Air Industry Analysis

Topics: Airline, Southwest Airlines, Low-cost carrier Pages: 12 (4028 words) Published: February 15, 2013

Table of Contents
Executive Summary
Market Structure
Industry Demand
Cost Structure
Analysis of Competitive Forces
Appendix A

Executive Summary
Airlines companies are undergoing major changes to cope with the new challenges of the modern economy. Geopolitical factors, such as war and terrorism, the financial crisis of 2009, high entry barriers, as well as extreme weather events, are some of the factors that are driving these changes. Costs in fuel prices, wages and ticket prices are some of the demand drivers of this multi-billionaire industry. Also, there has been an industry-wide shakedown, which will have far-reaching effects on the industry's trend towards expanding domestic and international services. The perception that air travel is an ordeal continues to grow, making it very difficult for airlines to charge the higher prices that are necessary to return to profitability. Today Airlines provide a vital service, but factors including like the continuing existence of loss-making carriers, bloated cost structure, vulnerability to exogenous events and a reputation for poor service combine to present a huge impediment to profitability. While a handful of low-cost airlines have successfully managed to post consistent profits, by and large, profitable airlines are few and far between.

The global airline industry provides transportation to virtually every corner of the world. The airline companies employ many people, hold multi-billion dollar equipment inventory, and generate billions of dollars in yearly gross revenue. It facilitates economic growth, world trade, international investment and tourism. However, the industry can be very vulnerable to government regulations, economic influences, extreme weather events and geopolitical factors such as war and terrorism.

The SIC/NAICS code for the industry is 4512 /4811. The NAICS term for the industry is "Scheduled air transportation" . The industry is further classified into 2 NAICS codes - 481111 for Scheduled passenger transportation and 48112 for Scheduled Freight Transportation. Per NCAIS, "This U.S. industry comprises establishments primarily engaged in providing air transportation of passengers or passengers and freight over regular routes and on regular schedules. Establishments in this industry operate flights even if partially loaded. Scheduled air passenger carriers including commuter and helicopter carriers (except scenic and sightseeing) are included in this industry."

The commercial airline industry in the US grew at a fast rate after the World War III. The commercial aviation industry in the United States has grown dramatically since the end of World War II. In 1945 the major airlines flew 3.3 billion revenue passenger miles (RPMs). By the mid 1970s, when deregulation was beginning to develop, the major carriers flew 130 billion RPMs. By 1988, after a decade of deregulation, the number of domestic RPMs had reached 330 billion (Source: Winds of Change). Up to the 1970s the industry was heavily regulated around the world. However, in 1976 under the recommendation of the Civil Aeronautics Board (CAB), the regulatory system was dismantled by the US Congress. Most of the industrialized world soon followed suite. The Airline Deregulation Act passed in the US in 1978 eased the entry of new companies into the business and gave them freedom to set their own fares and fly whatever domestic routes they chose. This lead to a swarm of new entrants, lower fares and the opening of new routes and services to all over the country.

The major Capital expenditure for the airline industry is the cost of the airplanes.  Boeing and Airbus are the two major providers of aircrafts to the industry. Other than that the Airports Authorities are the other major service providers to the airline industry....
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