Overview

Domestic air travel services are deemed vital to the efficient running of the US economy.   The presence of local carriers flying in inter-state and also a few cross-country destinations provides logistical support to key industries in the transfer of cargoes pertinent to operations as well as a fast and reliable mode of air transport for Americans as they move about in key cities and provinces.

As a premier US industry, the airline industry is subject to the intermittent movements of its economic and socio-political environment which directly affects the internal operations of most domestic carriers.  The untoward rise of bunker fuel prices in the world market tends to squeeze in profit margins; political tensions in both domestic and international destinations creates setbacks to targeted passenger volume and revenues; while disasters including the 911 attack create a momentary social stigma that has its ill-effects on the temporary slump of air travel sales.  On top of all these elements are the potential threats from competition.

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In response to these industry forces, domestic carriers have initiated strategical measures to improve overall productivity and control costs.   In line with improvements, these carriers also need to acquire efficiencies in terms of fleet utilization, pricing and revenue management, as well as schedule optimization.  While competition puts a stress on revenue margins, given the possibility of new entrants plunging air fare rates to low levels in order to penetrate the market or a head-on price war between major carriers, this also comes as a welcome challenge for local carriers to streamline operations and contrive ways to beat fluctuating fuel prices to reduce costs and counter any eventualities in the market.

The US market for domestic air travel is controlled by numerous low cost carriers or LCCs that serve flight routes across a number of US states.  While most of these LCCs employ cost leadership strategies, a few managed to apply differentiation in the delivery of in-flight services by promoting the image of quality and technological savvy that can be derived from a budget airline.

On top of the US market for domestic flights is Southwest Airlines, Inc., also known as the largest domestic airline based on passenger volume.  It appears that being number one is a reflection of the operational efficiencies acquired by the airline over time which largely complements its clear-cut cost-leadership strategy that now defines its position in the highly competitive industry.  Not far behind is New York-based LCC, JetBlue Airways Corporation.  In contrast to the broad-based, purely cost-leadership strategy employed by Southwest Airlines, JetBlue employs multiple strategies to a broad market; a cross between the generic strategies of cost-leadership and differentiation.

Problem and Objectives

The strategical contrast between the two major carriers creates an interesting argument in ascertaining the most likely strategy that would work for a low cost carrier operating in US domestic markets.  Was the solitary cost-leadership strategy applied by Southwest more effective as a positioning tool than the multiple strategies adhered to by Jet Blue?  Between the two carriers, who holds a competitive advantage that will most likely be sustained for the long-term?

This report will (1) conduct a comprehensive analysis of the strategic issue; (2) provide answers to the pertinent questions above and (3) integrate other relevant inputs in an attempt to resolve the issue at hand.  It is necessary to initially review the individual operations of both Southwest and Jet Blue prior to the discussion of the issue in order to derive a concrete basis for the arguments in the ensuing pages.

Southwest Airlines

The mission of Southwest Airlines is dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit.

Southwest Airlines is poised to serve city-to-city air travel at the lowest possible price for its air tickets.  The bulk of its customers are people willing to miss out on in-flight meals, direct routes and fancy seats.  Apart from providing low fare air-transportation, Southwest Airlines serves only 29 states which pales in comparison to the inventory of its competitors who serve customers from coast-to-coast.  Moreover, it has adopted an internal policy of using only Boeing 737’s for its fleet while targeting secondary airports that are outside major cities in order to guarantee rapid fleet turnaround.  It also eliminated the unnecessary conventions in air travel such as providing business and first class seats and offering in-flight meals.  Despite all these limitations and unconventional practices, the airline consistently meets customer expectations in terms of service.  Based on their model motto, “If they’re, satisfied, dedicated, and energetic, they’ll take good care of the customers.  When the customers are happy, they come back.  And that makes the shareholders happy.”

Southwest Airline, unlike any other carrier, puts premium on the value of people which refers to both its customers and employees.  This urges employees to have fun and make the experience of flying Southwest not only convenient but enjoyable (Wikipedia Contributors, 2007).

Other innovative practices that set Southwest Airlines apart from other LCCs include the following: (1) Tickets are only issued directly by the airline over the phone or online through its website, Southwest.com; (2) Passengers are allowed to change reservations without penalty; (3) Passengers are not assigned seats; and (4) 3 pieces of luggage can be checked-in for free.

