Strategic Analysys of US Airline Industry

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An outline:

  1. Foreword.
  2. Definition the parameters of analysis.
  3. Historical and social analysis of the industry.
  4. Economical pcharacreristics of US airline industry.
  5. PESTLE analysis of US airline industry.
  6. The ways of indusrty developing.
  7. Conclusion.

Scenario can be planned in exact accordance with outline.

A foreword:

We have chosen the airline industry because of the dynamism in its development and sophisticated economical situation that has to be solved and way out found. In conclusion we will try to develop opportunities of the industry.

What do we choose to do better than anyone in your market to achieve a competitive advantage? Customers want more of everything they value. If they value low cost they want it lower. If they value convenience they want it easier and faster. If they look for state of the art they want it first and want to push the envelope. If they need expert advice they want more time and dedicated effort and investment1.

By raising the level of value that customers can expect from everyone, leading companies are driving the market and driving their competitors out of business, or at least into a malaise of mediocrity. So what do you do? Here are a few options:

  • Alter the industry structure to change the basis of competition. Reconfigure the value chain – retailers become wholesalers and suppliers, insurers takeover brokerages, banks move into insurance, etc.2
  • Improve the position of the business within the industry by way of acquisitions and market share. Alter the playing field to achieve an enhanced scale of operations and competitive positioning.
  • Innovate and create new opportunities – new products, services, and markets.
  • Employ barriers to entry in terms of significant capital investment, proprietary technology, or in the magnitude of resources required to compete effectively.
  • Increase the dependence of customers for your products and services in terms of the total value for customers or higher costs of switching to alternates.
  • Change and enhance supplier relationships to obtain cost and quality improvements, reduced cycle times, and integrated processes.
  • Change the basis of competition by creating a service relationship and differentiation. Move away from price to service, software, and customer relationships.
  • Centralize into high volume, low cost, automated, “focused factories”, to achieve the lowest cost operations in support of customer value.
  • Decentralize into custom, low volume, flexible factories, quick to market, responsive, and able to customize products to specific customer requirements3.

According to Michael Treacy and Fred Wiersema, market leaders keep their edge by picking one discipline, and executing like crazy. Examples of the discipline of the leaders:

1) Winning through cost – focus on operational excellence to offer a combination of quality, price and ease of purchase that no one else in your market can match. Don’t worry about innovation, just execute extraordinarily well, guarantee low prices and hassle free services, standardize and simplify;

2) Winning through great products – innovate and develop products that push performance boundaries. Develop the capability of speed to market and be relentless in making your own products obsolete. Invent, develop, and market – fast;

3) Winning through customer intimacy – cultivate close and long term customer relationships and intimate knowledge of customer requirements. Create a dependency of customized service and support, and focus on customer retention and satisfaction4.

So it’s a matter of choice – and you do have to make the choice to be a leader. And then it all boils down to executing like crazy – to be the best at what you choose to do. Anything in between is just muddling and mediocrity.

US Airways and United Airlines have entered into a comprehensive marketing relationship, combining the carriers’ complementary capabilities to offer more competitive air travel services in the U.S. and around the world. This relationship is a key element of US Airways’ restructuring plan.

While both airlines remain independent and continue to compete aggressively, this marketing relationship offers benefits for customers of both airlines. They include network expansion through reciprocal code share service – the ability to sell tickets on each others’ flights — frequent flyer programs, airport lounge access and systems development to support a convenient travel experience for both airlines’ customers5.

US Airways travelers are able to earn Dividend Miles credit when flying on United, and members of United Airlines’ frequent flyer program, Mileage Plus, may earn credit when flying on US Airways. Dividend Miles award destinations have expanded to include destinations served by United, including new access to Asia, Latin America and Hawaii, while members of the United program have gained access to US Airways’ comprehensive East Coast network and growing number of destinations in the Caribbean.

Members of the US Airways Club and the United Red Carpet Club enjoy access to either airline’s facilities when traveling on flights operated by the host Club’s airline.

The agreement also includes provisions for US Airways to join United in the Star Alliance, which extended an invitation to US Airways on May 31, 2003. Membership in the Star Alliance will further enhance the value of US Airways’ domestic and international route network by allowing customers access to the global marketplace6.

