Part of the “art” in running an airline is keeping utilization high. Load Factor: The next most important metric for an airline is the Load Factor, which measures the percentage of available seats that are filled during a specific period. In 2007 load factors for major airlines ranged from 72-84%. In 2008 U. S. airlines averaged a Load Factor of 79. 74% on domestic flights and 78. 74% on International flights  Available Seat-Miles (ASM): The ASM metric is used to track seat supply among airlines. ASM is equal to the number of available seats times the number of miles flown.
Revenue Passenger-Miles (RPM): RPM measures the number of seat miles flown for which the company earned revenues. That is, RPM equals the number of filled seats times the number of miles flown. Yield: The amount of revenue earned per RPM is known as the airline’s yield. This metric is generally expressed in cents and ranged from 9. 8-13. 1 cents for the major airlines in the first half of 2007. Fuel Costs: Most factors that affect the profitability of airlines are fairly stable, except for fuel costs. Fuel costs are facing extreme risk from the threat of Peak Oil. During January 2009, airline fuel costs averaged $1.76 USD per gallon. Trends and Forces Joseph Weisenthal said in a recent post Airline-In-A-Box: Few businesses have as many variables and challenges as airlines. They are capital-intensive. Competition is fierce. Airlines are fossil fuel dependent and often at the mercy of fuel price volatility. Operations are labor intensive and subject to government control and political influence. And a lot depends on the weather. The “Dual Mandate” Problem The general public, including most investors, is not aware that congress long ago created what is referred to as a “dual mandate” for regulation of the airline industry.
This means that the Federal Aviation Administration (FAA), which is a sub-agency under the U. S. Department of Transportation (U. S. DOT), is charged with both the promotion of the airlines and the safety regulation of the airlines. This creates an obvious conflict of interest and the dual mandate has been questioned and criticized for decades. The question has been asked if the FAA should be divided into two separate divisions, one that would function as a “Department of Airline Promotion” and another that would function as a “Department of Safety.
Another proposed solution is to shift the “sky police” functions involving safety to the National Transportation Safety Board (NTSB). Although the NTSB seems like it might be a good solution to police safety, the political realities of the U. S. Congress, the FAA hierarchy and the extreme size and funding imbalance between the two agencies make it impractical and unlikely that any shift would be feasible. The FAA generally maintains that they do not “directly promote” the airlines, which is true in the sense that the public doesn’t see billboards and television commercials and email campaigns from the FAA promoting airlines.
However, the FAA indirectly promotes the airlines in a huge way on a daily basis by imposing generally lax standards and enforcement. In fact, it is a well known historical fact that the FAA is so bad at safety enforcement that there exists what is called in the airline industry the “Tombstone Imperative” which refers to the fact that over and over again the FAA has known about serious safety issues and refused to correct them and the result was dead people. –PGSanalyst 21:11, March 14, 2009 (PDT) The Railway Labor Act Problem
The general public, including most investors, is also not aware that labor in the airline industry is regulated by the Railway Labor Act. This is arguably amazingly strange and curious that one of the major modern industries, developed in the early 20th century, and now providing part of the industrial backbone for commerce and industry in the 21st century, is regulated by a body of law that was originally passed to protect wealthy railroad investors from railroad strikes in 1877. As a general rule, airline labor is not allowed to strike, similar to the prohibition on strike actions for Federal Employees and employees of some states.
For example, the Airline Pilots Association (ALPA) functions as the collective bargaining agent for most, but not all, of the airlines in the U. S. and most ALPA collective bargaining contract terms provide very, very limited circumstances under which a strike is legally authorized. Another example of the difficulty of labor expressing it’s grievances by means of a strike is the 1981 Professional Air Traffic Controllers (PATCO) strike that ended with President Ronald Reagan firing the controllers by using the authority of the Taft-Hartley Act that was passed in 1947 to greatly reduce the power and influence of unions in the U.S. The basic thing for a wise investor to understand about labor issues is that happy people are generally more productive than unhappy people and limiting by means of regulations people’s right to express their grievances may not promote happiness of the labor pool and thus adds risk to investments in those businesses in industries affected by labor relations risks. –PGSanalyst 21:11, March 14, 2009 (PDT) Consolidation After the events of 9/11, the domestic commercial airline industry went into a precipitous freefall, prompting consolidation of several airlines and bankruptcies of others.
