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In the startup and early growth phases of an industry, the general guidance from Thompson et al. may be sufficient: “Only rarely are there more than five or six key factors for future competitive success.”[3] However, as an industry approaches maturity, rivalry among competing business units often increases. Consolidation of the industry often follows. As a rivalry increases and consolidation proceeds, the number of key success factors is likely to increase.
Although there are few purely domestic industries today, as rivalry increases in an industry, business units are increasingly likely to expand into foreign markets in order to grow. For several stakeholders at least for customers, employees, and suppliers additional key success factors may also be required as the business grows more complex, if only because of the increase in national and regional cultures to be considered.
This analysis examines the U.S. airline industry, an example of the use of key success factors in an industry which by many estimates is mature and consolidating.
…An industry’s key success factors (KSF’s) are those competitive factors that most affect industry members’ ability to prosper in the marketplace… KSF’s by their very nature are so important to future competitive success that all firms in the industry must be competent at performing or achieving them or risk becoming an industry also-ran.
Crafting and Executing Strategy[4]
U.S. Airline Industry
The U.S. airline industry has been in a chaotic state for a number of years. In 1993, a U.S. government report indicated that the industry had “Lost huge amounts of money in the past three years, and it has never made a sustained, substantial return on investment;….”[5] According to the Air Transport Association, the airline industry trade association, the loss from 1990 through 1994 was about $13 billion, while from 1995 through 2000, the airlines earned about $23 billion and then lost about $35 billion from 2001 through 2005.[6] Early in 2006 the association expected about a $10 billion loss in 2005.[7]
Table 1 Annual Loss and Earnings
>Annual | Loss and Earnings |
---|---|
1990 | $ 3.9 billion loss |
1991 | $ 1.9 billion loss |
1992 | $ 4.8 billion loss |
1993 | $ 2.1 billion loss |
1994 | $ 0.3 billion loss |
1995 | $ 2.3 billion profit |
1996 | $ 2.8 billion profit |
1997 | $ 5.2 billion profit |
1998 | $ 4.9 billion profit |
1999 | $ 5.4 billion profit |
2000 | $ 2.5 billion profit |
2001 | $ 8.3 billion loss |
2002 | $11.0 billion loss |
2003 | $ 2.4 billion loss |
2004 | $ 7.6 billion loss |
2005 | $ 5.7 billion loss |
Source: Air Transport Association of America, Inc.
Economics; Annual Revenue and Earnings.
However, a few U.S. airlines are able to compete successfully. As defined in this article with regard to the current situation, “success” includes surviving for two or more years with growth in annual profitability (increasing positive net profits, not just operating margins) and growth in revenue services rendered (available seat miles flown). Southwest Airlines has a long record of success by this definition. While there are a couple of other successful airlines, they are much smaller than the eight major airlines examined in this article.
The Eight Airlines
This analysis and the codes used in this article’s data pertain to the eight largest U. S. airlines by capacity offered (available seat miles) and their capacity rankings: American Airlines (AA) (1), America West Airlines (HP) (8), Continental Airlines (CO) (5), Delta Air Lines (DL) (3), Northwest Airlines (NW) (4), Southwest Airlines (WN) (6), United Airlines (UA) (2), and US Airways (US) (7).
It should be noted that America West has acquired US Airways and will now operate as the US Airways Group, but the two will operate separately for awhile. In addition, Delta and Northwest are operating under bankruptcy court protection.
Except America West and Southwest, these airlines are known as “legacy” carriers because they conducted interstate flights before deregulation of the U.S. airline industry in 1978. Additional research might compare the performance of “legacy” carriers with that of startup airlines since deregulation. The “legacy” effects (on labor relations or leadership, for example) are likely to be minimal after more than 25 years.
The Key Success Factors
The origin of the key success factors focused on in this article dates from an earlier study by this author regarding the success or failure of new U.S. interstate airlines after deregulation in 1978.[8] That study explained according to 12 key success factors the success or failure of eight airlines that began interstate service between 1978 and 1995. A computer model of an airline was constructed and then simulated the operations of the eight airlines examined over the time periods studied, most of the airlines for a five-year period. Those same 12 factors can be used with today’s eight leading (by service volume) U.S. airlines to explain their respective situations and to suggest changes that each airline must make to survive in the long run.
