Individual Project
Brief description of industry
After World War II, commercial airline industry in the United States has grown dramatically. In 1945 revenue passenger miles (RPM) was already 3,3 billion miles, by 1970s this figure was already reached 130 billion and after 10 years was increased to 330 billion. During deregulation many new companies entered commercial aviation market, new routes were introduces and strict competition began. In 1990s and next decade air ticket prices were most competitive and US passenger airline industry became the biggest among same industries in the whole world. In last five years passenger numbers were increasing from year to year, however there was a period when we saw falling of this numbers, affected by increase of fuel prices and accordingly increase of air ticket prices.
Brief description of history of two firms
In the following section we are going to present general brief history and general information of couple air transportation companies, based in the United States. These companies are US Airways and Southwest Airlines. Both companies are among ten leading players on this market. Market share of US airways from August 2010 to July 2011 was reported 7,9 % and the same figure for Southwest Airlines was 14,5 percent. In 2010 US Airways reported revenue 7,26 billion dollars while Southwest Airlines reported 12,1 billion (According to southwestonereport.com)3.
US Airways is biggest airline based in Temple, Arizona. It holds eighth position by market share in the United States. Company was founded in 1979. Now it is operating 141 destinations around the world. In 2000th its situation was worsening, in 2007 by consumer survey it was names as worst airline by consumer satisfaction, however situation was becoming better in 2009 and 2010.
Southwest Airlines was founded in Dallas, Texas, on March 16 1967 year. Based on research in 2010 it was the largest domestic passenger carrier in the United States. Company performs more than 3400 flights every day and it has 552 commercial aircrafts. Now it operates flights in 72 destinations. (According to: southwest.com)
Operational Objective
Now let’s discuss what operational objectives should have Southwest Airlines and US Airways. I think will be seasonal to discuss what operational objectives for whole industry of passenger airlines are. All companies operating in this sector are commercial entities and for all of them main objective in to generate maximum profit for benefit of their shareholders. Due to this they should be competitive and provide their customers best services and best prices for these services. They should do their best to satisfy their customers with services and gain their loyalty.
Now let’s discuss what factors influence price levels and service quality. For having highest service quality company should have high quality management and best staff available on the human resources market. On the other hand high quality staff needs higher wages, and at this point companies face the problem of choosing between lower ticket price and higher service quality. Most companies solve this problem by diversification of ticket categories by classes. Higher is class of ticket, higher is service quality and staff qualification. If we take a look at service prices in commercial airlines industry, we can see that price depends on world fuel prices and technological development. For example Southwest Airlines has special equipment for cleaning jet engines and fuel consumption falls by 1,9 % that is quite big amount if we will imagine whole fuel consumption of the company. Airplane models also influence fuel consumption, newest Boeing aircrafts produces in recent years are consuming less fuel than older ones and to have up to date equipment will influence cost a lot.
So, from everything mentioned above we can conclude that objectives for those companies should be finding ways to reduce costs for their services and at the same time raising quality of service. The last objective is more essential for US Airways because we their poor service quality, which was observed in the result of customer surveys in recent years. For cutting costs they should find new technological solutions how to reduce fuel consumption, probably this will require even renewing airplane fleet.
The Specific Operational Challenges of the Industry
For US commercial airline industry main challenge is to cut costs and serve as much passengers as possible. Attracting passengers is harder day by day when reputation competitor companies from the countries where fuel cost and labor costs are lower. Passengers who fly outside USA prefer using Airlines of United Arab Emirates because prices are much lower and service better. So, if the first challenge is to cut costs then US commercial airline industry should try to do one thing that is most efficiently done in the United States in recent few decades, involve best aerospace engineers in creating less fuel consumptive airplane engines, which could give an edge to this industry in the USA. Second challenge is high labor cost in United States; maybe companies should outsource some activities? Both companies are operating international flights. If now they are repairing airplanes in the USA then probably they should think about doing it in such countries as Ukraine, where costs for same activities with same professional level are three time less. Third challenge for United Stated passenger airline industry is to provide service to everyone who needs it, by this I mean that more and more people are choosing airplane as best and fastest transportation method and now for almost every flight more that 80% of seats are occupied and sometimes it is even hard to find ticket when you need to fly somewhere urgently. Companies should try to serve all potential passengers who need to fly somewhere, especially during holidays when many people became frustrated because could not get air ticket and have to travel by train or by car long distances.
