Strategic Management in A Global Context
Instructor: Mark Louis Ulrich
By: Amer Nasser
The first ever scheduled airline was launched in St. Petersburg, Florida, a city not generally considered that can boast of an aviation. But on January 1, 1914, the St. Petersburg-Tampa Airboat Line was born there--the world's first scheduled airline using winged aircraft. A plaque on the entrance to St. Petersburg International Airport proclaims: "The Birthplace of Scheduled Air Transportation." Since then the industry has faced dramatic growth. Especially in the post WWII period, with the rising of jet engine planes the number passengers raised from year to year. Among the first internationally operating airlines were Lufthansa, founded in1926 and Air France, founded in 1933. Other commercial Airlines were founded such as the famous Pan Am and disappeared again.
Today, the world’s airline sector is dominated by large national Carriers who have for a 2
long time been under the influence of national governments. Only since 1978 deregulations formed a competitive market as direct subsidiaries consequently were abolished and the airlines were turned into independent, often stock-listed, companies. This step helped to complete the transformation from of air travel from a luxury to as mass-market.
However, during the last 4 years, airline industry faced major problems and profits were hardly earned. The challenge for al operating airlines today is to cut costs per passenger-mile and increase their network to offer best service at lowest costs. Key Success Factors
Never the less the worlds airline sector indices have substantially under performed over the past 20 years. Key factors explaining this failure and affecting the industry are:
Overcapacity and still government interference
Fix cost business
Passenger numbers major impact on profitability
Payments of landing slots are fix, irrespective passenger numbers Fuel costs are constantly rising
High capital employed
Severely affected by corporate spending
Pricing pressure with market entry of low-cost carriers
Issues that managers face when making decisions in yield management deserve some more consideration.
• Measuring performance of yield management is a major issue. Load factor, yield (revenue per passenger mile) are measures affected by external competition. In assessing performance, American Airlines uses the discount allocation revenue opportunity model. It measures where the airline stands in comparison to its maximum revenue possible and the minimum revenue possible
• Customers seem to be resigned to the fact that airlines discriminate on price but many find it very bitter and it sometimes leads to customer alienation. We emphasize the tradeoff between short-term which focuses on profits and long-term which focuses on delivering good, reliable service. From a managerial point of view, employee’s morale is at stake here. Since yield management takes much of the guess work out of how many seats to sell at what price, less decision power is left on their shoulders and as technology is more and more present in their professional lives, it may reduce them to being simple operators rather than decision makers. In addition, some employees are paid a percentage of the sales they make, fostering them to make group sales that in turn may be contradictory with the objective of yield management that is maximizing revenues for a whole flight. As an example, a sales person might be denied by the system to sell discounted tickets to a group of 30 people more than 45 days in advance. As a result, this employee may lose the sale.
In addition, unpredictable catastrophes with a global impact such as 9-11 or the SARS epidemic in South-Asia have a severe and sudden impact on demand. Industry Structure:
The airline industry is an imperfect oligopoly. A few carriers...
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