Successful airlines must do many things well. Not doing well in any one area may not result in failure as we define it. However, performing very poorly in any one area, or poorly in two or more areas, appears to make success elusive.
Airlines are in part service businesses. To be successful, an airline must be effective in four general areas: 1) attracting customers; 2) managing its fleet; 3) managing its people, and 4) managing its finances.[9]
Attracting Customers
In this article, we use two factors of measurement with regard to customers: 1) the attractiveness of the airline’s service and 2) the effectiveness of the airline’s promotional expenditures. In the original research we used a rather complex model of an airline’s “attractiveness” relative to that of its competitors, for example including infrastructure convenience, and scope of service. The base was the attractiveness of the price of tickets. In this analysis only the relative price of tickets has been used because ticket price was by far the most significant factor in attractiveness. A lower relative price would generally be more attractive to most travelers.
Similarly, the derivation of the promotional effectiveness in the current analysis has been simplified to that of the base used in the original study model. A measure of ticket sales per dollar of promotion expense is used in this study, with higher sales per promotion dollar being advantageous. Except where otherwise noted, the data for the analysis are taken from the U.S. Department of Transportation databases.[10]
Managing the Fleet
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In the area of fleet management, the same factors are used for this analysis as in the earlier study. Airplane utilization in hours per day deals with how well the companies’ major assets (airplanes) are used as a group. The load factor relative to the industry average indicates how well the average individual airplane is used. Simply stated, the load factor is that proportion of an airplane’s seats that are sold and actually filled at departure.
Managing People
We use two factors with respect to how well the airline manages its people. Productivity, in airline capacity per employee,[11] is a measure of how effectively the employees work together in providing the physical service of getting passengers from one place to another. Morale is a measure of how committed employees are to providing good service to the airline’s customers. As in the original study, productivity is measured in available seat miles per employee. Morale is measured using proxies since the original morale model is complex and requires information not currently available for the airlines being examined. In this case, lost bags per 1000 passengers and complaints per 100,000 enplanements derived from the Air Travel Consumer Report[12] are used as indicators of how committed airline employees are to serving their customers. The activities that result in lost bags or in poor enough treatment of passengers that they file complaints are indicative of the morale of the airline employees. Labor-management relations (including strikes and threatened strikes) are one example of a driver of these effects.
Managing Finances
The last of the four areas is financial management, for which six factors are used. Unit revenue and unit cost are important by themselves, but their relationship is also important. Therefore, we have compared both unit revenue and unit cost as well as the unit margins among the airlines. A measure of capacity to normalize these factors is used since the airlines fly all their available seats, not just those that are occupied. Better unit revenue may not be an advantage for an airline whose unit costs are out of line.
In addition to unit revenues and unit costs, funding for growth is an important factor for an organization’s long-term success. Most successful organizations choose to grow over time. In the case of the airlines, growth is measured in terms of capacity growth. Furthermore, in order to grow, an airline needs adequate funds. To be attractive for most equity investors, an airline must grow its equity over time. Moreover, to be attractive to most debt investors, a reasonable debt-to-assets ratio is desirable. In this realm of funding, this study is less precise. However, in light of this study’s prior research, the measures in this case appear to indicate the likelihood of enduring success for the airlines.
The Analysis
The second direct use of key success factors often occurs in the construction of a competitive strength assessment of the business units to be compared, the rivals within the industry. The first step in this assessment is analyzing the data. The second step is presenting the analysis in a comparative manner.
This article limits its analysis to U.S. airlines because the U.S. Department of Transportation maintains a database of information which U.S. airlines are required by law to provide to the government. Some of the same key success factors apply to airlines of other countries, but to the author’s knowledge, no other country has a similar consistent source of airline information, nor does the International Air Transport Association (the international airline organization).
Table 2 determines the scale number for each airline for each of the first eight factors. (For factors 9 through 12, see the separate assessments below.)
