Inzamam ul Haque. 1722090630. Mid. case 3 PDF

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MIDCASE 3Prepared byInzamam-Ul-Haque 1722090630Mgt 489Section:11; Summer 2020Submitted toBobby HajjajDepartment of ManagementNorth South UniversityBashundhara, Dhaka3 rd September 2020Prepared byTable of Contents Planning Scope Scenario Analysis All the drivers of change for PESTLE Developing Mini S...

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MID CASE 3

Prepared by

Inzamam-Ul-Haque

1722090630

Mgt 489 Section:11; Summer 2020

Submitted to Bobby Hajjaj Department of Management North South University Bashundhara, Dhaka

3rd September 2020

Table of Contents Planning Scope ................................................................................................................ 1 Scenario Analysis ............................................................................................................ 1 All the drivers of change for PESTLE .......................................................................... 1 Developing Mini Scenario ............................................................................................ 3 Combination of Scenario .............................................................................................. 6 Identifying Strategic consequences .................................................................................. 7

Planning Scope: A 2-years Scenario Analysis is going to be done for the US Airline Industry.

Scenario Analysis: All the drivers of change for PESTLE: The Scenario analysis of US Airline Industry shows the situation after 2 years, the level of uncertainty is going to be Range of Future. Political: I. II. III.

The incident of terrorist attack in World Trade Center on September 11th 2001 had ravaged the airline industry. Consolidation and mergers of Airlines stopped due to government intervention on antitrust ground. Deregulation creates problem in several fields.

Economical: I. II. III. IV. V. VI. VII. VIII. IX.

Due to the fluctuation in the price of crude oil from 2002-2006 the price of the jet oil became triple ($19 to $78) For many problems companies were generating poor return on investment both in US and outside USA. During 2001-2005 Major and big airlines gave passionate efforts to cut their cost. Demand of Air travel increases below 5% annual trend rate which was lower previousl y. The labor cost boosted for high level of employee’s remuneration which is $52732 in 2005 higher than previous average for all private industry. The equipment’s of airplane and the biggest expensive items are prices at 150 million per piece. Financial ruin in 2001 occurs due to competition from budget airlines and escalating of fuel cost. Small growth in demand together with the reluctant of major airplane did much to decrease the incentive of price competition. Different series of Economic recession.

Socio-cultural: I. II.

III.

The leisure consumers were more price elastic and the business consumer were highly inelastic so the airlines subsidize leisure fare with high margin business fare. The major event like competition from the low cost carrier and changing of travel policy by the companies tend to increase the gap of prices between business and leisure fare on 2001-2006. The unprecedented competitive pressure from new generation low cost airlines. Page | 1

Technological: I. II.

III.

IV.

The major carrier could bring the cost under control by gaining efficient benefits from outsourcing and better use of IT. Direct sales by the airlines companies both by telephone and web based reservation system. Though they were slower but introduction of online reservation service (Orbitz) was a great move. Still E-commerce platform like Expedia and Travelocity were leading the industry of online air ticket selling due to the ir transparency of price for their consumers. The major airlines had adopted the sophisticated software that is Yield Management to combine capacity and purchasing data and rigorously analyze to provide flexible price determination. This was a disruptive change in the industry as the goal was the make as much revenue on each flight as possible. Slight chances of developing high speed train service in USA similar to that of Europe.

Legal: I.

II. III.

IV. V. VI.

VII. VIII.

In 2001 the industry faced a loss of $35 billion dollars forcing four big major firm to go in Chapter 11 bankruptcy and even in the most fruitful year for airline industry that is 2006, two of the major airlines company were still in bankruptcy. The major airline could make the cost under control on 2006 by confronting with labor union and gaining substantial concession on pay, benefit and working practice. In 2006 flyer schemes helped the airplane companies to involved different other companies as partners like car rental companies, hotel chain, credit card which eventually became an important source of additional revenue for airlines (10 Billion Dollars per month). Because of Union contract it was very difficult to reduce employment and their hour work during downturns. Along with the increase on labor cost the union passed for which it agreed to rigid working practice. Airplane industry had significant barrier to both entry and exist and as well as potential competition had no substitute which causes legal barriers. Still many entrepreneurs wanted to enter in this industry. Possibility of new airline agreement between USA and EU might lift US restriction over European Airlines either by acquiring or providing internal service within US. The tendency for loss-making airlines continues for long time due to legal contract with the employees which give rise to large closure cost as well as chapter 11 bankruptcy allowed companies to take help from the creditors.

