A Strategic Variance Analysis of the Profitability of U.S. Network Air Carriers

Abstract

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. Therefore, it is often difficult to assess the effectiveness of changes in strategies, particularly since such effectiveness is often a function of the confounding forces of organizational strategy and market conditions. Managers thus need a multi-period methodology to evaluate the implementation of strategic positions. One such approach is the strategic variance analysis of operating income. Horngren et al. (2000, 2006, 2012) demonstrate a methodological template for decomposing operating income into three components: (1) growth, (2) price recovery, and (3) productivity. It is suggested that the price recovery component assesses a firm’s product differentiation strategy and that the productivity component assesses a firm’s low-cost strategy. Thus, this framework is very much in the spirit of Porter’s (1980) seminal work.This study examines U.S. network airlines in the post-9/11 environment. Utilizing the above methodology, it first identifies comparative strategic positions across airlines and then assesses the implementation efficacy of these positions.

Full Issue (23.1, Spring/Summer 2012)

“…Formulas for each variance are in Appendix A. Also, see Caster and Scheraga (2011) for a more detailed explanation of each component. Caster and Scheraga (2011) and Mudde and Sopariwala (2008) apply strategic variance analysis to companies in the airline industry.…”

“…Also, see Caster and Scheraga (2011) for a more detailed explanation of each component. Caster and Scheraga (2011) and Mudde and Sopariwala (2008) apply strategic variance analysis to companies in the airline industry. The framework provided by Horngren, et al (2000Horngren, et al ( , and 2012 was adapted by Sopariwala (2003) to include the impact of underutilization of capacity.…”

“…They found that Southwest Airlines continued its success pursuing a cost leadership strategy. Caster and Scheraga (2011) examine the performance of all of the U.S. network air carriers over two, three-year periods: 2004 through 2006 and 2007 through 2009. They found that each of the network air carriers had significant productivity gains in both periods, as they engaged in major cost cutting to deal first with the tragedy of 9/11 and its severe impact on the airline industry, and later, with the economic 47,929,656,245 67,676,690,192 74,442,676,271 Available seat miles 71,775,738,997 92,642,334,641 97,982,778,511 Data Source: International Civil Aviation Organization, Traffic: Commercial Air Carriers, Series T, Montreal, Quebec, Canada, 2003 Washington, D. C., 2003Washington, D. C., , 2006Washington, D. C., , and 2009 recession that began in mid-2008.…”

“…Table 2 provides the revenue passenger enplanements, RPMs, and ASMs, used to calculate the variances and Table 3 provides the fuel data used in those calculations. Table 4 reclassifies the financial data into three cost categories used by Mudde and Sopariwala (2008) and by Caster and Scheraga (2011), namely, fuel costs, flight-related costs, and passenger-related costs. Finally, Table 5 provides the calculations, using the data from Tables 2, 3, and 4, from which the strategic variance analysis is performed.…”

“…The growth component is impacted by exogenous changes in the market in addition to endogenous changes brought about by management's strategic decisions. Horngren, Datar and Rajan (2012) provide an adjustment to the growth component to estimate the percentage Caster and Scheraga (2011), we calculate a market adjustment and apply it only to the growth component, since management may choose a blended strategy rather than strictly following a product differentiation or cost leadership strategy. Table 10 provides the results of further analyzing the growth component.…”