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Delta Air Lines Inc

Solution Id Length Case Author Case Publisher
2330 1578 Words (7 Pages) Frank T. Rothaermel, David R. King McGraw-Hill Education : MH0056
This solution includes: A Word File A Word File

The Porter five forces model is a good technique to analyze the profitability of any industry. With its five factors that affect the competitive landscape of any industry, this model can be useful in explaining why most airlines in the industry have not been able to achieve profitability. The five forces of the Porter five forces model are the intensity of competitive rivalry in the industry, supplier bargaining power, buyer bargaining power, the threat of new entrants, and threat of substitutes.

Following questions are answered in this case study solution:

  1. Why have most airline firms not been able to achieve profitability? (Hint: Do an industry analysis to show how industry structure has impacted profitability in the airline industry, you have to use Porter's five 5 forces Model as a Graph and explain it in Paragraph each force separately).

  2. Why did the major legacy airlines like Delta and Continental not do well but low-cost airlines like Southwest and JetBlue did well in the same industry environment? (Hint – How did differences in the strategies and value chain activities of legacy airlines and low-cost airlines contribute to differences in competitive advantage and performance?).

  3. Why have legacy airlines not been able to imitate the success of their low-cost competitors? Even when legacy airlines like Delta launched low-cost subsidiaries like Delta Express, such strategies have failed. Why?

  4. Mark Balloun’s team at Delta is considering four strategic options (these are listed in the case). Which option would be the most effective strategy for Delta? Justify your answer.

Case Study Questions Answers

i. Intensity of Competition

The intensity of competitiveness is extremely high in the airline industry. The industry has price-sensitive customers leading to price-dominated rivalry. With many traditional and low cost airlines in the industry such as Southwest, JetBlue, Alaska Airlines, Delta, and American Airlines, etc. that are providing customers with the same end result only with minor differences in the service, the customers are spoilt for choice. The competition specifically increase after the deregulation era of the airline industry due to which many organizations started entering the market and competing based on price apart from other facilities and amenities. 

ii. Supplier bargaining power

There are three main suppliers of the airline industry. These are aircraft suppliers, aircraft fuel suppliers, and the labor required in the industry. All these three inputs are critical to the smooth operations of the airlines companies. However, there are only limited suppliers of these inputs especially aircrafts and their prices largely depend on the external environment. Apart from the suppliers of aircraft who are only a few due to which they significant power, labor such as pilots, cabin crew, and other personnel also have bargaining power as these are mostly unionized. Hence, the bargaining power of suppliers over the airline industry is also high.  

iii. Buyer bargaining power

Buyers have a high bargaining power over airline companies due to the myriad options available and low switching cost of the customers. The evolving technology and rapid use of the Internet has meant that consumers now have all the information they need to make an informed decision. With just one click, buyers today can compare the prices, services, and quality each airline is offering and can instantly reserve a seat as well through online booking systems. Thus, buyer bargaining power is also immense. 

iv. Threat of new entrants

Even after the airline deregulation act that effectively removed the government’s control over airline fares and allowed the entry of new airlines in the industry, the barrier of entries to the airline industry still remains high. This is because the airline industry is a highly capital intensive one. The high operating costs, as well as the knowledge required and associated risks, means that the threat of new entrants is low in the industry. Another reason of the threat being low is due to the already established large airline players, who enjoy cost advantages due to economies of scale. Thus, the overall threat of new entrants being low. 

v. Threat of substitutes

The substitutes of air travel include the different modes of transportations through road and sea such as cars, trains, buses, and ships. While these alternatives are suitable for short travels, they are not as attractive or suitable for longer distances. Thus, the threat of substitutes for the airline industry is at a moderate level. 

The diagram below summarizes all the five factors of the Porter five forces and the reasons why the overall profitability of the airline industry is low. Many factors contribute to the reason why many airlines are not profitable in the industry such as intense competitive rivalry, extreme price competition, high barriers to exit, high bargaining power of buyers and suppliers, etc. 

2. Why did the major legacy airlines like Delta and Continental not do well but low-cost airlines like Southwest and JetBlue did well in the same industry environment? (Hint – How did differences in the strategies and value chain activities of legacy airlines and low-cost airlines contribute to differences in competitive advantage and performance?).

The business models of the major legacy airlines such as Delta and Continental largely varies from the business model of the low-cost airlines such as Southwest and Jet Blue. The traditional or legacy airlines such as Delta and Continental use a differentiation strategy and operate by serving a lot of destinations through the hub and spoke business model. This model allows them to serve a large number of people who can fly to any part of the world since these legacy airlines are able to efficiently cater to a large number of routes. Airlines such as Southwest and JetBlue follow a low-cost strategy by only operating on point to point networks of city pairs that have high customer demand and traffic. Although this results in the airline serving less destinations but it also means the elimination of those areas that are not that profitable for the company.

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