Whats Happening?!

Chief Information Officers (CIOs) expect IT budgets to

increase by 2.5 percent in 2005, and believe their focus
will be on supporting business growth and results,
according to a survey by Gartner Inc.
In the past few years, CIOs have had to focus on internal
efficiency and cost control, while preparing their
organization for an economic upswing.
CIOs voiced concerns about their relationship with the
CEO and whether they have the right people to meet
current and future business needs.
Ted Kennedy says that the solution for run-away costs with
Medicare is Information Technology.
 ATP Clinic
Tomorrow, Wednesday at 4 to 5 PM
Baskin Engineering, room 318.
Leslie Clark will run the session.
 ISM Toastmasters
First session on Thursday at noon.

Engineering II building room 280.

 Chapter 3

The Porter Competitive Model for

Industry Structure Analysis
 Agenda
Porter Competitive Model
Objectives
Generic Example
Specific Example
Value Chain Model
Generic Example
Specific Example
Competitive Strategies
 Porter Model Objectives
Build barriers to prevent a company from entering an industry

Build in costs that would make it difficult for a customer to

switch to another supplier

Change the basis for competition within the industry

Change the balance of power in the relationship that a

company has with customers or suppliers

Provide the basis for new products and services, new markets
or other new business opportunities
 Porter Competitive Model
Potential
New Entrants

Bargaining Intra-Industry Bargaining

Power Rivalry Power
of Suppliers Strategic Business Unit of Buyers

Substitute
Products
and Services

Source: Michael E. Porter

Forces Governing Competition in
Industry Figure 3-1
Harvard Business Review, Mar.-Apr. 1979
 SUPPORT ACTIVITIES
Generic Value Chain
FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS AND SALES

PRIMARY ACTIVITIES
Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from
COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright Figure 3-6
1985 by Michael E. Porter.
Value Chain Model US Department of Justice
 Competitive Strategies

Primary Strategies Supporting Strategies

Differentiation Strategy Innovation

Low-Cost Strategy Growth
Alliance
 Examples of Wal-Mart
Strategies
Primary Strategy:
Least Cost as evidenced by its every-day low prices sales strategy.

Supporting Strategies:
Innovation: In both business processes and the use of
information systems.
Growth: Sales volume growth adds to their ability to leverage
purchasing discounts from suppliers and gain operational
productivity.
Alliances: Joint efforts with suppliers to implement leading
edge e-business processes.
 Possible Exam Questions
1. To date we have addressed three models developed by
Michael Porter: Diamond of National Advantage,
Competitive Model and Value Chain. Explain the
objective to be gained from using each of these models.

2. Identify three mistakes that are often made in using the

Porter Competitive Model.
Chapter 4 Introduction

Airline Industry Analysis

 Objectives and Key Points
History and Deregulation in 1978
Recommendations to ensure strong
competition
Analysis of the Airline Industry using the
Porter Competitive Model
Airline Industry Business Strategy Model
Two Successful Airlines
Importance of IT in the Airline Industry
 Industry History
Wright brothers first successful flight in Kitty
Hawk in 1903.
American Airlines in 1928 and United Airlines in
1931.
Development of the mail system by the U.S.
Postal Service helped create the airline industry.
Increased R&D of aircraft after World War II.
FAA created in 1958 to develop an air traffic
control system.
Deregulation in 1978.
 Some Necessary Background
Deregulation Entry and exit of routes and the
pricing of fares were deregulated.

Benefits:
1. The creation of new jobs and lower fares.
2. More Americans were flying so airplane
load factors were up.
3. There was increased competition and a
wider choice for passengers.
Does the airline industry have basic structural
problems or is it just a collection of poorly
managed companies?

Question raised by Presidential

Commission addressing the
competitiveness of the industry
 Presidential Commission Report
Recommendations

Reducing the burden of regulation.

