Classic Airlines Marketing Solution, Research Paper Example

Classic Airlines (Classic) is the world’s fifth largest airlines with over 32,000 employees that serves 240 cities with 2,300 daily flights. Even though Classic was still profitable last year, the company is faced with declining customer satisfaction, lower employee morale, and harmful price war with the competition among other problems. Company’s CEO Amanda Miller and CFO Catherine Simpson believe that the solution to company’s struggles is greater operating efficiency while other management team members such as CMO Kevin Boyle, SVP Customer Service Renee Epson, and SVP Human Resources John Hartman believe the solutions to the company’s problems lie in listening to the customers and paying more attention to their needs. One way to effectively analyze the issues facing the company and develop an effective competitive strategy would be to use marketing tools such as Porter’s Five Forces Model and SWOT analysis.

Porter’s Five Forces Model: Porter’s Five Forces model strives to understand the relative position of a company in a competitive environment. Under the model, there are five forces which determine the competitive position of a company and they are supplier power, buyer power, competitive rivalry, threat of substitution, and threat of new entry (MindTools).

Supplier Power:  The supplier power in the airlines sector is high because there are primarily only two suppliers that provide jets to all the airlines companies. The two suppliers which are Boeing and Airbus often have a long list of orders and jets have long production cycles due to the complex nature of the product. The low number of suppliers give more power to the suppliers because customers have little choice but to deal with few suppliers and accept their conditions. This may be why Boeing and Airbus have rarely any need to rely on discounts to boost sales.

Buyer Power: The customers also have high power in the airline sector due to large number of players. Even though Classic had $8.7 billion in revenues last year, it is only the fifth biggest airline and its extremely low profit margin also indicates the intensity of competition in the industry. The buyers have high power because they have large number of airlines to choose from and globalization has only increased the number of options available to them. It is no surprise that the profit margins in the airline industry are quite low because price is an important factor for many customers and many airlines compete on low prices to attract customers. Even Classic’s main competitive strategy is low price in order to increase sales.

Competitive Rivalry: The fact that Classic could manage to earn only $10 million profit on $8.7 billion sales is an important indication of competitive rivalry in the airline industry. One of the reasons airline industry is able to support large number of players is due to its huge size. According to U.S. Travel Association (USTA), travel expenditures in U.S. alone totaled $813 billion in 2011, up from $758.7 billion in 2010. Similarly, global travel industry is expected to amount to $3 trillion by 2022 and the average growth rate between 2012 and 2022 is estimated at 4.1 percent annually (Plunkett Research Ltd., August 15, 2012). The huge size of travel industry makes it possible to accommodate large number of players including both large and small companies which also results in high intensity of competition. The market structure of airline industry could be considered monopolistic competition (Investopedia) because there are large number of players who have been able to achieve some differentiation through branding and competitive strategies.

Threat of substitution: Threat of substitution is high in the airline industry because all players offer almost the same products to their customers which are travelling services. But it is possible for the market players to achieve some degree of differentiation through competitive strategies such as customer service, punctuality, and attractive customer loyalty programs. Southwest and JetBlue have demonstrated that taking care of customers is one of the best strategy to ensure high profits and loyal client base as well as achieving some pricing power. Moreover, it is also possible to lower threat of substitution by focusing on only few customer segments and meeting their needs better than the competition.

Threat of new entry: The threat of new entry is high in the airline sector. First of all, the size of the industry is large enough to support market players of all size. Second, the airline sector is mostly privatized with few if any legal barriers to entry. In addition, one can always form alliance with other players to gain access to new routes. The capital requirements are also not much problem because one can start operations with even few jets. Similarly, internet has eliminated the need to develop extensive physical distribution network or forming partnerships with independent travel intermediaries by making it possible to deal directly with clients. Thus, it has become both cheaper and faster to enter the airline industry and set up operations.

Conclusion: One cannot develop an effective competitive strategy without taking into account external factors and Porter’s Five Forces model has helped us understand several facts about the airline industry such as the fact that it is intensely competitive industry with large number of players and one of the keys to winning the competition is to attract customers and retain them. The next step is to carry out SWOT analysis which will help us understand the strengths and weaknesses of Classic as well as the opportunities and threats that exist in the environment (Knowledge@Wharton, 2012).

Strengths: One of Classic’s major strengths is the quality of its management team. CEO Amanda Miller takes a pragmatic approach to business and has extensive experience in a wide range of industries including energy and law. Similarly, CMO Kevin Boyle has a reputation of probably being the best mind in airline marketing. The company’s other strength is its customer relationship management (CRM) program which is one of the best on the market. Classic’s strengths also include company’s extensive network which covers 240 cities.

Weaknesses: One of the company’s weaknesses is its operating model which is relatively inefficient as compared to many competitors. For example, the company’s emphasis on maintaining harmonious relationship with union has resulted in one of the highest average labor costs in the industry. Similarly, the company avoids any industry alliance because CEO Amanda believes that the company can serve its customers better than others. This prevents the company from taking advantage of savings that result from joining an alliance such as the need to own fewer routes.

Another major weakness is the company’s customer relationship system which fails to meet the needs of many customers because of too much focus on operating efficiency such as keeping customer calls low and replacing customer service representatives with automated systems. In addition, the company’s Classic Rewards Program has also been losing its appeal as evident by 19 percent drop in membership as well as 21 percent drop in flights taken by remaining members.