Current situation in the US airlines is far from the ideal, it is suggested to be the most depressive industry. The U.S. airline industry slump will probably linger until at least 2005, said a majority of executives attending an annual airline finance conference, with more than 80% predicting another major airline bankruptcy in 2003.  The outlook from presenters was decidedly grim at the annual New York Air finance Journal conference here, which drew hundreds of professionals from the United States and abroad.

The Sept. 11, 2001, attacks, a weak economy, the war in Iraq and a deadly pneumonia virus have conspired to slam demand for airline tickets in what several executives referred to as the “perfect storm” now blowing through the aviation market.

As the industry’s worst crisis ever mounted in 2002, US Airways filed for Chapter 11 bankruptcy protection in August. That was followed by United Airlines in December the world’s largest carrier — American Airlines — narrowly avoided bankruptcy by reaching 11th hour cost-cutting agreements with its major unions. Those deals still have to be ratified by rank-and-file and American’s future is by no means assured. American Monday announced it will fly about 2% fewer domestic flights than planned in May. International flying will be about 13% lower, the Fort-Worth based airline said, citing the weak economy and the Iraq war.

For one of the nation’s most distressed economic sectors, the U.S. airline industry, the war in Iraq could prove to be an unsustainable “final straw”7 For some time, major U.S. carriers have been dealing with the combined impact of inflexible costs, an increasingly price-sensitive customer base, and a sputtering economy. And, in the aftermath of September 11, Americans have been choosing in large numbers simply not to fly.

Now, the new conflict is taking an additional large toll on airline revenues. The depth and duration of the current depression in air travel remains to be seen, but the Iraq invasion’s initial impact on major U.S. airlines has been dramatic, with international travel down in the range of 20% – 100% on some routes, where cancellations are actually outpacing new reservations. Traffic declines on domestic routes have been more pronounced than during the 1991 Gulf War.

For an industry already losing more than $1 million every hour, the effects have been grave. The nation’s second largest airline, United Airlines, remains in Chapter 11 bankruptcy, with some analysts warning that it faces a longer-term possibility of outright liquidation. Meanwhile, the largest U.S. carrier, American Airlines, remains at risk of bankruptcy, despite a last minute, month-end reprieve. The seventh largest, US Airways, very recently emerged from bankruptcy after cutting both services and jobs by a third, and some observers question whether even that will be enough in the event of an extended war in Iraq8.

The bottom line is that much of the nation’s network airline sector could be under court protection within the year, and another major incident of domestic terrorism, particularly an aviation-related event, could force all major U.S. airlines (except Southwest) to insolvency. The industry has lost some 90,000 jobs over the last 18 months, and further widespread bankruptcies would leave thousands more unemployed. Wholly aside from the potential effect of an industry meltdown on jobs and shareholder equity, the economic implications are obvious and of deep concern.

Airline IndustryUS Airways provides customers with convenient access throughout the eastern U.S., to major markets in Europe and Canada, and to a greatly expanded list of destinations in the Caribbean. By combining with United, customers gain access to markets throughout the world, while retaining the convenience of single-ticket pricing and one-stop check-in. Dividend Miles members will have greatly enhanced mileage earning opportunities as well as new award destinations including Hawaii, Asia, and Latin America.

US Airways Group, Inc. today reported a net loss of $794 million for the fourth quarter 2002, on operating revenues of $1.61 billion, compared to a net loss of $1.16 billion on operating revenues of $1.57 billion for the fourth quarter 2001. Net loss per diluted share for the quarter was $11.67 compared to $17.07 for the fourth quarter 2001, while the net loss excluding unusual items, which are described in the notes to the financial tables, was $295 million compared to $552 million for the same period in 20019.

For the full year 2002, US Airways Group, Inc. reported a net loss of $1.65 billion on operating revenues of $6.98 billion, compared to a net loss of $2.12 billion on operating revenues of $8.29 billion for the same period in 2001. On a diluted per share basis, the net loss for the year was $24.20 compared to $31.48 in 2001. Excluding unusual items in both years, which are described in the notes to the financial tables, the net loss for the full year 2002 was $1.05 billion compared to $1.17 billion for the same period in 2001.

