Airline business models and operations

¶ … Airline Industry

It is probably an indelible image on each American's memory, the vision of the two hijacked airlines plowing into the World Trade Center towers in New York. But did any of us know at that time what a significant event this would be to the economy of not only the United States but the world. The events of September 11, 2001 served to set in motion a cascade of events, some unrelated, which have been devastating to the financial stability of the airline industry as a whole. Besides fears about safety on domestic and international air travel, what other events have had a significant impact of the airline business? Why did they have effect? And what measures have the airline industries taken to combat these effects and remain solvent and successful businesses in the mean time?

The investment made in the September 11th attacks was relatively small - It is estimated that the hijackers spent about $50,000 total for their accommodations, rental cars and airline tickets. But in the week which followed the attacks, the financial goal to the American economy became clear -$60 billion in direct costs to the U.S. economy and well over $600 billion in stock market losses (Dallas Business Journal, 2003). Perhaps the hardest hit was the airline companies. In the following 18 months, the combined effects of the Severe Acute Respiratory Syndrome outbreak and the United States invasion of Iraq have only served to worsen the total impact on airlines. These issues and their significant effect on the airline industry will serve to be the topic of this paper, as well as strategies developed by the airlines in an attempt to boost declining air travel and encourage customers to come back to their companies as regular customers.

The United State led invasion of Iraq began on March 19, 2003. While the declared war itself was short lived, the impact of the war on the airline industry could not be immediately determined. The beginning of the war saw a significant decline in bookings on U.S. airlines. This was a problem, especially for airlines such as American who had already seen a slide in bookings following the September 11, 2001 attacks on the World Trade Center towers. American Airlines, the nation's largest carrier at the time of the invasion, had only narrowly avoided bankruptcy with governmental bailouts and almost 1.8 billion dollars in labor concessions from its staff. Immediately following the invasion of Iraq, three of the nation's five largest airlines - Delta, Northwest, and Continental reported sharply wider first quarter losses for 2003. To staunch the immediate flow, American cut management staff by almost 5%, adding to a 22% reduction which had followed the September 11th attacks. Delta and U.S. Air also announced management cuts and it was also reported that the invasion of Iraq caused Delta to furlough 200 pilots during the months of April and May, when the war was essentially complete. U.S. Airways laid off almost 900 flight attendants nearer to the end of June. It was hoped at that time that the cutbacks and lay offs were at an end. At the end of April 2003, the Air Transport association announced that the decline in air travel seemed to be resolving, reversing the trend which had been seen since September 11th (Money, 2003) But as the airlines were finally seeming to rebound came the outbreak of Severe Acute Respiratory Syndrome (SARS), a very deadly and unknown entity which prompted world health organizations to advise against travel to parts of Asia. The improvement was eroded by the significant declines in the Pacific routes, entirely driven by concerns about the spread of SARS. The Hong Kong-based carrier Cathay Pacific reported at the time that they were to halt 42% of its schedule due to reduced demand for flights. The fear was that this decline in airline travel would eventually spread to the United States if an outbreak of SARS was found there. Several U.S. airlines began to cut back on their schedules in response to a lowered demand for air travel. This still resulted in many empty flights, essentially overcapacity which in turn drove airline prices lower and hurt profit to an even greater degree. Airlines were boosted a little by a 30% drop in fuel prices in the spring and early summer of 2003. The United States government rallied around the failing airlines and signed into legislation 3.5 billion dollars in federal assistance, most of it taking place in the stead of tax cash reimbursements. The government also stepped up with extension of federal insurance programs, which saved the companies another 600 million dollars. But fliers still had their fears. And flyers with fears of diseases and terrorism will be less likely to fly.

When the SARS outbreak became a true news story, the International Air Transport Association gathered together all of the world airlines in Bangkok to make a battle plan. The industry became actively involved with the World Health Organization and developed a SARS task force. The number one priority was stated as being the prevention of a spread of the epidemic disease. But airlines could also only think about the bottom line, already in the red ink. When it was determined that the spread of SARS was essentially though droplets and close contact and not through air, it was good news for the airlines. Since the disease was considered to be communicable only after symptoms appeared, the World Health Organization was able to reassure airline industry leaders that screening procedures already in effect at most airports could be considered effective. They held up the evidence that despite the fact that 200 million travelers had boarded aircraft since the beginning of the crisis, only 5 cases of possible transmission had been traced to in-cabin contact and these had all been on flights which had taken place before screening procedures had been in effect. There was an analogy drawn between the checking of passengers for symptoms such as fever, and enhanced security checks which had been the norm since September 11th. It was felt that is passengers with SARS could be prevented from boarding the airplanes, then the passengers would be safe and the change of geographic spread of the disease would be minimized. Standardization of the procedures was felt to be essential. Public health authorities in Asia were quick in their response to the crisis (Pittsburgh Tribune-Review, 2003)