Airline Industry

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Airline Industry: Profitable or Lost Cause?:

Airline Industry: Profitable or Lost Cause? Brandon Bussey, Ali Chaudhry, Tim Chiu, & Mick Ferguson

Agenda:

Agenda Industry Overview Industry Financials & Profitability Industry Analysis Industry Map Recommendations Q & A

Industry Overview:

Industry Overview

Industry Overview:

Industry Overview Service Oriented Capital Intensive Airplane Cost 737 $60 M 747 $333 M 767 $152 M 777 $245 M 787 $194 M Source: Boeing.com

Industry Overview:

Industry Overview Labor Intensive Source: Air Transport Association; Boston Consulting Group Highly Fuel Dependent Labor Intensive Airline Flight Revenue Breakdown Fuel Dependent

Industry Overview:

Industry Overview Labor Intensive Source: Air Transport Association; Boston Consulting Group Highly Fuel Dependent Labor Intensive Highly Taxed & Regulated Airline Flight Revenue Breakdown High Taxes & Gov’t Fees

Industry Overview:

Industry Overview Source: Air Transport Association; Boston Consulting Group Highly Fuel Dependent Labor Intensive Highly Taxed & Regulated Thin Profit Margins High Taxes & Gov’t Fees Airline Flight Revenue Breakdown Thin Profit Margins

Industry Overview:

Industry Overview Seasonal Source: Airlines for America Average Departures by month in 2000-2011

Industry Overview:

Industry Overview Changing Industry Terrorism Natural Disasters Merger’s and Bankruptcies

Industry Overview:

Industry Overview

Industry Profitability:

Industry Profitability

Industry Profitability: Metrics:

Industry Profitability: Metrics Aircraft utilization Load factor Revenue passenger – Miles Alliance Passengers p/Year (MM) %RPM Share Approx. (2005) Key U.S. Airlines Star Alliance 413 25% United, US Air, Continental SkyTeam 373 20% Northwest, Delta One World 320 15% American

Industry Profitability: Metrics:

Industry Profitability: Metrics Yield – Revenue Per Mile ( RPM)

Industry Profitability: Metrics:

Industry Profitability: Metrics Top Airline Groups By Revenue in 2010 Group Revenue ($Billions) Operating Results ($Billions) Net Result ($Billions) Lufthansa Group $36.1 $1.76 $1.49 United Continental Holdings $34.0 $1.82 $0.85 Delta Air lines $31.8 $2.22 $0.59 Air France KLM Group $31.3 $0.16 $0.81 Oman Air Group $30.6 $1.23 $0.80 AMR Corporation $22.2 $0.31 ($0.41) International Airlines Group $19.5 $0.30 $0.13 Japan Airlines Corporation $16.0 $2.22 All Nippon Airways Group $16.0 $0.80 $0.27 The Emirates Group $14.8 $1.48 $1.46 Source: Airlines Business August 2011, Flightglobal Data Research

Industry Profitability: Current:

Industry Profitability: Current Present economic/industry structure Capital Intensive Competitive Labor Intensive Subject to government control and political influence Oil dependent

Industry Profitability: Current:

Industry Profitability: Current Level of Competition Large Airlines vs. Budget Airlines Partnerships/ Alliances Levels of Profitability Oil prices Cyclical Industry

Industry Profitability: Current:

Industry Profitability: Current Source: New York Mercantile Exchange Source: Airlines 2002-2010 SEC Filings

Industry Profitability: Trends:

Industry Profitability: Trends Attempts at differentiation Service, Food, Perks, Brand, Price, etc. Partnerships / Alliances

Industry Profitability: Trends:

Industry Profitability: Trends Consumer Travel Patterns Business vs. Leisure International Accounts

Industry Analysis:

Industry Analysis

Porter’s 5 Forces:

Porter’s 5 Forces External Environmental Analysis Analysis of Competitiveness of Airlines Industry Helps Shape Strategy

Porter’s 5 Forces:

Porter’s 5 Forces High Start up Cost Lease vs buy Product Differentiation Incumbent Power Brand Loyalty Distribution Channels Existing Routes High Sunk Cost Government Policies Steep Learning Curve Potential Entrants Buyers Substitutes Suppliers Industry Competition Potential Entrants Buyers Substitutes Suppliers Industry Competition Potential Entrants

Porter’s 5 Forces:

