Introduction
The U.S. airline industry continues to be fiercely competitive, due to a combination of rising costs, increased government regulation, fluctuating macroeconomic conditions, and increasingly price sensitive consumers (Southwest Airlines, 2016a). Environmental pressures have led to several mergers and acquisitions within the industry, including major carriers as well as regional and domestic carriers (Southwest Airlines, 2016a). Low-cost domestic airline carriers that offer non-stop service to popular domestic and tourist destinations within North America have emerged as formidable competitors to large, international carriers such as United Airlines. Southwest Airlines and Allegiant Air are two carriers that focus on variations of the aforementioned business model. In 2011, Southwest Airlines acquired AirTran, which resulted in the expansion of Southwest’s service to international markets in Latin America (Southwest Airlines, 2016a). In contrast, Allegiant Air continues to operate routes only to destinations within the United States and targets airports, such as St. Petersburg – Clearwater International, that experience less (if any) traffic from the major carriers (Allegiant Travel Company, 2015).
Allegiant Air needs to expand its service both within and beyond the U.S. in order to generate additional revenue, as the company currently competes with Southwest Airlines in the majority of its markets (Allegiant Travel Company, 2015). Consequently, a merger with or acquisition of Spirit Airlines appears to be the most profitable. Spirit Airlines operates under an almost identical model, offering passengers a low-cost cost base fare and the option to pay for additional add-ons (checked baggage, on-board snacks) (Spirit Airlines, 2016a). An acquisition of Spirit Airlines would expand Allegiant’s routes from domestic-only to international. The acquired routes would include destinations in Canada, the Caribbean, Mexico and Latin America (Spirit Airlines, 2016a). The actual and potential strategic level initiatives for Southwest and Allegiant will reveal how mergers and acquisitions can be employed in order to sustain a competitive position in the marketplace.
Southwest Airlines Acquisition of AirTran
Prior to its acquisition of AirTran, Southwest Airlines did not operate routes outside of the United States. For the first time, Southwest was able to offer non-stop service to San Jose, Costa Rica, Puerto Vallarta, Mexico, Belize City, Belize and Liberia, Costa Rica. As Southwest operates out of Houston’s Hobby Airport, the airline was able to leverage the fact that this airport had recently constructed the facilities necessary for international service. In addition, the airline increased its seat capacity by forty-three percent from fiscal year 2010 to fiscal year 2015 (Southwest Airlines, 2016a). Given the results of the acquisition, the strategy behind it appears to have been international expansion and growth. The strategy to expand into international markets is likely driven by a need to generate additional revenue and remain competitive with other carriers.
One of the environmental factors affecting the airline industry is increased price sensitivity on the part of consumers. Southwest’s management saw an opportunity to compete with larger carriers in international markets based on price and value. As a brand, Southwest is known for its low-cost, innovative, and customer-oriented business model. Yet as major carriers have had to strip included amenities from basic fares, Southwest has found a way to keep some of those amenities. This includes free checked bags and no fees for modifying travel plans (Southwest Airlines, 2016a). The fact that Southwest did not expand internationally prior to the acquisition suggests two things. First, the airline may not have had the internal resources to expand on its own or the cost of acquiring those resources was more expensive than purchasing a company that already had those resources established. Second, Southwest may have the long-term growth strategy of becoming a major carrier, offering both extensive domestic and international service. Acquiring AirTran allows Southwest to test the waters in regards to its brand’s capacity to attract and establish demand for service to international destinations. The smaller scale of international routes Southwest acquired also gives the company a chance to see how well it deals with multiple sets of regulations and resource allocation. Given the fact that the AirTran acquisition has been responsible for increased seat capacity (and therefore increased capacity for revenue), the decision has been in astute alignment with Southwest’s strategy of international expansion and growth.
Potential Acquisition/Merger for Allegiant Air
Unlike Southwest, Allegiant Air is a domestic, low-cost airline that has yet to expand into international markets. Allegiant Air currently offers non-stop service to the following U.S. destinations: Las Vegas, Orlando, Phoenix, Los Angeles, Palm Beach, FL, Honolulu, Tampa, Punta Gorda, FL, Myrtle Beach, S.C., Fort Lauderdale, San Francisco, Palm Springs, San Diego, Daytona Beach, Reno, and Monterey, CA (Allegiant Travel Company, 2016). Not only does the airline operate on a low-cost, basic service business model, but it focuses on providing service to leisure destinations (Allegiant Travel Company, 2015). This is not an airline that targets business travelers that have a frequent need for travel to the same destinations. In fact, the company’s annual report states that in addition to focusing on leisure travelers, its business model leverages “low-frequency service to small to mid-sized cities,” “large aircraft for non-stop service to under-served cities,” and direct sales to consumers (e.g. website booking only) (Allegiant Travel Company, 2015).
While focusing on leisure travelers who desire to travel a few times to smaller, underserved destinations is certainly a niche approach that can capture the fringes of the market, this strategy does not leave much room for growth or the ability to compete in some of Allegiant Air’s larger markets (i.e. Los Angeles, Honolulu, Orlando, Tampa). Allegiant Air needs to establish its brand in the minds of travelers (whether leisure or business) and establish brand loyalty. One way to do that is to increase capacity and the ability to offer travelers a more unique experience. The airline also needs to remain competitive with other low-cost carriers and major airlines in its markets. Travelers are likely to choose a carrier based on route availability, price and value.
