Growth and challenges in the U.S. airline industry

U.S. Airline Industry

AIRLINE INDUSTRY

Structure of the Industry

Deregulation Act of 1978

US Airline Industry During the 1980s

US Airline Industry During the 1990s

The Next Decade for the U.S. Airline Industry

Post 9/11

Bankruptcy

Issue of Fuel

Hurricane Katrina

Future for the Global Airline Industry

Airline Industry worldwide in general and United States in particular has played a central role in stirring the growth of the world economy. With USA appearing on the world map as one of the most developed nations in the world, it's Airline Industry and its growth and now its current travails provide us with interesting insights and a case study as to how an industry can grow tremendously supported by government actions as well as market forces and then major external factors mainly political and economic can affect the progress of overall industry.

Sources

The research is conducted mainly from the websites.

CONCLUSION

The U.S. Airline Industry initially thrived with Government backing and later on with deregulations in place; market forces stirred its growth. Furthermore, world events like 9/11, terrorism, security concerns, and even natural disasters like latest hurricanes Katrina and Rita have put the industry in trouble but in the current scenario the major concern for the industry comes from the rising jet fuel prices which do not show any sign of decline and the surge is further being accelerated by the natural disasters. In such difficult times a number of airlines are filing for bankruptcy. Operational efficiency, better management, mergers along with luck are some of the options that industry is looking up to but whether the future is bright for the U.S. Airline Industry is dependent ultimately and heavily on fuel prices in the future.

3 AIRLINE INDUSTRY

Economic growth, world trade, international investment and tourism are some of the main benefits of the airline industry. In today's globalized world, Airline industry plays a crucial role in bringing the world together. In fact, the fast growth of the Airline Industry has spurred the process of globalization. Traveling for business and leisure provide the fuel for this industry to flourish. As companies get more involved in business internationally when it comes to investments, supply and production chains and customers, the need for business travel arises more often resulting in demand for Airline industry. Tourism has also evolved over the years all over the world particularly in the developing countries as they concentrated on developing resorts and sights to attract wealthy tourists from the developed world. Thailand, Malaysia, Mauritius etc. could be the prime examples as they have been able to capture the attention of tourists worldwide resulting in a surge in regular air travel for leisure. Some of the recent events like Tsunami and terrorism have created a short-term dent in air travel for leisure but the industry pundits predict that the tourist travel will resume in the future.

3.1 History of U.S. Airline Industry

The U.S. Airline Industry has a history that dates back to 1903 when the Wright brothers made their first successful flight in Kitty Hawk, North Carolina. Initially the public did not take the idea of the airplane travel favorably. But this event marked the beginning of the Airline Industry as more and more inputs were given by people such as Charles Lindbergh who successfully completed a solo flight across the Atlantic Ocean in 1927 and created massive interest in flying with the general public.

The introduction and success of Air transport companies made the real progress with the passage of time. This process was started with a grant of 100,000 dollars. The Airmail system was then expanded to carry cargo and then finally passengers. The Aviation Industry backed by the Government started thriving even though Govt. spending on research and development was not sufficient. Govt. completely backed the industry by regulations such as The Air Commerce Act. However, as the time passed, Air traffic became more and more disorganized and the need for more regulation became apparent. With World War 2, Govt. spending increased on R& D. paving the way for innovation and introduction of modernized planes as jet service was introduced in 1959, enabling even faster cross-country service.

1950s was the decade when Airline industry bloomed and thus need for more regulations arose. There was a need to develop air traffic control system and for this Federal Aviation Administration (FAA) was created. The Federal Aviation Act was also passed in 1958. 1960s was the period of growth whereas 70s was marked by increases in costs, particularly increases in fuel prices.

3.1.1 Structure of the Industry

US Airline are classified as major, national and regional on the basis of operating revenues. Major airlines like America West, Delta, U.S. Airways etc. "generate operating revenues of more than $1 billion annually while National carriers generate annual operating revenues between $100 million and $1 billion" (Airlines.org). Regional operating airlines function in the particular regions of the country. They are further classified as large, medium and small. "This has been one of the fastest growing and most profitable segments of the industry since deregulation" ("Airline Handbook, 2001).

