Airline Industry
Strategy Comparison Report of
JetBlue Airways Corporation and Southwest Airline Co
By: Haiyue Yu
MBA Graduates
Central Michigan University
Email: yu3h@cmich.edu
MBA 690
Dr. Hyungu Kang
Central Michigan University
College of Business Administration
December 18, 2016
Abstract
This report is an airline industry analysis report. It discusses the opportunities and threats in U.S. airline industry. Also an extended discussion of strategy comparison between JetBlue Airways Corporate and Southwest Airlines Co could bring ideas about how companies’ strengths and weakness affect their competitive advantages.
Keywords: Airline, strategy, competition, JetBlue Airways Corporate, Southwest Airlines Co
Introduction
This research includes a detailed airline industry analysis and a comparison analysis between two airline companies JetBlue Airways Corporation and Southwest Airlines Co. The purpose of this research is finding out the opportunities and threat of the airline industry, so the companies could use the opportunities and avoid the threats in their future development. Also through the strategy comparison of these two airline companies, it could give us an idea about how the strengths support the companies’ competitive advantages and how the weaknesses impact the competitive advantages.
There are a lot of online sources have been used in this research include market research reports, news, teaching notes, journals, etc. By collecting, reviewing, categorizing, analyzing these sources, we could develop a clear understand of this industry and the two companies.
INDUSTRY ANALYSIS
Industry overview and analysis
Current strategic issues
As a great invention in human history, aircraft has brought a lot of conveniences to our life. It stimulated the progress of airline industry. Although airline industry has developed very well in recent years, it still has some strategic issues in this industry.
The federal governments in this period of time really pay more attention to the main airline companies, to make sure they are not break the competition rules in their industry. During the same period, two airline companies – Southwest Airlines and Delta Air Lines, they are facing the conflicts with their bottom workers. The workers are asking more pay otherwise they will refuse to continue their contracts with them (Lorenzetti, 2015). These situations could affect the outside investments of the airline companies. It could break their investors faith about this industry and give them a idea that airline industry’s development will slow down, so they will not continue invest industry. It also could bring bad effect to their stock.
As the main energy source in airline industry, fossil fuels are irreplaceable. At the same time, the negative impacts it could bring to the environment could not be ignored too. Airline companies are now facing the pressure from improving their fuel efficiency to reduce their negative impact to the environment (Coza, 2014).
According to the airline industry expense report form Air Transportation Association (ATA), fuel cost is the second largest expense to the airline companies (“The industry handbook,” n.d.). Once the fuel price decreased recent years, airfares decreased too. The lower price tickets help airline companies gain more customers, but it also bring a potential problem to these companies. Once fuel price begin to increase, the airfares will increase, and the companies will not able to provide low price tickets to their customer. If this happens, how the airline companies keep their current customers. They need to prepare corresponding strategy to overcome this problem.
Overcapacity could be a serious issue in airline industry. As a frequently change industry like airline, it difficult to follow the changes all the time (Coza, 2014). Once the airline company
fail to evaluate the development of the industry, they could suffer in overcapacity issues. It will bring addition cost to them and hurt their profits.
According the ATA’s report, labor is the largest expense to the airline companies (“The industry handbook,” n.d.). To make the business in airline industry more sustainable, the International Air Transport Association (IATA) has asked the airport reduce the labor charge (Topham, 2016). And then the union of the airport workers refused to follow and asked them to stop to hurt the bottom workers. It could bring threatens to the airline safety, aircraft maintenances, and services quality (Coza, 2014). Once the airport workers under the pressure from reducing pay, it is difficult for them to perform well.
Growth of the industry
According to ATA’s study, the growth GDP in the future years will bring a huge growth in people’s disposable income (Schmidt, 2016). Which means people will have more money could spend on airline travelling, so it could lead a growth on travel demand too. With this growth, the regional airline carries such as Southwest Airlines and JetBlue Airways Corporation will growth fast in the future because their low price tickets will help them attract more customers. The legacy carriers such as American Airlines, Delta Air Lines also will have growth in coming years, the different is their growth will slower than the regional airline due to their high airfares.