Opportunities: CEO Amanda Miller has made it clear to her management team that the price war has proven destructive for Classic and the company cannot afford any more price discounts. Fortunately, the company’s business travelers have indicated they are less sensitive to prices and care more about other aspects such as on-time arrival and good customer service. Thus, the company has a great opportunity to build a loyal business traveler client base by focusing on their needs. Another opportunity lies in joining an industry alliance which may enable the company to reduce costs by eliminating some routes and may also help improve the customer loyalty program by offering more options and flexibility to customers.

Threats: Probably the greatest threat facing Classic is the continued loss of customers due to poor customer service by Classis as well as better customer service and more attractive reward programs by the competition. Another threat facing the company is the growing competition due to globalization that may put even more downward pressure on prices and could force the company into bankruptcy as CEO Amanda fear. Another threat facing the company is the loss of talent to competition due to low employee morale many of whom feel that the company’s leadership do not take into account subordinates’ ideas and have lost touch with customers.

Issues facing the company: There are several issues Classic’s management should immediately tackle to ensure company’s long term future. They include working relationship among management team members, customer service, employees’ morale, developing an effective competitive strategy, and communication with both internal and external stakeholders. In addition, even though Amanda is a capable leader, her leadership style has not been embraced by some members of her management team as well as subordinates. The leader’s effectiveness is not only determined by his/her individual capabilities but also his/her ability to inspire subordinates to work towards common objectives.

Leadership Style and Organizational Culture: Classic needs to make several changes in the way it is being managed currently. First of all, CEO Amanda should change her leadership style from authoritative to democratic. It is apparent that Amanda seeks little or no feedback even from her management team members such as Kevin and Renee and different team members currently lack consensus as to how the company should be managed. While Amanda and Catherine prefer operating efficiency, many management team members believe that the key to success is to listening to customers and responding to their concerns and needs. Another suggestion is for the management to create an environment of more open communication. This will help the management obtain valuable feedback from those who are often in contact with customers and it will also improve employees’ morale. Employees are more likely to follow the objectives laid by the management when they have personal input and stake in it. Open communication will also increase the probability that everyone in the company is on the same page and working towards achieving the same goals which will prevent waste and duplication of scarce financial and human capital.

Options: There are several options available to Classic and each one has certain pros and cons.

#1: First option is to follow the same strategy of achieving maximum operating efficiency and competing on the basis of price. Classic’s management can take some measures to further increase operating efficiency. One strategy may be to eliminate less profitable routes and focus only on the most profitable ones. The company can also take lesson from Southwest Airlines by operating only one type of aircraft (Yglesias, 2012). It will yield several benefits such as lower maintenance costs and better pricing from the suppliers. The company may also join an industry alliance just like Skyway Airlines. The industry alliance will also help the company gain access to new routes cheaply and moreover, help improve its reward programs for customers.

Like most strategies, this option also has certain pros and cons. This option will help the company offer even better prices to leisure travelers who account for bulk of the overall global travel volume. This strategy will help the company fare well even during difficult economic times when demand for discount travel increases, even from business travelers. The main con of this option is that there are already many competitors who compete on price and price-based competition will only further lower profit margins. Another disadvantage of this strategy is that it will not appeal to business travelers who often result in higher profit margins and also care about traveling experience and not just prices.

#2: The second option is to compete on the basis of better overall traveling experience as opposed to lower prices. Under this option, the company will attempt to strike a fine balance between overall traveling experience including customer service and price. This strategy will be similar to JetBlue in the sense that the company will try to convince customers that better traveling experience is worth a little higher prices than the competition. This strategy means the company may lose some volume and its focus will shift to less price-sensitive customers such as business travelers and upper-middle class. The pros of this option include better customer service due to focus on few customer segments, higher profit margins, greater differentiation from the competition, and better control and management of operations due to smaller scale of operations. The cons of this option include lower revenues, greater dependence on smaller client base, and greater decline in revenues during tough economic times when customers become more price sensitive.

Recommendation and Conclusion: It is recommended that Classic’s management pursue option 2 and tries to differentiate itself through better value instead of better prices. The competition will continue to drive down profit margins but differentiation strategy will offer some protection to Classic. In addition, it is better to have better profit margins than higher revenues and Classic’s profit is extremely low when compared to the total revenue amount. Shorter scale of operations will also help the management better monitor and control business performance as well as communicate with subordinates.

It is clear from the case that Classic’s current strategy is not working and Classic is only a little bit away from bankruptcy. In addition to competition, Classic’s problems have also been due to poor communication within the organization as well as CEO’s leadership style that has not been embraced by some management team members as well as subordinates. Thus, Amanda needs to work on improving her relationship with subordinates and she also needs to take steps to improve employees’ morale and engage them to gain ideas that could help the company improve its competitive position.

References

Investopedia. (n.d.). Monopolistic Competition. Retrieved December 31, 2012, from http://www.investopedia.com/terms/m/monopolisticmarket.asp#axzz1WsesVFYG

Knowledge@Wharton. (2012, March 20). Strengths, Weaknesses, Opportunities, Threats: The SWOT Analysis. Retrieved December 31, 2012, from http://kwhs.wharton.upenn.edu/2012/03/strengths-weaknesses-opportunities-threats-the-swot-analysis/

MindTools. (n.d.). Porter’s Five Forces. Retrieved December 31, 2012, from http://www.mindtools.com/pages/article/newTMC_08.htm

Plunkett Research Ltd. (August 15, 2012). Introduction to the Travel Industry.

Yglesias, M. (2012, June 12). The Virtues of One Plane. Retrieved December 31, 2012, from http://www.slate.com/blogs/moneybox/2012/06/12/the_virtues_of_one_plane.html