Elimination of airlines, through consolidation or bankruptcy, benefit both revenues–through higher fares–and costs by eliminating redundant expenses and routes. Additional terrorist attacks or declines in the overall domestic economy could accelerate consolidation as weaker airlines get acquired by financially stronger ones or become insolvent. Airlines worldwide have also sought to share costs by creating partnerships or alliances. Through these agreements, airlines can share facilities and operational costs (e. g. , maintenance facilities, sales offices) and negotiate volume discounts on large purchases.
Passengers benefit from lower prices (due to lower expenses) as well as optimized routes and pooled loyalty rewards, especially in regards to international travel. Since the deregulation of the airline industry begain, airline ownership has been limited to companies and individuals of the operating country. THis has prevented major international mergers and acquisitions from occuring. Recently, the US government has announced its intentions to relax these regulations and clear the way for international m&a deals in the airline industry.
This could create significant cost-saving and synergy in the rapidly deteriorating industry. The three major global alliances are: Spotlight on Oil Prices Oil Prices are a key factor for airline operations because Jet Fuel costs are directly linked to the cost of the oil that must be refined to produce Jet Fuel. In 2008 fuel is constituting about 34% of an airline’s costs, as opposed to about 13% in 2002.  For the budget airlines such as Jet Blue and AirTran, this share rises to nearly 50%.
The rise has been very drastic just in the first six months of 2008. At the start of the year, jet fuel cost $850 a metric ton. As of June, the cost is now approximately $1300 a ton.  Jet fuel is extremely correlated with spot petroleum prices, which have risen significantly over the past several years. On the flip side, the stock prices of domestic airlines tends to be highly negatively correlated to jet fuel prices, indicating the sensitivity of this historically low-margin business to fuel expenses.
In an exogenous event for the fuel procurement of airlines, oil companies are increasingly making airlines pay up front for fuel. In the past, the airlines were allowed to use fuel on credit and pay up to weeks later. Now, the oil refiners are eliminating this free credit line and making the carriers prepay. This will cause a negative shift in the short term cash situation for the airlines as they can no longer keep cash from revenues on the books for this credit line period. On June 4, the International Air Transport Association drastically lowered their profit forecasts for the industry.
The group now projects that global airlines will collectively lose $2. 3 billion if oil averages $107 for 2008. If the price averages $135 for the last six months of the year, airlines will lose $6. 1 billion.  However, on 1 October 2008 Northwest Airlines (NWA) CEO Doug Steenland claimed that his company can maintain profitability even if oil stays at $100 a barrel.  Some airlines have utilized hedges to lock in the price of fuel and hence insulate themselves from oil price volatility.
Southwest was perhaps the most forward-looking of airlines, and has hedged significant portions of its fuel expenses through 2010 at various prices per barrel below the current market rate. The company will reap benefits compared to other airlines if oil prices continue to rise or remain at current levels. On the other hand, if prices fall below Southwest’s hedging levels, they will be at a disadvantage to other airlines. American Airlines and United Airlines, on the other hand, have no remaining fuel hedges in the foreseeable future as of 2008. Other airlines have limited remaining hedges. Peak Oil
Peak Oil experts from the oil industry are already warning of impending catastrophic drops in oil production that will severely limit the future growth of the airline industry and cause extreme increases in Jet Fuel costs and other oil related costs including fuel for airline support infrastructure such as maintenance vehicles, External Ground Power Units (GPUs), crew transportation vans, airline food costs, etc. , etc.. Some scientists and industry experts are seriously discussing the viability of the entire global airline industry and asking the question of whether their grandchildren will ever even fly on a commercial aircraft?
The mere fact that these questions are being asked and remain unresolved should cause a wise investor to carefully consider the long and short term impacts of Peak Oil on the airline industry as a whole. –PGSanalyst 21:23, March 14, 2009 Business vs. Leisure Travel Business travel is important to the commercial airline industry for two major reasons. First, it commands a much higher average ticket cost, approximately 5 times higher than the average leisure fare. Second, business travel is less elastic changes in macro-economic trends than leisure travel, which may be considered a form of luxury.
In the past 24 months, leisure fares have dropped slightly, ranging from $110 to $100 In the same time frame, business fares have increased significantly, from around $350 to $500 Domestic vs. International Travel International travel accounts for about one-third of all traffic and capacity for the major carriers. Comparing 2007 year to date to the same time period in 2006, these major carriers saw international travel increase by about 5% , which is faster than domestic travel, which was relatively flat.
