When Delta Airlines announced a business model transformation, I had welcomed it since as a management consultant I know that there was no other way the firm could survive. But now that all other major carriers are going to match the pricing of Delta Airlines, not only does it mean that airline sector losses will skyrocket, it will start a price war that can only mean that consolidation in the sector will be the next wave. I cannot imagine how else can an airline manage to have such lower prices without doing much to the cost structure. When Delta Airlines announced its plan, it was obvious that they had made major improvements in their cost structures. I am not sure if other airlines have made the same changes in their business model.
The US airline sector is completely directionless and there is ample evidence that most airlines do not have a strategy. The 10 largest carriers had losses of $20 billion in the past four years as competition from discount airlines forced them to lower prices. Southwest Airlines Co. was the only carrier among the seven biggest in the U.S. to be profitable in 2004
What does it mean for you?
The US airline sector is completely directionless and there is ample evidence that most airlines do not have a strategy. The 10 largest carriers had losses of $20 billion in the past four years as competition from discount airlines forced them to lower prices. Southwest Airlines Co. was the only carrier among the seven biggest in the U.S. to be profitable in 2004
What does it mean for you?
- Never enter into a price war. They are so tempting as a short-term fix to gaining or retaining market share but they cause more destruction to the company than anything else. In the end, they hurt everyone in the sector, eventually driving out some firms from the market, leading to consolidation, reducing competition, and hurting customers.
- If you are not competitive on price, change the business model. There is nothing to be embarrassed about when your firm is not the lowest cost provider. Your competitors, like you, are always working on reducing their cost structure. The correct move is to start a benchmarking exercise and figure out a cost reduction program. If your analysis shows that you can not reach a competitive cost level, you need to develop a competitive strategy that is not based on lower prices. There are dozens of ways in which you can create value for your customers. A company to study is Ecolab that stopped selling cleaning products long time and now provides complete cleaning solutions to institutions.
- Exit the business, if you cannot compete. Stop hoping that things will change in the future. Hope is not a solution in business. If the fundamentals of the industry have changed and there is no place for you, you will create more shareholder value by simply seeking a merger with a competitor.
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