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Ecological/Environmental: I.

II. III. IV.

V.

VI.

VII.

VIII. IX.

Consolidation and Merging between the firms and alliances with small airlines occurred in the industry from 2005-2006. Previously also consolidation was present but during this period it increases a lot. The major carriers cut cost and eliminated losses as a result many low cost carriers started to suffer. During 2002-2005 due to bankruptcy and market share gained by the low cost carriers result in decrease the number of concentration. The inability of the major carriers was unable to compete with the low budget airline shifted the airlines competition to more price dimension (Customer service, inflight food and entertainments etc.) Major change in the channel of distribution as previously they distribution of the airline tickets were under travel agency. For this the, airlines needed to pay commission to the agency. But it decreases a lot by 2006 and became 1.6% of the operational expends which were 6.2% previously. During 2002-2006 the airline forced major allowance to their employees which result in decrease of average compensation along with benefits of the employees. Moreover, number of employees had also decrease. Most airlines were owned by municipalities and they use to generate substantial revenues. As a result, landing cost was very high. The slots were very costly that those were traded between airline companies. The major difference of price between budget and major carriers was not economy of scale of scope it is basically more to managerial, institutional and historical factors. The major airlines can actually decrease the price up to budget airlines to make a similar amount of profit like the budget airlines. But, who will be beneficial the long suffering shareholders or the consumer is a matter of concern.

Developing Mini Scenario: Political: I.

II.

III.

Even after 5 years of terrorist attack on world trade center still it has effect over airlines industry. So, for the next couple of years this can be a threats for US airlines industry as it will eventually create loss for several airline companies. The intervention of government on antitrust ground and stopping merger might stop the expansion of airlines for next 2 years. Due to merger many companies were saved from chapter 11 bankruptcy as well as help both major and budget segment for more developed and scope in the market. This actually can decrease the expansion and facilities for following 2 years for airline industry. Deregulation exposed the myth of customer loyalty and customers became confused about which service they should take. In this case in the following 2 years, this deregulation can still create dilemma in customers’ head for which the companies might not create a loyal

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branch of customers. Moreover, the following election might make change the rules, regulation and economy to some extend which might affect the Airline industry in future. Economical: I.

II.

III.

IV. V.

VI. VII. VIII. IX.

The tripling of fuel price can affect the industry badly for next 2 years. In one side the new entry will not be eager to enter in airline industry on the other hand it can create a great loss for the existing companies (Especially the budget category) and hey might quite this industry. 9/11 incident and increase in fuel result in poor return on investment which might exist for next couple of years as well. Necessary measure might decrease the loss to some extend but still it would create have an after effect as well. During 2001-2005 the major airlines gave a lot of effort in decreasing cost so in next 2 years’ time they might do the same thing and target the budget service consumers as well. Demand for air travel which is 5% annual trend rate are going to increase in next 2 years. For next couple of years’ employee’s remuneration will increase more which would eventually effect the overall expenses of airline industry as the expenses are going to increase. The major equipment’s cost is going to be more in next 2 years affecting the overall cost of airline industry. Financial ruin might continue for next 2 years as well as budget airlines are still competing and has the cost advantage along with the price of fuel might also increase as well. The growth of demand might increase in next 2 years which might result in increase of incentive in price competition. Economic recession in next couple of years might cause loss in the airline industry.

Socio-cultural: I. II. III.

The subsidize leisure fare with high margin business fare might decrease within the next two years if the major airlines targets the budget consumers as well. The gap of price might increase for next two years but along with this the major carriers might start to target the budget segment as well which might compensate in total. For the next 2 years the unprecedented pressure from the budget category airlines might not decrease as they would also like to keep the most number of customers on their side.

Technological: I. II.

III.

The cost will get more under control and chances to target budget consumer will get easier due to better outsourcing and IT use in next 2 years. Direct sales of tickets via telephone and web based reservation system are going to be vast in next 2 years. Moreover, Orbitz are going to be more popular and can be the market leader E-commerce platform as well. The use of Yield management software is going to emerged in next couple of years resulting in increasing the amount revenue from each flight.

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IV.

If high speed train developed in next 2 years, it is going to be a problem for the Airline industry but chances of developing such a train in next couple of years is really low or close to impossible.

Legal: I.

II.