Growth in domestic travel has been soaked up in large part by the regional discount carriers such as Southwest and AirTran. History of Airline Bankruptcies Raises Risk Concerns For Investors Over the period from 1990 through 2006 the Air Transportation Association of America reports that domestic airlines posted a cumulative loss of $22 billion on cumulative revenues $1,866 billion. Since 1978, when commercial aviation was deregulated, no fewer than 137 carriers have filed for bankruptcy protection.
And from the end of World War II, when aviation started to become big business, through 1994, the sum of the industry’s profits and losses was less than zero. Warren E. Buffett once remarked that it would have been a blessing for shareholders if someone had thought to shoot down Orville Wright at Kitty Hawk.  One reason the major airlines are at higher risk for bankruptcy is that they use huge amounts of fixed capital — wide-body jets go for $100 million each and can’t be readily liquidated which explains why many airlines do not own their aircraft but lease them instead.
Airlines also depend on a highly skilled labor force that requires large cash flow into training, benefits and pensions. Consider some other businesses for a moment: Microsoft has highly skilled programmers but little invested capital. Merrill Lynch has both, but its assets — stocks and bonds mostly — could be liquidated overnight. Steel has high fixed capital, but it can replace its workers more easily. “Unbundling” of costs usually bundled in ticket prices Business practices for much of the history of the airlines included “bundling” all costs of travel into a single ticket price.
Although some “unbundling” of the costs in tickets has occurred to various degrees at some airlines in different parts of the world, since the summer 2008 spike in fuel costs many airlines have chosen to broaden the practice, for example, charging the passenger for each piece of checked baggage b) Forces in the macro environment In terms of the case, it suggests that the environment of airline companies is not very stable, especially the increasing price of fuel which is the key driver of change. From Ryanair profit statement (Exhibit 1a) it shows the fuel and oil cost has increased by €200 million from 2005 to 2006.
The increase in fuel costs is 74 percent. The impact to the airlines companies is obvious and the budget airlines may face the trouble more so than normal airlines. Moreover, airline companies also have to concentrate on some other issues. For example, according to the case, they are facing the risks from terrorist attacks which are difficult to predict. It is not difficult to find the changeability, however it is complex to the airline environment. Some factors, such as legal action and customer demand, also have influence on them. Some of these such as the price of fuel and oil can be predicted, while some of them cannot.
Audit environmental influences The Pestel Analysis is employed to identify macro-environment influences of the airline industry. Political: Government wants to strengthen the economy and, consequently, will support local airlines by setting rules, such as preferential rights. Every government however, will probably do so. Therefore there’s no obvious advantage between competitions. The political issues have a wide range of effect, so they are not the key points that budget airlines are facing. Economic: This is identified as the most crucial factor to airline companies, especially to budget airlines.
The influences refer to the macro-economic factors such as the national growth rates and the exchange rates. As budget airlines, they will pay more attention to the operation costs such as fuel cost. It became a big issue for budget airlines because of the increasing cost of fuel. That may reduce the advantages and the companies will be less competitive than before. On the other hand, the recession will lead more people to choose budget airlines. Social: With the development of Asian countries in particular China, there are more and more people deciding to study or travel in Europe.
In recent years, the lifestyle of local people has also changed. They tend to travel abroad to enjoy their lives. Most of these people are not wealthy such as student. The budget airlines therefore, will be their best choice to reduce the travel costs. Technological: The innovation of technology helps the airline companies reduce costs and carry out tasks more effectively. The new type of aircraft can help to reduce the burning of fuel; and new technology can also make the security check more efficient and accurate. Environmental: European countries pay more attention on environmental issues, especially greenhouse gases from carbon emissions.
Moreover in terms of the case, airline companies have to pay the environmental taxes for the contributions they make to global warming. In particular, it is bad news for budget airlines. Costs will increase and the companies want to maintain good brand image in the consumer’s perception. Furthermore, noise pollution and energy consumption cannot be ignored under such conditions. Legal: Some legal actions such as preferential airport rights are directed against the specific airlines. As budget airlines, which have higher competitive power, they should pay more attention to the legal forces to prevent loss.