Metrics of the Industry
Every industry has its own performance metrics, generally performance can be measured just by return on investment or net income but if we take specific industry such as air transportation, it would be better to introduce some additional performance measuring figures. In my opinion most important in this industry would be consumer satisfaction factor, because if customer was not satisfied with one air company he or she will use other company nest time and this company is losing money on this. This metric can be estimated by surveys, consumers who already used service of this company should be asked few questions about their experience with this company and what are they willing to improve in it. Then collected statistical information should be processed and determined what should be changed or improved. Next metric that is very important for this industry is aircraft utilization. It will measure ratio of flight hours per 24 hours for each airplane in the fleet of company. If this ration will be higher that means that equipment is used more efficiently. Third metric would be yield, which represent the revenue earned by the company per each flight mile. It can be simply calculated by multiplying number of filled seats in the aircraft on distance of flight in miles. Forth metric in this list would be available seat miles, which represent how many seats are available for people willing to fly somewhere. This metrics measures how efficiently can company supply service to large quantity of passengers. Fifth metrics but not the least important is fuel cost, because it changes the cost of flying most of all and companies should try to find solutions how to get fuel cheaper, especially in peak oil time when cost per gallon of aircraft fuel increased to almost two dollars.
How has each firm addressed these challenges?
In third section we discussed main challenges that these companies should face and find solutions. Now we will see how the situation is concerning the issues discussed above. US Airways is now among five largest domestic carriers, but by customer satisfaction it’s on last place among them and it is also among nineteen most hated companies in the United States of America, according to the surveys. From the point of view of cost cutting maybe they are trying to do their best and they even stopped offering free beverages during flight to the passengers and began selling these beverages. Maybe company management did not understand or simply did not want to understand that passenger will prefer to pay two dollars more for ticket than paying for water in the airplane and this will frustrate many of them. They are losing customer loyalty dramatically. If we will look at customer satisfaction level we will see that it is pretty low, maybe even lowest among all companies operating in this industry in USA and this is quite bad for US Airway’s reputation and income.
Now let’s see what happens with Southwest Airlines. Their market share is higher that US Airways. For cutting costs they introduces technologically new method of cleaning jet engines and this gives them almost two percents of economy on fuel, because fuel consumption falls. This company is rated as one of the most customer satisfying and gains loyalty of many US citizens who often fly domestically. Result of the surveys show that their staff is very professional and they handle all tasks pretty good and this is reflected on company’s financial performance.
Conclusions for this industry pair
Now we have to identify which firm of these two competitors performs better. From everything that was mentioned above we already can conclude that Southwest Airlines should be performing much better than US Airways but let’s look at the financial figures, which would be interesting for people willing to invest in this industry sector.
(Financial data retrieved from: http://www.annualreports.com/Company/4975)
After analyzing performance of these two companies by looking at these tables we can see that return on investment in higher in UA airways. This is probably caused by smaller amount of investments in this company because it is considered as risky. Southwest Airlines has more stable ROE figures besides we can see that their net income never became negative during last five years. In 2008-2009 we can observe falling of income in both companies because of peak oil, when oil prices became much higher and people flew less. In 2010 net income of both companies increased, besides in 2009 US airways had merger with other air transportation company and this improved its financial situation, otherwise bankruptcy could be inevitable. If I have to offer somebody to invest in this industry I would offer Southwest Airlines, because its management has better performance and has better experience in coping with critical situations on this market. US Airways is still in risky environment, despite of good result given by recent merger, I think it’s better to watch this company and invest in it when it becomes stable.
Applicability Elsewhere
As a representative of ABC group for proving our group’s broad knowing and understanding of operations management I would like to offer some other options for investing in to XYZ V.C.
I would like to offer US steel industry because in recent years demand on steel is increasing besides one of the main metal suppliers in the world, represented by Russian federation and Ukraine are leaving the scene because they raised prices on their products and export from these countries became a real nightmare and USA soon will became global leader in steel supply. As to the companies described above we can learn much from their experience, first of all, try all possible innovative technologies in company’s operations as Southwest Airlines did and that could give us edge in hard times when every extra percent of profit is very important. We should also always care about customer satisfaction because, dissatisfied customers almost became major reason of bankruptcy for US Airways. Operations management is first of all, knowing how to take out maximum from available resources and it is always better to learn on mistakes of other’s before risking our own money.
References
1. Top 10 Airlines in US and Canada by Passenger Numbers. Retrieved from: http://airtravel.about.com/od/basedinnorthamerica/tp/top10na.htm
2. Return on Equity. Retrieved from: http://wiki.fool.com/Return_on_equity
3. Financial Summary. Retrieved from: http://www.southwestonereport.com/financial-10yr.php
4. Annual Reports. Retrieved from: http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnual
5. 13 Ways the U.S. Airline Industry Has Changed Since 9/11. Retrieved from: http://www.businessinsider.com/how-the-us-airline-industry-has-changed-since-911-2011-9
