U.S. Airline Industry

U.S. AIRLINE INDUSTRY 5

U.S.Airline Industry

Question1

Overall,the airline industry has performed dismally in the past twenty years.Specifically, the industry performed partly well between 1996 and2001 due to the increased demand for air travel after deregulation.However, the market for the transport grew at 5% per annum lower thanthe previous decade. The financial crisis between the years 2001 to2009 saw a severe financial performance. The airline companies facedmore competition and threats from external factors. External threatsincluded the financial crisis and terror attacks. Besides, thecompanies faced high operational costs from increases in the pricesof fuel, as well as, elevated and rigid labor costs due tocontractual agreements with labor unions. The demand for the mode oftransport fell to 2-3% due to a 7.8% fall in passenger miles flown.Specifically, big airlines faced competition from low-budgetairlines. However, after the financial crisis, the financialperformance of the industry has risen due to the ability of thecompanies to reduce their costs (Case 3, U.S. airline industry).

Question2

Theaverage financial performance of the airline industry is mostlyattributed to the structure of the air industry. The industryexperienced two upturns. The first improvement occurred from 1996 to1999 while the second took place between 2006 and 2008. Theimprovements were limited partly by external factors such asterrorist attacks on September 11, as well as, the financial crisis.The industry’s principal character of over-optimism contributedlargely to the low average performance. Specifically, the key playersin the industry failed to observe fiscal discipline. For instance,the forecasts on the possible increase in demand for air travel in2009 fuelled an intensification of the companies need to increasetheir capacity. It also led to an increase in new startup companiesthat further led to increased competition. Higher costs of majorcarriers emanated from their need for adding their capacities.Besides, the labor contracts of the major carriers were fixed bylabor unions that further limited their abilities to reduce costs(Case 3, U.S. airline industry).

Themajor porter’s five forces factor that depressed the industry isthe threat by competitors. Notably, the industry witnessed anincrease in low budget airline companies that led to price battles.Besides, low budget airlines such as South West and Jet Blue hadoperational efficiencies, therefore, intensified competition sincethey could maintain a cost advantage over major carriers (Case 3,U.S. airline industry).

Question3

Theupturn in profitability since 2004/5 emanated from the increase inthe market for air travel. The demand for leisure travelers waselastic while that of business passengers was highly inflexibleduring the period. Consequently, airline companies earned heftyprofits from stable business travelers. The introduction of theinternet contributed to higher incomes due to the decline of thetraditional travel agents sector. Online booking eliminated thecommissions paid to agents and reduced operational expenses ofairline companies. For example, commissions fell to 1% by 2008compared to 6% in the year 1991(Case 3, U.S. airline industry).

Theairline companies have adopted a plan of cost reduction. The strategyhas played a significant role in improving the financial performanceof the industry. First, the approach has led to the decrease inairfare prices that has consequently led to an increase in demand forair travel. The cost reduction plan has spurred competition withinthe transport sector and further stimulated the need for operationalefficiency in the improved financial performance. The major carriersadjusted their operational costs by negotiating for labor pricereductions as well as selling their inefficient air crafts (Case 3,U.S. airline industry).

Question4

Accordingto the predictions made by the FAA, the outlook for the period 2007to 2011 indicated an unexpected slow growth rate of 2% to 3%. Mostobservers reported the growth rate was over optimistic. The observersexpected both firms and individuals to economize their spending onair travel. The expectations were backed by the ongoing upsurge intechnology. In particular, the introduction of video conferencing wasexpected to shift businesses from their primary face-to-faceactivities to virtual meetings and, hence, reduce the need forbusiness travel (De &amp Waalewijn, 1999).

References

Case3, U.S. airline industry

De,S. A., &amp Waalewijn, P. (1999).&nbspAknowledge base representing Porter`s five forces model.Rotterdam: RIBES, Rotterdam Institute for Business Economic Studies.