An airline that operates on a similar model to Allegiant Air is Spirit Airlines. The company is another less prominent low-cost domestic air carrier that prides itself on adhering to an ultra low-cost structure geared towards leisure travelers (Spirit Airlines, 2016a). Spirit Airlines lowers its costs by maximizing seat capacity, following a point to point or non-stop route model, using a single type of aircraft, employing direct marketing tactics, and charging for amenities (Spirit Airlines, 2016a). Spirit Airlines would help Allegiant Air expand into international markets and also increase Allegiant’s domestic capacity. Allegiant would gain capacity in international markets such as Cancun, Los Cabos, Guatemala City, San Jose, Costa Rica, Lima, Peru, Montego Bay, Jamaica, and Aruba. Domestic markets would also be increased to include Denver, Boston, Atlantic City, Chicago, Atlanta and New Orleans (Spirit Airlines, 2016b).
Given the fact that Spirit Airlines’ operations are larger – and thus more expensive- than Allegiant’s, it would be more profitable and fiscally sound to undergo a merger versus an acquisition. A merger with Spirit Airlines would be profitable as the airline competes on price and appeals to consumer price-sensitivity. The airline’s two major competitors are Southwest and American (Spirit Airlines, 2016a). A merger would allow Allegiant to compete more effectively against Southwest and be in a position to gain access to markets that are difficult to enter due to major carrier dominance. In addition, the operating revenue and net income for Spirit Airlines has continued to increase from fiscal year 2011 to 2015 (Spirit Airlines, 2016a).
Southwest Strategy Analysis
Southwest’s international strategy focuses on an initial expansion to Mexico, the Caribbean, and Latin America. According to the airline’s website, Southwest has continued it focus on the customer experience and low-fare pricing structure into these markets (Southwest Airlines, 2016b). The international expansion is limited to destinations adjacent to the United States and are locations that are relatively popular with tourists. In other words, these destinations are more likely to be desirable to U.S. citizens and frequented on a regular basis. Furthermore, the close proximity in distance and area concentration helps keep the company’s increased operational costs to a minimum. While this is a smart strategy in terms of operational efficiency and allows Southwest to shift consumer perception from a low-cost, short distance carrier to a full-capacity airline, the strategy limits Southwest’s ability to compete with the major carriers. Furthermore, it continues to allow loyal consumers to develop loyalty with other airlines that serve a wider variety of international destinations.
Southwest Airlines should consider the possibility of differentiating its domestic service from its international service. Longer flight times and different sets of traveler needs gives the airline the opportunity to see if there is a need for a higher tier of service. Instead of focusing on one class of service, Southwest could consider adding additional add-on amenities for international flights. Southwest should also consider expansion into the Canadian and European markets at the very least. The company’s strategy of focusing on low fares combined with customer appreciation needs further refinement as it is easily duplicated in the marketplace, and there is less differentiation between competitors.
Allegiant Air Strategy Proposals
Allegiant Air has been successful at penetrating small to medium sized cities that are likely to be popular with leisure travelers. The airline has also been successful at establishing a presence in tourist hot spots such as Orlando and Los Angeles. In line with this strategy, expansion into larger domestic and international hot spots is needed for growth. The airline should maintain service to Honolulu (instead of ceasing service) and expand into Chicago, New York, and Alaska. Any international expansions should first focus on Mexico, the Caribbean, Canada, and Costa Rica. These domestic and international destinations seem to be the most likely to be frequented by U.S. based leisure travelers. Expanding into other major tourist destinations gives Allegiant Air the opportunity to increase brand awareness and loyalty.
In alignment with the above business-level strategy, Allegiant Air needs to implement a customer loyalty program and focus on employee retention. The company has had significant problems with retaining qualified pilots and has spent a great deal of financial resources on training replacements (Allegiant Travel Company, 2015). If the company cannot retain one of the backbone’s of its operations, Allegiant Air is putting itself at risk of sacrificing its service capabilities and losing its customer base. Even though the airline is appealing to leisure travelers based on price, what other incentives do they have to stick with Allegiant Air as their preferred airline? Rewarding repeat purchases and purchases for travel related services, such as hotels, rental cars and dining is a no-brainer. Otherwise, Allegiant Air will have difficulty differentiating itself from the competition solely based on price. Price points are easily manipulated, especially by more well-known airlines with brands that leisure travelers already know and trust. Allegiant Air could also highlight the fact that it services popular tourist destinations at less busier airports, which could become a competitive advantage for travelers that desire less hassle and shorter wait times at the airport.
References
Allegiant Travel Company (2015). 2014 Annual Report. Retrieved from
http://ir.allegiantair.com/phoenix.zhtml?c=197578&p=irol-IRHome
Allegiant Travel Company (2016). Travel Info. Retrieved from
https://www.allegiantair.com/travel-info
Southwest Airlines (2016a). 2015 Annual Report. Retrieved from
http://investors.southwest.com/financials/company-
reports/annual-reports
Southwest Airlines (2016b). Why Fly Southwest. Retrieved from
https://www.southwest.com/html/why-fly-southwest/index.html
Spirit Airlines (2016a). 2015 Annual Report. Retrieved from http://ir.spirit.com/annuals.cfm
Spirit Airlines (2016b). Where We Fly. Retrieved from
https://www.spirit.com/RouteMaps.aspx#
