Questions 1) How does consolidation improve airlines’s revenue? How might it imp
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Questions 1) How does consolidation improve airlines’s revenue? How might it improve their costs? (5marks) 2) Are there any disadvantages to the airlines of consolidating? (5marks) CLOSING CASE The Rapid Consolidation of the U.S. Airlustry In July 2008, American Airlines (AA) was the largest airlines, including American and JetBlue Southwest air carrier in the world, and it competed against five however, was the exception because it has always pur- other established U.S. airlines as well as newer airlines such as Southwest and JetBlue. Then, oil prices, which withstand falling ticket prices and rising costs better are approximately 35% of an airline's total operating than the older, more established airlines. costs, were rising, and the recent financial recession occurred that led to a significant decrease in the num- Justice Department began to look more favorably upon ber of business travelers (who are the most lucrative requests by airlines to merge their operations, expand source of revenue for an airline). These circumstances their route structures, and reduce their cost structures. sued a cost-leadership strategy and so had been able to With many major airlines facing bankruptcy, the led to billions of dollars in losses for most major U.S.The downside for passengers of merger and horizontal
Explanation / Answer
1) The primary reason why consolidation helps improve airline’s revenue is the increase in customer base. Let’s say Airline A can acquire a total of 50,000 customers per month with their offering and Airline B can acquire a total of 75,000 customers per month with their offering. Then through consolidation the increased customer base is 125,000 customers per month.
Through consolidation, the airlines can offer their services to the other set of customers from a competing airline. In addition to this, there is also the benefit of increasing their network. For example, Airline A focuses on the northern part of the country and Airline B is mostly busy in the south, then through consolidation the both get access to network that spans across the country. These are the benefits of consolidation to the customer base and network which means they contribute to the overall revenue of the airline.
In addition to adding revenue, the airlines can schedule their flights according to the demand of a location and optimize their operational cost. If both Airline A and B were flying from city X to Y earlier and were only able to sell 50% of their seats, then it makes economic sense to have only one flight and fill the seats to 100%. Such optimization of capability and resources allow reduction of operation cost.
2) Airlines consolidation has many benefits. However they are not completely fool proof. There are possibilities where consolidation causes disadvantage to the company. While it is clear that the consolidation is good for business and not so much for the consumers, there are certain pitfalls and disadvantages that plague the consolidated company.
Additional complexity: Rapidly adding new routes and new processes within the consolidated system is not very simple. Both the airlines resources need to work in synergy to get the best out of consolidated venture. While many of the operations are standardized in airlines industry, the management of the company is also brought to question with increasing level of complexity.
Revenue sharing: Consolidation provides cost cutting and additional revenue for the airlines. However, this also means that certain routes end up becoming less profitable for one of the airlines. This may not be a very desirable outcome that the companies expect out of consolidation.
Branding: Consolidation of airlines often means that when a customer books an air ticket to travel to a destination with Airline A, he/she may be provided Airline B as a part of the journey. This impacts branding of an organization.
Mixed strategy/pricing: Due to consolidation airlines may be forced to redesign their pricing structure and market strategy. This in turn may impact their long standing and tried & tested business operation.
3) To understand the advantage of Southwest airlines, first we need to understand the various competitive strategies. Airlines industry is more or less a commodity service market. While there are definite distinctions between the levels of service, for majority of the passengers, airlines is a means of travel. Hence certain competitive strategies such as focused-differentiation or focused-low cost or best-cost provider strategies may not be relatable.
Southwest airlines used the overall low-cost provider strategy. When, the product or a service of industry is pretty commoditized then the only differentiator is the price. This is where Southwest focused their energy and gained the market.
There were no qualms about their identity. From the very beginning, their mission and objective was to provide affordable air travel to people. Following their ideology and goals and providing low cost option to travelers meant that they had plenty of customers. Even though the profit margins were low, they are most profitable due to the economies of scale.
They should not attempt to integrate with other airlines. The simple reason is that they are definitely doing better than their competitors and are always profitable. Their approach to the airlines industry is working and they should continue this way to become larger player themselves while keeping their identity intact. Integrating with other airlines may cause disruption in their overall strategic path.
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