Strategic management

Anar Karimli

Etibar Shahverdiyev

Javanshir Mammadli

Karim Huseynov

Musa Tahirli
Environmental Scanning

The process of environmental scanning consists of analyzing current market, gathering

data and then finding threats and opportunities for that selected market. Companies analyse the

market that they belong, collects data about other companies in that market, then analyse also

their own company and at the end decides in which way to formulate current strategies of

company in order to change new opportunities to strengths and to defeat threats. In the case of

Pan American World Airways, we will use to find some external factors that affected company as

a whole. We will first analyse overall environment in the market and find which political and

economic factors that affected company. 1973 oil crisis affected Pan Am very negatively. As oil

crisis made the price of fuel to increase and Pan Ams airplanes was not fuel-efficient, high fuel

prices was resulted in huge increase of company operating costs. From the point of political

factors, it can be stated that company did not have strong connections with government and as a

result government was not giving domestic flights to that company because of the threat that it

can create monopoly. Porters five forces model is a methodology that is used in order to scan the

external environment of company. Porters five forces is really essential tool for the scanning the

external effects on the industry and competency. The Porters five forces consist of rivalry

among competing firms, bargaining power of suppliers, bargaining power of customers, threat of

new entry and finally the threat of substitutes. The airlines industry in United States is one of the

most competing industries around the country. This is because of low cost carriers and high

safety costs that force companies to have great service, to make sure that customers should be in

safe and at the same time should find cost-efficient methods in order to increase profit. Pan Am

actually failed to compete because of that high costs that is mentioned above and that was

actually one of the most important factors made company to go to bankruptcy. Bargaining power

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of suppliers is very high for the industry like airplanes. This because all airplane companies are

affected by external suppliers like fuel, labour and also aircraft. As it is mentioned how oil crisis

affected to the operating costs of Pan Am. Some factors such as protection of them by regulators

are in favor of customers, thus the strength of buyers is good enough in Porter's five forces.

Besides this, they can enter into the so called price discovery which signifies that they can

purchase their tickets from. Threat of new entry to market is very low. As the cost of buying

airplanes and all other inputs that are needed for the airlines industry is very high, the entry

barrier cost is very high for the companies, which makes the threat of entry to the market very

low. The threat of substitutes and complementary products are very high in the industry.

Substitutes like cars and trains are the substitutes of the airplane. Like the airplane, they are also

useful for arriving long distances. Taking into considerations these facts we see that the threat of

substitutes are very high.

Strategy Formulation

As it is clear from its vision, Pan Am strived to make the flight affordable for everyone.

They had come a long way from their formation back in 1927 until late 1960s, when their place

in the industry started to decline. During these years, to choose the correct strategy they

obviously had to make some analysis to recognize their company better and act in accordance

with that. One of such important analysis is SWOT analysis which is very crucial in defining a

companys internal strengths and weaknesses, as well as, external opportunities and threats. The

SWOT analysis of Pan Am Airlines for the above-mentioned period is given below:

Strengths: Good profitability, huge growth rate, domestic market

Weaknesses: Little business units

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 Opportunities: Thriving economy, new markets, new highly potential acquisitions, new

services
Threats: Alterations in prices, technological issues

In 1968, after retirement of Juan Trippe who was the greatest person in the history of Pan

Am and considered one of the greatest CEOs in Airways history, the company decided to be the

first one ever to introduce Boeing 747 to its passengers which is still one of the most popular

aircrafts. They thought this type of innovation would be reflected in an increase in the number of

passengers. Further, they were planning to acquire one of the airlines companies in order to

arrange flights in domestic market. They had previously asked government regarding this issue,

but their request was rejected due to their tremendous power among all US Airline companies.

Thereby, they were having their flights only in international routes, except for Alaska and

Hawaii. In addition to above plans, they were intending to make some restructuring work in

aircrafts in order to more actively participate in competition. After several years, in 1980 they

were considering to sell one of their enormous assets, the interest in Falcon Jet Corporation

because of worsening situation. Due to the continuing unpleasant situation, they had started to

think of selling one of divisions to be able to revive.

Strategy Implementation.

Pan America World Airways was one of the greatest airlines in the United States and reached its

peak point during late 1960s with carrying 6.7 million passengers over 20 billion miles. In 1968,

Pan Am had 150 jets that flew to 86 countries on every continent. The company had more than

$1 billion cash reserves because of the successful strategies. Until 1968, Pan Am brought various

innovations to airline industry, however, after that period the decline of the company had begun.

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The company followed different strategies in order to keep the notable place in the industry. In

the early years, Pan Am started South American routes under the names of American Clipper,

Southern Clipper and Caribbean Clipper. At the end of 1930s, the company began to operate long

distance routes to Europe and China. Another successful strategy of Pan Am is to give a usage of

ten long range Boeing 314 planes, which increased the effectiveness of Trans-Atlantic service.

