General Environment Analysis of the Airline Industry

The U.S. airline industry has been in a chaotic state for a number of years. In 1993, a U.S. government report indicated that the industry had “Lost huge amounts of money in the past three years, and it has never made a sustained, substantial return on investment…” According to the Air Transport Association, the airline industry trade association, the loss from 1990 through 1994 was about $13 billion, while from 1995 through 2000, the airlines earned about $23 billion and then lost about $35 billion from 2001 through 2005. Early in 2006 the association expected about a $10 billion loss in 2005. In 1903, the Wright brothers' first successful flight in Kitty Hawk, North Carolina marked the beginning of the aviation industry. In the early years, the public did not embrace airplane travel as an option, thinking that it was too dangerous. The first major stimulus that helped to develop the industry was the United States' participation in World War I. After the war, though, the government stopped funding research and development, practically stagnating growth in the aviation industry. In 1927, Charles Lindbergh successfully completed a solo flight across the Atlantic Ocean and created massive interest in flying with the general public. One of the biggest factors in the growth of the air transportation industry during this time was the development of a mail transport system by the U.S. Postal Service. The Kelly Airmail Act of 1925 provided private airlines the opportunity to function as mail carriers through involvement in a competitive bidding system. These private carriers, through the airmail revenue, could then expand into carrying other forms of cargo, including passengers. Charles Lindbergh, in the position of "technical adviser" to Pan Am World Airways, piloted that airline's first airmail service flight to South America in 1929.

Passengers were targeted as a way to supplement the income of the airmail systems. Slow starting, due to the perception of less than stellar safety performance and high fare costs, passenger volume grew tremendously and carriers multiplied. The Air Commerce Act, passed in 1926, allowed Federal regulation of air traffic rules. The aviation industry backed the passage of this act, believing that without the government's action to improve safety the commercial potential of the airplane would not be realized. Air traffic became more and more disorganized and the need for regulation became apparent. With United States' entry into World War II, commercial fleets and pilots were sent to Europe to participate in the war effort. The war also helped to generate support for research and development of aircraft, which extended beyond the war to commercial aviation. A major post-war development was the four-engine aircraft, such as the Lockheed Constellation. This innovation substantially cut the flying time for ocean and continent crossings, and thus negatively effecting travel by ocean liner and train. The 1950s saw dramatic improvements in the capacity and comfort of commercial flights. Planes were modernized, and jet service was introduced in 1959, enabling even faster cross-country service. After major in-air collisions in the 1950s, the Federal Aviation Act was passed in 1958. The Federal Aviation Administration (FAA) was created, and was charged to develop an air traffic control system. The 1970s saw dramatic increases in costs, particularly increases in fuel prices. The 1980s were marked by the deregulation of the industry, which resulted in the growth of smaller carriers and the mergers of larger carriers. The 1990s saw a dramatic increase in the number of passengers, including first time passengers, as prices were cut and the cities served by airlines increased. Most commercial airline companies declined abruptly after the terrorist events of 9/11 as consumers flew less for business and leisure. As a result of this shock, the industry faced increasing consolidation and key bankruptcies (including...