III. IV. V. VI. VII. VIII.

Even in 2006 two of major airlines are still in bankruptcy. For next 2 years one of this company might get relief from bankruptcy. If there is mergers and acquisition than both of them can get relief from bankruptcy. Confronting with labor union will help the industry to make the cost more under control on next 2 years which can make the overall cost less and generate more revenue for the airline industries. Partnership with hotels chain, credit card can become a very big business for the airlines in next couple of years. The airlines might make a huge amount of money from this sector. Union contract might cost more for the airline companies in next two years. In next 2 years more rigid working practice might increase the labor cost for the airline companies. The significant barrier to entry along with exist and not having substitute for the potential competitors will make the industry more lucrative in couple of years. If the airline agreement between USA and EU passes, then it would be easier for US airlines to provide internal service in US for next couple of years and onward. The loss making industry might not sustain for next couple of years and might get closed in the meantime.

Ecological/Environmental: I. II. III. IV.

V. VI. VII. VIII.

The consolidation between 2005-2006 increases which would result in better operations along with more revenue of the two firms. Cutting cost by the major carriers make the low cost carrier sufferer and but the low cost carrier might not suffer very badly or measurably in couple of years. The number of concentration might decrease more in next 2 years if the low cost carriers get more market share. The industry might shift to more price dimension in the next 2 years if the major carriers fails to compete with cost leader. But chances are low as major carriers might be able to target the budget category as well. The commission paying to the travel agency will be less than 1% of the operational cost in next 2 years. Airlines forced allowance to the employees might decrease the compensation to a large scale in next 2 years which would result in more decrease in number of employees. The landing cost might increase in next couple of years which will affect the airline industry to a vast extend and might decrease a large part of the company’s revenue. The major carriers might change the managerial, institutional and historical factors which eventually help them to target the budget segment consumers in next couple of years.

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IX.

In next 2 years the major airlines are going to target more budget segment consumers as well so that it can bring more revenue and be beneficial for both the shareholders and the consumers as well.

Combination of Scenario: I.

The incident of 9/11, Deregulation, Government intervention in antitrust ground (stopping for merger) . All this might make the social change and force the major carriers to target the budget market as well. As currently there is unprecedented pressure form the budget airlines so they have the cost advantage from all dimension compared to major carriers. The cost of major carriers will get under control by better outsourcing, use of IT, use of Yield management software, sales of tickets via telephone and web based reservation system. All and those are going to be vast in next 2 years and can cut cost for the major carrier. Along with this change in managerial, institutional and historical factors which also reduced the cost for the major carrier. As the budget segment might get a more market share in couple of years so all these would help the major carriers to target the budget segment consumer and bring more revenue which are beneficial for both the shareholders and the consumers.

II.

In next couple of years’ employee remuneration can increase, the price of major equipment of airplane might increase which may become a problem for airline industry in next 2 years. Though confronting with labor union initially can cost less and make the cost under control but due to this union contract in the long run it would make the labor law more rigid. Moreover, forced allowance for the employees might decrease the compensation of the employees to large scale resulting in decrease the number of employees in airline industry for next 2 years. Along with all these the previous loss making companies might be in bankruptcy as well if necessary measure like merger/acquisition are not taken. Moreover, economical recession in next couple of years can be threats to the airline industry.

III.

The commission paid to travel agency might decrease by a large margin, partnership business with hotel chain, credit card will generate a huge revenue, easy internal service by US by passing of airline agreement between USA and EU. Moreover, significant barrier to entry and not having a substitute for potential competitor is good for the industry in next couple of years. All this are eventually going to improve the airline industry, increase the rate of demand for air travel and make the industry more lucrative in the long run.

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Identifying Strategic consequences: Looking at the overall scenario it is seen that Airline industry is facing relatively good time now compare to the previous years and this good time might exist for next 2 years as well. All the technological advantages, changes in managerial, historical and institutions factors, partnership with the business chain all these are blessing for the airline industry. The labor union problems, bankruptcy of some major carriers, economical recession might be a threat for the industry but the advantages have the capability to overcomes all this threats. But the strategy of Major airlines must be a bit different. Currently luxury airlines are more into targeting those people who are using budget airlines (for now) and doing low cost differentiation but they cannot achieve the whole market of budget category. To keep their imagine uplifted for long run and for the following time as well, they should not target the budget category in mass rather find a specific group in budget category and target them.

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