During the World War II, Pan Am was the only American passenger aircraft that can travel

internationally. At those years, Pan Am adopted unique styles of uniforms, more formal rather

than leather-jacketed. However, in the post-war era, the competition between airlines started to

increase and Pan Am tried to preserve its position in international routes using diverse strategies.

The company was able to re-establish the most of its international routes again, nevertheless in

domestic routes the situation was different. The U.S. government had not authorized Pan Am to

access domestic routes until 1977. At the year of 1947, Pan Am opened "Round the World" route,

departing New York and flying to San Francisco via points in Europe, The Middle East, India,

and Asia.

In 1950, Pan Am introduced double-deck luxury Boeing 377. These aircrafts had sleeper seats

and berths, which gave Pan Am an opportunity to increase its sales. Another strategy was that to

add an economical aircraft at the same years, consequently Pan Am began to be known as

tourist airlines on various international routes. Also, it was the first airline to launch Jumbo

Jets (Boeing 747) from New York to London.

At its peak, the airline had very high returns and was known as worlds most experienced cabin

crew and modern fleet. Also, Pan Am had owned InterContinental Hotel chain, which it created

the opportunity for passengers to book airline tickets and hotel reservation in the computerized

reservation system at the same time. Most of the strategies that implemented by that time were

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accomplished and all these brought the success to airline gradually. However, upcoming

strategies of poor management, deregulation and unions had caused Pan America to fall over the

long-term.

At the beginning of 1970s, Pan Am had invested in large aircrafts of Boeing 747s, which

decreased the profit margin in an enormous size. 1973 oil crisis was the main factor for

overcapacity problem in Pan Am airline. High fuel prices and increasing overhead costs damaged

the company heavily. By the mid-1970s, Pan Am had losses of $364 million and almost $1

billion debt. After that period, the company began to pay attention to domestic market and

attempted to monopolize the U.S. air routes by the method of merging with another airline.

Nevertheless, it was against the regulation of the U.S. government and Pan Am could not realize

to operate routes inside of the country. It remained as the American airline that operates

internationally only. All these factors which came from poor strategy implementation made the

bankruptcy come faster.

During the years of 1980s, Pan Am began to sell off its assets such as 50 percent of Falcon Jet

Corporation, InterContinental Hotel Chain, which stake was $500 million. As the company went

backward at those years, sold its Pacific division, which is 25 % of overall route system to

United Airlines. However, these financial actions had not helped the company to revive again.

Since during that period, continuing terror act happened at Pan Am flights, which damaged the

reputation and image of company in a great scale.

Consequently, all these factors pave the path to lose the trust of customers in terms of security

during flights. In 1991, Pan Am reported the bankruptcy officially and Delta Airlines purchased

the remaining assets of the company. Generally, Pan Am could not handle the crisis properly,

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hence this created different problems for the company after 1970s. Gradually, the drop in the

public confidence and trust led to downturn of the airline.

Strategy Evaluation

With the beginning of 1970s decline of Pan American World Airways, one of the leading

airways companies of those times, had started. It was the beginning of the end for American

giant. On September 6, 1970 a Boeing of Pan American World Airways, which wan on the route

from Amsterdam to New York, was hijacked by two men. This unfortunate accident created

questions about security on minds of customers, and the following incidents strengthened these

question marks. After three years, on December, 1973 Pan American World Airways flight was

attacked and bombed while passengers were boarding by five Palestinian terrorists who claimed

that Western countries, headed by United States, helped Israel, their political enemy, in

occupation processes of their homeland. In this accident 30 people were killed and many injured.

After this evil terrorist attack the other concern had arisen about Pan American World Airways,

as the company were considered as flag carrier of United States around the world: Was flights of

the company most significant and easiest target of terrorists who saw United States as enemy?

After company's constant promises about increased security in its flights it achieved to stay at the

market, though it lost reputation of customers and market share. In 1980s security issues

appeared again and this time it was the end for the company. On July 9, 1982 the worst incident

of aviation history happened in New Orleans in the plane of Pan American World Airways which

made takeoff few minutes ago from the airport. Unfortunately, all of 145 passengers and crew

members died and additionally eight people lost their lives on the ground because of this

accident. On the same year, the other airplane of the company was bombed over the Pacific

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Ocean. Even though this accident had finished with the death of one passenger and safely

landing of plane in Honolulu, happening of this incident after only two months from previous

action made the outcomes worse. On September 5, 1986 a plane of Pan American World

Airways, which had to stop in Karachi, was hijacked again, and in this terrorist action twenty

people were killed. The last horrible incident of Pan American World Airways history happened

on December 21, 1988. Explosives were placed on the forward cargo and in this explosion two

hundreds seventy people died. There was very huge explosion as the total search for the

evidences and parts of victims was done on the area of eight hundreds forty five miles in the

small Scottish village of Lockerbie. The company could not repair its reputation after this

incident.