“Our disappointing results reflect an industry that continues to operate in uncertain economic times with weak passenger demand, escalating fuel prices, and the threat of war,” said David Siegel, US Airways president and chief executive officer. “Despite these challenging conditions, we have made great progress in our efforts to restructure our company and remain on track for emerging from Chapter 11 reorganization at the end of March 2003. We are gaining momentum and are achieving the cost position, regional jet growth and alliance network necessary to compete more aggressively,” said Siegel.

Since the beginning of the fourth quarter 2002, US Airways has taken a number of important and necessary steps towards Chapter 11 emergence in March 200310. Among those steps are:

1) Secured additional cost savings, which increased the company’s expected savings to approximately $1.9 billion in average annual savings over the next seven years. This includes additional participation from all employees, aircraft lessors and lenders, and other vendors;

2) Received U.S. Bankruptcy Court approval to present the reorganization plan to creditors for voting. A confirmation hearing on the plan is set for mid-March;

3) Continued to “right-size” the business to be in line with industry demand by decreasing capacity. This resulted in an 8.8 percent reduction in available seat miles for the quarter compared to the same quarter in 2001;

4) Reduced cost per available seat mile by 3.1 percent for the current quarter (4.3 percent excluding fuel), versus the same quarter 2001, driven primarily by a 16.8 percent decrease in personnel costs;

5) Unit revenue for the fourth quarter 2002 increased by 7.7 percent to 10.30 cents per available seat mile, compared to the same period last year;

6) Introduced code sharing with alliance partner United Airlines, offering seamless ticketing and baggage handling. Customers for both US Airways and United now can travel on 459 code-share flights, with significantly more markets expected to be introduced this year;

7) Reached agreements with US Airways Express affiliate carriers Mesa, Chautauqua and Midway on regional jet growth. Also established the terms for operating regional jets at a new MidAtlantic Airways operation with a regional cost structure. Finally, employees at US Airways’ wholly owned subsidiaries ratified agreements on regional jet flying upon emergence from Chapter 11;

8) Reached global restructuring agreements with two major partners, GE and Airbus. The Airbus agreement remains subject to Bankruptcy Court approval11.

US Airways has shown significant improvement in nearly all operations quality measurements. The company’s completion factor for 2002 was 99.4 percent, up 2.7 percentage points year over year. Departure and arrival performance improved in nine of the 12 months of 2002, while the completion factor improved in each of the 12 months. US Airways ranked number one in on-time arrivals among the 10 carriers in November 2002, according to the U.S. Department of Transportation (DOT) Air Travel Consumer Report. US Airways also ranked first in arrival performance for the months of August and September.

“Our employees have not lost focus on the most important facet of our business – our customers. We continue to rank in the top tier of consumer indexes in terms of operational performance. This would not have been possible if not for the resolve and dedication of our more than 33,000 employees,” said Siegel12.

Looking forward, US Airways expects decreased revenue as a result of recent reductions in business fares initiated by its competitors. “While we have fewer routes than most of our competitors that were impacted by these lower fares, we have estimated that our revenues will be reduced by approximately $10 million per month. It also appears that customers are purchasing these fares for future travel, suggesting that buyers are taking full advantage of the lower fares and simply pulling forward sales from future months,” said B. Ben Baldanza, US Airways senior vice president of marketing and planning.

The company also continues to face challenges related to its pension plans. In the fourth quarter of 2002, the company recognized a $742 million charge to stockholders’ equity in connection with its increased minimum pension liability. On Jan. 30, 2003, the company filed formal notice with the Pension Benefit Guaranty Corporation of its intent to terminate its defined benefit pension plan for its pilots effective March 31, 2003, and to replace that plan with a defined contribution plan. A hearing on the company’s distress termination motion is scheduled in the Bankruptcy Court on Feb. 20, 2003.

Operating revenues for the fourth quarter 2002 were $1.61 billion, up 3.1 percent over the same period in 2001, while operating expenses of $2.22 billion were down by 3.2 percent. The operating loss for the fourth quarter 2002 was $603 million, compared to an operating loss of $725 million for the fourth quarter 2001.

For the quarter, US Airways, Inc. carried 10.4 million passengers, a decline of 7.1 percent compared to the same period of 2001. Revenue passenger miles for the quarter declined 1.5 percent while available seat miles declined 8.8 percent, resulting in a passenger load factor of 68.3 percent, a year-over-year increase of 5.1 percentage points. The yield of 13.35 cents for the fourth quarter 2002 was down 0.8 percent from the same period in 2001, while revenue per available seat mile of 10.30 cents was up 7.7 percent. Cost per available seat mile of 12.45 cents for the quarter decreased 3.1 percent versus the same period of 2001. The cost of aviation fuel per gallon for the period was 83.67 cents, up 9.3 percent from 2001. The cost per available seat mile, excluding fuel, decreased by 4.3 percent13.