No matter growth fast or slow, the growth of economy will bring growth demand to airline industry. At the same time, with the low price fuel, the airline companies could low their cost and have the opportunities to expand their business, such as increase their capacity.
Competitors
After a period of acquisitions and mergers, airline industry is consolidation industry. Now, there are six main competitors in this industry. The legacy carries such as United Continental Holdings Inc., Delta Air Lines, and American Airlines. The regional carries including JetBlue Airways Corporation, Southwest Airlines Co. and Alaska Air Group, Inc. These six main competitors share about 94% market share in the U.S. airline industry (Cederholm, 2014b).
Customers
According to different customer needs and the motivations that could cause their needs, we could define customers into five market segmentations in airline industry.
No-business customers with frequent airline travel demand (“Market segmentation example for airlines” n.d.). Most of these customers are older, they have money to afford the airfares and have time to plan their travels. They are not price sensitive when they buy tickets. They may choose different airline companies based on their destination. They travel frequently by airlines, so there are experiences travellers too. They have import impact to other customers. The reviews and commends they write on the social media could affect other customers’ decisions.
Brand loyalty customers, most of these customers they are highly loyal to one airline companies. They are not price sensitive too. They pay main attention to their membership points, and willing to collect the points so they could redeem them in the future. They are the customers airline companies need to engage because they are long-term customers to the airline companies. Usually, they are not willing to switch to other companies.
Infrequent flyers with urgent need, this kind of customers, they are not frequent to travel, or they travel but airline is not their first choice. The reason they choose airline because they have some important things to do, so they need to arrive the destination as soon as possible. Typically, with their urgent need, they purchase date are super close to their depart date. Also, They consider the time and destination first, and then the price of the tickets. So the airline tickets they bought are always with premium prices. It a good chance for the airline companies, they could hold a few of tickets in hand and release them few days before the flights depart dates to satisfy urgent need to this kind of customers.
Business travelers, they are the most frequent flyers. They pursue the quality and efficiency of airline travel. So most of them will choose business class, and usually their companies will have contracts with the airline companies. So most of them are customer groups instead of individuals. They are not very price sensitive, and most of them are brand loyalty to one airline.
Price sensitive customers, most of these customers are infrequent flyers. They are very price sensitive and their brand loyalty is very low. They could be attracted to any airline companies if they find a cheapest ticket price.
Products/services
The main product and service airline companies sell to satisfy their customer need is airline tickets with different class fares. Usually, most airline companies will offer three kinds of class, first class, business class and economy class. Most of their revenue is from selling airline tickets (“The industry handbook,” n.d.).
The other products and services airline industry use to earn revenue including cargo transportation, selling fly miles and addition services such as checked baggage fees, in flight Wi-Fi, etc.
Suppliers
The main suppliers to the airline industry are aircraft manufacturers. The number of this kind of suppliers is limited. Boeing and Airbus are the main suppliers in the aircraft manufacturers industry (Cederholm, 2014b). Airport and airport workers are the other important suppliers to airline industry. They provide site and services to support the airlines. Such as ground services and safety checking. Some technology companies are suppliers to airline industry too. For example, some of them provide navigation systems and online reservation systems to the airline companies.
Industry-wide opportunities and threats
Porter’s five forces model
Threat from new entrants
The entry barriers of the airline industry are low. For the new entrants, it is not very difficult to rent aircrafts from the aircraft manufacturers or from the aircraft leasing companies. They could get their start-up capital from banks, investors (Cederholm, 2014b). Although it is easy for entrants to enter airline industry, the threats from new entrants are still low. In airline industry, if the companies hope to have long-term development, they need constantly capital supports. The main airline companies have built their supply chain of capital support. It is difficult for the new entrants to achieve it in short time. Customer brand loyalty and company reputation are very important too. As the main competitors in this industry, they have built their brand recognition successfully. The new entrants need time to achieve this. So to the main companies in this industry, the threat from new entrants is very low.
