Module 8 information

There is not a textbook reading for this Module as you will be using the information from the Porter Five Forces model and from previous modules to produce a discussion of a segment on the air transportation industry of your choosing.

Required Reading: Porter download

Michael Porter Classic Interview (Links to an external site.)

You might find this video of the forces model and the airline industry useful: Porter 5 Forces Explained (Links to an external site.)

This presentation on the Business Model Canvas is also pretty good and this web site in general has a great deal of useful explanations for other ways to examine industry and firm strategy and profitability including Porter’s Forces and many of the ways it has been modified and used over the years. 4 Week MBA: Canvas (Links to an external site.)

In the syllabus you were provided several “focus” areas within the aviation industry to sere as a thematic thread for the assignments that follow and for your final paper that is due at the end of the course. Those areas were:

1. Domestic major network carrier airlines

2. Domestic regional carriers

3. Domestic and International low-cost carriers

4. General aviation: a. Corporate/Business aviation b. General aviation aircraft manufacturers c. Light sport aircraft manufacturers d. Flight Schools

5. Air Cargo/Freight carriers

6. Unmanned Aeronautical Vehicles and Systems

7. Regulatory environment and management: Federal Aviation Administration

Choose one of the above aviation industry segments and develop a short proposal for why you selected it and provide some background information about the industry segment that includes a description and NAICS ( NAICS_LINK ) (Links to an external site.) classification. Also choose a firm operating in that segment for further analysis. You should also use the data sources that have been discussed in previous modules to create additional data in your spreadsheet for your market segment and firm. Please note that I have added a flight school segment to General Aviation. The list above is generic and not meant to be exhaustive. If there is some other segment within air transportation that you would like to explore (eg. passenger aircraft manufacturers, airports, etc.) feel free to do so although you must send me a message regarding what you would like to do and get approval.

As you read through the Porter document and watch the accompanying videos you should keep the industry segment and firm that you selected in mind as this weeks assignment is to develop a rough outline of the elements that will be included in your final paper for the course. Effort expended here will save you time on your final paper at the end of the course as materials that you submit for biweekly papers may be used again in your final paper.

Take a look at the flight school segment of the industry, especially those located at a university. The labor market for pilots is currently experiencing a shortage and the demand for flight schools has been increasing nationally. To fly for an airline (CFR part 121) pilots are required to have an Airline Transport Certificate (ATP) and the minimum flight hours for an unrestricted certificate is 1,500. Pilots must also go through a series of licensing requirements including the following certificates: private pilot, instrument rating, commercial pilot. In addition most are also required to get a multi-engine rating and in order to meet the hour requirements they usually get flight instructor, instrument flight instructor, and multi-engine flight instructor ratings. A good example of a University with an aviation program is Auburn University (Links to an external site.) and a university dedicated to aviation in Florida is Embry Riddle (Links to an external site.) in Daytona. At present the college is entering the university aviation training market and three degree programs are under development: aviation and airport supply chain management, a professional pilot program, and unmanned aircraft systems/unmanned aeronautical vehicles.

Module 9 information

Carrying cargo has been far more important than carrying passengers for almost every mode of transportation ever used by humankind. The only exception so far has been aircraft: Many people believe that aircraft will always be primarily passenger carriers. Others believe that aircraft will be carrying more cargo than passengers as the 21st century progresses. There is no doubt that cargo volume has been increasing more rapidly than passenger volume for the past two decades.

Historical Overview.

There are three separate elements of air cargo services—air mail, air express, and air freight. Air mail is mail transported via aircraft , air express refers to small packages that usually have a higher priority of carriage than air freight. Air freight and air express are difficult to distinguish, but freight usually involves the transport of bulky goods. Air mail was responsible for the beginnings of the U.S. airline system as we know it today. The ?rst air mail service, which its founders hoped would be permanent, started with an experimental service between Washington, D.C., and New York.

Air express service was inaugurated at Hadley Field near New Brunswick, New Jersey, on September 1, 1927, by National Air Transport, a predecessor of United Airlines, created speci?cally for the purpose of carrying air express. On April 17, 1973, Frederick W. Smith began his Federal Express operations at 13 airports; Smith’s concept was to provide a door-to-door overnight service for small packages. Operationally, Fred Smith revolutionized the air industry by introducing the hub and- spoke system, routing all packages and aircraft through a hub in Memphis.

