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The aim of this paper is to analyze United Airlines' current management issue of overbooking. United Airlines is a global brand with a market capitalization of more than 3.5 billion dollars. Via its parent firm, United Continental Holdings, the company trades on the New York Stock Exchange. The airline has recently made headlines after a video emerged of a passenger on Flight 3411 being abused (CNN Money). In this day and age, it's questionable at best for a big company like United Airlines to behave in this way. The incident has attracted public outcry with critics calling for the resignation of United Airlines C.E.O (Washington Post). This paper examines how the management of the company handled this problem. The examination includes a brief description of the brand’s organizational structure and financial performance. A SWOT analysis is conducted to have a better understanding of the airline’s dynamics. An analysis is done using porter’s five force model to examine the impact of the incidence. The conclusion of the paper recommends various measures the company should take to solve the public relations disaster and gain competitive advantage.
Problem facing United Airlines
The problem facing United Airlines is bad publicity and a reduction in the stock price. The public relations humiliation the company is experiencing began when a video of a passenger, Dr. David Dao, being dragged off the plane went viral (Pizam 94). The airline seemingly overbooked the flight. Evidently, Dr. Dao had a right to be on the plane because he had paid for his flight. These turn of events lead to a decline in the company’s share price. Social media went abuzz, with various social media users calling for the C.E.O’s resignation (Washington Post). U.S president, Donald Trump also critiqued the airline, terming the incidence as horrible. Oscar Munoz, United Airlines C.E.O initially issued a statement that gave the impression that he was justifying the ejection of Dr. Dao. After criticism from the public, he issued another statement apologizing for the incidence (CNN Money). He gave assurance that such an incidence would never occur again.
As a result of the incidence, Munoz was denied a previously planned promotion to Chairman. Further, officers involved in the incidence were placed on forced leave. The brand approved an internal policy to make sure flight attendants are booked at least 1 hour prior to departure (Washington Post). United Airlines reached a settlement of undisclosed amount with Dr. Dao following the incidence. The airline also proposed to give compensation to all passengers aboard the plane. The compensation would be equivalent to the cost of their tickets. However, the airline staff were assured that no one will be fired in relation to the incidence (CNN Money).
United Airlines Organizational Structure
United Airlines organizational structure plays a fundamental role in steering the organization to success. The airline serves a wide range of destinations such as Asia, Australia, Africa and the Middle East, among others. The Board of Directors are on the highest level of the hierarchy. The board approves all strategies recommended by the management. The CEO is the highest officer in the company. He is charged with the responsibility of developing innovative strategies for the company. This structure is efficient since United Airlines is a large corporation. The organizational structure is summarized in figure 1.1.
The airline industry is greatly dependent on the various business cycle. For instance, during a recession company profits decline significantly. United Airlines is no exception. The airline recorded a decline in profits following the 2007-2008 financial crisis. Additionally, the company suffered greatly during the September 11 terrorist bombings by al-Qaida terrorist group (Greer 427). Customers lost confidence in the airline leading to a decline in the sales revenue. The company later filed for bankruptcy under Chapter 11 in 2002. Over the years, the company revenues have been on the rise (Greer 427). The airline publicly trades in the New York Stock Exchange through its parent company United Continental Holdings. A five year summary of the company’s revenue and net income is summarized in figure 1.3.
Competitive advantage is simply defined as what a company is good at. It explains why customers would prefer buying goods from a certain company. Competitive advantage comes about when a company acquires a trait that enables it to do better than its opponents (Wagner 70). United Airlines competitive advantage is arguably the best making it a world leader in the Airline industry. This is majorly attributed to the strategic alliances with other airline companies. United Airlines is a member of the Star Alliance (Washington Post). In addition, the airline has diversified its operations in different destinations globally.
United Airlines SWOT Analysis
Strategic alliances occur when two or more companies decide to consolidate to undertake a distinctive, mutually beneficial project (Wheelen 11). United Airlines is among the pioneers of the world’s leading airline strategic alliance, Star Alliance. The company has been able to access many destinations through the alliance. Additionally, the airline has been able to diversify their operations through the alliance
High Staff Motivation
United Airlines staff are highly motivated in what they do hence increasing the airline’s productively levels. The organization employs more than 86000 employees globally (Washington Post). Most of the employees live in the United States; nevertheless, the airline has international staff working in diverse parts of the globe.
