US Airways Group: Challenges

(Your Full Name)

BA 301 Final Term Paper

Section Number (e.g., Section 002)

Date

Table of Contents

TOC o “1-3” h z u HYPERLINK l “_Toc294226652” Title Page PAGEREF _Toc294226652 h 1

HYPERLINK l “_Toc294226653” Table of Contents PAGEREF _Toc294226653 h 2

HYPERLINK l “_Toc294226654” Executive Summary PAGEREF _Toc294226654 h 3

HYPERLINK l “_Toc294226655” Position PAGEREF _Toc294226655 h 4

HYPERLINK l “_Toc294226656” Sense PAGEREF _Toc294226656 h 5

HYPERLINK l “_Toc294226657” Uncover PAGEREF _Toc294226657 h 7

HYPERLINK l “_Toc294226658” Solve PAGEREF _Toc294226658 h 9

HYPERLINK l “_Toc294226659” Build PAGEREF _Toc294226659 h 11

HYPERLINK l “_Toc294226660” Achieve PAGEREF _Toc294226660 h 12

HYPERLINK l “_Toc294226661” Bibliography PAGEREF _Toc294226661 h 14

HYPERLINK l “_Toc294226662” Appendices PAGEREF _Toc294226662 h 15

Executive Summary

In the diversified airline industry that the developed world is experiencing, it is clear all types of challenges that the general economy has also affect the airline industry. The role of management team in the midst of such challenges will continue to have a huge bearing on the operations and profitability of the players. Challenge identification coupled with the appropriate solution finding mechanism will prove to be the solution in the market marred by several uncertainties. In this report, the US Airlines Group is visited in a perspective that highlights its challenges as posed by the industry, in order for the discussion of possible management decision making to deal with them. Throughout the report, management intervention is informed by the identification of a specific challenge that the firm’s operations seem to be linked to. Offering a response to the challenges in a flexible management age is the way to handle these challenges.

The US Airways is a merger of two players of the US airline industry since 2005 yet some of the challenges that characterize the market continue to pose operation threats to the firm (Star Alliance, 1). In this discourse, an analysis of the challenges is made after highlighting the origin of the modern situation of the American commercial airline industry. From the highlighted challenges, a list of possible managerial interventions is introduced and briefly discussed. In another section, some of these interventions are discussed in detail, to clarify their relevance within the scope of US Airline Group. Finally, a roll-out plan of these alternatives is included, with clear timelines and projected expenditure. An order of merit is applied in the presentation of the practicality of the interventions.

PositionThe airline industry in the United States is one industry that faces competition and challenges of nearly all kinds that a modern industry faces. On the other hand, it can be explored and analyzed as one of the most profitable industries despite the mixed reactions in operation results. Since the introduction of air passenger and cargo deregulation in the 1970s, the air industry has witnessed many changes that have facilitated reforms into the industry as a free business. From the changes that were introduced, it is evident that issues such as fares and business controls were left for the forces of the market to trigger developments such as infrastructure (Bailey, 1). Introducing the necessary policies into the industry was aimed at attracting investment and facilitate growth in the industry. Players such as the US Airways made their entry into the market to experience the uncertain forces that the market presented, particularly in terms of economic performance of the country and the entire world. Fuel prices uncertainties would later catch up with the US Airways as well as the other firms in a manner that caught their attention to even more challenges that face the industry to date.

Observations and recommendations of various reports assessing transformation areas in the airline industry have indicated similar direction of enhancement of competition among the industry players. One of such recommendations is contained in the National Academies Press (1) report. The report particularly points at strengthening airline penetration into the market as well as travel agents cooperation with the industry. Alternatively, protection of consumers from unfair business practices is conspicuously contained in the report.

There are several other developments that have taken place in the industry to represent the mixed reactions that the industry has had to come terms with. Using the available economic theory to solve some of the existing challenges, the airline industry is approached as an industry with an international profile and significance.

In light of these factors, management at the helm of airline business processes must act in line with the progress in the airline market. Management of airline industry risks and opportunities must apply the modern business strategic approaches to minimize costs and maximize benefits. Using an analysis of the market challenges, the management can identify the best policies to bring about the appropriate changes in the industry. Having the necessary platform to do this, modern management in the industry is better placed to handle industry challenges than the old industry. In addition, the advancements in technology both in aircraft and subsidiary technicalities present the management with a lot of chances to make improvements in the industry. Universality of business management models to the modern business settings is also an added advantage that can be exploited by the airline industry players.

