Airline Industry Analysis Term Paper

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Airline Industry Analysis

This report aims to present a summary of findings for a research study regarding the airline industry. The objective of this project was to first, gain new experience in the analysis process of an entire industry from an economic and business perspective as well as an environmental and social viewpoint. Secondly, the research attempts to provide direction for potential employment opportunities within the various aspects of the direct and indirect aeronautic and airline industry professions. The assessment of the airline industry entailed centralizing facts through a combination of case studies, governmental studies and reviews of both primary and secondary data research sources. In this scenario, case study and the vast amounts of secondary data offer a plethora of information which constitutes a comprehensive review of the aspects of the industry. Thus, the information was acquired through sources such as:

Physical Searches: searching core journals, relevant books and articles

Database Search: electronic databases both library and internet

Case Studies: Specific airlines, journals and statistics

Internet: web page studies and alternate business journal indexes

Interviews: experts and relevant organizations pertaining to the topic of Airline industry historical events

Industry Growth - Past, Present, and Future

The situation throughout the airline industry is at, or can be considered to be, very close to calamitous. Many major airline carriers such as American Airlines, Delta, United and Continental are already considering bankruptcy protection if in fact they are not already under court protection. In other words, bankruptcy has become a logical business option if not the only alternative to keep these organizations from complete economic collapse. Since deregulation occurred within the airline industry, bankruptcy has therefore kept a number of organizations somewhat solvent.

Of course, the historic events of September 11, 2001, where terrorists hijacked planes and perpetrated abominable attacks on several sites including the World Trade Center and the Pentagon, have been blamed as the underlying problem that have caused the industry's financial troubles. However, over the past four decades, the true factors creating the airline industry's problems stem from more obvious issues and concerns such as aging fleets, fuel prices and other economic concerns like labor management, growing trends toward globalization, reduced fairs in proportion to lower costs, frequent flights which entail fewer connections and airport expansion periods.

Industry experts now understand that the financial troubles suffered by carriers like United and American Airlines were already present throughout the industry long before September 11th. "The seeds of this disaster at United were sown long before September 11, and no amount of denial or obfuscating will change that." (Unavailable, The Washington Times, 2003) Today, the industry continues to face all new challenges which unfortunately also include the aftermath and effects of September 11th.

Newly defined factors therefore are at the root of the problem and change in these vital areas has not been supported well historically. "While globalization should continue to boost traffic, the other two drivers-cost cutting and convenience-are reaching their limits within the traditional model. In the past, major airlines could achieve significant profit improvement by increasing load factors; by moving from three- to two-engine aircraft, thereby saving on fuel; and by reducing the size of cockpit crews, saving labor costs. Furthermore, convenience has been declining of late; congestion and flight delays reached record levels before September 11, and the additional security measures now in place have added further difficulties for travelers." (Costa, Harned, & Lundquist, 2002)

Of course, for every rule there is an exception and this holds true in the airline industry as well. There have been some carriers that have shown a propensity to excel both economically and in regard to the social acceptance needed in a service and customer oriented business. For example, some success stories come from "discount" or "low-cost" carriers who have consistently stolen market share from major carriers. "While the majors lose billions of dollars (American Airlines lost $3.5 billion in 2001 and 2002 combined), low-cost carriers continue to earn profits. U.S. low-cost carriers AirTran Airways, JetBlue Airways and Southwest, and Canada's WestJet all made money in 2002. Southwest, while still consistently profitable, has faded to the background as start-ups such as JetBlue fly passengers across the U.S.A. In new Airbus A320s with satellite television at every seat. Even some of the majors are attempting to launch low-fares subsidiaries." (Karp, 2003)

Cost Patterns and Profitability Patterns

Large carriers such as American Airlines, Delta, United and Continental have all had more difficulty dealing with external economic factors such as tough competition, inflation, the effects of past and potential acts of terrorism as well as the "on again -- off again" United States and world economies. Tie these concerns to internal industry troubles like the ever increasing price of jet fuel and other mandatory resources, maintaining and replacing aging fleets and human resource concerns like salaries and healthcare costs. Suddenly, the business and economic outlook for the airline industry becomes bleak. Certain economic indicators can be examined to clearly see the trouble ahead.

The Gross Domestic Product, specifically the trends of the U.S. And the world GDP's, show that our nation may be out of recession but that does not mean that we are keeping pace with the world. Consider that the U.S. forecast for the GDP is expected to remain around 2.7% annually while the combined first world nation's GDP has been forecast at 3.1%. The problem for the airline industry with this trend is that most air travel is done by American passengers. If the U.S. economy cannot maintain pace with the rest of the world's growth, overall travel trends could spiral downward.

The same indications hold true of inflation as measured by the Consumer Price Index. A big part of this indicator is the price of crude and overall world oil production. The Consumer Price index measures the changes in the cost of wage-earner's purchases of goods and services. The price of oil is an obvious predictor of how much things will cost in the future. The media has more than adequately demonstrated that future trends in oil prices will continue to break new records. OPEC and other oil producing nations like the African nations raised production to offset the increasing world demand but these measures have failed to reduce the cost of oil. As long as the United States is so heavily dependent on foreign oil, consumer pricing trends will continue to suggest increased inflation and the airline industry will feel the results of consumers having less money to use for business and personal travel.

Another major monitoring factor the industry must address is that of Capacity Utilization. The industry uses this indicator to compare internal industry competition -- a big part of this is the cost of replacing aging fleets. "Even as airlines stake out their positions in the global market, they are not immune to competition in their own backyard. Regional airlines have gained new ground with the development of newer, smaller jets that are faster than turboprop planes and have greater ranges." (Yahoo Finance, 2005)

To make matters worse, cash on hand is a big problem for the entire airline industry. A monitor that affects this area is that of the Federal Reserve's actions. The Fed dictates the cost of money when companies are forced to borrow. The airline industry historically has needed to borrow heavily as airlines seek to slash expenses to emerge from bankruptcy and to retool themselves in order to become leaner. Because the Fed is heavily influenced by consumer consumption and governmental spending, borrowing will continue to become an expensive venture. All of these indicators should cause concern for the leaders of the airline industry as they pertain to cost patterns and profitability patterns.

Industry composition, including information on concentration

One area for improvement throughout the industry in regard to fuel efficiency, profitability and pollution reduction boils down to how carriers use airports for landing, loading and getting the plains back in the air. "Large airlines use a hub-and-spoke model in which flights are clustered around peak flying times at a few major airports. Low-cost carriers, such as Southwest Airlines, JetBlue Airways and AirTran Airways, do not use hub airports. Instead, they fly "point-to-point," which means they adjust their schedules and routes frequently to keep airplanes flying longer with the maximum number of passengers. The hub-and-spoke model is the most convenient for passengers, but the "point-to-point" system can bring in the most money on shorter routes. (Ramstack, 2002)

The hub and spoke model used by the major airlines for example has been the industry standard for many years and is heavily used by carries like American Airlines because of the advantage of providing an expansive geographic umbrella. Today the approach has become less attractive. Conflicts with the consumer's needs are the reason because business and leisure travelers require different priorities. Leisure travelers expect low prices so they do not consider flight frequency. Business travelers on the other hand base travel on the number of flights throughout more destinations and they choose to pay…[continue]

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