US Airways Group ended the year with total restricted and unrestricted cash of $1.15 billion, including $633 million in unrestricted cash, cash equivalents and short-term investments. This cash balance includes $300 million drawn on the company’s $500 million Debtor-in-Possession (DIP) facility.

Operating revenues for 2002 were $6.98 billion, down 15.8 percent from 2001. Operating expenses were $8.29 billion, down 16.8 percent. Available seat miles for US Airways, Inc. for the full year 2002 declined 15.5 percent year-over-year, reflecting US Airways’ capacity reductions resulting from the ongoing sluggish economic environment. US Airways carried 47.2 million passengers during 2002, a 16.0 percent decline compared to the 56.1 million passengers carried during the previous year. Revenue passenger miles declined 12.9 percent compared to 2001, while the passenger load factor increased by 2.1 percentage points to 71.0 percent. Revenue per available seat mile was 10.38 cents for 2002, a decrease of 4.9 percent compared to 2001, while the cost per available seat mile was 12.10 cents, a decrease of 2.9 percent year-over-year (0.8 percent excluding fuel)14.

In light of the company’s continuing restructuring efforts, which includes an ongoing active solicitation period through March 10, 2003, of acceptances to its First Amended Plan of Reorganization pursuant to a related Disclosure Statement, both dated as of Jan. 17, 2003, US Airways will not hold a conference call to discuss these results.

Bankruptcy law does not permit solicitation of acceptances of the Plan until the Bankruptcy Court approves the applicable Disclosure Statement relating to the Plan as providing adequate information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor’s books and records, that would enable a hypothetical reasonable investor typical of the holder of claims or interests of the relevant class to make an informed judgment about the Plan. On Jan. 17, 2003, the Bankruptcy Court approved the company’s Disclosure Statement with respect to its First Amended Plan of Reorganization and authorized a balloting and solicitation process that will commence on Jan. 31, 2003, and conclude on March 10, 2003. A hearing on confirmation of the First Amended Plan of Reorganization is scheduled to commence in the Bankruptcy Court on March 18, 2003. Accordingly, this announcement is not intended to be, nor should it be construed as, a solicitation for a vote on the Plan, which can only occur based on the official disclosure statement package that is being mailed on Jan. 31, 2003. The company will emerge from Chapter 11 if and when the Plan receives the requisite creditor approvals and is confirmed by the Bankruptcy Court.

The airlines stocks are influenced by factors affecting the trend in passenger travel, the most influential of which is the change in the economy. As corporate profits are reduced, so too is the amount of business travel – business people are the primary users of full-fare tickets.

Other important factors include trends in disposable income and their effect on leisure travel as well as the result of across-the-board fare increases in the fare wars.

The cost factor that influences profit trends the most is that of fuel; as oil prices rise, profit decline. Historically, fuel expenses have made up about 15% of total operating costs. The third quarter (summer season) generally provides the bulk of earnings, as passenger traffic is highest15.

Stock prices have shown a tendency to rise late in the year, particularly if there is general optimism toward the overall economy in the coming year. A downtrend sometimes develops in the following spring-to-summer months if the economy does not perform to expectations.

Economic indicators influencing the growth of the industry include: GDP growth, Consumer Confidence, Fuel Costs.

Small communities face a range of fundamental economic challenges in obtaining and retaining commercial passenger air service. The smallest of these communities typically lack the population base and level of economic activity that would generate sufficient passenger demand to make them profitable to air carriers. While larger communities in this group may have less difficulty in sustaining a base level of service, they may not be able to attract additional carriers to provide greater choice and lower fares. Smaller communities located near larger airports may also face reduced demand because passengers choose to use the larger airport with lower fares or more choices for flights. These communities also have difficulty because the airline industry is in turmoil, making less profitable operations increasingly vulnerable.