If we accept the original de?nition of air freight as traf?c carried in all-cargo aircraft, then the birth of air freight operations would date back to 1931 when Transcontinental and Western Air began overnight air freight service between New York and Kansas City. Air freight received a big boost at the end of World War II with two landmark decisions by the Civil Aeronautics Board (CAB). The ?rst, in April 1948, legitimized air freight forwarders as middlemen between shippers and airlines, giving them the right to consolidate individual shipments and tender them to the airlines at the carriers’ volume rates. The second CAB decision gave operating rights to three all-cargo carriers: Slick, U.S. Airlines, and Flying Tiger.

Integrated carriers, also called express carriers, operate door-to-door freight transportation networks that include all-cargo aircraft, delivery vehicles, sorting hubs, and advanced information systems. These carriers operate their own aircraft to ensure adequate capacity and service reliability. Combination carriers transport both passengers and cargo These carriers primarily offer point-to-point service on a wholesale basis, relying on freight forwarders for pickup and delivery, sales to shippers, and customer service. All-cargo carriers operate a variety of cargo-only services. Some provide point-to-point service for air freight forwarders, either as common carriers or under guaranteed-space agreements.

Air cargo traf?c continues to grow at a healthy rate, but it has not yet achieved the status envisioned by the air cargo pioneers of the 1930s and 1940s as the most important revenue source for airlines. A fundamental reason for air cargo’s inability to surpass passenger revenues is that air is a premium-cost transportation mode compared to any surface system. Aircraft being produced today, and on which air cargo has relied in the past, have been designed primarily for the carriage of passengers and are not particularly well suited for freight. Although air cargo has failed to achieve the preeminent position that was expected of it, and in spite of the limitations imposed by the marketplace and the design of aircraft, air cargo is alive and well.

Although cargo accounts for only 5 to 10 percent of total revenues for most of the combination carriers in the United States, it is a considerably more important revenue source for many of the foreign-flag carriers, which continue to operate jumbo freighters and combination aircraft on international routes. The four largest markets—the North Atlantic, transpaci?c, Europe–Far East, and U.S. domestic—account for nearly three-quarters of air cargo shipments, with traf?c divided almost equally among them. Integrated carriers have held a two-thirds market share and have earned over 80 percent of domestic air freight revenues

Although air mail was the ?rst of the air cargo products, it now accounts for less than 7 percent of the revenues for cargo carried by the world’s airlines. Two primary factors influence freight growth: Economic growth rate levels and the globalization of the world economy Globalization, the production of parts and the assembly of products half a world away from where they will be placed in service will continue to provide a major stimulus to air freight.

The Market For Air Freight

Shipping commodities by air is the most desirable form of distribution when one or more of the following characteristics is present:

· When the commodity is: Perishable Subject to quick obsolescence

· Required on short notice Valuable relative to weight

· Expensive to handle or store

· When the demand is:

·

· Unpredictable Infrequent In excess of local supply

· Seasonal

· When the distribution problems include: Risk of pilferage, breakage, or deterioration

· High insurance costs for long in-transit periods

· Heavy or expensive packaging required for surface transportation

· Need for special handling or care

· Warehousing or stocks in excess of what would be needed if air freight were used

Types of Air Freight Rates

General commodity shipments are rated by weight. Dimensional weight is used if the shipment is of very low density. Dimensional weight is computed by ?nding the cubic measurement of a shipment (length × width × height) and charging the rate for 1 pound for each 194 cubic inches (this can vary).

Specific commodity rates are established for unusually high-volume shipping of certain products between certain cities, such as ?sh from Anchorage, Alaska, to certain points in the continental United States, Exception rates are higher than the usual air freight rates and apply to certain types of shipments that require special handling. For domestic shipments transported on two or more airlines between origin and destination, a published rate, called a joint rate often applies. Priority reserved air freight is designed to serve shippers of heavy or bulky freight who need the advantage of reserved space on a speci?c flight. Speed package service is a small-package fast-delivery service, airport to airport, with certain carriers on their own system.