Reducing the tax burden.
Moving beyond nationalism in the air
service.
Modernizing the air traffic control system.
 Porter Competitive Model
Airline Industry Analysis U.S. Market
Aircraft Manufacturers Foreign Carriers
Aircraft Leasing Companies Potential Regional Carrier Start ups
Labor Unions New Entrants Cargo Carrier Business Strategy Change
Food Service Companies
Fuel Companies
Airports
Local Transportation Service
FAA
Hotels
Intra-Industry Rivalry
Bargaining SBU: American Airlines
Power Network (traditional) Rivals: United, Bargaining
of Suppliers
Delta, Northwest, US Air Power of Buyers
Low-cost Rivals: Southwest,
JetBlue, ATA
Travel Agents
Business Travelers
Pleasure Travelers
Alternate Travel Services
Charter Service
Fast Trains
Federal Government
Boats Substitute U.S. Military
Private Transportation
Videoconferencing
Products Cargo and Mail
Groupware and Services Figure 4-2
 Airline Industry Strategies
Products/Services
Scheduled Flights Chartered Flights Air Freight Mail
Customers
Business Travelers Personal Travelers Seniors Families Government
Fare Strategy
Low Fares Premium Fares
Markets
North America Europe Asia Latin America
Routes and Route Structure
Short Haul Long Haul
Hub and Spoke Point to Point
Company Structure
Independent Alliances Code Sharing
Information Systems
Customer Systems Operational Systems Logistical Systems Business Systems
Two Successful Airlines

1. Southwest Airlines

2. Singapore Airlines
 Importance of IT
Convenience to Customers.
Knowledge of Customers.
Providing a Foundation of Other Systems.
Building a Base for other Business.

Can be assessed through the use of the

Value Chain.
 Conclusions
A clearly structured industry.
Vital role of Information Systems in the
industry.
The industry is greatly affected by many
factors.
Strategies dictated by the market are
crucial.
Still regulated.
 Chapter 4

Porter Competitive Model

and
the Airline Industry
 Key Points
Analysis of the Airline Industry using the Porter
Competitive Model
Airline Industry Business Strategy Model
Lessons Learned from Profitable Airlines
A Perspective of the Challenges of the Industry
A Historical Perspective
Importance of IT in the Industry
 U.S. Airline Industry
Does the airline industry have basic structural problems

or is it just a collection of poorly managed companies?

Question raised by 1993 Presidential Commission

addressing the competitiveness of the industry

This industry is always in the
grip of its dumbest competitors.

Robert Crandall
Former CEO
American Airlines
We must look at the world as it
is versus how airlines would
like it to be.

Robert L. Crandall

And as government officials, politicians

and consumers would like it to be.
 Airline Industry Goals
Public Service. (Service to Customers)
Return to Investors.
Country Strategic Resource.

Are these consistent or in frequent

conflict?
 Porter Competitive Model
Airline Industry Analysis U.S. Market
Aircraft Manufacturers Foreign Carriers
Aircraft Leasing Companies Regional Carrier Start ups
Labor Unions Potential Cargo Carrier Business Strategy Change
Food Service Companies New Entrants
Fuel Companies
Airports
Local Transportation Service
FAA
Hotels Intra-Industry Rivalry
SBU: American Airlines
Bargaining Network Rivals: United, Bargaining
Power Delta, US Air, Northwest
Low-cost Rivals: Southwest, Power of Buyers
of Suppliers
JetBlue, ATA, etc.
Travel Agents
Business Travelers
Leisure Travelers
Alternate Travel Services
Charter Service
Fast Trains Substitute Federal Government
Boats
Private Transportation
Products U.S. Military
Cargo and Mail
Videoconferencing and Services
Groupware
Figure 4-2
 Product/Service Strategy
Scheduled Charter Mail
Passengers Services Cargo
Air Express
Customer/Fare/Market Strategy
Business Leisure Senior First Time Frequent
Travelers Travelers Citizens Flyers Flyers
Low Fare Super Saver Premium Fare

North American Europe Pacific Rim Latin American

Sales Strategy
Business Strategy
Reservation Agents Travel Agents Web Page
Model
Routes and Route Structure Strategies

