Hello. I need help for question 4 only.

What is required for thr industry to return to profitability?

73 CHAPTER 2 Fatalie The Identification of Opportunities and Theats Fiect the fer any re sich im es Closing Case Plane Wreck: The Airline Industry in 2001-2004 Between 2001 and 2003 players in the global line indos iets at the gate. As a result of such flexible work rules, try lost some $30 billion, more money than the industry Southwest needs only 80 employees to support and fly an had made since its inception. The losses were particularly aircraft, compared to 115 at the big six airlines. The severe among the big sis airlines in the United States budget airlines also favor tying point to point" rather ican Airlines United, Delta, Continental US Airways, and than through hubs, and they often use cheap secondary Northwest). In 2002 the major airlines lost 574 bilo airports rather than major hubs. They focus on large and another $5.3 billion in 2003. Both US Airways and markets with large traffic volume (such as up and down United were forced to seek Chapter 11 bankruptcy pro the East Coast). To cut costs further, they offer no frills on tections. Although forecastsugest the six major airlines the flight to in-flight food or complementary drinks will break even in 2004, a return to the boom years of Finally, prices are set low to fill up the seats 1995-2000, when the airlines posted record profits, seems In contrast, the business model of the six major air- unlikely anytime soon lines is based on the network or hub-and-spoke system The dramatic slump in airline profits began in early Under this system. the network airlines route their flights 2001 when business travel started to fall off in the wake of through major hubs. Often a single airline will dominate the rapidly deflating technology and dot-com bubble of hub (thus United dominates Chicago O'Hare airport) the 1990s. Then, in the aftermath of the terrorist attais This item was developed because it was a way of effi- of September 11, demand dropped through the floor. The ciently using airline capacity when there wasn't enough airlines began cutting prices to try to maintain their demand to fill a plane flying point to point. By using a senger loads in the face of declining demand. However, hub-and-spoke system, the major network airlines have the tactic didn't work. When one airline serving a partic been able to serve some 38.000 city pairs, some of which ular route cut its prices, its competitors, desperate to generate for than fifty passengers per day. But the cover their fined costs, quidiy followed. The result was a budget airlines seem to have found a way around this downward price spiral. In the fourth quarter of 2001, constraint by focusing on a few hundred city pairs where prices fell by 15 percentas itines tried to induce people to there is sufficient demand to fill their planes and flying fly. Despite this effort, passenger traffic fell by 19 percent directly between them (point to point). The network car and revenue a major airlines fiell by over 30 percent riers also suffer from a higher cost structure because of Even though demand and profits plumme at the their legacy of a unionined workforce. In addition, their big six airlines, some carriers continued to make profits costs are pushed higher by their superior in-flight service. during 2001-2003, notably the budget airline In good times, the network carriers can recoup their costs Southwest. In addition, other sewer budget airlines, is by charging higher prices than the discount airlines, par- cluding Air Tran and JetBlue (which was started in 2000 ticularly for business travelers, who pay more to book late gained market share during this period. Indeed between and to fly business or first dass. In the weak demand en- 2000 and 2003 the budget airlines in the United States vironment of the early 2000s, however, this was no longer panded capacity by 44 percent even as the moslashed their carrying capacity and parked med plans in the To make matters wone for the network airlines, the desert. In 1998 the budget airlines held a 16 percent share budget airlines have started to enter the lucrative coast- of the U.S. market, and by mid 2004 their share hade to-cost markets. The major airlines long dominated to 29 percent these markets and kept fares high. However, by taking ad- The key to the success of the budget airlines is their vantage of new long-range versions of their favorite aircraft, business model, which gives them a 30 to 50 percent cost such as the Boeing 737-800, to fly these routes nonstop, advantage over traditional airlines. The budgetirlines all budget airlines have been able to directly compete with the follow the same basic script They purchase justotype etwork airlines. JetBlue for example, has over 50 percent of aircraft (some standardise on Boeing 737 others on of its capacity on cut-to-cost routes. To protect their Airbus 320s). They also hire nonunion labor and cross turf, the network airlines have responded by adding more train employees to perform multiple jobs (for example, to fights in an attempt to squeeze the budget carriers out. help met turnaround times, the pilots might help check As a result, between June 2003 and June 2004, capacity on the the of be the sed 74 PART 1 Introduction to Strategic Management coast-to-coast routes increased anywhere from 14 to 100 percent. With all these extracts to fill, airlines have had to desh fares, which have fallen by as much as 60 to 70 percent on some route The major network airlines have also moved to cut their operating costs. Between 2001 and 2004. they cut their operating costs by $13.4 billion and reduced per rolls by 100,000. Yet it has not been enough to check the expansion of the budget airlines or to do the cost ad vantage the discounters enjoy. To make matters worse, in 2004 prices for jet fuel soared as oil peaked at over $40 barrel. Some of the major airlines responded by trying to Taise prices, only to give up within days. Some observers have also commented that the industry's problems are acerbated by bankruptcy laws that keep troubled a lines such as United in the industry by allowing them time to reorganise under Chapter 11 bankruptcy protec tion Case Discussion Questions L the the competitive forces model to analyze the struc ture of the airline industry during 2001-2004. How well does this analysis explain the low profitability of the industry! 2. Are the budget airlines in a different strategic group than the major network airlines? 3. Compare and contrast the business models of the net work and budget airlines. What are the strengths and weakness of each model? What is required for the industry to return to profitability 5. What must the major network airlines do to respond to the competitive threat posed by the budget airlines! Huse they taken steps in this direction! Have they done enough