Airline industry analysis and market trends

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 premiums to have their needs met.

Top 3 "Players" Of The Industry

When deciding who the industry leaders are, economic indicators go a long way in dictating success and failure. These indicators suggest that success can be measured by carriers that have reduced fares and focus on eliminating waste in an effort to be cost efficient. They also suggest that success entails fuel efficient planes and taking advantage of load factors which help capacity utilization. Success also entails understanding the new economy and the cost of money as well consumer friendly services with technologic advantages.

In other words, to cover the top three industry players entails a clear definition of what "top" means. One could approach it as the largest or the most profitable or the most socially accepted. With these different perspectives, this report looks at three very different airline organizations: JetBlue, Southwest and American Airlines. The report attempted to understand what success and future potential implied for these players within the airline industry. Consider that JetBlue and Southwest are fairly new organizations that have been very successful in the sense of profitability and market share during a time of demise within the airline industry. American Airlines is a very large and more established player that has become the latest member of the industry contemplating bankruptcy protection.

This report therefore looked at the various aspects of the domestic airline industry as it applies to the likes of JetBlue, Southwest and American Airlines. This was done through an analysis of the strengths and weaknesses, opportunities and threats as they pertain to the external environment, competitors, and the before mentioned macro environmental trends.

AMR Corporation is the mother company of American Airlines, Inc. The company operates both scheduled passenger flights and also provides freight and mail services for shippers. The company provides connecting service throughout the United States, Canada, Mexico, and the Caribbean. This entails nearly 150 destinations throughout North America, the Caribbean, Latin America, Europe, and the Pacific as well as serving more than two hundred cities in more than forty countries with daily flights by more than 1,000 aircraft.

Jet Blue and Southwest are much smaller. JetBlue Airways provides mainly passenger services and has nearly 300 daily flights for more than 30 destinations in 12 states, Puerto Rico, the Dominican Republic and the Bahamas. It operates just over 70 new Airbus A320 aircraft that also offer in-flight entertainment systems like live in-seat satellite television, digital satellite radio, wireless aircraft data link service, and cabin surveillance systems. Southwest Airlines is a domestic airline that provides service to nearly sixty cities throughout the United States with its over four hundred Boeing 737's aircraft.

SWOT - Strengths

New low-cost carriers such as Southwest and JetBlue have shown that they have a unique advantage in the airline industry over older, larger and less flexible major carriers. For example, JetBlue and Southwest have each instituted business models that have lead to consistent profitability during times of many industry organizational failures. "As for the service provided, any employee of a major airline who thinks his carrier is providing a product better than what is offered by discount lines such as Southwest, Jet Blue and AirTran is living in severe denial. From now on, use your passes to fly coach, not first class, on your own airline." (Unavailable, The Washington Times, 2003)

JetBlue and Southwest each have business models that have been overwhelming successful and even the likes of 9/11 did not have the devastating affects on these companies when compared with the larger carriers. JetBlue and Southwest are simply better at managing costs and meeting consumer expectations. "We achieve high aircraft utilization in several ways. New aircraft can be safely scheduled to fly more hours each day because they are more reliable and require less maintenance than older aircraft. In addition, we operate a number of "red eye" flights, which enable a portion of our fleet to remain productive through the night." (JetBlue, 2003)

Weakness

The weakness that the industry will face seems to be universal. Any other catastrophes such as compared with September 11th could also make it even more difficult throughout the aviation industry as a whole. The fact is that there has simply been less demand in regard to air travel and these trends seem to be forecast to continue into the immediate future. What this implies is that United, JetBlue, Southwest and all of the other carriers will have to reduce orders for new planes and the adverse effects will carry over into the all other associated industries such as the airplane manufacturers like Airbus and Boeing.

Opportunities

There seem to be more opportunities for the low cost carriers such as Jet Blue and Southwest because they seem to utilize more modern business philosophies and progressive management teams that consider available technological advances as well as stay more in line with consumer requirements and the global economy of the twenty-first century. "IATA's latest corporate air travel survey, released in November, found that one-third of all business travelers had used a low-cost airline in the past 12 months, mainly to save costs, and 37% had used video conferencing to save travel time and money. The U.S. National Business Travel Association says it expects corporations to direct more employee travel next year to low-fare carriers like JetBlue Airways, Frontier and Southwest Airlines. The trend could accelerate with the new penalties major U.S. carriers have put on non-refundable tickets, such as a charge of $100-150 for standing by for an earlier flight." (Shifrin, 2003)

Consider the use of technology as an opportunity. Another way low cost carriers reduce fuel consumption is through computerized efficiency. For example, in addition to a powerful mainframe for organizational operations, JetBlue also has incorporated a revolutionary new cockpit approach called the 'paperless cockpit' where all of the organization's pilots can use laptop computers in the cockpit -- in-flight or grounded. The computers instantly calculate weight and balance as well as takeoff performance prior to any departure so that the plane instinctively uses only the fuel minimally needed to fly. "JetBlue's most powerful tech innovation is the "paperless cockpit," which other airlines have yet to match. Equipped with laptops, more than 700 pilots have ready Web access to flight manuals that are constantly updated at headquarters. Pilots can adjust speedily to changing conditions -- and get off the ground quickly. That helps keep operating costs among the lowest in the industry and keeps customers coming back. In the struggling airline business, that's a winning combo." (Zellner, 2003)

Threats

A serious concern for all carriers comes in the form of potential competition from possible mergers of airlines in order to regroup and eventually offer the same options as the low cost carriers. The fact is that the major carriers in bankruptcy still have more financial clout than the smaller startups. The major carriers may eventually catch on that they too must adjust their business models to match that of the low-cost carriers. "As recently as four years ago, a look at low-cost carriers in North America would have focused almost exclusively on Southwest Airlines - Texas businessman Herb Kelleher's no-frills, point-to-point brainchild that has earned steady profits while catering to the "everyman" passenger. In the late 1990s, with the Internet boom in full swing, Southwest plugged along as a low-fares, low-amenities alternative to North American majors, which raked in money from business passengers willing to pay high fares to travel the continent and the world in relative luxury." (Karp, 2003)