Bargaining Power of Buyers
To airline industry their buyers could be business groups and individuals. Most of them are individuals. For the business group buyers, they have some power to negotiate with the airline companies to get a better price because they purchase large quantities of their tickets. For individuals, they don’t have bargaining powers to negotiate the price. The switching power for individuals is low, but for business groups its high because they always have contracts with the airline industry. The cost of break the contracts will be high. Buyers are rarely entering airline industry to compete with airline companies. So the bargaining power of buyers is low.
Bargaining power of suppliers
The main suppliers to airline companies are the aircraft manufacturers. There are few number of aircraft manufacturers they could choose, the top two are Boeing and Airbus (Cederholm, 2014b). As main customer to aircraft manufacturers, airline companies could not find substitutes to instead aircrafts. The switching cost for changing suppliers are supper high, due to their long-term contracts. Although the suppliers are rarely entering airline industry, they still have very high bargaining power.
Substitute products
For the general airline industry, the threat from the substitutes is low. For the regional carriers, the threat is higher than the international carriers, because the substitutes are more than international carriers (Cederholm, 2014b). For example, trains, car, bus, even the online collaboration technology could be a substitute. For long distance, international carriers, the threat from the substitutes is low, because they’re few substitutes could replace airline travel. If we use time usage and efficiency as the measures to evaluate the airline industry and its substitute products, we will find that the power of substitute products is weak.
Competitive rivalry
The competitive force from the competitors in airline industry is high, but the competition is not as intense as it is in past years. The industry is consolidated after the acquisitions and merges period. Now there are six main competitors in the U.S. airline industry. The legacy carries such as United Continental Holdings Inc., Delta Air Lines, and American Airlines. The regional carries including JetBlue Airways Corporation, Southwest Airlines Co. and Alaska Air Group, Inc. With the growth travel demand, the competitive rivalry could be reduce more or less. The reason we thought the force from competitors are still high because the exit barriers are high in this industry (Cederholm, 2014b). For the existing companies in the airline industry, the fixed costs to exit are high. They have contracts with aircraft manufacturers and airports, costs of break contracts to exit this industry are very high. As huge airline companies, they have a lot of employees, if they exit, it will bring a significant unemployment problems to the society. It also has connections and dependences with other industry, such as transportation industry and aviation industry.
Market attractiveness
Insert Table 1 here
According to the table above, we could see, the competitive force of the new entrants, bargaining power of buyers and the power of substitutes are all low in airline industry. Only the bargaining power of suppliers and the competitive forces between competitors are strong. It tells us, the airline industry has a profitable environment, especially for the existing companies in this industry.
Macro-environment factors
Global forces
The development of globalization has facilitate the international business development, it give companies chance to go to aboard and find new market oversea. So does airline industry. With strategic combination or joint ventures, U.S. airline companies, especially the international carriers, they could find a partner in other courtiers. The multinational cooperation could help them increase their service efficiency in international airlines.
Macroeconomic forces
According to IATA’s report, with the GDP growth, the people’s disposable incomes will growth too. It will bring a huge increasing in the travel demand (Schmidt, 2016). With the falling fuel prices, the airline industry will achieve a huge growth in the following years.
Political and legal forces
Once the issue of the labor contracts between Southwest Airlines and Delta Air Lines happened, the federal government began to pay more attention to monitor the airline industry (Lorenzetti, 2015). It brought some pressures and limitation for the airline industry. Also the issue such as terrorism could bring long-term impact to airline industry. For example, after the terror attack happened in September 11, 2001, the whole airline industry was suffered for a long time. The revenues of whole industry declined more than five percent and it took more than five years to fix the issue and get profit again (Cederholm, 2014a).
