The US airline industry in 2004

U.S. Airline Industry

Assess the [financial] performance of the U.S. Airline industry during the past 20 years

The problems which the U.S. airline companies are now facing are rather severe and however they have been present throughout the past two decades, they have been accentuated by the tragic events of September 11, 2001. The major problems came from unsatisfactory levels of the services offered and the high prices implemented, all boycotted by the airline customers.

Before the plane hijacks into the World Trade Center, the airline companies were already loosing money and encountering as such financial difficulties, but these were being kept under some control and reduced through the implementation of various strategies. "Making money in the airline business has always been tough, but the years following 9/11, in which the industry lost more than thirty billion dollars and several airlines filed for bankruptcy, were especially brutal."

The financial problems encountered by the largest airline companies during the past two decades have influenced the airline industry as a whole. In 2001 for instance, more than 3 billion was estimated to have been registered in current losses and the cash shortfall was estimated at the least of 10 billion dollars. However their financial problems are serious, the airline companies are still managing to end the year with some liquidity, and even if the profitability is decreasing, it still exists.

But these financial shortages prevent the airline companies from further developing their services, training their employees and purchasing newer and better technologies. "Since the attacks, the major airlines have laid off more than 80,000 employees, cut wages for others and reduced the number of flights, but they still expect to lose $9 billion last year. Two have filed for bankruptcy in the last six months - United Air Lines and U.S. Airways."

2. To what extent can the industry's low profitability be attributed to the structure of the industry? Which of Porter's five forces has had the biggest impact in depressing industry profitability?

The profitability of the airline industry can be divided into two major areas: the profitability of the big airline companies and the profitability of the airline companies which offer low costs tickets. In this sense, the profitability of the big American companies has been negatively influenced by the occurrence of more and more low-cost airline companies which managed to "steel" the customers of the long established companies.

An analysis of the airline industry can be developed through the usage of Porter's five forces: rivalry among competing firms, bargaining power of buyers, bargaining power of buyers, threat of substitute products and barriers to entry.

The rivalry among competing firms is a highly significant factor which influences the profitability of one company, but since the profitability of the entire sector has decreased drastically, it is difficult to assume that rivalry and competition were the major causes.

Then, the bargaining power of suppliers is indeed a factor which negatively affected the financial outcomes of the airline companies. This can be explained through the increased price of oil, which increased the companies' costs and finally the price of the ticket. This can easily be considered as a major factor which contributed to reduced profitability in the airline industry.

The bargaining power of buyers is yet another factor which drastically influences the profitability of the airline industry. Given that the companies activate in a service industry, where there is no actual product sold, and the final profit depends on the quality of the service delivered and the satisfaction of the customer, it is highly explainable that the buyers hold a responsibility of the decreasing profits. As such, their refusal or fear to use air travel companies has materialized in reduced incomes and a lower profitability.

The substitute products generally pose significant threats upon an industry, but it is rarely the case with the airline industry, where no similar services are available. "For many trips, there's no meaningful alternative to flying, which limits the power that fliers have as customers. They can make certain choices -- they consistently go for the cheapest flights, making it hard for an airline to raise prices -- but anyone who vows never to fly with a particular airline again will likely have an equally bad experience on a rival carrier soon afterward."

There are few barriers to entering the airline industry and proof of it stand the large numbers of small airline companies which opened their gates and attracted customers with low cost flights. But this has little influence over the overall profitability of the airline sector. Whereas it can influence the profits of the large companies, within the sector it only manages to redistribute profits, without significant influences upon the airline industry's profitability.

3. In what ways, and with what success, have the airlines' strategies attempted to counteract competitive forces depressing profitability in the industry?

In order to reduce the decreasing profitability, the airline companies have developed and implemented a series of strategies. First of all, they downsized and engaged in processes of organizational restructuring. In this order of ideas, they closed down some of their locations. Then, they fired several of their employees. Most of the remaining employees were faced with decreasing wages and benefits. All these were done in order to reduce costs to a minimum.

Also to reduce costs, several airplanes were taken out of operation. "Over the past six years, airlines have laid off more than a hundred thousand workers, around a sixth of their workforce, and six major carriers have shrunk their fleets -- planes are expensive not only to acquire but to maintain -- by twenty per cent."

Aside from reducing costs, the airline companies tried to increase the efficiency of their operations. As such, they eliminated numerous small size airplanes and replaced them with fewer large size airplanes. This has also aided them in reducing costs, but ensured they did not lost customers and that their clients got to the desired destination in time. "So airlines moved aggressively to cut the fat out of their business, trying to insure that each of their planes flew as many flights, while carrying as many passengers, as possible. The strategy was so successful that, even as business has recovered, the airlines have chosen to stay slim. As a result, planes today are more crowded than before -- last year, the airlines filled seventy-nine per cent of their seats, compared with sixty-five per cent in the mid-nineties -- and forecasts suggest that the industry as a whole may clear four billion dollars in profits this year."

These strategies have made it easier for the airline companies to prevent a potentially disastrous outcome from occurring. But they seem viable only for the short run, and the need to replace them with better developed strategies on the long run arises. "The lean-and-mean approach may have saved the airlines, but for passengers it's made an already bad situation worse. If something goes wrong with a plane, servicing it will likely take longer than it used to, and there's less chance that another jet will be available to get passengers where they need to go."