Established Brand Name Globally
Various factors are considered when evaluating brand strength in the airline industry. These factors include financial performance, customer loyalty, major industrial rankings and number of destinations, among others. United Airlines is the world’s leading airline in terms of the total destinations it operates globally (Business Insider). In addition, the company ranks as the fourth largest carrier in America by passenger income.
Dwindling Financial Performance
Over the past years, the airline’s profits have been on the decline. In 2002, the company filed for bankruptcy protection under Chapter 11 (Greer 427). Further, the brand has not been performing well compared to the airline industry performance. United Airlines has borrowed huge amounts of loans to keep the company afloat. The poor financial performance will make it challenging for the brand to acquire loans in years to come, for business expansion.
Over Reliance on Third Parties
The company is greatly reliant on third party service sources. Most of the organization’s services like maintenance of the fleet, customer service, fueling of aircraft and other major services are outsourced to third parties (Washington post). Outsourcing increases the airline’s revenue. Moreover, failure by the third party to provide quality services impacts negatively to the airline.
A large number of the brand’s staff are members of professional unions. The unions compel for higher staff salaries with no connection to production. The unions engage their members in strikes if the company does not meet their demands. United Airlines canceled over 4800 air travels in 2000 due pilot strike (Washington Post). The company incurred huge losses during the strike.
Growth in the Airline Industry Globally
Over the years, the airline industry has been on steady growth globally. Financial analysts and economists predict the trend will continue through 2017 and continuing years (Murray and Zimmerman 10). If these predictions are anything to go by, United Airlines will expand its operations and strengthen its financial performance.
Economic Stability in the United States
United Airlines was greatly affected by the 2007-2008 financial meltdown. The U.S
economy has stabilized following this financial crisis; though, at a slow rate (Murray and Zimmerman 10). Economists predict the country’s GDP will increase in the coming years. In anticipation, United Airline has increased the number of domestic flights.
Growth in the Tourism Sector
The tourism industry has been gradually growing. This growth has spilled over to the airline industry. United Airlines with its huge fleet number and established brand, will benefit greatly from this opportunity
Terrorist attacks are bad news for United Airlines. Increased terrorist attacks reduce the demand for air travels in certain parts of the world. Additionally, issuance of travel warnings by various governments affects the performance of the company.
Political instability slows economic growth. Political dynamics affecting United Airlines is dependent on the market, among other factors. For instance, the recent diplomatic rift between Qatar and its Arab neighbors will affect flights in that region.
Fluctuating fuel prices
The biggest challenge affecting the airline industry is the fluctuating oil prices. Oil prices are extremely volatile and depend on the economic cycles. Most companies hedge on fuel prices rising. The decrease in oil prices reduces company profits. Hence constant fluctuation in oil prices will affect United Airlines negatively.
Porter’s Five Forces Analysis
Michael Porter’s five forces model is one of the earliest models used to analyze industry economics and attractiveness (Porter 25). Porters five forces analysis is a structure for assessing the level of competition, fresh players in the market, the threat of substitute products and bargaining power of suppliers and buyers. The weaker the forces, the bigger the prospect for greater accomplishments by organizations within the industry (Porter 25).
Threat of new entrants
Entry of new airline players in the market present negligible threat to United Airlines. The entry barriers in the airline industry are extremely high, making it hard for new firms to venture into this market. The government regulations and capital requirements make it difficult for entry of new firms. Further, United Airlines has formed alliances with other airline firms.
Threat of Substitutes
Substitutes in the airline industry pose no risk to United Airlines. The substitutes include; use of trains, buses and personal cars. Unless traveling for short distances, no means of travel is a viable substitute for air travel. This is because air travel is faster over long distances. Hence, United Airline has a little threat from substitute modes of travel.
Suppliers bargaining power
The main suppliers in U.S airline industry are Boeing and Airbus. Suppliers dictate the prices due to their limited numbers. Labor, a crucial input in the airline industry, is subject to labor unions. Prices of fuel are subject to global market fluctuations. Also, the number of aircraft fuel sources is very minimal. The fuel prices are subject to global market fluctuations.