Communities have taken a variety of steps to try to obtain or improve air service, such as marketing to increase passengers’ demand for local service or offering financial incentives to airlines to attract new or enhanced service. At communities GAO studied in depth, financial incentives were most effective in attracting new service16. However, the additional service often ceased when incentives ended. Longer-term sustainability may rest on a community’s commitment to making air service a priority.

Certain of the information contained in the Plan and Disclosure Statement should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company’s current views with respect to current events and financial performance. Such forward looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to the company’s operations and business environment which may cause the actual results of the company to be materially different from any future results, express or implied, by such forward-looking statements.

Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following:

  • the ability of the company to continue as a going concern;
  • the ability of the company to operate pursuant to the terms of the DIP facility;
  • the company’s ability to obtain court approval with respect to motions in the Chapter 11 proceeding prosecuted by it from time to time;
  • the ability of the company to develop, prosecute, confirm and consummate one or more plans of reorganization with respect to the Chapter 11 cases;
  • risks associated with third parties seeking and obtaining court approval to terminate or shorten the exclusivity period for the company to propose and confirm one or more plans of reorganization, for the appointment of a Chapter 11 trustee or to convert the cases to Chapter 7 cases;
  • the ability of the company to obtain and maintain normal terms with vendors and service providers;
  • the company’s ability to maintain contracts that are critical to its operations;
  • the potential adverse impact of the Chapter 11 cases on the company’s liquidity or results of operations;
  • the ability of the company to fund and execute its business plan;
  • the ability of the company to attract, motivate and/or retain key executives and associates;
  • and the ability of the company to attract and retain customers;
  • demand for transportation in the markets in which the company operates;
  • economic conditions;
  • labor costs;
  • financing costs;
  • aviation fuel costs;
  • security-related costs;
  • competitive pressures on pricing (particularly from lower-cost competitors);
  • weather conditions;
  • government legislation and regulation;
  • consumer perceptions of the company’s products;
  • acts of war or terrorism;
  • and other risks and uncertainties listed from time to time in the company’s reports to the United States Securities and Exchange Commission17.

Other factors and assumptions not identified above are also involved in the preparation of forward-looking statements, and the failure of such other factors and assumptions to be realized may also cause actual results to differ materially from those discussed. The company assumes no obligation to update such estimates to reflect actual results, changes in assumptions or changes in other factors affecting such estimates other than as required by law. Similarly, these and other factors, including the terms of any plan of reorganization ultimately confirmed, can affect the value of the company’s various pre-petition liabilities, common stock and/or other equity securities18. No assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these constituencies. Accordingly, the company urges that the appropriate caution be exercised with respect to existing and future investments in any of these liabilities and/or securities.


  1. Porter, M.E. (1980). Competitive Strategy. New York: Free Press.
  2. The same source.
  3. The same source.
  4. Friedman, Thomas L. (1999). The Lexus and the Olive Tree: Understanding Globalization. New York: Farrar, Straus and Giroux.
  5. D-Aveni, R. (1995). Hypercompetitive Rivalries. Free Press.
  6. The same source.
  7. Barney, J.B. (1997). Gaining and Sustaining Competitive Advantage. Addison Wesley.
  8. Hitt, Ireland and Hoskisson (1999). Strategic Management: Competitiveness and Globalization, 3rd edition.
  9. The same source.
  10. Smith, J.R. and P.A. Golden (1994). Airline: A Strategic Management Simulation. 3rd edition, Upper Saddle River, N.J.: Prentice Hall.
  11. Grimm, C & K.G. Smith, (1997). Strategy as Action. Austin, Texas: West Publishing.
  12. Dixit, A.K. and Nalebuff, B.J. (1991). Thinking Strategically: The Competitive Edge in Business, Polities and Everyday Life. London: WW. Norton & Company.
  13. Mintzberg, Henry, Bruce Ahlstrand and Joseph Lampel (1998). Strategy Safari: A Guided Tour through the wilds of Strategic Management. New York: The Free Press.
  14. The same source.
  15. “VA202 Airline Management and Operations Unit” – Part 2, 2002.
  16. The same source.
  17. Hill, Charles W.L. and Gareth R. Jones (1998). Strategic Management Theory: An Integrated Approach. 4th edition. Boston: Houghton Mifflin.
  18. DeKluyver, Cornelius A. (2000). Strategic Thinking: An Executive Perspective Upper Saddle River, NJ: Prentice Hall.

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