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Assessing the Strategic Evolution of U.S. Low-Cost Carriers in the Post-9/11 Environment

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Assessing the Strategic Evolution of U.S. Low-Cost Carriers in the Post-9/11 Environment Fairfield University DigitalCommons@Fairfield Business Faculty Publications Charles F. Dolan School of Business 2012 Assessing the Strategic Evolution of U.S. Low-Cost Carriers in the Post-9/11 Environment Carl A. Scheraga Fairfield University, [email protected] Paul Caster Fairfield University, [email protected] Follow this and additional works at: https://digitalcommons.fairfield.edu/business-facultypubs Copyright 2012 Journal of Transportation Management/Delta Nu Alpha Transportation Fraternity Peer Reviewed Repository Citation Scheraga, Carl A. and Caster, Paul, "Assessing the Strategic Evolution of U.S. Low-Cost Carriers in the Post-9/11 Environment" (2012). Business Faculty Publications. 114. https://digitalcommons.fairfield.edu/business-facultypubs/114 Published Citation Scheraga, Carl A., and Paul Caster. “Assessing the Strategic Evolution of U.S. Low-Cost Carriers in the Post-9/11 Environment,” Journal of Transportation Management, Delta Nu Alpha Transportation Fraternity (2012): 77. This item has been accepted for inclusion in DigitalCommons@Fairfield by an authorized administrator of DigitalCommons@Fairfield. It is brought to you by DigitalCommons@Fairfield with permission from the rights- holder(s) and is protected by copyright and/or related rights. You are free to use this item in any way that is permitted by the copyright and related rights legislation that applies to your use. For other uses, you need to obtain permission from the rights-holder(s) directly, unless additional rights are indicated by a Creative Commons license in the record and/or on the work itself. For more information, please contact [email protected]. ASSESSING THE STRATEGIC EVOLUTION OF U. S. LOW COST AIRLINES IN THE POST - 9/11 ENVIRONMENT Carl A. Scheraga Paul Caster Fairfield University ABSTRACT It has been suggested in the literature that low-cost airlines have, in varying degrees, departed from the original low-cost model introduced by Southwest Airlines. This study provides a multi-year analysis in the post-9/11 time period, for the years 2004-2009, of the demonstrated strategic positioning choices of U. S. low-cost airlines. The sample utilized is restricted to U. S. low-cost carriers so as not to conflate operating environments. Furthermore, a quantitative methodology is employed to measure effectively these choices and to facilitate inter-airline comparisons. Airlines, as part of their strategic planning process, articulate positions with regard to cost leadership, product differentiation, and growth. Decisions implemented are dynamic and inter-temporal in nature. Managers thus need a multi-period methodology to evaluate the implementation of strategic positions. One such approach is the strategic analysis of operating income utilized in this study. INTRODUCTION contribution customers, and the minimization of Michael Porter in his seminal work Competitive expenditures on research and development, Strategy (1980) outlines three generic strategies service, sales force, and advertising (Porter, that a firm can pursue in the building of a 1980). Thus, the model introduced by competitive advantage vis-a-vis its competitors. Southwest Airlines (see Alamdari and Fagan, These three strategies are: cost leadership, 2005) was characterized by fares that were low product differentiation, and a focused niche that and unrestricted, high frequency point-to-point eschews an industry-wide strategy for a narrow flights with no interlining. Flights were single- market segment. The emergence of the low cost class with high density unassigned seating model in the commerical airline industry without meals or free (alcoholic) beverages or represents a movement from the predominant snacks, and purchasable light drinks. Travel product differentiation strategies of U. S. trunk agents and call centers (later the Internet) carriers to the low cost model as introduced by operated with a ticketless format. A single type Southwest Airlines. of aircraft was intensively utilized with flights into and from secondary and uncongested The goal of a differentiation strategy is the airports in order to facilitate quick turnaround creation of a product or service that is perceived time. Human resource cost effectiveness and industrywide as being unique. This uniqueness productivity was achieved through competive allows the firm to command a premium price wage rates and profit sharing. and therefore higher profit margins. Differentiation can occur along such lines as Two points need to be noted here. The focus brand or image, technological innovation, strategy may be implemented either on the basis quality of product or service, or