Short Haul Long Haul

Airline Industry

Hub and Spoke Point to Point

Company Structure Strategy

Independent Alliances Code Sharing

Information Systems Strategy
Figure 4-1
Passengers Operations Logistics Business
 Airline Industry Value Chain
FIRM
INFRASTRUCTURE
-Financial Policy - Accounting -Regulatory Compliance - Legal - Community Affairs

HUMAN Flight, route and

RESOURCE
Pilot Training Baggage Handling Agent In-flight
yield analyst
MANAGEMENT Safety Training Training Training Training
training
Product
TECHNOLOGY
Computer Reservation System, In-flight System Baggage Tracking
Development
DEVELOPMENT Flight Scheduling System, Yield Management System System
Market Research
Information Technology
PROCUREMENT Communications

Route Selection Ticket Counter Baggage System Promotion Lost Baggage Service
Passenger Service Operations Flight Advertising Complaint Follow-up
System Gate Operations Connections Advantage
Yield Management Aircraft Rental Car and Program
System (Pricing) Operations Hotel Reservation Travel Agent
Fuel On-board Service System Programs
Flight Scheduling Baggage Handling Group Sales
Crew Scheduling Ticket Offices
Facilities Planning
Aircraft Acquisition

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS AND SALES

Adapted with the permission of Michael E. Porter from Competitive Advantage: Creating and Sustaining Superior Figure 4-3
Performance, copyright 1985 by Michael E. Porter.
 Impacts of a Weakened Airline Industry

Airline Industry
Carriers, General Aviation, Airports

Travel &
Suppliers Services Passengers Tourism
Aircraft Insurance Business Travelers Travel Agents
Financing Tourist Attractions
Engines Leisure Travelers
Conferences and
Electronics Distribution
Conventions
Computers Telecom
Hotels
Chemicals Maintenance
Restaurants
Fuel Retailers

Induced
Costs
Lower Lower Decreased Productivity Lost
Sales Sales & Weaker Relationships Revenue
 Airline Related Statistics
The total economic impact of the airline industry is
approximately $900 billion or 9% of the U.S. GDP.

Ten million people owe their jobs directly or indirectly to

the airline industry.

U. S. leisure travelers spent $187 billion in 2000. This was

7% less in 2001.

A financially viable airline industry is necessary for a

healthy U.S. economy.
 Operating ANNUAL PROFIT/(LOSS) CUMULATIVE PROFIT/(LOSS)

YEAR Revenues ($000) Operating Net Operating Net

1940 N/A 7,224 N/A 13,064 N/A

1950 839,920 75,986 42,678 270,281 60,211

1960 2,884,779 77,591 9,140 1,383,754 638,095

1970 9,289,658 43,031 -200,503 5,439,165 2,226,533

1980 33,727,806 -221,615 17,414 10,763,271 5,810,207

1990 76,141,739 -1,912,335 -3,921,002 20,590,676 4,343,887

1991 75,234,234 -1,784,741 -1,940,157 18,805,935 2,403,730

1992 78,357,040 -2,444,460 -4,791,284 16,361,475 -2,387,554

1993 85,298,379 1,438,172 -2,135,626 17,799,647

-4,523,180
1994 89,036,582 2,713,455 -344,115 20,513,102 -4,867,295

1995 95,117,473 5,859,518 2,313,591 26,372,620 -2,553,704

1996 102,443,738 6,209,069 2,803,915 32,581,689 250,211

1997 109,917,304 8,586,794 5,167,657 41,168,483 5,417,868

1998 113,810,206 9,327,810 4,903,203 50,496,293 10,321,071

1999 119,455,126 8,403,305 5,360,252 58,899,598 15,681,323

2000 130,838,619 6,998,931 2,486,298 65,898,529

18,167,621
2001 115,526,896 -10,325,852 -8,274,866 55,572,677 9,892,755

2002 106,985,463 -8,566,412 -11,312,415 47,006,265 -1,419,660

2003 115,906,315 -2,200,450 -3,624,682 44,807,448

-5,042,710
2004 2004 results expected from U.S. DOT in June 2005
 Aviation Week Contentions
U.S. major hub-and-spoke carriers are being forced to
restructure their operations or face the prospect of eventually
going out of business.