On the contrary, they can also take the initiative over illegal aid to rivals. Stage 3 – Determine industry specific factors (this stage will be analysed in Question 2) Stage 4 – Identify competitive position (this stage will be analysed in Question 3) Stage 5 – Identify key opportunities and threats There are many potential opportunities for the airline companies. For instance, the recession may lead to more people choosing the budget airline rather than the expensive ones; new technology which helps to reduce the usage of fuel; government set the tax at a lower percentage.
On the other hand, the increasing cost of fuel may be the most significant issue most budget airlines face. What’s more, the compensation to passengers, terrorism and security, and customers’ satisfactions will all have potential negative impacts on the airline. In order to achieve lower costs, budget airlines will have to reduce costs from many departments and operations. That’s why lots of customers are not satisfied with the budget airlines except for the price. Question 2 Prepare a Porter Five Forces analysis of the budget airline industry. Express Ryanair’s perspective of these forces.
The threat of entry There are high barriers to enter the budget airline industry. i) High investment requirements. Economies of scale are important in the airline industry. It is difficult for new entrants to match others existing competitors. In addition to this, the operational experiences cannot be acquired in such short space of time. ii) Expected retaliation. Retaliation will take place when new entrants appear for budget airlines, it will probably be in the form of a price war due to costs of entry being very high for them. iii) Legislation or Government action.
Government won’t let new entrants enter the market if the industry is saturated. With regards to Ryanair in the budget airline industry, there will not be large impacts to existing budget airlines if new entrants appeared. Budget airlines always focus on the costs and price, so does Ryanair. According to the case, Ryanair was the first budget airline in Europe and now its ticket prices are much lower than the other rivals’. Therefore it will be impossible for new entrants to set a low price to win the market. The threat of substitutes Before discussing the threats, some comparative data is showed below.
London Stansted – Milan Going Out Regular Fare Adult 8. 99 GBP Tue, 2 Dec 08 Flight FR 4184 8:15 Depart 11:15 Arrive Coming Back Regular Fare Adult 12. 99 GBP Sun, 8 Dec 08 Flight FR 4185 6:45 Depart 7:50 Arrive (Source: Ryanair. com) One way by Rail Europe: London (ST Pancras) – Milan Standard Class Adult 227 GBP Tue, 2 Dec 08 8:40 Depart 21:20 Arrive (Source: Raileurope. co. uk) Most of the travellers will prefer the short journey, in addition to the cheaper way to travel. From the tables it is obvious that taking a plane from Ryanair is much cheaper than taking the train in a similar situation.
Although some airlines may be expensive, budget airlines such as Ryanair will usually be the best choice. The impact of substitutes, therefore, has less impact on the budget airlines. The power of buyers Buyers of airlines tickets can sometimes be the travel agency. In other cases, Ryanair caters to ultimate consumers. Majority of the buyers are not concentrated buyers and they come from all over the countries. Individuals can select the budget airlines according to their preference, because the switching costs are low and the differentiation of such service is weak.
It is extremely expensive for people to own an aircraft. When there is a choice of budget airlines to use, with low prices. So there is a low buyer competition threat. Like Ryanair, with less concentrated buyers and buyers’ competition threat, the power of buyers is low. The power of suppliers The high power of suppliers may be one of the most significant threats among the budget airline industry. The increasing price of fuel, which leads to a high cost for airlines, is a basic issue they are facing. As we know, fuel industry is now concentrated in the hands of few producers.
Therefore, in this situation it is difficult to cut the price for this essential material. In addition to this, it is useless to change fuel suppliers when the global price is growing. Moreover there are no practical substitutes. Ryanair is facing this problem with other budget airlines. Furthermore Ryanair sells all the ticket directly through the website. Thus there is no intermediary. Competitive rivalry Rivalry is influenced by these four competitive forces and each of them may have different levels of impact on the competitive rivalry.
In this market, every airline provides the same services which are poorly differentiated. Low differentiation and switching costs in this industry, therefore, cause the price competition. Ryanair, which has the first mover advantages, still holds the dominant position. Although many of the competitors were losing money or even have been taken over, Ryanair remains steady in incremental growth. For industry growth rate, this industry is in the maturity situation of life cycle, which means the growth is low. Price war is therefore playing a crucial role throughout the competition. Question 3
Evaluate Ryanair’s particular strengths and weaknesses and explain, with reasons, what Ryanair must do to retain a sustainable competitive advantage. As the first-mover of budget airline industry, Ryanair still holds the dominant lowest-cost position. This is also the one of the strengths it has. What’s more, Ryanair was announced being the most profitable airline in the world according to the case. The revenue is still increasing, despite the price of fuel did not stop growing in recent years. The brand image of Ryanair is also one of its strengths. Customers are attracted by the lower price.
