Airline Industry research
Airline Industry Did you know that only 5% of the world’s population has been on an airplane but there are over 14,000 commercial flights in the air at any one time and over 3 million people in the air on planes at any one time? Since the birth of flight in 1903, air travel has emerged as a crucial means of transportation for people and products. The hundred-plus years following the invention of the first aircraft have brought about a revolution in the way people travel. The airline business is a major industry, relied upon by millions not only for transportation but also as a way of making a living.
Airplanes were around the first few years of the 20th century, but flying was a risky endeavor not commonplace until 1925. In this year, the Air Mail Act facilitated the development of the airline industry by allowing the postmaster to contract with private airlines to deliver mail. Shortly thereafter, the Air Commerce Act gave the Secretary of Commerce power to establish airways, certify aircraft, license pilots, and issue and enforce air traffic regulations. The first commercial airlines included Pan American, Western Air Express and Ford Transport Service.
Within 10 years, many odder-day airlines, such as United and American, had emerged as major players. N 1938, the Civil Aeronautics Act established the Civil Aeronautics Board. This board served numerous functions, the two most significant being determining airlines’ routes of travel and regulating prices for passenger fares. The CAB based airfares on average costs, so because airlines couldn’t compete with each other by offering lower fares, they competed by striving to offer the best quality service.
If the CAB found an airline’s service quality was lacking on a certain route, it would allow other carriers to begin operating on that route. In this environment, established airlines enjoyed an advantage over startups, as new carriers found it difficult to break into existing routes. The Federal Aviation Agency, now known as the Federal Aviation Administration, was created in 1958 to manage safety operations. In the mid-sass, Alfred Kahn, an economist and deregulation advocate, became chairman of the CAB. Around the same time, a British airline began offering exceptionally inexpensive transatlantic flights, awakening a desire for U.
S. -based airlines to lower their fares. These influences led to Congress passing the Airline Deregulation Act of 1978, sheering in an era of unencumbered free market competition. The CAB disbanded a few years thereafter. Post-deregulation, new carriers rushed into the market, and new routes directly connected cities previously accessible only via a string of layovers. Fares dropped as competition and the number of customers increased. A 1981 air traffic controllers strike brought a temporary setback to the growth, which continued throughout the sass.
Some of the major carriers who had dominated the skies during the middle portion of the century, such as Pan American and TWA, began to collapse in the wake of competition. Such carriers disappeared completely following the Gulf War and subsequent recession of the early sass. Surviving airlines rode out the recession and returned to record profitability by the late sass. In 2001 , the industry dealt with the effects of another economic downturn, as Airline Industry research By technicalities events 9/1 1 greatly magnified the airlines’ issues, leading to a sharp decline in customers and significantly higher operating costs.
Losses continued for years; the industry as a whole didn’t return to profitability until 2006. A relatively stable period allowed, although controversies arose over service quality and passenger treatment in terms of flight delays, particularly those involving planes waiting on the runway. In 2010 and 2011, the U. S. Department of Transportation issued a series of rules mandating that the airlines provide adequate modifications for passengers in extenuating circumstances. Between 2000-2010 the group of 230 airlines that make up the International Air Transport Association (DATA) managed to post Just three profitable years as a group. Harris) The economic importance of the airline industry and, in turn, its repercussions for aircraft manufacturers, makes the volatility of airline profits and their dependence on good economic conditions a serious concern for both industries. This concern has grown dramatically since airline deregulation, as stable profits and/or government assistance were the rule rather than the exception for most international airlines prior to the sass. As shown in Figure 1, the total net profits of world airlines have shown tremendous volatility over the past 1 5 years.
After the world airline industry posted 4 consecutive years of losses totaling over $22 billion from 1990 to 1993, as a exult of the Gulf War and subsequent economic recession, it returned to record profitability in the late sass, with total net profits in excess of $25 billion being reported by world airlines from 1995 to 1999. Even more dramatic was the industry plunge into record operating losses and a financial crisis between 2000 and 2005, with cumulative net losses of $40 billion. (Airline Industry Overview).
The most commonly seen business organizations that are seen in the airline industry in North America are Airports Council International – North America IAC- AN , Air Transport Association of America ATA, , Federal Aviation Administration FAA, Flight Safety Foundation IFS, Joint Aviation Authorities AJAX, , Regional Airline Association ERA, Universal Air Travel Plan – IGATE, Women in Aviation International and the WAY World Airline Entertainment Association WAY. There are also many other businesses that are seen through the airline industry worldwide. AAA) Since of all of the equipment and facilities involved in air transportation, it is easy to lose sight of the fact that this is, fundamentally, a service industry. Airlines perform a service for their customers – transporting them and their belongings (or their products, in the case of cargo customers) from one point to another for an agreed price. In that sense, the airline business is similar to other service businesses like banks, insurance companies or even barbershops. There is no physical product given in return for the money paid by the customer, nor inventory created and stored for sale at some later date.