Table 2: Assessment Rubric for Key Success Factors | ||
---|---|---|
Scale* | Relative Position | Ranking Relative to the Average of the eight airlines. |
1 | Good | 10% or more better than the average for all 8 airlines. |
2 | Above Average | 3% or more, but less than 10% better than the average for all 8 airlines. |
3 | Average | between 3% worse than average and 3% better than average |
4 | Below Average | 3% or more, but less than 10% worse than average |
5 | Poor | 10% or more worse than average. |
Note: * Scale of 1 to 5 for first 8 factors In marginal cases, a trend toward better or worse may influence the scale assessment over the 24-month period. |
Table 3 lists the key success factors and the measures used to determine each airline’s situation with respect to each factor. Table 3 also identifies each airline’s position during calendar years 2004 and 2005 relative to the other seven rivals. The first eight of the 12 key success factors determines each airline’s position relative to the average of the eight airlines studied.
In reading Table 3, an example may help to clarify the relationships of the scale value to the measures. In the first factor, attractiveness, the lower the value, the better for the average customer, the stakeholder for whom the factor matters most. The lowest values are for America West, and they are more than 10 percent better (lower) than the average for all eight airlines. Therefore, in the example, the scale value of 1 applies to America West.
Summary of the Analysis
This section assesses the likelihood of each of the airlines’ “Ability to Prosper in the Marketplace.”[13] It is the second direct use of the key success factors discussed in the introduction, the competitive strength assessment. In this article, each factor is weighed equally. However, this is not a prediction of exactly what will happen to each airline.
This summary is based on the airlines’ rankings on the 12 factors in Table 3 and the summary below in Table 4, which provides a ranked score for each airline regarding the airlines’ abilities to prosper in the marketplace.
Table 4: Airlines’ Competitive Strength Assessment | |||||
---|---|---|---|---|---|
Good | Above Average | Average | Below Average | Poor | |
American Airlines | 1 | 4 | 5 | 2 | |
America West | 3 | 3 | 3 | 3 | |
Continental Airlines | 2 | 2 | 4 | 2 | 2 |
Delta Air Lines | 1 | 1 | 5 | 1 | 3 |
Northwest Airlines | 1 | 2 | 2 | 1 | 5 |
Southwest Airlines | 6 | 3 | 1 | 1 | 1 |
United Airlines | 1 | 3 | 3 | 2 | 2 |
US Airways | 1 | 4 | 6 |
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American Airlines (AA) scores average, below average, or poor on all but one factor. American can probably survive over the next several years, but the airline will have to improve in several factors to be considered successful by our definition.
America West (HP) (now part of US Airways Group) performs well (average or better) in all but three factors. The biggest issue for America West will be to effectively integrate US Airways with America West. US Airways Group (the combination of the two) may already be experiencing “merger turbulence.”[14]
Continental Airlines (CO) is better than American Airlines by these measures and is likely to continue to be so, but CO’s below average and poor factors may prove to be challenges.
Delta Air Lines (DL) has three poor scores. It is not surprising that Delta sought Chapter 11 bankruptcy protection. (In November 2006 US Airways began an attempt to merge with Delta.)
Northwest Airlines (NW) has five poor scores. As found with the Delta data, it is not surprising that Northwest sought Chapter 11 protection.
Southwest Airlines (WN) has recently been the model successful U.S. airline. It ranks good or above average in more factors than do any of its competitors in this analysis. Southwest’s faults are its low unit revenue and its low load factor. Southwest has grown more rapidly in the periods during which this analysis was made than it did for much of the airline’s existence. Careful growth has been one of the hallmarks of Southwest’s success. It would appear that Southwest might want to slow its growth over the next couple of years and trade that growth for somewhat improved unit revenues and load factors to ensure the airline’s continued success.
United Airlines (UA), which had been reorganizing under Chapter 11 protection for over three years at the end of our analysis and had shed significant pension liabilities, is still not in a good position from this study’s perspective to succeed by the above definition over the next several years.
US Airways (US), (now merged with America West), was by the definition a failure as an independent airline. Download gemac mbh port devices driver printer. The assessment indicates that approximately a year under Chapter 11 protection was not sufficient to make US Airways an attractive investment opportunity. Six poor factors and four below average factors do not suggest a path to success.
Conclusions
With regard to the key success factors in the U.S. airline industry, one question comes to mind: Why is the airline industry able to continue to attract enough investors to keep all these airlines in business?