3.3 U.S. Airline Industry During the 1980s

This decade saw two major events taking place in the U.S. Airline industry. Firstly, there was a mushrooming and growth of startups and eventual collapse of some of them. Secondly, the bigger airlines also suffered due to various reasons.

Airlines started functioning in the late 70s and major airlines kept on working despite increasing problems like industry consolidation, rapid increases in multi-type aircraft fleets, increases in labor costs and development of the "hub and spoke" system. With the hub system airlines operate at a limited number of hub cities, serving most other destinations in the system by providing one-stop or connecting service through the hub.

All the major airlines suffered some kind of problems in the 80s. Most of the airlines witnessed less financial growth than expected while some went on the verge of bankruptcy, for instance, Continental, Eastern and pan America suffered very badly during the decade. The unstable climate and the growth of small carriers also resulted in the mergers of major airlines.

Low fare airlines worked with the help of unconventional management and development of low cost or cost effective ways. Deregulation allowed competition on many routes putting low fare airlines to an advantage. Southwest Airlines, the largest low-fare, major U.S. airline, offered fares that were significantly lower than those charged by other major U.S. airlines.

Under capitalization and lack of proper business plans were the major reasons of failures of some of the start-ups during the 80s. Braniff collapsed completely in 1982 and again started operating from 1984 under new ownership and went bankrupt again in 1989. Similarly, another airline called People's Express entered the industry and showed revenue in 1981 reaching a billion dollars by 1985. The company was sold in late 80s due to rising losses and passenger dissatisfaction.

3.4 U.S. Airline Industry During the 1990s

The 1990s saw a dramatic increase in the number of passengers, including first time passengers, as prices were cut and the cities served by airlines increased. In the early 1990s the airline industry suffered due to adverse economic conditions and reduced demand for air travel. Gulf War also made the situation worse for the industry but later things improved and airline industry showed dramatic improvement as compared to its past performance.

The airline industry lost about 10 million in between 1990 and 1992. Almost all the airlines showed net operating losses in the early 90s. Braniff, Eastern, and Pan America went completely out of the business whereas TWA, Northwest, and Continental entered bankruptcy proceedings.

Due to the adverse conditions of the industry Congress started a campaign for the betterment and uplift of the airline industry. Congress established the National Commission that made recommendations concerning FAA's structure, the airline industry's financial status and progress, and determined foreign ownership. The era that started after 1992 that is right from the 1993 was the best era for the industry in the two decades. During the period from 1993 till the end of the decade, most airline companies showed better financial health and net operating profits. In 1998, U.S. scheduled airlines reported almost $90 billion in total operating revenues, with approximately 500,000 employees and a total asset value of over $100 billion. The export value of U.S.-built commercial aircraft totaled $24 billion in 1997, resulting in a positive trade balance in this sector for the United States of close to $20 billion. The economic impact of the Airline industry was good both directly and indirectly. The industry directly affected itself in terms of airline employment, company profitability and net worth. The indirect effect was also felt on the aircraft manufacturing industry, airports, and the tourism industry, not to mention the large economic impact on virtually every other industry affected by the ability to travel by air.

3.5 The Next Decade for the U.S. Airline Industry

3.5.1 Post 9/11

As the 90s ended and the fateful day of 9/11 dawned on the soils of North America, the decline of the industry started. We all know that the industry profitability has been cyclical over time and negative since 9/11.Travel by the passengers declined considerably, particularly, business travel suffered badly due to various reasons. Skyrocketing business airfares, eroding customer service levels, growing aviation system unreliability, travel eliminated altogether by corporations, travel replaced by video conferencing, or other technologies, travel on charter, fractionally owned or corporate-owned jets etc. are some of the reasons why business travel declined affecting the airline industry. Similarly, general travel trend of a common person declined due to individuals because of fear of flying, or the hassle of travel today caused by the events of 9/11 and war on terror. Later on war in Afghanistan and then in Iraq also affected the overall scenario. Besides these reasons economic slump is the final blow. "From 2001 through 2003, the U.S. airline industry has reported net losses of $23.2 billion dollars, compounded by an additional $1.6 billion in the first quarter of 2004. This $24.8 billion shortfall exceeds the total profits earned over the entire six-year period 1995-2000" ("Aviation Hearing," 2004)

Now the need of the day is to restore profitability to the industry for the better financial health. There are different issues that need to be looked into like restoring travelers' confidence and increasing consumer demand for air travel, especially business travel, controlling costs, addressing certain pricing issues etc. Govt. is also making effort in this regard as the President has signed the airline and airport security bill to restore consumer confidence and for alleviating travelers' apprehension about flying and Congress provided $40 billion and passed Air Transportation Safety and System Stabilization Act. Every effort is being put in to stabilize and eventually spur growth in the airline industry.