The crux of the problem is a combination of excessive costs in

relation to carriers' current and projected revenues, an
imbalance between the supply and demand for available
airline seats, and an inability to boost air fares.
 United Flight 815
Chicago to LAX, October 31, 2003

204 tickets were sold and 186 people showed up.

68 passengers originated in Chicago and 118 were from
connecting flights.
97 passengers terminated at LAX, 89 continued on another
flight.
Of the 33 passengers that were only Chicago-LAX there were 27
different fares:
A frequent flyer passenger paid nothing.
A 1st class passenger paid $1,248.51 on the day of the flight.
A coach passenger paid $102.26 on the day of the flight.
A cash fare passenger paid $87.21 twenty-nine days in advance .
 Airline Profitability
Profitability = [yield X load factor] - cost

In order to survive and profit in this tough environment,

airlines attempt to manipulate three main variables:

Cost, calculated as total operating expenses divided by

available seat miles (ASM)

Yield, calculated as total operating revenues divided by

the number of revenue passenger miles (RPM)

Load Factor, calculated as the ratio between RPMs and

ASMs, which measures capacity utilization.
 Always Profitable Airlines
Southwest Airlines
Aircraft Utilization, focus on city pairs, corporate culture, cost savings
in reservations

Singapore Airlines
Geographic Locations, National Strategies, Shrewd Management and
Leadership in IT, Competitive Strategies
 Southwest Airlines
A U.S. carrier success story.
Commuter airline that concentrates on city pairs.
(Average flight is 541 miles and takes about one
hour)
CEO Herb Kelleher, a Connecticut attorney turned
Texan, had the best labor relations in the industry
and an excellent company culture.
Lowest cost structure in the industry.
31 years of consecutive profitability
Why Southwest is Successful
1. The success of Southwest starts with the following
three important factors: 1) Focus, 2) focus and 3) focus.

2. Standardizing their fleet on the Boeing 727 provides

major operational and financial benefits.

3. Herb Kelleher as one of the founders and the long time

CEO should probably be cited as the number one
reason for the success of this airline.

4. Focus on high volume city to city routes.

 Southwest Success
5. Southwest came into the deregulated era of the
industry as a small, intra-state airline that had always
been able to compete on the terms that they chose
since they were not subject to federal regulation.

6. The financial success of Southwest has received a

large amount of free publicity that has certainly helped
to create an image of an airline to be trusted and used
by many passengers.
Best Airlines for Business Travelers
1. Singapore Airlines 11. Finnair
2. Swiss Air 12. British Airways
3. Cathay Pacific 13. Alaska
4. Midwest Express ** 14. Air France
5. Japan Airlines 15. Varig
6. Quantas 16. Aer Lingus
7. ANA 17. Kiwi
8. Virgin Atlantic
18. Air Canada
9. Lufthansa
19. American **
10. KLM-Royal Dutch
20. Delta**
Source: Zagat Survey of Frequent Flyers
 Singapore Airlines
Winner of multiple awards for airline
excellence.
Leader of the Orient Airlines Association (OAA)
Abacus reservation system.
Price collusion on major routes.
Outsourced IS application development.
Nervous regarding U.S. carrier price competition.
 Why SIA is Successful
1. Singapore has always been only an international carrier and
focused accordingly on global competitiveness through
quality customer service.

2. The airline is an integral part of the country strategy to be

the center for commerce and travel within Southeast Asia.

3. The success of the country strategies promotes travel

demands.

4. SIA has been blessed with excellent senior management.

 SIA Success Factors
5. While suggested above, the point needs to be made that
excellent management is capable and willing to do
aggressive things and take chances when it feels that it is
prudent to do so.

6. Prudent financial management has been a major strength of

the airline.

7. SIA had a labor cost advantage during its early years.

8. There were no comparable competitors in Southeast Asia.

 Major Airline Issues
1. Dysfunctional labor situation.