Demographic forces
Demographic force is an important factor when we talk about the airline industry growth forecasting. According to the research from Boston Consulting Group (BCG), the millennial generation will be the main customer group for the airline industry in the future. They will spend more than ten percent than other generations, because most of them are interested in purchasing the addition in flight servies such as Wi-Fi (Cederholm, 2014a). The mobile devices have been widely used by the millennial generations, so they also like to use the mobile apps. This could give the airline companies an investment direction in the future – developing and updating their online and mobile services.
Technological forces
The development of technology is very important to the aircraft manufacturers, advance technology give them opportunities to improve their engine performance. It means the aircraft could operate more efficiency and help airline companies reduce their fuel costs.
Social forces
When people begin to pay attention to environment, they begin to concern the impact the fossil fuel could bring the environment. In recent years, airline industry faced a lot pressure from environment protection. As we know, fossil fuel is an irreplaceable energy source to aircrafts. Airline industry needs to find a way to improve their efficiency of their fuel usage. To show the determination to protection environment, most airline companies have signed a goal from IATA to reduce the CO2 emissions (Cederholm, 2014a).
Strategic group analysis
The following figure is showing the strategic groups in airline industry. Since there are just six main competitors in U.S. airline industry, so we separated them into to groups, the legacy carries including United Continental Holdings Inc., Delta Air Lines, and American Airlines. They are using the hub-and-spoke route structure. The prices of their tickets are higher than the regional carries. And they capture more than forty-five percent market share in the U.S. airline industry. The other strategic group is the regional carries including JetBlue Airways Corporation, Southwest Airlines Co. and Alaska Air Group, Inc. They are using the point-to-point route structure. The prices of their tickets are lower than the legacy carries. They hold more than twenty-eight percent market share in the U.S. airline industry (“Domestic market share,” 2016).
Insert Figure 1 here
Opportunities
The low threat from new entrants could bring an opportunity to the existing business to expand their business by acquiring the potential new entrants. The low bargaining power of buyers also means the airline companies have high power to affect the price of the tickets. The revenue from increasing the price of the tickets could remit their large expense pressure on fuel and labor. Since their competitive force of the substitute product is low, they could keep improving their operation processes to achieve efficiency. And made their efficiency airline travel became a competitive advantage to other transportation industries. The development of globalization and growth disposable income could bring a huge travel growth to the airline industry, it is a good chance for the airline companies to increase their revenue and expand oversea markets. Advance technology in the aviation industry gives them opportunity to invest into new aircrafts that could increase their fuel efficiency and reduce the impact in environment. The structures change in the demographic shows the millennial generation will be the main customer group in the future. If the companies could catch this opportunity, develop strategy toward this generation. They could attract more customers in following years.
Threats
The conflicts between the bottom labor and the airline companies could be a threat for their operations, so companies need develop new strategy and policy to deal with them. The strong bargaining power of suppliers could be a threat to airline industry. The airline companies should keep good relationship with their suppliers because the switch costs of new suppliers are supper high. The strong force from their competitive rivalry is also a threat to existing companies, how to achieve and keep their competitive advantage is important for them to consider. Once they fail, they may be able to not afford the high exit costs. The trend of social concern of the environment problem is important, so keep engage in the environment protection activity could help them build brand reputation.
BRIEF INFORMATION FOR SELECTED COMPANIES
Brief history overview
Southwest Airlines Co.
In 1967, Herb Kelleher established the airline company Southwest Airlines. Now Southwest Airlines Co. has developed into the largest low-cost carrier in the world (“Southwest Airlines”n.d.). Its main office is located in Dallas, Texas. It is an airline companies that use the point-to-point route structures. The main market to Southwest is United States and some nearly international market, such as Aruba, Mexico. The destinations of Southwest are located more than 100 cities, which cover 40 states in United States (“Profile Southwest Airline Co” n.d.).