Its traffic is the highest among the competitors (see Exhibit 2) and it is still increasing due to the enlargement of the company. On the other hand, there are still some weaknesses of this budget airline leader. In terms of the case, Ryanair win the market mostly depends on the costs. However, the costs of its major raw materials are increasing rapidly these years. This will be a serious issue. Further, minimize costs largely will cause the lack of service and training quality and so on. The Skytrax star rating (See Exhibit 2) indicates Ryanair is below the average level.
Besides, competitors contribute big influence to Ryanair. For example, Easyjet which is a young upstart of the European budget airline industry grows quickly with a large number of market shares. It is obvious Ryanair makes success base on its price advantage, and how to sustain this advantage become very crucial issue in recent situation. Keep first mover advantages. Long history with experiences, well-known brand image and economy of scale, these are the unique resources of first mover advantages. It is difficult for competitors to get these resources at a similar level.
Therefore, in order to prevent the competitors from copying the same strategy as cost reduction, Ryanair must make good use of these unique resources and try to dominate the market. Technology. Purchase and introduce the latest technological support. Although the fixed costs will be high, they can help the airline carry out tasks more efficiently and effectively such a new security check machine. Moreover it can also help to reduce the variable costs. For example, according to the case, new type aircraft produced 50 percent less emissions, 45 percent less fuel burn and 45 percent lower noise emissions per seat.
They help Ryanair reduce the fuel cost with a lower pollution to environment. Unique cost structure. A cost structure which aims to minimize the costs must be set up. In particular to fuel cost, the fluctuations are subject to unpredictable and volatile world events according to the case. It is important for Ryanair hedge the risks before the price goes up suddenly. On the other hand, choosing the secondary and regional airport destinations is a good way of the structure. Moreover, the internet is used to reduce distribution costs. Service quality / Customers’ satisfaction.
Customers will normally associate low price with low service benefits. Ryanair was voted the world’s least favourite airline due to its bad service such as unfriendly staff and poor legroom. However it still won a great number of customer base on the price. Thus if some competitors cut down the ticket price to a low level, Ryanair will get into a big trouble due to the similar prices but lower service quality. Therefore it must not only focus on the price but also the service. In order to gain competitive power, for example, brand loyalty can be one of the aspects.
Government / legal actions. Ryanair should take care of the government and legal actions and moreover, can take the initiative over illegal aid to rivals. These may prevent the unnecessary loss. In summary, Ryanair, as the cost leader in budget airline industry should not only focus on the costs but also lots of other issues. Although it is developing rapidly and successfully, the future is unknown. The uncertain environment is changing all the time, thus Ryanair should always follow it and make the long-term plans in order to retain a sustainable competitive advantage.
Grasp the opportunities, and it will has a bright future. c) Sources for collecting information Collecting your info: We may collect personal information that can identify you such as your name and e-mail address, as well as other information that does not identify you. When you provide personal information through the Site, the information may be sent to our servers located in the United States and other countries around the world. User Provided Information. We may collect and store any personal information that you enter into the Site or provide to us in some other manner.
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If, however, we are going to use users personally identifiable information in a manner different from that stated at the time of collection we will notify users by posting a notice on our Web site for 30 days. d) Collection tools and methods Prior to 1992, the length of time that aircraft deicing fluids (ADF) provided protection was overestimated by most commercial airlines. This was realized after the crash of U. S. Air Flight 405 at LaGuardia Airport, in which a long queue caused ice to re-accumulate on the plane’s wings and airframe after ADF had been applied.
Bryan Wagoner, the Environmental Programs Administrator at Detroit Metropolitan Airport (DTW), says this incident spurred a nationwide focus on deicing practices. “The FAA mandated that every plane must be absolutely free of snow at the end of the runway prior to take-off,” he explains. This resulted in a significant increase in the quantity of ADF used nationwide. Midwestern winters, however, can be unpredictable. Months can go by with little to no precipitation, and then a snowstorm worthy of national news can hit with a fury. W