SenseThe airline industry, just as any other modern business industry is faced with a number of challenges that the management must rise to the occasion and offer solutions to. Among the major challenges that the industry is faced with are those highlighted above namely competition and global market performance volatility. There are also other challenges that are specific and unique to the airline industry that require specialized attention from the management. This segment will highlight some of these challenges that the management in the US Airways prioritizes due to their important impact that they have on the general operations of the industry. To demonstrate the impact of these challenges, most have strikingly been identified in the SWOT analysis of the US Airways as conducted by Datamonitor (24), also included in Appendix 1. In the SWOT analysis, fuel and operation scale as will be observed below make up the list of weakness and threats. Solutions such as expansion are strikingly also present on the opportunities that the firm has.

Firstly, the global economic crisis greatly affected the airline industry in a similar way that it did to many other industries. One of the main areas of concern that airline corporations had and severely affected their operations was the lowered travels by a huge segment of the market clients (Zacks Equity Research, 1). This is because as the hard economic times continued to emerge in the global economies, the clients had to reduce their travel costs. The industry outlook by Zacks Equity Research demonstrates that business and other air trips reduced due to risen costs by stating that, “the economic environment, plunged to an all-time low in 2009 as many corporations slashed travel budgets. Leisure travel as well as cargo also showed a remarkable decline.” The US Airways was at the blunt of increasing costs of operation experienced in the US, perhaps more than in many other countries. Other related cost raising factors include the global fuel pricing mechanism which has been left at the mercy of political unrest in the Middle East and Africa.

Secondly, the direct exposure that the industry had to the difficult global economic performance could not be managed easily with a market characterized by many players who were busy competing with each other. In light of the magnitude of the reduction in spending that consumers’ response had, it was very difficult for the industry to weather off the impact thereon. The fragmentation of the industry added more negative impact since sharing of the operational costs and understanding the market direction would not be facilitated in the highly segmented industry. Competition that the industry attracted through deregulation acted against possible regrouping by the various players for a positive response against the economic downturn. The US Airways could not act in opposition of the market forces but was also forced to raise the charges it exposed its clients accordingly and avoid cut-throat competition. An analysis of the effect of competition to the general industry performance was not forthcoming since every player would rather have gone it alone in to the uncertainty surrounding the market.

Finally, the lack of a coordinated front between the US government and the industry players to shield the economy from unfavorable impacts of the underperforming airline industry made the scene worse. According to the ATA (1), the US airline industry plays an integral part of the economy through various commercial facilitation and the appropriate coordination and support from the government must not be compromised. Commercial aviation industry contributes over one trillion US dollars into the economy, which is a significant element of the entire economy. As such, the government should have a clear-cut policy that assists the industry from unfavorable economic effects. The US Airways is among the leading employer in the American aviation industry that lacks proportionate support from the federal government as far as operations are concerned. According to Sparks (1), the taxation element that the US government subjects the industry to, can be identified as a hindrance to the appropriate benefit realization that the economy would be making from the industry today. The author also feels that there are various regulation tools that seem to unnecessarily over-regulate the industry. However, with the necessary discovery of management of the industry, the author reckons that the appropriate policies can be formulated to change the situation for the good of the economy and the investors. Similarly, the author identifies the competition factor to be causing more harm than the players would imagine, although the management at US Airways would find the competition favoring them at a glance due to its market presence.

UncoverWhile deregulation of the airline industry was aimed at reducing the air travel fair and charges for various commercial flights, it did not take long before the sharp pricing started to crop up again. According to the National Academies Press (1), there is a huge difference between the fares charged by airline companies across the ticket types. The cause for this is identified to be the cut-throat competition that the players have been operating under. Expanded demand for air travel as business activities thrive across the US and outside the borders illustrates the danger that this trend exposes the industry fare regulation to. In light of the competition challenges that the airline players have cultivated over the several years of its existence, it appears that the industry must address the issues of competition with the attention that it deserves.

Giving an analysis of the US airline industry state of competition, the National Academies Press (1) identifies certain trends in the market that create room for unfair competition and manipulation of the market by certain players at the expense of others. The report particularly points at the recent alliance formation and the engaging into partnerships by big players in the industry. The US Airways is among the big players that such an observation targets, creating a risk from possible policy intervention that would eliminate the benefits that these large firms make. It follows that several other domestic airlines will struggle to make their market presence be felt. Using the Porter’s Five Points, it is clearly possible that there will be unfair competition against these smaller firms, since the big airlines will be successful in locking out new entrants from making market contribution which would favor lowering of travel charges (Investopedia, 1).