customer of cost leadership or product differentiation in a service, among others. The goal of a cost narrow market segment. As suggested by leadership strategy is the aggressive pursuit of Alamdari and Fagan (2005), such a strategy efficient scale facilities, cost reductions from would not seem to apply to low cost commercial accumulated operational experience and control airlines in the United States. (They note that of overhead, the avoidance of marginal corporate jet service providers might fall into Spring/Summer 2012 77 this strategic group.) However, there is a cost model. Specifically, such markets may be second, critically important issue. Porter (1980) chosen to avoid competition (pg. 16). notes that a firm that does not develop a viable strategy is “stuck in the middle.” While it takes Thus, there are two important empirical time and effort for a firm to extracate itself from questions to be investigated. The first is whether such a situation, it is not uncommon for firms the low cost model in the commercial airline that are stuck in the middle to move back and industry has indeed evolved over time in the forth among the generic strategies in an context outlined by Porter (1980). The second is inconsistent manner. Frequently, such behavior how well has the low cost model been leads to failure. implemented. Evolution of the Cost Leadership Model by To date, only Alamdari and Fagan (2005) have Airlines and Strategic Groups:The U. S. Case undertaken an empirical examination of the Strategies chosen by firms are dynamic and evolution of the cost leadership model on the evolutionary by the nature of competition. This part of commercial airlines designated as low notion is illustrated in Porter’s (1980) cost carriers. However, their study compared admonition as to the risks or vulnerabilites of the airline low cost strategic models at a single point cost leadership strategy. Competitors may learn in time – the year 2001. In correlating model how to implement the low cost model through choice to performance this is problematic not imitation or investment in state-of-the-art only because of the issue of the single year facilities. Carey and Nicas (2011) indicate that utilized but also because of the extremely this has happened to Southwest Airlines, as other confounding event of 9/11. Additionally, similar low cost carriers, such as JetBlue Airways and to Button (2009), their study groups U. S. low Spirit Airlines have cut into Southwest’s cost airlines with European low cost airlines. competitive advantage. Technological changes This makes it very difficult to isolate the or innovations may nullify the advantages that endogenous effects of management‘s strategic had accrued to the low cost leader through prior choices from the exogenous effects of the operating learning and investments. The low cost leader environment in which airlines conduct business. may become so preoccupied with cost that necessary product and marketing changes are Evaluating the evolution of a low cost airline’s overlooked. Finally, inflation in costs may erode strategy requires a methodology for classifying the profit margins enjoyed by the low cost leader carriers using Porter’s (1980) generic strategies. relative to firms pursuing a differentiation strategy. Kling and Smith (1995) present a methodology for identifying strategic groups amongst U. S. Button (2009) offers a critical view of the trunk carriers, Southwest, and the then low cost efficacy of the implementation of the low cost carrier America West. Their study covered the model in the commercial airline industry, in a time period 1991-1993. Airline membership in combined analysis of U. S. and European low particular strategic groups was done utilizing the cost carriers. He suggests that “there are, in two variables of cost per seat mile and the addition, reasons to suspect that the model as we Airline Quality Rating index calculated by the have seen it in the past, will need to change to National Institute for Aviation Research. succeed in a dynamic market and, in the short term, to function well in the depressed macro- The current study focuses on the evolution of the economic environments...”(pg. 2). Furthermore, low cost model by U. S. carriers in the post 9/11 he also suggests that where low cost carriers timeframe. The period examined is 2004 to have enjoyed financial success it may be because 2009. A methodology called strategic variance of the particular markets they have chosen rather analysis is used for decomposing operating than their particular implementation of the low income into three components: (1) growth, (2) 78 Journal of Transportation Management price recovery, and (3) productivity. The price higher prices to compensate for the higher costs recovery component assesses a firm’s product associated with such a strategy. The productivity differentiation strategy
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