2. High taxes, fees and other government-mandated costs.

3. Inadequate long-term plans for air and ground

infrastructure.

4. Restrictions on airline consolidation and foreign

investment.
 Earnings for Paid Hours
Based on a U.S. survey of 437 professions in 2001.

Pilots includes regional, commuters and general

aviation.

Transportation attendants includes airline flight

attendants.
Rank Occupation Hourly Weekly
Earnings Hours
1 Pilots $107.22 21.9
2 Lawyers $59.78 41.4
21 Math Teachers $37.51 38.9
33 Electrical Engineers $34.56 41.0
37 Financial Managers $34.29 40.4
45 Transportation Attendants $32.73 20.7
56 Computer Scientists $30.52 40.1
58 High School Teachers $30.23 37.1
100 Architects $24.08 39.7
120 Aircraft Mechanics, Engine $22.04 40.0
130 Police $21.50 40.0
141 Aircraft Mechanics, Non-engine $20.64 40.0
National Average $17.13 39.6
 Airline Labor Costs
Labor negotiations in the airline industry are governed by the
Railway Labor Act (RLA) of 1926.

The negotiation process is very complex and drawn out. It

can take multiple years to work through the approximately
fifteen stages.
A key distinction between the application of the RLA is that
the railroad unions bargain on a national basis while airlines
bargain as individual companies.
Within the airline industry there is incredible sensitivity to
contract changes at other carriers that results in continuously
spiraling labor costs.
 Union Power

The highly unionized airline industry is unable to respond in

a timely manner to changing markets and unable to prevent
labor led service disruptions.
 American Airlines
Has historically been the largest airline in
the world in terms of revenue and number
one in the U.S.
A premium service carrier.
Hub and Spoke System
SABRE System
Strongly opposed industry deregulation.
Financial losses same as most other carriers
 CEO Revolving Door
AMR Donald Carty to Gerald Arpey, May 2004
United James Goodwin to John Creighton, Oct. 2001
John Creighton to Glenn Tilton, Sept. 2002
Delta Leo Mullin to Gerald Grinstein, Jan. 2004
Northwest Richard Anderson to Douglas Steenland, Oct. 2004
US Airways Rakesh Gangwal to Dave Siegel, May 2002
 Airline Industry Time Line
12/17/03 First flight in Kitty Hawk, North Carolina
1927 Lindbergh Trans-Atlantic Flight to Paris
1931 United Airlines was created from earlier multiple companies
1934 American Airlines was created from earlier multiple companies.
1941-1945 World War II
1949 First flight of Pacific Southwest Airlines (PSA)
1971 First flight of Southwest Airlines
1972 Singapore Airlines is created in split from Malaysian Airways
1978 US airline industry was deregulated
1987 Pacific Southwest bought by USAir
1/16/91-2/27/01 Gulf WarDesert Storm
10/22/01 US invasion of Afghanistan
2/11/03 Iraq War starts
On-going Many problems for most US airlines
 A Glamour Industry
The place for the rich and famous:

Barney Oldfield, Amelia Earhart, Howard Hughes, Bill

Boeing, Manfred von Richthofen aka The Red Baron, Eddie
Rickenbacker, Billy Mitchell, Jimmie Doolittle, Saburo
Sakai, Curtis LeMay, Frank Borman, Sir Freddie Laker,
Frank Lorenzo, Richard Ferris, Robert Six, Richard Branson,
Jan Carlzon, Herb Kelleher, Bob Crandall, Stephen Wolf,
Sam Walton, Larry Ellison

Conquistadores del Cielo, crop duster, jet-setter, Concorde,

SABRE, CRS, frequent flyer, Admirals Club.
Orville Wright Wilbur Wright
First flight by Orville Wright, December 17, 1903
 Airline Industry Financial
Viability?

If I had been at Kitty Hawk when Orville Wright

took off, I would have shot him down as a public
spirited act for the benefit of future capitalists.