Competitive rivalry created in the industry appears to favor a few players in the industry. The US Airways Group however identifies this as an advantage since the locking out competition from incoming firms is a serious threat that any firm would love to avoid. The policy target for improvement by the authorities is however the risk that the US Airways faces. Domination of certain firms makes it difficult for the smaller firms to make an impact in the industry. This has particularly gone worse by the alliances formed by a few huge players, which appears to lock out the smaller firms. The consumer’s power to voice their bargain is substantially reduced by the unfair competition that makes it difficult for lower end firms to operate. In an attempt to gain more popularity and brand loyalty, smaller firms can only find the venture unsustainable forcing them to quit the industry. Availability of substitute services is likewise likely to be faced with a huge challenge since only a few players are dominating the market. High fare pricing is therefore the resultant impact of these competition factors.

The main challenge of fuel cost uncertainties on the global market directly affects the US Airways like it does to any other aviation firm. According to the report by Datamonitor (24), it is clear that the rising cost of fuel is a threat to the US Airways Group since its reliance on the commodity cannot be substituted. Following the problem leads to national energy sustainability which falls on the national policy formulation.

SolveFrom the above challenges, it is clear that the management at the US Airways must tackle the challenges in order to formulate a strategic approach to face each of them. Firstly, the global economic turmoil as experienced from 2008-9 periods till recently must be confronted in a manner that will enable resilience even in future occurrences. Perhaps a more interagency consultation from the US Airways would have been sought in a well structured economic surveillance to detect the risks involved in the operations. Decision making structure at the UA Airways would have been more instrumental in weathering the occasioned losses under the influence of the economic crisis. Perhaps a more consultative approach would have enabled the firm to consider seeking government protection in case of serious risks. Diversification or limitation of operations to only include the most basic operations would have enabled the firm to avoid extra risky costs. In the wake of commercialization of the industry thereby attracting all types of investment players, it is clear that the multi-billion industry is exposed to the market forces that characterize the international market.

The global economy performance directly impacts on the performance of the airlines industry in the US. According to Zacks Equity Research (1), the recent global economic turmoil affected the airline industry in the US, which can be seen to be recovering from the negative impact experienced across the world. It is clear that factors such as fuel prices and recession related costs greatly affect the performance of the industry. Future operations at US Airways must be performed on an economy surveillance system which will act as a warning to avoid venturing into risky operations like many other firms did. Engaging the government on foreign policy issues could perhaps act as a long term strategy on solving the fuel pricing uncertainties.

Secondly, although operating under competition is good for the delivery of services and locking out certain threats, it is logical that the US Airways considers entering into profitable mergers. In the heat of difficult economic times, it is easy for such an industry player to jointly weather off unfavorable economic environment with a like-minded firm. Business success has been reported by mergers or amalgamations, which offer a powerful bargaining power in the market. Considering such decisions would assist the management at the US Airways an opportunity to weigh options of tapping all levels of market segments. Besides, the appropriate bargaining power at the government policy formulation level would be successful if a common front was facilitated by the US Airways alongside other players than when done in separate ways. According to Datamonitor (5), there are mainly two subsidiaries of the US Airways Group, which could perhaps be expanded to cover more coverage across the globe.

Share code arrangements could be enhanced to facilitate a more player inclusive approach and consolidation. Perhaps the court battle with the British Airways could have been solved outside the courtroom to avoid bad relations for a better cooperation throughout Europe (Datamonitor, 5). Since stiff competition comes from firms such as AMR Corporation, Northwest Airlines Corporation, Southwest Airlines, Delta Airlines and UAL Corporation, it is possible for the management to formulate a competitive advantage agenda. One of the most appropriate repositioning strategies would be to explore other markets such as Africa and Asia. This would tap into the huge potential that the African and Asian markets present to some of these players. Perhaps diversification of the market would enable it to raise the scale and operation level to match and outdo the rivals. Reliance on the American market would be detrimental to the already expanded US Airways which must get out of the domestic market as soon as possible.

BuildTo overcome the global economic uncertainty and fuel prices instability, two management approaches are recommended for the US Airways. A well connected economic surveillance system will be implemented for the detection of unfavorable performance periods ahead. From such a system, the management will be able to monitor not only the national economy, but also the global economic performance. From the insights obtained from the data, managerial decisions will be formulated to factor in the attached risks. Relying on other firms for such information such as the Wall Street caused the devastating impact that the global economy is experiencing today. Fuel policy will be facilitated through the research and development department to come up with a long lasting solution to weather off the oil producing areas political uncertainties. US Airways will indulge relevant players to a research program to investigate possibilities of fuel alternatives such as the automobile industry is currently doing. Involving the government is such a program would facilitate a long lasting solution for the entire industry in the US and the globe. The cheapest among these two will be fast tracked while the expensive one will be rolled out across a longer period of time to facilitate implementation such as the fuel research option.