Customers bargaining power
Customers in the airline industry have a greater bargaining power because of the increased competition in the industry. The cost incurred by buyers to switch from flight to another is negligible. Nowadays, passengers do not contact airline companies to book their travel. Technological advancement has made it easy for them to book flights through smartphone apps and travel agency websites. United Airlines should research on the destinations that passengers search for most on the travel agency websites, and offer more flights to this destinations at lower prices. Additionally, the company should partner with credit card companies and offer rewards to customers in form redeemable points. The customers will find it hard to switch to another carrier if they accumulate many points.
Level of competition
The airline industry exhibits high levels of competition. Airline companies are innovating their operations to attract new customers. Following the infamous Flight 3411 incidence, three major airline companies have changed their "passenger removal" policy, two of which are Delta and American Airlines. Delta stated that it shall offer its customers a compensation equal to $9,950 for overbooked flights. On the other hand, American Airlines stated that it would not unwillingly eject a passenger. All these measures taken by the airline firms are aimed at retaining and attracting customers.
United Airlines stock prices reduced immensely after the Flight 3411 controversial video went viral. Needless to say, the airline is still feeling the effects of the public relations fiasco. Some people have threatened to boycott the airline in solidarity with Dr. Dao. The C.E.O’s initial statement was a wrong move. The statement worsened the situation and attracted public outcry. Despite the backlash, the organization may adopt various strategies to minimize the effects of public relations fiasco.
To start with, the airline should publicly publish an apology to all clients and stockholders. The airline’s top officials should make an appearance on major television channels and issue a sincere apology. More to this, an apology could be published in major newspapers and journals such as the Wall Street Journal and New York Times. Further, the company should use a cost-benefit analysis to evaluate the stock and monetary incentives. By performing a cost-benefit analysis, United Airlines will learn whether they are able to offer stocks and monetary incentives. If these offers are at a loss, the cost-benefit analysis would project the size of the loss. In addition, the brand should practice transparency when dealing with the aftermath of the fiasco. United Airlines should become more transparent with regard to this incident and show how they accept fault and how they are making changes, if any. Some of the ways they could show their transparency is by use of social media platforms, their website, local and national advertising agencies. Lastly, the airline should reduce the use of law enforcement. Police officers should be limited only to security and safety issues.
Company Background and History
United Airlines, Inc. is a multinational airline company with headquarters in Chicago. The firm is among the major airlines in the world. Its main competitors are the American Airlines, Southwest Airlines, and Delta Airlines (Washington Post). Over the years, the company has expanded its operations globally. The company’s success is attributed to its diversification into different markets and strategic alliances. Additionally, the organization engages itself in corporate social responsibilities by sponsoring major professional sporting activities.
The company’s history dates back to 1926 when it was founded as Varney Air Lines. A few years later, the name was changed to United Air Lines (UAL). The company has achieved a lot since its incorporation (United Airlines Press Release). For instance, United Airlines is the first airline to run operations of the Boeing 764. Further, the firm is acknowledged as being the first airline company to acquire advanced aircraft simulators which had visual, sound and motion signals for teaching pilots. The company has created myriad job opportunities globally, both directly and indirectly. The company has employed more than 8600 employees.
Though the company boasts as being successful, it has faced several problems in the course of its operations. The firm lost one of its airliners during September 11, 2001, terrorist attacks by the al-Qaida terrorist group. These attacks affected the organization negatively resulting in a drop in the firm’s share price (Greer 427). The company later filed for bankruptcy. These turn of events resulted in massive job losses in the organization and closure of some of its branches. All these actions were aimed at cutting costs and downsizing the firm’s operations.
United Airlines Organizational structure
Figure 1.1 United Airlines Organizational Structure
United Airlines Market Share
United Airlines ranks as the fourth largest carrier in America by passenger income (Business Insider). The airline has a market share of 14.5%. Figure 1.2 presents an analysis of the airline.
Figure 1.2 Market Share Analysis
Figure 1.3 United Airlines Financial Analysis
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Jack Wattles, United Airlines Reaches Settlement with Passenger Who Was Dragged Off Plane. Retrieved April 27, 2017, from CNN Money http://money.cnn.com/2017/04/27/news/companies/united-airlines-dao-settlement/index.html
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