Market entry in the U.S. Airline Industry.

Author:Helleloid, Duane
Position:Abstract
 
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STRUCTURE OF THE U.S. AIRLINE INDUSTRY

The U.S. airline industry underwent significant deregulation in the late 1970s, and by the early 1980s, each airline was largely free to decide what routes to fly, and the fares to charge on those routes. Deregulation also allowed for entry of new competitors, and the development of price-based competition. The failure rate of new entrants was high, however, and by 1995 only six of the airlines started between 1979 and 1982 remained in business as independent airlines. Most faced a fate similar to that of Trump Airlines--after failing to post a profit and defaulting on its debt, remaining assets were acquired by other airlines (Webley, 2011). Since 1995, airlines have reported cumulative losses of over $20 billion, most of which occurred between 2001 and 2009 (Airlines for America, 2015).

"In the early years [after deregulation], new airlines had appeared; but most could not survive. Some, like People Express, were consumed in mergers and acquisitions, while others, like Air Florida and nearly 200 other airlines, collapsed into bankruptcy. Although ticket prices had spiraled downward, new entrants had never accounted for more than 5% of the passenger market." (McGahan and Kou, 1995).

The U.S. airline industry has undergone significant restructuring and consolidation over the past twenty years. At the end of 1994, the top three airlines were American (17% of the market), United (16%), and Delta (13 %), with a combined forty-six percent of industry revenue. The next three airlines--US Air, Continental, Northwest--have all subsequently been merged into the first three, with Southwest (#7 in 1994 at 3%) now #4 in market share. By 2014, the top four airlines (American, United, Delta, and Southwest) generated over two-thirds of the industry's revenues. Two regional airlines, Alaska and Hawaiian, were the only other airlines that operated in their current form in 1994 and survived to have more than $1 billion in revenues in 2014 (MIT, 2015a). The period from 1990-2011 saw 189 bankruptcies in the airline industry (AP, 2011), with most new entrants either simply dissolving, and/or being acquired by one of the larger competitors.

Four new airlines, that either did not exist in 1994 or were trivial in size, managed to attract capital and grow their operations to achieve more than $1 billion in revenue in 2014. In an industry where competitors bear significant fixed costs, have logistical difficulties in making rapid capacity changes, face volatile demand due to economic changes, are buffeted by changing oil prices, and have challenging labor relations, survival has proved difficult for both established firms and entrants. Allegiant, Virgin America, JetBlue, and Spirit, however, have all staked out a vialble position in the U.S. airline industry. Analyzing the strategies utilized by these entrepreneurs, and identifying similarities across firms, provides insight on successful entrepreneurial strategies in highly competitive industries.

Table 1 provides comparative data on the four airlines profiled, and for comparison purposes, Delta Airlines.

ALLEGIANT

Allegiant's first flights in 1997 served Fresno, California, and by 1999 the company provided regular service between Fresno, California and Las Vegas, Nevada. The company entered bankruptcy in 2000, moved to Las Vegas, and began providing charter services to Harrah's hotels and casinos. By 2002 it started developing its own routes to and from Las Vegas, and by 2004 it was offering vacation packages from 13 small cities to Las Vegas. The company now serves 96 U.S. cities with most flights taking vacationers from small northern communities to vacation destinations in the south. (Allegiant, 2015) (Allegiant's route map can be found at https://www.allegiantair.com/route-map.)

Allegiant's business model involves serving a clear target market (vacationers in the northern U.S., and Canadians who drive across the border to catch a flight) with low cost flights. It faces no direct competition on most of the city-pairs it serves (Mayerowitz, 2013). For example, a customer in Bellingham (Washington) or Bozeman (Montana) interested going to Phoenix (Arizona) would have to change aircraft in one of the hub cities of those airlines also serving these cities. In addition to offering direct flights, Allegiant charges low fares to attract budget-conscious vacationers. Thus, Allegiant's value proposition to its target market of leisure customers is cheap non-stop service to popular vacation destinations. It also will bundle hotels, car rentals, show tickets, and even Las Vegas wedding chapels for customers. Many of Allegiant's customers would not have taken a trip if not for Allegiant's route, or would not fly as often. In that way the company is attracting new customers, rather than taking customers away from other airlines (Aleshire, 2012)

Keeping costs low is key to Allegiant's business model. One way Allegiant does this is by tightly managing labor costs--most employees earn $10-20 less than they would at competitor airlines (Mayerowitz, 2013; CAPA, 2014). Most aircraft are in use less than 6 hours per day, and return to where they originated, thus avoiding any overnight layover costs for crew members. While this results in low aircraft utilization, most of Allegiant's aircraft are over 20 years and are paid for. Although the older aircraft are less fuel efficient than newer aircraft, these higher fuel costs are easily offset by the low aircraft acquisition and depreciation costs and the high capacity utilization (and high seat density) on each flight. Allegiant's flights operate over 87% full, and they also install more seats on each plane (CAPA, 2014).

"Allegiant's business model seems to fly in the face of conventional wisdom. A fleet of old, fuel-inefficient aircraft, flying with low frequencies and at low daily utilization rates in markets with a high degree of seasonality." (CAPA...

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