There are numerous plans that are in the pipeline to restore confidence in the industry. Investments are being made for the modernization and technological innovation. The ideas of a flying car, new-generation supersonic transport, bigger and faster than the Concorde and the largest commercial passenger aircraft are there but right now airlines are fighting for survival. Most analysts expect resumption in travel growth by mid-decade.

3.5.2 Bankruptcy

Another problem that has always been the hallmark of the airline industry is the bankruptcies or organizations on the verge of bankruptcy. For example by the end of 2004 major Airlines like United Airlines and U.S. Airways were on the verge of bankruptcy. Apart from the large airlines, small airlines like ATA also filed for bankruptcy. As a result of bankruptcies, the number of airlines decline and so do the number of seats for passengers and that may result in increase in fares. The bankruptcies may also create problems for passengers if they purchase tickets of Airlines with precarious financial position. "That is why Air Travelers Association, urges passengers to purchase tickets with a credit card. That way there is some recourse with the credit card company in the event of a significant disruption in service" (Hunter, 2004).

In the current year as well, companies are marching towards bankruptcy. Charlotte is one of the airlines that were on the verge of bankruptcy but it came out of it and a merger is planned for the company with America West Airlines. Now, the fate of airlines including this new merger depends on leadership and superior management skills coupled with luck. "For the merger to succeed, the new team must continue to cut costs as it aligns flight schedules, ramps up marketing and manages what could be a tricky integration of labor groups" (Mecia, 2005). Currently four major Airlines are operating with bankruptcy looming large over their heads.

3.5.3 Issue of Fuel

Airlines are completely dependent on jet fuel, as they cannot be run on any alternative source of energy and higher fuel prices means higher operating costs for Airlines. In this decade one change that remained constant was volatility in the fuel prices. Even slight increase in the fuel prices may drive the operating costs of Airlines higher and the trouble is that they cannot simply pass it to the passengers in the face of myriad issues facing the industry, competition and alternative ways of traveling available for passengers. The reality is that crude oil prices are going higher and that along with many other factors create a surge in fuel price. The option available to the industry in these conditions is that they have to find ways of achieving fuel efficiency such as "employing single-engine taxi during normal operations and selective engine shutdown during ground delays or optimizing flight planning for minimum fuel-burn routes and altitudes etc." ("Q & A, 2005). Due to the collective efforts made by the Airline Industry, they have been able to attain fuel efficiency in the first quarter of 2005. If the fuel prices go down then the Airlines can mint money otherwise the problem of fuel prices may hit the industry very badly as it affects the whole of industry irrespective of their management expertise.

3.5.4 Hurricane Katrina

The first response after hurricane Katrina was the announcement by the industry that it would participate voluntarily in emergency airlift. The major concern however, by the industry pundits, was that the flights would be cancelled in the aftermath of Hurricane Katrina but no cancellations actually took place. John Heimlich, Air Transport Association Vice President and Chief Economist, said in an interview, "U.S. refineries produce 1.55 million barrels of jet fuel on a daily basis. Katrina eliminated about 13% -- nearly 200,000 barrels -- of daily production" ("Q & A," 2005).

3.6 Future for the Global Airline Industry

There are 1.5 billion passengers who travel through the global airline industry annually. There has been on an average 5% growth in the industry over the last two decades with major variations due to changing economic conditions, regional differences in economic growth and major political events. The challenge for the global airline industry is again in sustained profitability. In this regard cost management also becomes important as management people in airlines need to concentrate on methods to reduce unit costs, improve productivity, and increase total network revenues without raising average fares. Innovations, schedule optimization, fleet utilization and offering services through Internet and advances in computer technology could prove fruitful. In the face of economic downturn, global liberalization of airline markets, disparities between airlines with respect to their ability to compete effectively, instability and slow pace in terms of technological innovation of aircraft performance the airline industry's survival is dependent on better management and increased assistance from the Governments.

4 BIBLIOGRAPHY