Justin Flatt Mgmt. 439.01 March 8, 2012
Case Study #3
SkyWest, Inc., and the Regional Airline Industry in 2009 Situation: The regional airline industry specializes in short-haul flights that operate to serve as feeder airlines transporting passengers to and from major hub airports that have larger aircraft and the ability to cover a larger geographical area. Regional airlines partner with major airlines to create an efficient hub and spoke system. Major carriers pay regional airlines a fee for every departure. This allows regional airlines to develop a customer base and establish a revenue stream. Regional airlines are controlled by or have contracts with major carriers to secure flights but because one cannot exist with the other, the relationship between regional and major airlines is reciprocal and necessary for the success of both entities. Complication: Since 2001, SkyWest, Inc. has been struggling to maintain their string of success. SkyWest was adamant on acquiring new contracts with major carriers, but would have to overcome the external situations to achieve this growth. During this time, it was difficult for SkyWest to develop and maintain high levels of customer service, develop and maintain a strong safety image, maximize on-time arrivals, and acquire new aircraft. Before SkyWest could compete with existing contracts and competitors, it first had to prevail over external factors in the industry to achieve the requisites for acquiring new contracts. Table 1 shows some of the external factors in the industry. Table 1Economy
Partnerships
Fuel Cost
Regulations
• Airline industry highly correlated to economy • SkyWest's relationship with Delta over $25M in unpaid payments • Didn't want to sue for money and risk loss of business
• Midwest Airlines bankrupt/bought by direct competitor of SkyWest • Old partner could eventually become larger, more capable, and become threatening competitor in future.
• Estimated 30-50% of total costs • Availabilty becoming problem, limiting number of flights company could support • "Scope clauses" limited size of plane SkyWest could use
• Planes grounded to perform safety inspections • Oxygen for passengers $262-$577M additional costs
Contracts with other airlines also played a role in SkyWest’s future success. Delta Airlines contributed to 59.9% of SkyWest’s capacity, while United Airlines made up the difference of 40.1%. Because both airlines were comprised of the same business operations and were subjected to the same economic and environmental risks, SkyWest’s revenues had become less predictable and more risky. SkyWest had to expand and diversify their company to reduce their risks. Table 2 illustrates SkyWest’s strategy. Table 2Pursuit of new Expansion partnerships through acquisition
Expand Current Partnerships
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Motivation: SkyWest is a big player in the regional airline industry with their success stemming from on-time arrivals, exceptional customer service, and baggage handling. SkyWest is striving to become more diversified and broaden their scope. For SkyWest to be successful at this, the acquisition process in the industry must not be taken lightly. External and internal factors will contribute a stepping stone in decisive actions. Table 3 shows a five forces model for SkyWest. Table 4 shows a TOWS analysis of SkyWest. Table 3-
Table 4-
Suppliers The cost of fuel, third part manufacturers, non-routine maintenance, planes and parts, and unions can all be strong factors in a regional airline
Rivalry With the industry completely saturated, there are more providers than needed, causing stiff competition in the market.
Buyers
Strong
Moderate
Because all airlines are competing for the same customer, the buyer has enormous power. Buyers are persuaded by price, technology, entertainment, and service.
Opportunities Routes outsourced by major airlines due to recession Bankruptcy of major carriers
Weak
New Entrants
Substitution
Because the industry is so saturated, there is no room for new entrants.The cost of entering is extremely high and too expensive.
Other options can include: trans, driving, other airlines with competitive advantage, video conference (no travel), or private jets
Threats Potential merger of major airlines Shutdown of major airlines’ hubs
Strengths Partnerships with Legacy airlines Diverse line of airline carriers Safety implementer SO Partnerships to take over major carriers’ routes Competitive advantage created to appeal to competitions’ consumers
Weaknesses Limited to one region Dependent on major carriers Affected by bad weather
ST
WT
Become diverse with major carriers and broaden domestically and internationally Safety and sound business practices will draw business over competitors
WO
Partner with large airlines to achieve greater reach Broader reach can achieve business growth, weather will not affect as large a section of business Increase business ventures by merging with broader, national airlines. Create own diverse airline that will not be affected by large parent company
Resolution: SkyWest airlines is in a bounce-back from post 2001 turmoil and turbulence that has stricken the airline industry with profit losses and bankruptcy. SkyWest airlines can reach ultimate success in the regional airline industry by capitalizing on external opportunities and fortifying their internal strengths. SkyWest should continue to develop partnerships with major carriers, ultimately reducing costs by sharing them with several different companies. As the industry remains in economic limbo, SkyWest should take advantage of their strengths that the industry is providing and repair weaknesses that are due to partner companies’ poor customer service, human resources, and strategies for staying out of the red during the economy’s recession. Companies that are filing for bankruptcy can prove a beneficial aspect for SkyWest. Employees that are being laid off at partner companies in the airline industry should be hired by SkyWest enabling them utilize their already established set of skills. Any skills lacking in SkyWest can be gained back by the hiring these employees that are forced to find alternate jobs due to the recession.
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References Gamble, J.E., & Thompson, A.A., Jr. (2011). Essentials of strategic management: The quest for competitive advantage (2nd ed.). New York: McGraw-Hill Irwin. CAPA (2009). The future of us regional airlines: big changes imminent. Retrieved from http://www.centreforaviation.com/analysis/the-future-of-us-regional-airlines-bigchanges-imminent-17054 USA Today (2009). Regional airlines thrive while the big boys cut back. Retrieved from http://www.usatoday.com/travel/columnist/grossman/2009-11-03-regionalairlines_N.htm
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