Monday, November 2, 2015

Competitors as Stakeholders: Look at the Airline Industry

In my long-running series discussing the fact that competitors are stakeholders, this post looks at what happens to the airline industry when competitors make major changes.

The four largest carriers in the U.S. airline industry (an oligopoly because of the relatively few carriers who compete) are the target of a Department of Justice probe over "capacity discipline." Translation: Are American, Delta, Southwest, and United working together -- illegally -- to constrain expansion, which has the effect of increasing the pricing power of the airlines and therefore keeping up healthy profits? 

In the airline industry, "adding capacity" can lead to profit-sapping price wars as airline carriers seek to fill more seats by slashing prices to attract passengers (who in some cases might otherwise fly a different airline). During the Great Recession that followed the financial turmoil of 2008, most airlines found themselves with excess capacity as business and vacation travelers alike reduced their travel budgets. So for economic reasons, the carriers restricted capacity individually and, in that way, kept costs like fuel and payroll under control.

Clearly, if and when Southwest or American Airlines or another major airline adds flights, its competitors need to pay close attention. In fact, American's CEO recently said that although lower fuel costs are improving profit margins and can support more capacity, his airline won't aggressively add capacity in the near future. So America is maintaining capacity discipline on its own.

Yet Southwest Airlines CEO Gary Kelly said during an interview  that he's sticking to his plans to increase capacity: "Our competitors are always complaining about Southwest, and we're just going to continue to focus on running a great airline…" Not maintaining capacity discipline, in other words, which will inevitably affect the marketing strategies of other major competitors.

Meanwhile, airlines are looking at ways to increase productivity by increasing the number of seats crammed into every aircraft. This would boost per-flight profitability, but would be likely to decrease passenger satisfaction.

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