlines. Interestingly, while it started as a low-price airline (and has maintained this feature), it also has generally offered superior service compared to the full-service airlines. The large airlines tried, but were unable, to imitate Southwest. In effect, Southwest developed its resources and capabilities which over time allowed it to provide service much more effectively and at a lower price than its full-service rivals. However, JetBlue has duplicated much of Southwest’s strategy, although it is focused on business travelers.

1. How important is the environment to the performance of air- lines in the airline industry? What does this suggest regarding the industrial organization (I/O) model to explain how firms can earn above-average returns?

2. Why is there a lot of imitation in the airlines industry, and how does this affect firm performance?

3. How important is the resource-based model to explain how well firms perform in the airlines industry?

4. How can strategic leaders be successful in an industry like the airlines industry?