Unlike many service businesses, airlines need more than storefronts and telephones to get started. They need an enormous range of expensive equipment ND facilities, from airplanes to flight simulators to maintenance hangars. As a result, the airline industry is a capital-intensive business, requiring large sums of money to operate effectively. Airlines own large fleets of expensive aircraft which depreciate in depreciation). Most airlines use their cash flow to repay debt or acquire new aircraft. When profits and cash flow decline, an airline’s ability to repay debt and acquire new aircraft is Jeopardized.
Airlines also are labor intensive. Each major airline employs a virtual army of pilots, flight attendants, mechanics, baggage handlers, reservation gents, gate agents, security personnel, cooks, cleaners, managers, accountants, lawyers, etc. Computers have enabled airlines to automate many tasks, but there is no changing the fact that they are a service business, where customers require personal attention. More than one-third of the revenue generated each day by the airlines goes to pay its workforce. Labor costs per employee are among the highest of any industry.
The airline business historically has been very seasonal. The summer months were extremely busy, as many people took vacations at that time of the year. Winter, n the other hand, was slower, with the exception of the holidays. The result of such peaks and valleys in travel patterns was that airline revenues also rose and fell significantly through the course of the year. This pattern continues today, although it is less pronounced than in the past. About 75 percent of the U. S. Airline industry’s revenue comes from passengers; about 1 5 percent from cargo shippers, the largest of which is the U.
S. Postal Service. The remaining 10 percent comes from other transport-related services. For the all-cargo carriers, of course, cargo is the sole source of transportation revenue. For the major passenger airlines which also carry cargo in the bellies of their planes, less than 10 percent of revenue comes from cargo (in many cases far less). Most of the passenger revenue (nearly 80 percent) comes from domestic travel, while 20 percent comes from travel to and from destinations in other countries. More than 90 percent of the tickets sold by U. S. Airlines are discounted, with discounts averaging two-thirds off full fare. Fewer than 10 percent pay full fare, most of them last-minute business travelers. The majority of business travelers, however, receive discounts when they travel. A relatively small group of travelers (the frequent flyers who take more than 10 trips a year) account for a significant portion of air travel. While these flyers represent only eight percent of the total number of passengers flying in a given year, they make about 40 percent of the trips. Travel agencies play an important role in airline ticket sales.
Eighty percent of the industry’s tickets are sold by agents, most of whom use airline-owned computer reservation systems to keep track of schedules and fares, to book reservations, and to print tickets for customers. Airlines pay travel agents a commission for each ticket old. There are more than 40,000 travel agents in the United States, providing a vast network of retail outlets for air transportation. Adding seats to an aircraft increases its revenue-generating power, without adding proportionately to its costs. However, the total number of seats aboard an aircraft depend on the operator’s marketing strategy.
If low prices are what an airline’s customers favor, it will seek to maximize the number of seats to keep prices as low as possible. On the other hand, a carrier with a strong following in the business community may opt for a large business-class section, with fewer, larger eats, because it knows that its business customers are willing to pay premium prices for the added comfort and workspace. The key for most airlines is to strike the right Since deregulation, airlines have had the same pricing freedom as companies in other industries. They set fares and freight rates in response to both customer demand and the prices of competitors.
As a result, fares change much more rapidly than they used to, and passengers sitting in the same section on the same flight often are paying different prices for their seats. For the airlines, the chief objective in eating fares is to maximize the revenue from each flight, by offering the right mix of full-fare tickets and various discounted tickets. Too little discounting in the face of weak demand for the flight, and the plane will leave the ground with a large number of empty seats, and revenue-generating opportunities will be lost forever.
On the other hand, too much discounting can sell out a flight far in advance and preclude the airline from booking last-minute passengers that might be willing to pay higher fares (another lost-revenue opportunity). The process of finding the right mix of fares or each flight is called yield, inventory or revenue management. It is a complex process, requiring sophisticated computer software that helps an airline estimate the demand for seats on a particular flight, so it can price the seats accordingly. And, it is an ongoing process, requiring continual adjustments as market conditions change.
Unexpected discounting in a particular market by a competitor, for instance, can leave an airline with too many unsold seats if they do not match the discounts. Contrary to popular myth, airlines do not cancel flights because they have too few passengers for the flight. The nature of scheduled service is such that aircraft move throughout an airline’s system during the course of each day. A flight cancellation at one airport, therefore, means the airline will be short an aircraft someplace else later in the day, and another flight will have to be canceled.
If an airline must cancel a flight because of a mechanical problem, it may choose to cancel the flight with the fewest number of passengers and utilize that aircraft for a flight with more passengers. While it may appear to be a cancellation for economic reasons, it is not. The substitution was made in order to inconvenience the fewest number of assigners. Since aircraft purchases take time (often two or three years, if there is a production backlog), airlines also must do some economic forecasting before placing new aircraft orders.
This is perhaps the most difficult part of the planning process, because no one knows for certain what economic conditions will be like many months, or even years, into the future. An economic downturn coinciding with the delivery of a large number of expensive new aircraft can cause major financial losses. Conversely, an unanticipated boom in the travel market can mean lost market share or an airline that held back on aircraft purchases while competitors were moving ahead. There have been several important trends in aircraft acquisition since deregulation.
