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Industry Attractiveness

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In the recent years, airlines in the United States (and overseas) have evidenced a clear-cut tendency towards new organizational forms that allow for increased sales and decreased costs at all levels. In the past, airlines fiercely competed for market share (e.g., passenger volume) as strong, rigid, independent, hierarchically structured organizations. Today, the tendency is towards more flexible and flatter organizations that pursue either horizontal distribution or vertical integration. When the airline industry fell into crisis during the previous decade, companies were not only obliged to cope with the competition (which can even be catalogues as ‘hypercompetition’ at the present moment), but also with increasing operational costs (primarily fuel) and a massive debt. Today airlines are not merely competing for a greater market share, but also continue operating in the market (lest they are forced to file for bankruptcy and disappear entirely).

Today, after having overcome the crises in 2001 and 2009, the global airline industry appears to be recovering. The demand for flight travel has increased since 2010, and even though most airlines are struggling to find ways to keep costs down and generate profits, stock prices have generally proven to be indifferent to such policies (as top airline executives are to raise stock value to its pre-2009 levels). It has been a great challenge for executives, as they have found themselves faced with two problems: controlling operational costs and generating increased revenues (improving company’s image and market valuation). Due to this, airlines across the globe have decanted in favor of organizational forms that differ from their traditional hierarchical ones. Instead of maintaining bulky bureaucracies that lengthen operational processes and inevitably signify higher costs, executives have chosen to indulge in personnel cutbacks. Of course, such a determination has signified traumatisms for both the society and the economy, but it has allowed companies to stay operational. By flattening an organizational structure, efficiency, effectiveness and economy have been ascertained.

Vertical Integration and Horizontal Distribution Aliances

Vertical Integration and Horizontal Distribution Alliances (HDAs) are perhaps the two most attractive organizational forms pursued by airlines today. Given the market current situation, the best option for airlines will be perhaps to indulge in vertical integration strategies. Through vertical integration, airlines will be able to internalize transaction costs, while at the same time, enhancing their service capabilities. This is an approach, which is not unfamiliar for Delta; several years ago, the company purchased regional airlines Comair, since it attempted to connect with a wider segment of the U.S. market. However, today, the company announced that Comair would be shut down by September; this clearly indicates that even though vertical integration attracts airlines, there are other economic considerations to be taken into account (as Delta strives for flying bigger jets choosing to cut low-traffic routes and frequencies in regional markets). However, this does not mean that Delta has foregone vertical integration. In 2008, Delta Airlines tried to vertically integrate once again by attempting to merge with Northwest Airlines. According to both company’s executives, “the new combination, which will keep the name Delta, will provide synergies that could reduce the firms’ operating costs by up to a $1 billion from the costs that would be incurred by the two firms as separate entities” (Fischer, Elias, & Kirk, 2008). In October, 2008, the merger was approved, confirming that vertical integration through mergers and acquisitions is highly attractive for airlines today. Furthermore, on April 30, it was announced that one of the Delta’s subsidiaries would acquire an oil refinery; Delta’s subsidiary is “to pour some $100m into retooling the complex to maximize jet fuel production” (The Economist, 2012).

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Vertical integration holds a lot of promises for airlines, both in the United States and overseas, especially considering that resources are scarce (given the adverse economic ambient brought about by the 2008 recession and high levels of debt that most airlines currently have). However, it is important to point out that government regulation usually constraints the consolidation of such organizational forms. For example, in the United States, the authority to approve or disapprove an airline merger “rests entirely with the Department of Justice (DOJ). The Office of the Secretary of Transportation (OST) makes recommendations to DOJ based on its evaluation of the effect of a proposed merger on airline industry competition” (Fischer et al., 2008). Due to this, most airlines pursue Horizontal Distribution Alliances (HDAs); HDAs allow airlines to “effectively meet the needs of passengers in new and expanding markets” (Sullivan & Coughlan, 2004). Analyzing this organizational form, it becomes clear that in many instances, it is even more appropriate and attractive, given that airlines tend to form “alliances in order to use the operating assets (e.g., airline crews, baggage handlers, airplanes, docking gates, etc.) of other airlines to gain access to markets while avoiding large capital outlays” (Sullivan & Coughlan, 2004). It is widely known as ‘code sharing.’

The airline industry’s costs are exceedingly high; this constitutes a major entry barrier for new entrants. Furthermore, a difficult economic situation in the market has marked a clear tendency towards a reduction in the size of the industry. Instead of new airlines appearing, many smaller airlines have merged (or been acquired) with larger airlines, consolidating a smaller group of bigger and stronger global airlines (which is precisely Delta’s case). It is also important to point out that HDAs have allowed major airlines to enter foreign markets, facilitating the consolidation of networking within the industry (as airlines indulge in code-sharing, and offer higher frequencies and routes to passengers throughout the globe).

HDAs are more likely to be formed when an entrant is big, when uncertainty about the target market is low, and when the available code-sharing partner is not prone to an opportunistic behavior. These results are consistent with the predictions of the transaction cost analysis. HDAs are also favored, when the target country partner's expertise is not too great, and when the entrant has relatively little previous market presence (Sullivan & Coughlan, 2004).

Strong signs of recovery of the airline industry 

"After a decade in which the airlines lost a collective $60 billion, the FAA says the industry turned a profit last year of $9.5 billion as the U.S. economy rebounded from recession and airfares rose” (Levin, 2011). This indicates that new organizational forms pursued by airline executives have proven effective and efficient in decreasing costs and generating profits. Apart from this, the market starts to evidence an upward tendency. In 2011, domestic passenger increases were estimated 3%, climbing “by an average of 2.5% annually for the remainder of the next 20 years. International traffic is forecast to surge this year by 7.8%, and continues growing by 4.3%” (Levin, 2011). However, this does not mean that airlines are in the clear. For the most part, airlines owe banks billions of dollars, and expansion into foreign markets can only signify an increased debt (as market capitalization is scarce for airlines). As well, the volatility of oil prices is another shock that airlines are susceptible to, and there is no association that can intervene in prices control in the industry (the OECD is the organization that manages oil prices).

Finally, anyone employed in the airline industry (or interested in becoming a part of it) can benefit from specialized magazines, such as Aerlines, Air and Space, Airsoc, Flight Journal, Flying, Plane and Pilot, and Flight Global (World Newspapers, 2012). Furthermore, there are aviation blogs that can be found through search engines; top executives have seldom blogs of their own, but airline websites contain ample information about their history, actuality, and market situation as well. Keeping informed about what is going on in the airline industry is important, not only because it affects a wide group of stakeholders, but also because it has serious implications on the overall global economy.

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