Analysis of the
December 8, 2003
Table of Contents
The airline industry is facing one of its most challenging environments in history. A global economic recession coupled with the terrorist attacks of September 11, 2001 have led to a decrease in passenger traffic, reduction in revenue per mile flown, and rising labor costs. Additionally, a collapse in pricing power and a shift in the buying behavior of business travelers, coupled with fierce competition from low cost airlines, are forcing major airlines to restructure their operations or face the prospect of going out of business. The airline industry has responded to this difficult environment by taking measures to reduce their costs. Airlines announced layoffs involving more than 100,000 employees immediately following the attacks. To make matters worse for the industry, the Federal Aviation Administration (FAA) predicts only a gradual recovery in passenger traffic during the coming years. Environment
The U.S. airline industry went through a deregulation process in 1977. Prior to deregulation, 34% of all passengers did not have a choice of selecting an airline and domestic carriers transported 240 million passengers annually (TIA.org website). After deregulation, 85% of all passengers in the U.S. had a choice of two or more carriers and traffic increased to 640 million passengers annually (TIA.org website). The growth in the number of passengers flying can be attributed to increased competition, innovations in marketing & operations resulting in lower cost of flying, introduction of new services and improvements in service quality. The industry became a perfect competition marketplace in that no single firm can influence the price of the product, consumers (for the most part) view the products of all firms as perfect substitutes and consumers will purchase a product from the firm with the lowest price. In late 1990s, during the technology bubble and the increased globalization of business, the airline industry grew at a rapid pace. However, the industry has suffered quite a few setbacks after experiencing that boom. Pummeled by poor profits and scarred from a terrorist attack against the United States, the airline industry finds itself on an uncertain course. Below are travel expenditures (in $billions) for the U.S. airline industry from 2000 through 2004 secured from the plunketresearch.com website. Year
Total Travel Expenditures in US$billions
In an already intensely competitive market, the inevitable industry-wide shakedown is having far-reaching effects on the industry's trend towards expanding domestic and international services. Many international airlines are still partly owned by their respective nations, and treaties between nations determine which airlines can land where. In 1992, the United States, as part of the continuing deregulation of its airline industry, began signing "open skies" treaties with other countries, which eliminate restrictions on routes and fairs. The United States currently has fifty-nine open skies treaties, including eleven with European Union countries. The United States is presently negotiating with the European Union (15 members in total) on a single aviation agreement with all participating nations that would allow any US or EU airline to fly to any point on either side of the Atlantic, without needing permission on routes, fares or frequency of flights (Michaels, 2003, p.A3). The accord could...
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