JetBlue Airways Corporation
In 1998, David Neeleman established the low-cost airline company NewAir. It is the initial name of JetBlue Airways Corporation. Its headquarter is located at Long Island City, New York. Its main operation airport is John F. Kennedy International Airport (“JetBlue” n.d.). Same with Southwest Airlines Co., JetBlue uses point-to-point route structures. Its main market is United States. The destinations of JetBlue are located more than 90 cities, which cover 30 states in United States (“Profile JetBlue Airways Corp” n.d.).
Major products/services
Southwest Airlines Co.
As a passage transportation airline, the main products and service Southwest provide is airline ticket. Southwest provide three class fares with different prices range and features. One of them is called Wanna Get Away, this class fares always offering cheapest tickets. The mid-level class is called Anytime, it allows the customers to cancel and change with refund. Its high-level class is Business Select, its ideal for high frequent flyers. It not only allows the customers to cancel and change with refund also it could help the customers earn more points to their membership account. Southwest membership program called Southwest’s Rapid Reward Rewards (“Profile Southwest Airline Co” n.d.).
Southwest also provide some additional services to bring conveniences to their customers. For example, EarlyBrid Check-In provides early automatic check-in services and allows customers choose their seat early. Its Pet Are Welcome on Southwest program gives their customers opportunity to travel with their pets (“Products” n.d.). They also offer in-flight services such as Wi-Fi and movies.
JetBlue Airways Corporation
Similar with Southwest, JetBlue’s main products and services are airline tickets too. It offer three types classes including Blue, Blue Plus and Blue Flex. Its membership program is called TrueBlue. Customer’s could earn their TrueBlue points by purchasing airline tickets and airline miles. The TrueBlue points could use to redeem free checked baggage or reduce the payment of checked baggage (“Profile JetBlue Airways Corp” n.d.). Also if they have enough TrueBule points, they could exchange a free flight ticket.
The in-flight services such as Fly-Fi, the Internet services are provided on their flights. Also they provide in-flight entertainment such as movie, radio. Any purchase the customer make in-flight could use Apple Pay (“Profile JetBlue Airways Corp” n.d.).
Financial performance data quantitative analysis
Comparison of financial performance
In the following figures, it shows the profit margin and operating margin of Southwest and JetBlue (“JetBlue Airways Corporation” n.d.). From the figures, we could know both of these two companies profit and operating income grown fast. Although their revenues are not in the same level (due to the different percent of market share) the growth percent of their profit margin and operating margin are very close (“Southwest Airlines Co” n.d.).
Insert Figure 2 here
Insert Figure 3 here
COMPANY ANALYSIS AND STRETEGY COMPARISON
Internal Assessment
Southwest Airlines Co.
Efficiency
Southwest has more 100 destinations and cover more than 40 states in the U.S. market. Also its have seven nearly international markets (“Profile Southwest Airline Co” n.d.). And with their large number of in service aircrafts, it gives Southwest super large capacities than its competitors, and helps them reduce the unit costs.
Quality
Southwest offers reliably quality services and products to their customers with their experienced employees. It helps Southwest earn good reputation and stable customer loyalty.
Innovation
Process innovation helps Southwest reduce their cost. For example, their process innovation of aircrafts turnaround time, it helped airports save time on passenger loading processes and then reduce the cost of their operating expense (“Process innovation” n.d.).
Responsiveness to customers
Southwest offer their customer a good offer that other low-cost carries do not offer, they allow their customer bring two checked bags for free (Landsel, 2015). Their EarlyBrid Check-In service provide early assess to their customers, bring convenience to their customers. To support their customers travel, they offer pet services to allow their customers travel with their pets.
Strengths
The large capacities lead to their efficiency and help reduce the unit costs. Reliably quality of their customer services help them build good brand loyalty and company reputation. Process innovation reduces the time usage and operational costs. Checked bags policy makes them differ from other competitors. Additional services bring ultimate convenience to their customers.
