Airline Industry

Topics: Airline, Low-cost carrier, Southwest Airlines Pages: 13 (4748 words) Published: July 21, 2013
An Economic Analysis of the Airline Industry
The history of the modern United States airline industry can be traced to the Boeing Company’s introduction of the 707 jet model in 1952 (The Airline Monitor, 2005). The earliest airline companies actually formed in the days of the propeller-driven craft when passenger capacity was limited to relatively small airplanes. Shortly after the successful introduction of Boeing’s 707, passenger traffic increased to the point that trains and ships quickly became outmoded means of travel. Because the industry grew so fast, the federal government created the Federal Aviation Administration (FAA) to regulate the industry’s safety aspects (The Airline Monitor, 2005). Since 2011, much of the safety and security responsibility previously held by the FAA was transferred to the Transportation Security Administration (TSA). Together, the FAA and TSA are the primary government regulators of the commercial airline industry.

A significant change in the airline industry occurred in the late 1970s when the federal government removed itself from oversight of air fares, carrier routes, and the entry of new competition into the industry. The Airline Deregulation Act of 1978 ultimately phased out the Civil Aeronautics Board, which had governed these aspects of the airline industry since the late 1930s. This action exposed traveling passengers for the first time to true market forces and caused major fallout among the airlines. Mergers and bankruptcies became the norm until the industry stabilized with several major carriers and a host of smaller regional carriers. The four largest U.S. airlines today are Delta, United, Southwest, and American. All but Southwest have recently gone through bankruptcy and mergers to stay profitable. As a measurement of success, carriers use industry standard measurements such as Available Seat Miles (ASM) which is a basic measure of capacity; Revenue Passenger Mile (RPM), a production measurement, Revenue per Available Seat (R/ASM); and Cost per Available Seat (C/ASM). In Table 1 below, one can see the 2011-2012 results for the entire U.S. airline industry with regards to ASM and RPM. It is evident the major carriers are still recovering from the recession, but the losses in these metrics are better than previous years. Table 1

Airline| 2011 RPM| 2012 RPM| % Change| 2011 ASM| 2012 ASM| % Change| Delta| 168,282,394               | 169,562,740         | 0.80%| 203,449,949              | 200,851,060         | -1.30%| United| 181,763,454              | 179,415,806         | -1.30%| 219,436,755              | 216,330,246         | -1.40%| American| 126,443,353              | 126,350,862         | -0.10%| 154,254,350              | 152,547,989         | -1.10%| Southwest| 103,864,488              | 102,874,979         | -1.00%| 128,518,201              | 128,137,684         | -0.30%|

A common characteristic of major airlines is to have at least one airport where the airline is very prominent. Once a consumer walks into a “hub” airport, they will immediately notice that one airline has more advertising and planes present than their competitors. However, there are smaller airlines that only have a couple planes at each airport but they are not considered to be a major competitor.

Every airline is subject to government regulations that not only affect how they operate their business, but also their profits. The cost of instituting a new government mandate to improve safety can be expensive and there is no additional revenue, in most cases, to cover the additional cost. A few examples of the more major regulations include how an airline can sell tickets, advertise prices, disclose fee-based optional services, and operates flights (Compart & Wall 2011). Just as government regulations can change the operation of businesses, economic indicators can spur change also. There are indicators specific to the airline...
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