For the competition challenge, two possibilities will be assessed. Firstly, expanding competitive capacity will involve increasing fleet size, incorporating cargo flight services, expanding flight coverage to all continents and improving brand loyalty by programs such as through discounted ticket pricing. The second option will be to analyze the feasibility of carrying out a merger with bigger or smaller rivals. The increment of the internal capacity will first be explored first since it bears a lesser obligation than engaging an outsider. In case it does not solve the pressing challenge, the merger will be explored. However, all stakeholders must be brought close to the proceedings of these critical processes, to avoid project failures occasioned by the lack of cooperation from the stakeholders. Since each of these proposed solutions bear elements of stakeholder approval rating, the US Airways management will apply the initial indications to venture into less conflict projects first.

AchieveFirstly, regarding the economic performance surveillance system, a market and general economy research scouting team will be constructed and deployed to strategic locations across the US Airways market regions. For instance, major hub centers across the US such Charlotte and Philadelphia among others as well as overseas market areas will be used to install a financial surveillance office. About 240 cities will be represented in the plan, to cover the flight cities covered by the firm. The available agency offices can be facilitated to bear the new surveillance element. Initial staffing and training as well as deployment should take about one year to cover the entire market. A budgeted figure of about 2 million US dollars will be invested. Extra marketing services will be enjoyed from these offices, which make the venture more pleasant to engage into. Reviews will be conducted through a six month period assessment, through analysis of the market information gathered, revenue gained through extra marketing impact. Beyond the next two years, comparison of the information gained from the major financial institutions will be used to check the relevance of the office.

Secondly, with regard to the expansion of the fleet size, more aircrafts will be procured in light of the need to expand market coverage. Recent procurement of 15 Airbus A321 units, 30 A320 units will need to be supplemented by more versatile aircrafts in the future (Datamonitor, 27). Perhaps more passenger and cargo aircrafts will need to be procured to handle the expanded capacity for overseas flights as well as diversified cargo flights. Another 2 billion dollars will be invested in the next five years for the procurements.

Research and development fuel project will be rolled out over a period of ten years, with a one year progress review approach. The firm’s research and development department will expand research facilities for chemical testing with an intensive consultation with other players as well as the government. An initial projected expenditure of 1 million dollars will be made.

Bibliography

Air Transport Association of America “ATA Economic Reports of the U.S. Airline Industry,” 2010. Web. <http://www.airlines.org/Economics/ReviewOutlook/Pages/AnnualEconomicreportsoftheUSAirlineIndustry.aspx > (Accessed 25 May 2011)

Bailey, Elizabeth E. “Air Transport Deregulation,” 2008. Web. <www.aeaweb.org/annual_mtg_papers/2008/2008_264.pdf>

Bamber, Greg Up in the air: how airlines can improve by engaging their employees. New York, NY: Cornell University Press, 2009. Print

Datamonitor “US Airways Group, Inc.: Company Profile,” 2007. Web. <http://favormall.net/clientimages/38996/transport-usairwaysgroupinc.pdf> (Accessed 26 May 2011)

Investopedia “Industry Handbook: Porters 5 Forces Analysis,” 2011. Web. <http://www.investopedia.com/features/industryhandbook/porter.asp > (Accessed 26 May 2011)

Jones, Geoff The big six: US airlines. Osceola, WI: MBI Publishing Company, 2001. Print

National Academies Press, “Updates of 1991 TRB Report: Winds of Change: Domestic Air Transport Since Deregulation,” (n.d). Web. <http://www.nap.edu/readingroom.php?book=airline_dereg&page=pdf/index.html> (Accessed 26 May 2011)

Sparks, Evans “US Airways Doug Parker on Challenges for the Airline Industry,” 2009. Web. <http://evansparks.wordpress.com/2009/03/24/us-airways-doug-parker-on-challenges-for-the-airline-industry/> (Accessed 26 May 2011)

Star Alliance “Member Airlines: US Airways,” 2011. Web. <http://www.staralliance.com/en/about/airlines/us-airways/> (Accessed 26 May 2011)

Zacks Equity Research “U.S Airline Industry Outlook- June 2010,” Last updated 8 June 2010. Web <http://www.zacks.com/stock/news/35295/U.S.+Airline+Industry+Outlook> (Accessed 25 May 2011)

AppendicesAppendix 1

US Airways SWOT ANALYSIS

Strengths

Financial strength

Industry position

AWA acquisition

Emergence from bankruptcy

Weaknesses

Lack of scale

High dependence on US

Low cargo revenues

Opportunities

Passenger traffic in Asia Pacific

Fleet expansion

Reduced fares

International business

Threats

Intense competition and price discounting

Rising aviation fuel prices

High interest rates