Weaknesses
Although they have larger capacities than other low-cost carriers, their aircraft utilization is not enough. Lacking of products innovation, the existing products they have are outdated to attract more customers.
JetBlue Airways Corporation
Efficiency
With large number of destinations cover 90 cities in 30 states in U.S. market and its high frequent daily flights JetBlue could lower their unit costs (“Profile JetBlue Airways Corp” n.d.). The network structure gives JetBlue ability to lower their costs and get better aircraft utilization. The utilization rate of their aircrafts is high, each aircraft averagely work about 12 hours a day (Cederholm, 2014c).
JetBlue’s fuel cost is very high, it covers large percent of operating cost. It brings difficulty to reduce the unit costs (Dalavagas, 2015).
Quality
Although it is not easy for a low-cost carrier to pursue high quality products and services with low price, JetBlue has achieve in this area too. They earn high score on their ancillary products in Net Promoter Score’s customer satisfaction research (Cederholm, 2014c).
Innovation
JetBlue doing really well in product innovation, they create new products with new features to enhaced their customer experiences. For example, they have a special product that other low-cost airlines companies don’t have called Mint. Once their customers buy Mint, it means they could enjoy the fully lie-flat seats and private space with door around their seats (“Profile JetBlue Airways Corp” n.d.). Also they could enjoy other in-flight service such as premium food and drink for free. Their member reward program TrueBlue has a feature called family pooling, which allow the customers involve their family into this reward program to earn more reward points (Cederholm, 2014c).
Responsiveness to customers
According to J.D. Power’s customer satisfaction survey, JetBlue are the top one customer satisfied company among the low-cost airline companies in United States (Cederholm, 2014c). JetBlue also focus on the niche market, which customers prefer low-cost airlines but still hope to have better experience with reasonable prices. So they create Mint to satisfy their customer needs.
Strengths
JetBlue have strength in their good quality ancillary services and they earn high customer satisfaction points among the low-cost airline industry. Their products innovation make their products are differentiated than other low-cost airline companies. Their aircraft utilization rate is high.
Weaknesses
The fuel cost covers large percent of operating cost. It brings difficulty to reduce the unit costs. Also it brings difficulty for JetBlue to keep offering low price tickets.
Comparison of strengths and weaknesses
Both Southwest and JetBlue have strengths in their network. They all have a lot of destinations in many cities and cover more than 30 states in United States. JetBlue’s network is smaller than Southwest. If we compare their in-service aircraft, we will find Southwest has much more than JetBlue. A larger capacity gives Southwest much more ability to reduce their cost and achieve efficiency than JetBlue. Comparing with Southwest, which have lower operational cost, JetBlue have high operational cost, especial large percent of fuel cost.
Southwest has process innovation that helps them reduce time usage and operational cost, JetBlue are lacking of process innovation. JetBlue’s product innovation help them create products and service differ from other competitors. Southwest have some additional service differentiation but they need more main product innovation.
Comparison of competitive advantages
Southwest has competitive advantages in their large transportation capacities and widely covered point-to-point network. They also have a competitive advantage of lower operational cost that gives them aggressive finance support to the future development and expansion.
JetBlue has competitive advantages in product innovation. Their products help them differ from other competitors not only in low-cost carriers group, also made them more competitive in the whole airline industry.
SUMMARY OF FINDINGS
Airline industry is a profitable industry, especially for the current existing companies in this industry. Although the force from competitors and bargaining power from suppliers are high, they could find opportunities in acquiring potential new entrants, negotiating contract with buyers and building irreplaceable products and service to compete with their substitutes industries. With the good understanding of the macro-environment and strategic group analysis, airline companies could define them in an accurate position in airline industry and find a direction for future development. Through the comparison of JetBlue Airways Corporation and Southwest Airlines Co., we could know that even the companies they are in the same strategic group, their strategy could different. They could learn from each other, keep their strengths and reduce their weakness, so they could achieve long-term competitive advantages.