Warren Buffett
Charles Lindbergh's
Transatlantic Flight

New York to Paris

Timeline, May 20-21, 1927
33 hours, 30 minutes, 29.8 seconds
Lindbergh had not slept in 55 hours
Pacific Southwest Airlines
 In the Beginning
Pacific Southwest Airlines began initial operations on May 6,
1949, flying a leased DC-3 aircraft with a seating capacity of 31
passengers once a week between San Diego and Oakland via
Hollywood/Burbank.

Original fares for the three-city route structure were: SAN-OAK

$15.60, SAN-BUR $5.65, and BUR-OAK $9.95.

By the end of 1949, PSA was operating two DC-3s and had
carried 15,011 revenue passengers over 321,112 plane miles.

The airline posted operating revenues of $172,796 against

operating expenses of $160,902 for a net profit of $11,984.
PSA's 1969 fleet consisted of one DC-9, one Boeing 727-100, 14
Boeing 727-200s, and nine Boeing 737-200s.

The airline's fare structure included the following: SAN-LAX,

SAN-BUR, SAN-ONT, SFO-SMF $7.14; SAN-SFO, SAN-
OAK, SAN-SJC $20.95; LAX-SFO, LAX-OAK, LAX-SJC,
BUR-SFO, BUR-OAK, BUR-SJC $14.52.

PSA entered the seventies with an all Boeing-equipped fleet that

included one 727-100, 16 727-200s, and nine 737-200s.
 With Growth Came Financial
Problems
One million passengers flew PSA in the month of August,
1986 marking the first time in the carrier's history that it
boarded that many passengers in a single month.

PSA carried a record 10.7 million travelers in 1986, but posted

a year end net loss of $3 million.
 The End of PSA

On May 29, 1987 Pacific Southwest Airlines became a

division of USAir.

The last PSA departure left San Diego, California as flight

1486 bound for Las Vegas, Nevada on April 8, 1988.
The National Commission to Ensure a
Strong Competitive Airline Industry

Change, Challenge and

Competition

A Report to the President and Congress

August 1993
 Commission Findings
The Airline Industry is more competitive than before
deregulation in 1978.

Travelers and shippers are charged less than in 1978.

The Airline Industry has never made a sustained,

substantial return on investment.

It lost huge amounts of money from 1990 to 1993.

It canceled many aircraft orders shortly after an

unprecedented buying binge.

Its freedom to compete in international markets is

uncertain because of government restrictions.
 Commission Conclusions
For the U.S. to prosper in a global marketplace
the airline industry must:

Be efficient and technologically superior.

Have the financial strength to respond to rapid

change and opportunity.

Efficiently move people, products and services

to markets, wherever they exist.
 Recommendations

Efficiency: Reinvent the FAA.

Financial Health: Deal with factors that impact

the financial health of the industry.

Access to Foreign Markets: Replace the current

bilateral system with a multi-national regime.
To return their balance sheets to
respectability, most airlines would
have to achieve profit margins that
are almost unprecedented in their
history, and sustain those margins
for years.
 September 11 Impact

An absolute disaster for the industry.

 A Sobering Fact

Before September 11, 2001, the global industry was

showing a net loss on international services of
around $3 billion.
 US Airline Industry Must
Restructure or Die
Aviation Week & Space Technology
November 2002
Low-Cost Airlines, Not September 11, Have
Transformed Industry Fundamentals

"When people say the traditional industry model is broken,

they are moving their jaw without putting their brain in gear,"
responds former American Airlines CEO Robert Crandall. He
added that he is skeptical that the industry will ever be
competitive as long as there are so many carriers selling what
has evolved into a commodity product.
 Corrective Actions

It will take much more than concessions by labor for

major U.S. airlines to solve their financial problems.
 Airline Industry US Market
Share
Based on current trends, the domestic market share held by
the six major US airlines (American, Continental, Delta,
Northwest, United and US Airways) plus Alaska Airlines
will drop from 75% in 2002 to 62% in 2010and 45% by
2020, according to an industry projection.

