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The airline industry has experienced significant restructuring in recent years. Today, mega-carriers and small airlines collaborate rather than compete with one another. Turbulent years of the airline industry began with Asian economic crisis in July 1997 followed with 9/11 terrorist attack that negatively impacted the aviation industry.
Year 2011 was a challenging year for the aviation industry as fuel price, major cost component for airlines, not only continued to stay stubbornly high but showed an upward trend as the year progressed. Fuel rose from USD99 per barrel in the fourth quarter of 2010 to USD134 per barrel in the fourth quarter of 2011. The struggles of many of large airlines introduced an additional twist to the impact of the crisis. (Malaysian Airline System 2005)
The Malaysian airline industry is in an oligopoly market structure, where it consists of one full service carrier (FSC) Malaysia Airline System (MAS). MAS experienced the worst financial crisis in 50 years history, recorded loss of Rm2.52 billion in the year under review as stated by the newly appointed CEO in 2011 annual report.
The purpose of this essay is to analyze the airline industries using tools that fit best towards its strategic potential, ambition and decision effectiveness for sustainability in its competitive position. Strategies are invention of new ideas not modifying old ones (Mintzberg 1994)
Analytical tools that can be used in the market to analyze the condition of a company and to make a strategic decision effectively are PESTEL, SWOT, and PORTERS 5 FORCES. The age of strategic planning is fast evolving into the era of organizational learning (Bartlett and Ghoshal 1998). Each will be referred to identify different scenario for effective correction.
PESTEL analysis will enable the airline industry to have a macro perspective of external environmental factors affecting its business positioning. The components of PESTEL are Political, Economic, Social, Technology, Environmental and Legal. External factors have a high impact on the success or failure of strategy (Johnson et al.2011), therefore companies strategize to anticipate and mitigate these effects. Buying trends, media and changes in lifestyle this is imminent as the world is moving towards modernization and buying power has increased tremendously.
The airline industry can capitalize on social behaviors as more countries embrace modernization as a key factor to build customer platform. In order to tap the global market, move towards online booking has made many budget carriers to be in the lead Innovations, access to technology and global communication.
As most airlines today fly across borders, advance information on legalities facilitates strategies on approaches of code-sharing with other airlines will be an added advantage to be in the competition.(Competition laws, health and safety laws and employment laws).
Cost factor is critical to the airline industry as it enables managers to anticipate and make changes before its too late. Airline can put a stop to nonprofit routes (Taxes, interest rates and Inflation) information will help on future strategy.
If a company does not plan for external environment changes, likely it may miss opportunities to grow or suffer setbacks, for example, losing business to a competitor. PESTEL becomes relevant to larger and complex businesses similar to the airline industry.
Successful manager need an all-round view of their environment for strategic decision-making. This involves scanning the environment to gather data (Bonn and Fisher 2011). PESTEL analysis draws attention to each of the key external environmental factors that allows managers to identify links or inter-dependencies between them.
SWOT analysis is fundamental for understanding and decision-making for all situations in a business environment. Itâ€™s used to determine types of strategies to be used. Managers must consider internal strengths and weaknesses of their organization and compare these with external opportunities and threats. Strategies may be developed using the firm's strengths to exploit the opportunities that exist. E.g. a strong brand name may be used to extend the airline services into new markets. It may also use these strengths to protect itself against threats; e.g. locking itself with a long term commitment of landing rights to prevent entry of a competitor. As stated by Beer and Eisenstat (1996) partnership among all relevant competitors are important to enact a new strategy.
A firm may also want to protect itself against its weaknesses. It may try to find alternative suppliers to reduce an over-reliance on a particular one (this might hit a bottle neck in the airline industry as there are not many supplies). It may invest in a rebranding exercise to reposition itself. These are some of the strengths MAS has over its competitors. (Potential markets, Brand name and Government Link Company). Not addressing its weaknesses is the main cause we have seen most airline went bankrupt which gives an opportunity for new entrants (Poor management, new entrants and brand is vital for market position and developing it is always a challenge).
SWOT underlines business, strategic planning, competitor evaluation, marketing, business and product development. Managers need to evaluate appropriate strategies that combine the strengths and opportunities for a smooth implementation. Putting plans into action proves challenging than coming up with it in the first place due to people resistance or unexpected glitches.
MICHAEL PORTERâ€™s FIVE FORCES analysis uses concepts developed in Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market they are in. The implication of Porter's analysis for managers is that they should examine five factors and consider ways of changing the five factors to make them more favorable. These are supplier power, barriers to entry, threat of substitutes and buyer power. A strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry in which the firm operates.
Senge (1990) suggest that the intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences. In the airline industry with information on the internet buyers possesses a credible backward integration threat. Porter referred to these forces as the microenvironment, to contrast it with the more general term macro-environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace. (Bargaining leverage, buyer information and brand identity)
Using tools like SWOT analysis enabled MAS to evaluate and indicate the strength and weakness of the company and had the ability correct its flaws and overcome its financial issues. As stated by De Geus (1996) high level thinking among mangers in most companies is admirable but cannot be noticeable when it comes to implementation. The advantage and disadvantages of SWOT analysis is that it is simple to come up with a list but far too easy to miss important external factors. (Johnson et al.2011).As the development of strategic management continued, the demand for a strategic management framework that was able to blend internal capabilities and external environment increased (Kong 2008).
PESTEL strategy is more directly aimed at the external macro environmental factors that might be affecting the position of the company, the reasons behind growth or decline in the market and also identify new directions for the company.
PESTEL underlines the key drivers of change in the airline industry in a global prospective as most of the factors in PESTEL are linked together for example IT innovation implicate economic changes. (Johnson et al.2011).
Like the airline industry seeking to develop an edge over rival firms can use Porters five forces model to better understand the industry context in which the firm operates. Strategic planning is not a precise science - no tool is mandatory - it's a matter of pragmatic choice as to what helps best to identify and explain the issues.