One is the increased popularity of leasing versus ownership. Leasing reduces some of the risks involved in purchasing new technology. It also can be a less expensive way to acquire aircraft, since high-income leasing companies can take advantage of tax credits. In such cases, the tax savings to a lesser can be reflected in the less or’s price. Some carriers also use the leasing option to safeguard against hostile takeovers. Leasing leaves a carrier with fewer tangible assets that a corporate raider can sell to reduce debt incurred in the takeover.
A second trend, since 1978, networks resulted in airlines adding flights to small cities around their hubs. In addition, deregulation has enabled airlines to respond more effectively to consumer demand. In larger markets, this often means service that is more frequent. These considerations, in turn, increased the demand for small- and medium-sized aircraft to feed the hubs. Larger aircraft remain important for the more heavily traveled routes, but the ordering trend is toward smaller aircraft. The third trend is toward increased fuel efficiency.
As the price of fuel rose rapidly in the sass and early sass, the airlines gave top priority to increasing the fuel efficiency of their fleets. That led to numerous design innovations on the part of the manufacturers. Airlines, today, average about 40 passenger miles per gallon – a statistic that compares favorably with even the most efficient autos. Similarly, the fourth trend has been in response to airline and public concerns about aircraft noise and engine emissions. Technological developments have produced quieter and cleaner-burning Jets, and Congress has produced timetables or the airlines to retire or update their older Jets.
A ban on the operation of Stage 1 jets, such as the Boeing 707 and DC-8, has been in effect since January 1, 1985. In 1989, Congress dictated that all Stage 2 Jets, such as sass and DC-as, were to be phased out by the year 2000. Today, Stage 3 Jets, taking their place, include the Boeing 757 and the MD-80. Hush kits are also available for older engines, and some airlines have chosen to pursue this option rather than make the much greater financial commitment necessary to buy new airplanes. Others have chosen to re- engine, or replace their older, noisier engines with new ones that meet Stage 3 standards.
While more expensive than hush kits, new engines have operating-cost advantages that make them the preferred option for some carriers. The market structure for airlines is an oligopoly. This means that there are only a handful of companies that compete in this industry. Oligopolies are more competitive than monopolies, industries for which there is only one seller of the product, but are less competitive than industries that experience near perfect competition. Before discussing how oligopolies work, a few words about monopolies and perfect intention…
A monopoly exists when one seller is the only seller of the product or service. Some industries are prone to become monopolies naturally, and because the industry operates more efficient with one provider, they are allowed to become a monopoly but are regulated to keep the company from exploiting the buyers. For instance, electric companies are generally natural monopolies. Since it would not be worth it for a competing electric company to lay their own electrical lines all the way to your house when you might not even switch to them, only one company controls the electricity that sells to your house.
It’s more efficient that way, and the government allows this type of monopoly while regulating the price this company sells electricity to you. Some other industries, such as steel and oil, once become powerfully monopolistic over a hundred years ago. These monopolies were formed in ruthless ways, which destroyed other companies and then exploited buyers with anti-trust laws to prevent future monopolies. On the opposite end of the spectrum is perfect competition. Perfect competition is pretty much Just a theoretical concept and never actually exists, but some industries can come very close to perfect competition.
Some items sold on eBay approach perfect competition. Suppose people on eBay are selling a book for which there are many, many sellers selling identical editions of the same best-selling book. Adding in shipping and handling, you will find that people are all buying the book for almost the same price. An eBay seller could not sell the book for more than that price, and people will bid up the price to the going price. Each individual seller sells the book at a price set by the market and has virtually no power to set prices. In the middle are oligopolies.
In an oligopoly, each company has mom pricing power, but they can’t set prices to whatever they want. Each company affects the market (unlike perfect competition) but is also affected by other companies in the market (unlike monopolies). Oligopolies are industries where set- up costs are extremely high, so people can’t Just enter the market even if there’s money to be made in the industry. Imagine trying to start a new airline to compete with United or American. It would be extremely difficult. (On the other hand, one could start an eBay business rather easily. Even a family restaurant is relatively easy compared to a new airline.
The same would be true of starting a car company. In oligopolies, people will sometimes refer to the “Big 3” or “Big 4” or “Big” however many major players there are in the market. That’s not to say that there arena small players in the airline or automotive industries that fill a special niche in the market, but the small companies don’t affect the major players. One characteristic of oligopolies is that they engage in price wars. When one airline company decides to cut fares or one car company decides to cut new car prices, the other industries will usually cut theirs as well.
Price wars happen because some company is trying to grab a larger percentage of the market, and the other companies lower their prices to not lose market share. With oligopolies, people feel some loyalty for various reasons (such as frequent flyer program or availability of certain flights), so people might stick with their preferred company when a competitor offers a lower price, so Just because one company is selling at a higher price does not mean they won’t sell at all. (On the other hand, a company in perfect competition will sell no units if its price is higher than other companies in the market.