US Airways’ merger with America West may be an indicator of a consolidation trend. However, something else may be involved. A 1995 Fortune assessment[15] concluded, “Chaos may just be in the nature of this crazy business.” The possible explanation that followed dealt with an economic phenomenon known as “core theory.” Fundamentally, core theory is a mathematical formulation of the competitive environment of an industry. As in many mathematical models, there may be many, one, or no solutions to the equations of the model. According to this theory, the model for the airline industry has no solution, therefore it is an “empty core.” A lot of things have changed in the ensuing decade, but the industry still seems to be just as chaotic as before. However, Lester Telser, the University of Chicago economist who is the proponent of core theory, is still exploring that theory with respect to the airline industry.[16]
While the economists pursue their theories, it would seem to be appropriate for more airlines to emulate Southwest and its few other successful rivals if not literally, at least in terms of the competitive strengths of the key success factors.
As explained in the introduction, an increase in the number of key success factors for a maturing industry is supported by this example. It is impossible to choose only five or six of these 12 and have confidence that successful performance will follow. In fact, as the industry further matures and more competitors are able to imitate the practices of the successful airlines, even more key success factors may be needed.
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And more key success factors may be needed as more international expansion is pursued, as indicated in the introduction. Perhaps a risk assessment factor that includes such risks as currency risk or political risk (perhaps “Managing the Public Policy Environment”) will be appropriate as large organizations evolve to have no dominant national home.
This analysis raises additional questions. How does Jet Blue, probably the most successful recent startup, compare with the eight airlines examined? (Jet Blue has now probably matured sufficiently, for example, in terms of maintenance costs, to be comparable for this type of analysis.) Will the merger of America West and US Airways be consummated well enough to induce further consolidation of the U.S. airline industry? Will “legacy” carriers be able to succeed by this definition without Chapter 11 bankruptcy experience (American and Continental, so far) or with Chapter 11 bankruptcy experience (Delta, Northwest, and United)? These questions will have to be examined further in future studies.
[1] Thompson, Arthur A., Jr., A. J. Strickland, and John E. Gamble. Crafting and Executing Strategy: The Quest for Competitive Advantage – Concepts and Cases. Boston, et al.: McGraw-Hill Irwin, 2005.
[2] Ibid.
[3] Ibid.
[4] Thompson, op cit.
[5] The National Commission to Ensure a Strong Competitive Airline Industry. Change, Challenge and Competition: A Report to the President and Congress. Washington, D.C.: U.S. Government Printing Office, August, 1993.
[6] Air Transport Association of America, Inc. Economics; Annual Revenue and Earnings. Retrieved 19 October 2006, from http://www.airlines.org, selected years.
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[7] Trottman, Melanie. “Continental Posts Narrower Loss: Forecast is Dim.” Wall Street Journal, 18 January: A-3, 2006.
[8] McCabe, Richard M. “Why Airlines Succeed or Fail: A System Dynamics Synthesis.” (Ph.D. diss., Claremont Graduate University, 1998).
[9] Ibid.
[10] U.S. Department of Transportation, Bureau of Transportation Statistics, TranStats databases, Retrieved 17 May 2006 from http://www.transtats.bts.gov, Aviation, Air Carrier Financial Reports for the B-1 and P-12 schedules, and Aviation, Air Carrier Summary Data for the T-2 schedule. (Two-letter codes are from this resource.)
[11] U.S. Department of Transportation, Bureau of Transportation Statistics, Press Releases. Retrieved 17 May 2006 from http://www.bts.gov/pressreleases/passenger_airline_employment.html, for selected dates. The median of the number of employees at the beginning and at the end of the period was used.
[12] U.S. Department of Transportation, Aviation Consumer Protection Division. Air Travel Consumer Report. Retrieved 17 May 2006 from http://airconsumer.ost.dot.gov/reports/, selected dates.
[13] Thompson, op cit.
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[14] Trottman, Melanie. “US Airways Experiences Merger Turbulence,” The Wall Street Journal, 7 March: B-2, 2006.
[15] Smith, Timothy K. “Why Air Travel Doesn’t Work,” Fortune, 3 April: 43, 1995.
[16] Telser, Lester G. Theories of Competition. New York & North Holland: Elsevier Science Publishing, 1988.