Porter’s 5 Forces High Start up Cost Lease vs buy Product Differentiation Incumbent Power Brand Loyalty Distribution Channels Existing Routes High Sunk Cost Government Policies Steep Learning Curve Risk Meter Barriers of Entry High Competition High Concentration Medium Capital Requirement High Regulations Medium

Porter’s 5 Forces:

Porter’s 5 Forces High ASM vs. Low RPM Undifferentiated Products Short Gap of Price and Service Low Ability to Compete on Service Potential Entrants Buyers Substitutes Suppliers Industry Competition Potential Entrants Buyers Substitutes Suppliers Industry Competition Buyers

Porter’s 5 Forces:

Porter’s 5 Forces High ASM vs. Low RPM Undifferentiated Products Short Gap of Price and Service Low Ability to Compete on Service Risk Meter Buyer Power High Price Sensitivity High Switching Costs Low Available Seat/Mile High Revenue/Mile Low

Porter’s 5 Forces:

Porter’s 5 Forces Rail, Bus, or Road Networks Low Switching Costs Depends on Customer Situation Technology Relationship with Tourism Potential Entrants Buyers Substitutes Suppliers Industry Competition Potential Entrants Buyers Substitutes Suppliers Industry Competition Substitutes

Porter’s 5 Forces:

Porter’s 5 Forces Risk Meter Substitutes Low Rail Substitutes Medium Road Low Technology Low Rail, Bus, or Road Networks Low Switching Costs Depends on Customer Situation Technology Relationship with Tourism

Porter’s 5 Forces:

Porter’s 5 Forces Boeing and Airbus No Substitutes and High Switching Costs Power of Unions Jet Fuel Potential Entrants Buyers Substitutes Suppliers Industry Competition Potential Entrants Buyers Substitutes Suppliers Industry Competition Suppliers

Porter’s 5 Forces:

Porter’s 5 Forces Risk Meter Supplier Power High Manufacturers Medium Unions Medium Jet Fuel High Boeing and Airbus No Substitutes and High Switching Costs Power of Unions Jet Fuel

Porter’s 5 Forces:

Porter’s 5 Forces Many players No dominant firm Price wars Same routes Low product d ifferentiation Low switching costs for buyers Potential Entrants Buyers Substitutes Suppliers Industry Competition Potential Entrants Buyers Substitutes Suppliers Industry Competition Industry Competition

Porter’s 5 Forces:

Porter’s 5 Forces Risk Meter Threat of Rivalry High Price Wars High # of Competitors High Product Differentiation Low Many players No dominant firm Price wars Same routes Low product d ifferentiation Low switching costs for buyers

Industry Map:

Industry Map

Industry Map:

Industry Map Average Price Per Ticket High Low Medium Quality/Differentiation High Medium Low Highly Differentiated/High Cost Higher Differentiation/Medium Cost

Red versus Blue Ocean:

Red versus Blue Ocean Red Ocean Strategy Blue Ocean Strategy Compete in existing market place Create uncontested market space Beat the competition Make the competition irrelevant Exploit existing demand Create and capture new demand Make the value-cost-trade-off Break the value-cost-trade-off Align the whole system of a company's activities with its strategic choice of differentiation or low cost Align the whole system of a company's activities in pursuit of differentiation and low cost

Recommendations:

Recommendations

Recommendations:

Recommendations Average Price Per Ticket High Low Medium Quality/Differentiation High Medium Low Highly Differentiated/High Cost Higher Differentiation/Medium Cost

Recommendations:

Recommendations Stop trying to be everything to everyone Differentiation & Low Cost

Recommendations:

Recommendations Differentiation Free WIFI Social Media & Media Applications on board Partner with key travel apps to improve customer experience From Point of Sale to Post flight Partner with Shuttle Service

Recommendations:

Recommendations Differentiation Free WIFI Social Media & Media Applications on board Partner with key travel apps to improve customer experience From Point of Sale to Post flight Partner with Shuttle Service

Recommendations:

Recommendations Differentiation Free WIFI Social Media & Media Applications on board Partner with key travel apps to improve customer experience From Point of Sale to Post flight Partner with Shuttle Service

Recommendations:

Recommendations Differentiation Free WIFI Social Media & Media Applications on board Partner with key travel apps to improve customer experience From Point of Sale to Post flight Partner with Shuttle Service

Recommendations:

Recommendations Low Cost Strategic partnership with Fuel Company Standing option for shorter flights

Recommendations:

Recommendations Do not invest at this time High volatility due to fuel price uncertainty Blue oceans exist No one operating in a blue ocean Profitable or Lost Cause? Neither

Q & A:

Q & A

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