Container rates are low rates charged by the carriers to shippers using containers to ship air cargo; advantages of container rates include:

· Transportation charges are lower when a shipper has a large enough shipment to ?ll, or nearly ?ll, the container used

· Packaging costs can be reduced, because the container provides protection against handling mishaps

· Shippers can seal containers to prevent pilferage

· Shipments arrive as one complete unit; there are no delayed or missing parts

· Counting and checking the pieces of the shipment at destination is simpli?ed

· Lower transportation costs for high-density

Special Air Freight Services

· Assembly Service where airlines will consolidate packages from a shipper, or group of shippers, and base the transportation charge on the total weight of all the pieces, which allows a price break on heavy shipments.

· Distribution Service. A iservice where airlines that fly air cargo are accepting one shipment from a shipper and, at destination, separating it into its parts and distributing them to different customers

· Pickup and Delivery Service. Air freight pickup and delivery service is performed by independent local truckers under contract to act as the carrier’s local agent

· Airlines also provide a number of other specialized air freight services:

· High value items,

· Dangerous goods

· Restricted articles

Factors Affecting Air Freight Rates

· Cost of the service. A basic consideration in rate making is that the rates should cover the costs of service and yield a reasonable pro?t

· Volume of traffic. Volume is signi?cant, because traf?c potential is a key factor in determining the maximum net revenue that can be derived from any commodity

· Directionality. Air cargo traffic is unidirectional

· Characteristics of the Traffic. Air carriers also consider the transportation characteristics of the commodity as an important element in the rate-making process, such as density, weight, size…

· Value of the service. Value of service is frequently an important factor in establishing a speci?c commodity rate, a speci?c commodity rate should allow the commodity to move in a volume that yields the maximum revenue in excess of the added costs of carrying the commodity

· Competition. Where capacity exceeds demand, there is considerable pressure to lower rates. Rate reduction can be introduced by the least successful competitor to improve its market share or possibly by the principal carrier to generate new traf?c

Exercise:

Consider the following revenue data from the ICAO for the U.S. domestic air cargo industry in 2018:

Revenue (Millions $)

Federal Express 37.3 UPS 6.0 Atlas 2.5 United 1.2 American 1.0 KalittaAir 0.9 Delta 0.9 Polar 0.5 SouthernAir 0.1

TOTAL 50.4

You should be able to calculate the top 4 firms concentration ratio is 90% and the contribution to the HHI just for FedEx is 5,476 (74 squared). Together UPS and Atlas contribute only an additional 148 to the value of the HHI. You should also verify that if Atlas and UPS wanted to merge that the change in the HHI would be less than 100 so that merger would nor receive any scrutiny form the FTC or the DoJ should it be proposed. Since FedEx has more than 50% of the market share in the domestic air cargo industry it can be considered a dominant firm and that model might be applicable for explaining market behavior. It should also be mentioned that only the domestic market is under consideration and if the market geographic scope is broadened the competitiveness of the market would be different. Still, FedEx would be a major player. Another oligopoly market structure is the dominant firm model. Typically a dominant firm is a large vertically integrated firm that has a market share of 50% or more. The dominant firm serves as the price leader and serves as the “market” for a large number of firms that make up the remainder of the market. The dominant firm estimates total market demand and the supply that the competitive fringe is capable of and accepts the difference as its own market demand. That generates a revenue function for the dominant firm and then given its cost structure chooses a point (price) on the market demand curve which in turn becomes the market price for all the competitive fringe firms who, like a competitive firm, can only decide how much to produce give the price set by the dominant firm.

Dominant Firm Math (Links to an external site.)

It is interesting to watch Amazon’s entry into the air cargo market (via a stake in Atlas) and given its volume could shift the industry in the US from a dominat firm oligopoly with price leadership to a duopoly.

Finally consider the Porter five forces model for the U.S. air cargo industry and develop an assessment of future economic profit expectations based on those structural characteristics. You should also read the following and think how that would influence your Porter assessment of the industry:

https://www.businessinsider.com/amazon-cargo-airlines-scouring-the-desert-for-cheap-passenger-jets-2021-7

FedEx vs Amazon 1 (Links to an external site.)

FedEx Amazon 2 (Links to an external site.)

FedEx Amazon 3 (Links to an external site.)