The low-cost model, complemented with the fewer services that its carriers’ offer, resulted in the success of Southwest Airlines.  Competitors cannot simply match Southwest’s low air fare rates and this is probably the reason why other carriers tend to vehemently drop prices to end with eventual bankruptcy and more carrier consolidations in the industry.

JetBlue Airways

JetBlue Airways’ advantage over other airlines revolves around a uniformed, integrated, low-cost IT structure and vision on top of having the most advanced automation in the industry.  It concentrates on attracting customers of major airline companies such as American Airlines.  The positioning of JetBlue Airways can be described as a low-cost carrier offering superior services.

The carrier attempted to create a new airline category by focusing on the premise of value, service and style for its in-flight services.  At the same time, it also employs the strategy of Southwest Airlines, that of being a low-cost airline.

JetBlue is a hip airline, where guests can enjoy the blue and roomy leather seats and onboard satellite televisions.  Its carriers also provide branded snacks, beverages and delicious wines.  It flies Airbus 320’s, 200’s and Embraer 190 which are actually larger than Southwest’s jets.  However, its services are not available as frequently as that of Southwest’s.

JetBlue calls its employees “crewmembers” while its customer support groups create cost savings for the airline where its Utah employees work home-based.  The airline also sells its tickets online and over the phone.

 

Analysis using Porter’s Generic Strategies

Southwest Airlines most likely holds a competitive advantage that neither JetBlue nor other low cost carriers could overcome in the long run.  The carrier has implemented a much evident cost-leadership plan by limiting its services from the conventional conveniences present in regular flights such as in-flight meals, seat assignments as well as direct city routes. This has successfully developed in the minds of its loyal clients its own brand of low-priced air travel.  Yes, its services are really limiting, but then again said concept was clearly communicated that client expectations over a Southwest airline flights are consistently met; if not exceeded due to the overwhelming presence of friendly and talented in-flight crew.

More importantly, this concept of cost-leadership was well supported by marketing strategies that allow Southwest to sustain its low air fare rates apart from the obvious economies of scale achieved through its pricing strategy.

Direct costs incurred during a regular flight include fuel expenses, pertinent airport charges and aircraft maintenance costs to which profit margins are dependent.  To guarantee that it can maintain its pricing for the long term, Southwest contrived innovative financial techniques and solutions.  For its fuel requirements, Southwest hedged fuel purchase price with suppliers to serve as buffer against the anticipated fluctuation of oil prices within an operational year.  To get around the high landing and take-off fees at major airports, Southwest turned to secondary airports which largely complements with the concept of a low cost carrier.  Finally, Southwest maintains the policy of sticking out to a single aircraft manufacturer to supply its fleet.  This practice translates to operating cost savings in terms of aircraft maintenance.

In contrast, JetBlue’s compounded approach of implementing both differentiation and cost leadership strategies did not create a clear positioning in the minds of most passengers.  Multiple strategies when not properly implemented create a confusing market perception.  For one, the concept of cost-leadership is geared towards a broad market.  JetBlue took after Southwest’s positioning and integrated a differentiation approach by developing a hip and urbane look to its carriers, apart from installing modern audio-video gadgets.  Now this type of differentiation will work well to an industry-wide market but appeal only to a particular segment.  Moreover, its supposed cost-leadership strategy was not matched with cost-effective measures to reduce direct product costs.  Thus, volatile fuel prices dampened its profit margins every now and then.  What’s more is that high investments in-flight technological gadgets only served to increased overall operational expenses.  This left JetBlue’s bottomline on the red in 2006 because its high operational costs could not be sustained by its low air fare charges.

Conclusion and Recommendation

Southwest Airlines’ existing competitive advantage will work to sustain its dominance over the domestic air travel market.   It appears that only this carrier adopts a pure cost-leadership approach and it has been generally successful in terms of branding, passenger volume and of course revenue-wise.

On the other hand, I would strongly recommend for JetBlue to reposition its carrier away from the shadows of Southwest’s low airfare image. Shifting to a focus strategy on the premise of differentiation and not cost, towards a narrow market segment would do well to achieve long-term profitability.  Moreover, the carrier’s urbane and technology savvy image with do well to appeal to the air travel needs of the hip youth crowd and the young professional market.

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