Southwest could pass American to become the largest U.S.

airline by 2013, and JetBlue could pass Delta to become the
third largest by 2020.
 Industry Structure Problems

The fact that low-cost carriers have been able to mature this
far says as much about what's wrong with the majors as it
does about what's right with their low-cost counterparts,
and begs the question: does the underlying strategy or
business model employed by the large hub-and-spoke
airlines still work?
Analysts and other industry observers believe it does, but to
function properly carriers must reduce their costs and
restore the balance between supply and demand.
Benefits of Information Systems
to an Airline

1. Convenience to Customers.
2. Knowledge of Customers.
3. Providing a foundation for other
systems.
4. Building a base for other businesses.
Computer Reservation System:
Business Traveler Choice?

Personal Traveler Choice?

Ticket-less Versus No Reservation?

 Airline Alliances
The Star Alliance is the largest of the major groupings.
Consisting of 15 airlines led by United Air Lines and
Lufthansa. Star serves about 815 destinations in more than
130 countries.

Oneworld, which is eclipsed by only Star among the major

airline alliances, is led by British and American Airlines.
Eight airlines offer service to 550 destinations in more than
130 countries.

SkyTeam is quickly becoming a major alliance player by

serving more than 450 destinations in nearly 100 countries.
Led by Air France and Delta, SkyTeam has also consolidated
cargo services.
 Code Sharing Agreements
The US Transportation and Justice Departments approved a pact
that will let Delta Air Lines, Continental Airlines and Northwest
Airlines share access to each other's routes.

The code-share agreement allows each carrier to market the

others' routes as its own. One Northwest flight, for instance,
might also have a Continental flight number and a Delta flight
number.

The agreement is the biggest in the industry. US Airways and

United Airlines have a similar agreement.
 Code Sharing Agreements
It's an especially appealing arrangement to frequent fliers who
prefer to build up miles on one airline while flying all three.

The government placed several conditions on the deal.

Specifically, the DOT said 60 percent of any new code-sharing
routes must serve those areas of the country that are considered
under-served.
It also bans anti-competitive practices like coordinated pricing or
shared decisions about route planning and capacity.
 Barriers to Entry
Access to airports continues to be impeded by:

(1) Federal limits on takeoff and landing slots

at the major airports in Chicago, New York, and
Washington

(2) Long-term, exclusive-use gate leases

(3) Perimeter Rules prohibiting flights at New Yorks

LaGuardia and Washingtons National airports that
exceed a certain distance.
 US Industry Strength
Fifteen major US carriers represent the following
significance in the world-wide airline industry:

29% of the aircraft

46% of the employees
32.5% of the the 2000 passenger miles

Based on a number of years of operating in a deregulated

environment within the US that forced them to compete in
a very tough market.
 International Airline Industry
Between 1982 and 2002 the IATA airlines had
revenues of $2 trillion and cumulative losses of $5
billion.

Does a business model exist that is more susceptible to

things going wrong?
Deregulated But Very Regulated
Safety factors.

Air traffic controllers.

Impact on constituents.

International routes.
 Continuing Concerns

1. Fuel costs
2. Decisions regarding passenger services like
whether to charge for food, the need for more
electronic capabilities.
3. Upgrading aircraft.
4. Route strategies.
5. Union relations.
6. Relations with travel agents.
 Needed for the Industry
1. Changes in tax laws as they relate to airlines.

2. Encourage foreign investment in U.S. carriers.

3. Changes to bankruptcy laws to eliminate the ability for

airlines to hide from their creditors under court protection.

4. Improve the capacity and capabilities of airports.

Airports belong to cities and counties so there is no
national-wide plan.
 Needed for the Industry
5. Provide a better air traffic control system to
minimize flight delays.
6. Continue to negotiate better international rights
for U.S. carriers.
7. Gain equalization of the regulatory requirements
on U.S. and foreign carriers worldwide.
8. Further eliminate unnecessary and costly
regulatory requirements on airlines within the
United States.
Airline Industry Conclusions
It is a vivid example of the dynamics of the
markets that it serves.
Establishing strategies dictated by the market is
critical.
Once the right strategies have been identified,
information systems can play an important
supporting role.