American Airlines and the Airline Industry
Michael Porter has argued that a firm’s core competencies fall into two broad categories, that of cost advantage and differentiation, and thus three basic strategies emerging from these competencies are cost (in terms of value conveyed to the customer or the ability to save on costs), differentiation (the ability to seem unique from one’s competitors and serve a particular market segment) and focus (finding or developing a niche market) (“Porter’s Generic Strategies,” Quick MBA, 1999). All airlines, including the major carriers United Airlines, Delta, and Continental offer similar basic services, that of transportation, but all have chosen to emphasize (or ignore) different core competencies. Of these three, Continental’s differentiation strategy has proven the most successful, or, given that all of these companies posted losses in 2006, the least unsuccessful.
One critique of United Airlines is that it has insufficiently maximized customer loyalty by not having such programs as ‘loyalty miles,’ where customers have added miles if they fly another United Airlines flight in the six months immediately prior to that date. Cultivating a core market of loyal passengers is especially difficult in the age of the Internet, where fare shopping is extremely easy for consumers. High labor costs at United coupled with public relations problems after 9/11 have also made cost value maximization difficult. Instead of slashing fares to draw in more customers, United has tried to cut costs by replacing its planes with smaller planes and fewer flights and by slashing business discounts and the salaries of non-flight personnel like sales representatives (Rowell, 2002). This has resulted in business travelers leaving the airline, and also made improving public relations and generating loyalty more difficult, and has not resulted in substantial savings.
Delta Airlines has also been beset by labor woes, and also has tried to curtail the costs of its frequent flyer programs in recent years. “The awards program yields a very large liability…Four free tickets represents a future financial obligation” (Katz 2001:1). Like American, this airline believes such program’s costs are not worth the possible customer loyalty it generates, as many customers go with the ‘quick fix’ of lower cost flights they can find on the Internet, rather than stick to one airline, even if they are part of a frequent flyer program. The uncertain price of oil and the general political instability that affects all airlines makes maximizing value at the supply chain level difficult as well. Neither United Airlines nor Delta Airlines has been able to generate substantial cost savings in terms of fuel, albeit for circumstances beyond their control.
In contrast to the other airlines, “Houston-based Continental Airlines Inc., the fourth-largest airline in the U.S., has actually invested in customer-service improvements, increased its routes, and kept prices steady, all while managing to lose the least money last year,” an impressive statistic when one considers that while Continental lost $68 million in 2005, Delta lot $3.8 billion. Continental has deployed a unique strategy of emphasizing one core competency. It was unable to slash fares drastically because higher fuel and labor costs, and it could not compete with the prices of value carriers, so it instead identified Continental’s most valuable customers and offered them unique customer services such as automated tools and greater efficiency. Technology is its emphasis in customer service
For example “if an airplane is more than 90 minutes late, we’ll send an automated e-mail to our top customers on that flight apologizing for the delay,” says Mike Gorman, senior director of customer relations….Our best customers get rewards, like frequent-flier miles, for that inconvenience’…[and] the people who get those e-mails increase their business with Continental by 8%, a significant figure when you consider that those customers pay top dollar for their fares”
D’Agostino 2006:3). Continental is also one of the few airlines to serve meals on every flight, and it expanded its routes last year to compete with the more limited routes of value carriers
D’Agostino 2006:2). “Company executives knew that the fickle, low-cost consumer would never be their bread and butter — they tend to jump from carrier to find the cheapest fare” so the company decided to concentrate on attracting a loyal group of frequent fliers who would be willing to pay more for superior customer service
D’Agostino 2006:2). It obeyed its mantra to ‘Work Hard, Fly Right, as even the company’s internal slogan reflects its stress upon high-end business travelers
D’Agostino, Debra. (14 July 2006). “Case Study: Continental Airline’s Tech Strategy
Takes Off.” CIO. Retrieved 1 May 2007 at http://www.cioinsight.com/article2/0,1540,1989438,00.asp
Katz. David. (15 Mar 2001) “Delta’s Strategy for Reducing Turbulence.” CFO.com. Retrieved 1 May 2007 at http://www.cfo.com/article.cfm/2992209
Porter’s Generic Strategies.” (1999) Quick MBA. 1999. Retrieved 1 May 2007 at http://www.quickmba.com/strategy/generic.shtml
Rowell, David. (2002).”Six Steps to Success for United Airlines” the Travel Insider. Retrieved 1 May 2007 http://www.thetravelinsider.info/2002/1213.htm
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