Here is a good look at the potential for air cargo from a more global perspective: FlightGobal Webinar (1hr)

Discussion Assignment M8 &M9

Read Chapter 13, Air Cargo in the Wensveen (2015) text.

Review the data available from USDOT and develop a time series plot of air cargo data from January 2017 through the most recent available (July 2019):

Air Cargo Data (Links to an external site.)

There is a paper due with this module and here is the required discussions from last weeks work:

For the most part the Porter model is used to assess competition and profitability in an industry while the Business Model Canvas focuses on the firm and the elements that combine to drive its profitability: revenue and cost side of the business. For this modules paper requirement:

1. Describe each Porter Force and its impact on potential on the competitive environment and economic profitability in an industry.

2. Describe the 9 elements in the Business Model Canvas and develop a detailed discussion of the value proposition design.

3. For your selected air transportation industry segment perform a Porter Forces competitive assessment of the industry and also develop a generic canvas business plan model for the firm that you selected within the industry. No need to include any actual numbers in your analysis just describe the market structure using the porter model and discuss the potential for economic profits. Use the canvas business model template to identify characteristics for a firm in the industry. Note that the Porter model is an industry level assessment while the canvas business model is firm specific. You might find it useful to make use of industry association s and organizations that you have looked at in previous modules.

4. Given that UWF is developing an aviation degree program, develop a canvas business model for a pilot training program similar to the one that is offered by Auburn University. The program will include private, commercial, instrument, multi-engine, and flight instructor ground school and flight training so that students will complete the flight instructor certificate in their junior year and then qualify to work in the program to teach flying courses. The program will target approximately 200 majors and require 10 Cessna 172 airplanes ($350k each), one multi-engine airplane ($800k), and two flight simulators ($50k each). Extra tuition for all the flying course will be approximately $60k. The university will have to hire 5 additional staff members plus a department head and chief flight instructor (approximately $500k annually). The university will also employ approximately 12 flight instructors on an hourly basis. There are other costs that should be considered as well and can be estimated for the development of the business model.

5. Develop a written assessment of the air cargo industry using the Porter forces methodology and discuss the implications suggested from the articles discussing Fed Ex and Amazon as it pertains to your forces assessment.

6. Discuss how the dominant firm oligopoly model works and use the U.S. domestic air cargo model as an example.

7. Calculate the HHI for the Air cargo industry. Suppose Fed Ex filed to merge with UPS what would be the impact on industry competitiveness and would the merger be challenged by the DoJ/FTC? How about a merger between Fed Ex and Atlas?

8. Summarize and discuss what you learned from the Global air cargo webinar.

These 8 questions are to be thoroughly answered in the discussion paper. Paper must be 10 pages.

General Paper/Essay Information

1. Your paper should be 10 pages of double spaced text in a 12 point font with a ragged right margin. Title page and references , and figures and graphs do not count.

2. Your paper should be a Microsoft Word Document. The filename should be: yourlastname.docx

3. Do not use wikepedia, investepedia, cliff notes, dictionaries, encyclopedias, etc. as sources if you do your grade will be reduced.

4. Your paper should have a title page that, in addition to the title (Use Paper1, Paper 2, etc. as the title), includes your name and email address.

5. Your paper should cite material that you use in your text and have references.

6. The paper should not be copied text from other sources; it should be in your own words. Your report will be run through a plagiarism checker ( http://turnitin.com/static/plagiarism.html (Links to an external site.)Links to an external site. ).

7. If you require guidance on text organization and want a style guide to follow you should use the APA style guide (http://apastyle.apa.org (Links to an external site.)Links to an external site. ). Please note that there is no need for an abstract or lists of tables and figures or a table of contents.

8. Each essay should be turned into the UWF eLearning assignment folder (dropbox) for that essay by the deadline.

9. Generally I take 10 days to grade your essay (The first grade will be sooner so that you can see that you are meeting expectations).

10. Your grade will be a numeric score. Generally if you get a 95 if everything was fine, that is you answered all the required questions in sufficient detail and correctly so that you get full credit (for an exceptional essay it is possible to earn a 100). If your score is anything less than a 95 then something was lacking: insufficinet detail, errors, no references and citations, required content left out etc. I do not reduce your score for style. If you want info about your score feel free to email me with questions and I will provide you with additional information about your work. You can also check out the rubric I use for grading