After the last horrible accident the flights of Pan American World Airways were almost

empty. When there was a war in the Persian Gulf which affected the oil prices negatively and a

recession in the United States, the situation of Pan American World Airways became worse and

the U.S. Department of Transportation secretary advised the society that the company would go

bankrupt. The increase on the oil prices made the company to sell its only consistently

productive subsidiary, Pan Am World Services, in 1990 in order to meet fuel costs. Moreover,

because of fear of terrorist attacks and economic concerns the company made inadequate traffic

in its flight options and hence lost the interest of some consumer segments, such as business

people. On December 4, 1991 giant airways company of once shut down. Loss of trust of

security of customers, which is considered as a key feature on airways business, is the most

significant reason for failing of Pan American World Airways. Of course, main responsibility for

this failure could be seen in operations team. However, the strategy of the company about being

flag carrier of United States of America was the main reason of terrorist attacks against United

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States overseas policy. Because of this brand image terrorists from Middle East chose company

as a target of their acts. In this case it could be said that the political analysis of company was

weak. Furthermore, the government of United States did not proved enough political and

diplomatic support to Pan American World Airways in order to deal with these terrorist whose

main target was the policies of the government. After initial incidents the company's promises

about strengthening of security and failure on keeping them made it lose reputation and weaken

relations and trust with its customers and all society. People started to lose their willingness to fly

with Pan American World Airways and it made the company lose its market share.

Recommendations

The explicit reasons behind the failure of Pan American Airways were related to increase

in the price of oil, decrease in the number of passengers contrary to anticipated increase, not to

have seen support from the government of US different from other airline companies, and that

notorious terrorist attack in 1988. However, in case we dig out the roots of its bankruptcy, we can

see that it is somehow correlated to Juan Trippe. During his time, the company was the worlds

greatest airline company, and reached its peak in 1960s, but right after its retirement, company

commenced to weaken. Juan Trippes only mistake was he did not train strong management team

who could replace him well enough when he retired. That was why after his 41 years of

experience, the ones who replaced him stayed there for 2-3 years and were not enthusiastic

enough to revive the company again. Thus, the first thing is that Juan Trippe had to leave a

decent team after himself. Additionally, they did not have to make so huge investments on

Boeing 747 and a company in Airline industry has to be cost efficient as much, just like

Southwest and Virgin America. The management team who were not prescient could not predict

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the possible oil crisis in 1973, and had contrarily predicted an increase in demand for flights. So,

they did not have to invest that much on Boeing 747 and had to move on with their aircrafts at

hand, which was earning them quite enough at the time. Moreover, relations with government

had to be perfect, since it was a vital factor in the life of any US Airline company. Pan Am had to

take some measures to improve the relationship with government, for instance, taking part in or

organizing an enormous social responsibility project which would protect environment, and by

that obtaining a grant in the form of permission to operate in some divisions of domestic market.

To perform in domestic market was attainable only after deregulation in 1978, when competitors

entered international routes. Afterwards, in 1980 acquisition of National Airlines was one of the

biggest mistake of the company, since it anyway had approximately $1 billion of debt at that

time. This was a nonsense action since it just resulted in 157% cost increase compared to 62%

revenue growth. At last, perhaps the biggest punch to Pan Am was the terror attack on Lockerbie

where all 270 passengers passed away. This was the greatest hit to the brand image of Pan Am

which showed the inadequate level of security in Pan Am. The first point here is Pan Am had to

keep the security at its highest level, and this action did not have to happen. Establishment of

good relationship with government was needy at this time, as well. After paying large losing

large amounts of money after having been sued by the relatives of Lockerbie victims, they had

lost the trust of their customers, too. The passengers that were using Pan Ams services had

drastically gone down. They had to ask for some subsidy or any other type of help from the

government, which would bring back the trust of customers that would result in revival of the

company. All in all, bad managerial issues and bad luck brought the end of Pan Am which was

the biggest Airline Company in the world at a time and these are our recommendations which we

believe could prevent their bankruptcy.

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 References:

http://www.nytimes.com/1982/04/22/business/pan-am-s-survival-strategy.html

http://www.everythingpanam.com

http://www.fundinguniverse.com/company-histories/pan-american-world-airways-inc-history/

http://articles.latimes.com/1991-12-05/news/mn-607_1_airline-industry

https://www.washingtonpost.com/archive/opinions/1992/01/25/lots-of-reasons-why-pan-am-

failed/ec58b7ee-7287-496c-8a63-343a25d2fce9/?utm_term=.af3dc25046cd

https://www.slideshare.net/dharamp100/brand-failure-pan-american-airline

https://en.wikipedia.org/wiki/Pan_American_World_Airways#Accidents_and_incidents

http://www.tandfonline.com/doi/pdf/10.3846/1648-7788.2009.13.78-86

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